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ENTREPRENEURSHIP THEORIES. The entrepreneur has been variously defined as a risk- taker, an organization builder, a decision maker, and/or an innovator.

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entrepreneurship theories
ENTREPRENEURSHIP THEORIES
  • The entrepreneur has been variously defined as a risk- taker, an organization builder, a decision maker, and/or an innovator.
  • A large number of research prefer to define him/her as the owner/initiator of business enterprise (Berna 1960; Bygrave and Hofer 1991; Cole 1959; Sharma 1980; Singh 1963.
  • The collective wisdom of this school of thought is summed up by Landau in the following words: ‘Entrepreneurship is the process whereby people, money, markets, production facilities and knowledge are brought together to create a commercial enterprise which did not exist before’ (1982:53)
slide2

This is in the Weberian tradition, according to which the entrepreneur is the ultimate source of authority in an organization (Hartman 1959).

  • Definitions of this type have been used in many studies of the characteristics of those who have started business ventures.
  • However, the contribution of these to the understanding of the concept of entrepreneurship is not substantial, because they have not tried to focus on the critical function of the entrepreneur so the concept remains elusive, and the search for the entrepreneur is similar to a ‘hurt for Haffalump’, an imaginary creature (Kilby 1971)
the concept of innovation
The concept of innovation

The, concept of innovation according to Schumpeter (1934:66), covers the following five cases.

  • The introduction of new good – that is, one with which consumers are not yet familiar – or of a new quality of a good.
  • The introduction of a new method of production, that is, one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a scientifically new discovery, and also exist in a new way of handling a commodity commercially.
  • The opening of a new market, that is, a market into which the particular branch of manufacture of the county in question has not previously entered, whether or not this market has existed before.
  • The conquest of a new source of supply of new materials or half-manufactured goods, again irrespective of whether this source already exists, or whether it has to be created.
  • The carrying out of a new organization of any industry, like the creation of a monopoly position (for example the breaking up of a monopoly position.
slide4

The Schumpeterian concept of entrepreneurship has been elaborated by other prominent writers later, such as; March and Simon (1958), who stress the need to distinguish between the investor and the innovator (entrepreneur);

Drucker (1985), who illustrates entrepreneurship and intrapreneurship, with numerous examples of innovation;

Vesper (1994), who maintains that every new venture is an innovation;

Peterson (1981), who defines entrepreneurship as the process of unprogrammed innovative recombination of pre-existing elements of activity; and

Landau (1982), who defines the entrepreneur in terms of two dimensions, namely, innovativeness and risk-bearing capacity (see figure 3.1).

defining entrepreneur as innovator and risk taker
Defining ‘Entrepreneur’ as Innovator and Risk-Taker

(High)

Risk-Bearing

Capacity

(Low)

Low Innovativeness (High)

Source: Adapted from Landau (1982).

resource bases theory
Resource bases theory

Identifying attributes of strategic resources

Entrepreneurs are individuals and they are unique resources to the new firm, resources that money cannot buy.

The theory says that firms have different starting points for resources (called resource heterogeneity) and other firms cannot get them (called resource immobility).

The theory values creativity, uniqueness, entrepreneurial vision and intuition, and the initial conditions (history) under which new ventures are created.

What are the origins of new firm? Economic organizations have their origins in the resources of the entrepreneur and the assets that entrepreneurial team controls.

Such potentially acquire, and finally combine and assemble.

Firms usually begin their history with a relatively small amount of strategically relevant resources and skills, and each company’s uniqueness shows how these resources are expected to perform in the marketplace.

the theory has a rather simple formula
The theory has a rather simple formula.
  • Buy (or acquire) resource and skills cheaply –Transform (the resource or skills) into a product or services
  • Deploy and implement (the strategy)
  • Sell dearly (for more than you paid).

However, this is only possible if cheap or undervalued resources and skills exist. And their availability depends on market imperfections and differences of opinion about prices and events.

The resource based theory holds that Sustainable Competitive Advantage (SCA) is created when firms possess and employs resources and capabilities that are-

    • Valuable because they exploit some environment opportunities.
    • Rare in the sense that there are not enough for all competitors
    • Hard to copy so that competitors cannot merely duplicate them.
    • Non-substitutable with other resources
resource types
Resource types
  • The resource-based theory recognizes types of resources: Physical. Reputational. Organization, Financial, Intellectual/human and Technological.
  • These can be called or PROFIT factors. These six types are broadly drawn and include all ‘assets’ capabilities, organizational processes, firm attributes, information and knowledge.
  • We need to review these six types and note the special situations where these resources may confer particular advantage or no advantage at all.
slide9

PHYSICAL RESOURCES

  • Physical resource are the tangible property the firm uses in production and administration.
  • These include the firm’s plant and equipment, and the amenities available at that location.
profit factors cont
PROFIT factors cont…

Some firms also have natural resources such as minerals, energy resources, or land. These natural resources can affect the quality of its physical inputs and raw materials.

Physical resources can be the source of SCA if they have the four attributes previously described. But since most physical things can be manufactured and purchased they are probably not rare or hard to copy. Only in special circumstances, like a unique historical situation, will physical resources be a source of SCA.

Fortuna magazine’s annual survey of corporate reputation indicates that seven of the top ten corporations in any given year have appeared in the top ten many times before.

slide11

The Fortune survey uses different criteria for their rankings.

  • The quality of management
  • The use of corporate assets
  • The firm’s value as an investment
  • The quality of products and services
  • Innovativeness
  • The ability to attract develop and retain people
  • The extent of community and environmental responsibility.

Other research indicates that the importance of these are product quality management integrity and financial soundness.

a psychological approach
A PSYCHOLOGICAL APPROACH

PERSONALITY CHARACTERISTICS

Are there personality characteristics that help us predict who will be an entrepreneur and who will not? Who will be a successful entrepreneur and who will not? Over the past few decades, entrepreneurial research has identified a number of personality characteristics that differentiate entrepreneurs from others. Among the most frequently discussed are the need for achievement, locus of control, and risk-taking propensity.

The Need for Achievement The entrepreneurial need for achievement, or n Ach. was first identified as personally trait by McClelland (1961) in his work on economic development. People with high levels of n Ach have a strong desire to solve problems on their own, enjoy setting goals and achieving them through their own efforts, and like receiving feedback on how they are doing. They are moderate risk takers.

However, the link between n Ach and entrepreneurship has not always held up in empirical testing. Researchers who have attempted to replicate McClelland’s findings or apply them in other settings have occasionally been disappointed.

For example, n Ach is a week predictor of a person’s tendency to start a business and people specially trained to have high n Ach sometimes perform no differently from a control group that receive no training. The causal link between n Ach and small business ownership has not proven.

slide13

Locus of Control

A second trait often associated with entrepreneurship is locus of control. In locus-control theory, there are two types of people

  • Externals, those yond their control and
  • Internals, those who believe that for the most part the future is theirs to control through their own effort. Clearly, people who undertake a new business must believe that their efforts will have something to do with the business’s future performance.

A logical prediction of this theory would be that internals are more entrepreneurial than externals. But evidence supporting this hypothesis has been inconclusive.

Some studies have shown that there are more internals among entrepreneurs but others show no difference between entrepreneurs and others. In fact, it could be argued that any good manager must also possess the qualities of an internal; a person who believes that efforts affect outcomes.

So, while locus of control might distinguish people who believe in astrology and those who do not, it may not differentiate potential entrepreneurs from potential managers or just plain business students.

slide14

Risk-taking Propensity Related to the need for achievement is risk-taking propensity. Since the task of new venture creation is apparently fraught with risk and the financing of these ventures is often called risk capital, researchers have tried to determine whether entrepreneurs take some risks than other businesspeople. That hypothesis has been tested in a number of way, but the work by Brockhaus has been most incisive.

One researcher described the search of the entrepreneurial trait this way, “My own personal experience was that for ten years we can ran a research center in entrepreneurial history, for ten years we tried to define the entrepreneur. We never succeeded. Each of us had some notion of it – what he thought was, for his purpose , a useful definition. An I don’t think you are going to get farther than that.

The trait approach looks for similarity among entrepreneurs. But as the resource-based theory suggests, if all entrepreneurs have a certain trait or characteristic, it is not an advantage to any of them, for it is neither rare nor hard to duplicate. To understand entrepreneurship, we must look for circumstances that produce differences, not similarities. For this we turn to a sociological framework that emphasizes personal history and the uniqueness of an individual’s path to new venture creation.

a sociological approach
A SOCIOLOGICAL APPROACH

How are entrepreneurs unique? Each has a background, history and biography. The sociological approach tries to explain the social conditions fro which entrepreneurs emerge and the factors that influence the decision. A sociological model is presented in figure 2-2. It depicts the decision to become an entrepreneur as a function of two factors; the impetus factors and the situational factors. The model is multiplicative; A zero on either the causes means a failure to produce the entrepreneurial event.

IMPETUS FOR ENTREPRENEURSHIP

What propels entrepreneurs forward toward self-employment? There are four factors; negative displacement, being between things, positive push, and positive pull.

Negative Displacement

Figure below begins with the notion that people who find themselves displaced in some negative way may become entrepreneurs.

Negative displacement is the alienation of individuals or groups of individuals from the core of society. These individuals or groups may be seen as ‘not fitting in’ to the main flow of social and economic life. Because they are on the outer fringes of the economy and of society, they are sensitive to the allure of self-employment; having no one to depend on, they depend on no one.

An example of this phenomenon is the tendency of immigrants to become entrepreneurs. In societies where economic rights are more easily exercised than political rights, immigrants turn to entrepreneurship. Throughout the world, for example. Asian and Jewish immigrants, wherever they have settled, have gone into business for themselves.

the supply of entrepreneurship
The supply of entrepreneurship

Perceptions of Desirability

Culture

Family

Colleagues

Mentors

Peers

Negative Displacement

Immigrant status

Fired

Angered, bored

Middle-aged

Divorced

Perceptions of Feasibility

Support

Demonstration

Models

Mentors

Partners

Between Things

Army

School

Prison

Entrepreneurship

Positive Pull

From partner

From mentor

From investor

From customer

Entrepreneurial Event

Initiative taking

Consolidation of resources

Management of organization

Relative autonomy

Risk bearing

Positive Push

Strong father

Career

Experience

slide17

Source: Adapted form A. shapero and L. sokol. The social Dimension of Entrepreneurship in c, Kent D. Sexton, and K. Vesper, eds, Encyclopedia of entrepreneurship (Eaglewood Cluts NJ. Prentice Hall, 1982) pp 72.90

sociological approach cont
Sociological approach cont..

Other negative displacement result from being fired from job or being angered or bored by current employment. Many bored managers and stifled executive in large corporations are leaving their white collar jobs for challenges and autonomy.

According to Harry Levingsone, a Harvard psychologist who specializes and life cycle issues, “The entrepreneur psychologically speaking, has a lot more freedom than anybody in a big corporation”

To illustrate this, consider the case of Philip Shawtz, who was an executive with Olin corporation and Airco Inc. He left his middle-level managerial career to start a business as a wholesaler of packaging materials and cleaning supplies and to find out “who and what I am "He reports that he enjoys the autonomy and the action of drumming up business and interacting with customers. He enjoy putting his own personal stamp on his company. Having only four employees, he can create a family atmosphere, relaxed and friendly.

He imprints his own values of honesty and dependability on the business, something that no middle-level corporate manager can do.

Middle age or divorce can also provide the impetus for new venture creation. In an unusual example, one entrepreneur recreated his business because of a midlife crisis. Tom Chappell co-founded a personal-care and health-products business, Tom’s of Maine Inc. A number of years ago he realized that he was not happy running this business even though he was successful. He went back to school and obtained a Master’s degree from Harvard Divinity school.

His studies there led him to examine his values and his motivation for managing his own firm. Hen changed the company’s goals, setting its mission to “address community concerns, in Maine and around the globe, by devoting a portion of our time, talent and resources to the environment.

sociological approch cont
Sociological approch cont..

“Between Things”

People who are between things are also more likely to seek entrepreneurial out-lets than those who are in the “middle of things”.

Like immigrants, people who are between things are sometimes outsiders. Three examples are offered

  • between military and civilian,
  • between students life and a career, and
  • between prison and freedom.
slide20

Positive pull

Positive influences also leads to the decision to investigate entrepreneurship. And these are called positive pull influences.

They can come from a potential partner. A mentor, A parent, an investor, or a customer.

The potential partner encourages the individual with the offer of sharing the experience, helping with the work, and spreading the risk.

The mentor raises self-esteem and confidence. Mentors and partners can also introduce the entrepreneur to people inside the social and economic network for new venture activity.

There also appears to be a relationship between a parent’s occupation and offspring entrepreneurship. Many entrepreneurs have a strong self-employed father figure in the family. Investors that provide the initial financing can convince the individual that ‘there may be more where that came from.

The prospect of a potential customer pulling the entrepreneur into business raises some difficult ethical and economic issues. However, having a guaranteed market for the products or services is a temptation few can resist.

positive push
POSITIVE PUSH

The final category of situations that provide impetus and momentum for entrepreneurship is termed positive push.

Positive-push factors include such things as a career path that offers entrepreneurial opportunities or a education that gives the individual the appropriate knowledge and opportunity.

What types of career choices can people make that put them in good position to become entrepreneurs? Two types of career paths can lead to entrepreneurship.

The first is the industry path. A person prepares himself for a job or career in a particular industry and learns everything there is to know about that industry. Since all industries display some sort of dynamics or change, over time, entrepreneurial opportunities that exploit that change come and go. A person with a deep knowledge of the industry is an excellent position to develop a business that fills a niche or gap created by industry change.

slide22

People taking the industry path to new venture creation emphasize that specialized knowledge is the key resource. That knowledge may be embodied in particular people, a technology, or a system or process.

The new firm may be a head-to-head competitor. It may serve a new niche not served by the former employer, or it may be an upstream firm (a supplier) or a downstream firm (a distributor or retailer).

Whatever its functional form, a spin-off is a knowledge-based business, its primary resources are the competencies and experiences and the networks and contacts being transferred to a new venture.

The challenge for these people is to procure the other resources, financial and physical, that will enable them to make their plan a reality.

A different approach, the sentry path emphasizesthe money and the deal. People with careers in sentry positions see many different opportunities in many different industries. They tend to be lawyers, accountants, consultants, bankers (especially business loan officers), and brokers.

These people learn how to make deals and find money. They have contacts that enable them to raise money quickly when the right property comes along.

perceptions of the situation
Perceptions of the situation

Perception of Desirability Entrepreneurship must be seen as desirable in order to be pursued. The factors that affect the perceptions of desirability can come from the individual’s culture, family, peers and colleagues, or mentors. For example, the Sikhs and Punjabis who dominate the service station business in New York City also dominate the transportation and mechanics business in their native country. Sometimes religion can spark entrepreneurship and entrepreneurship and legitimize the perception of desirability. For example, Zen Buddhist communities are historically self-sufficient economically and provide the background for the story of an unusual entrepreneur, Bernard Glassman.

Glassman was born the son of immigrant Jewish parents and trained as a systems engineer. But now he is building a better worlds by combining Zen entrepreneurship with a mission to help people at the bottom of the economic ladder. After Glassman introduction to Buddhism, he found that meditation alone could not meet his spiritual needs. So he chose the way of Entrepreneurship. In 1983, he and his Zen community launched Greyston Bakery in Yonkers, New York, supplying high-priced pies and cakes to wealthy consumers. He received his early training as a baker from another Zen sect in San Francisco. Today his bakery grosses $1.2 million and employs 200 people, many previously considered unemployed. Many entrepreneurs say that they want to help the poor and needy, but Glassman has made it happen. Through Greyson’s profile, he has been able to renovate buildings, provide counseling services , and open a day-care centre. He still has to pay close attention to the bottom line, however; the bakery is his mandala and he must concentrate intensely to make it a success.

slide24

At the end of the process depicted in the figure, the new venture creation process begins, The pre-entrepreneurial conditions described end in the entrepreneurial event, that is, in the creation and management of a new venture.

One model of this process comprises five components:-

  • Initiative. An individual or team, having been brought to the state of readiness by personal factors and by perceptions of desirability and feasibility, begin to act. Evidence of initiative usually includes scanning the environment for opportunities, searching for information, and doing research.
  • Consolidation of resources. Levels of resource needs are estimated, alternatives for procurement are considered, and timing of resource arrival is charted and eventually consolidated into a pattern of business activity that could be called an organization.
slide25

Management of the organization. The business’s resource acquisition, transformation, and disposal are routinized and systemized. Those elements that are not easily systematized are managed separately.

  • Autonomous action. The management of the new venture is characterized by free choice of strategy, structure and processes.
  • Risk taking. The initiators have put themselves at risk. They are personally affected by the variability of returns of the business and by its possible success or failure.

Another process-oriented model by Stevenson emphasizes entrepreneurial behaviour toward resources. This model makes two valuable contributions to our understanding of the entrepreneurial process;

  • It recognizes that no entrepreneur behaves in an entrepreneurlike manner all the time. There are forces acting upon the individual that sometimes make entrepreneurial behavior appropriate and that at other times make administrative or managerial behavior appropriate.
  • It emphasizes that the commitment and control of resources are as important to the process as environmental scanning and opportunity recognition. Each entrepreneur assesses the forces pushing for entrepreneurial action and those requiring administrative action and then makes the choice thatis best for the new venture.