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   Dec'2006
 
  Entrepreneurship - Concepts and Cases
 Edited by : R Prasad

 

 

 
In the middle of the last century, economists predicted the dominance of large firms. They argued that size was needed to obtain economies of scale, to exploit foreign markets and to keep abreast of regulations and of the opportunities in technology. Large companies dominated in the 1960’s and 1970’s. Since then, the trend has started to reverse. Globalization increased competitive pressure on manufacturing firms in high – cost locations, leading to a shift in production capacity to low cost countries and increase in productivity by use of technological inputs. Meanwhile, ‘Information and Communication Technologies’ (ICTs) gave rise to new markets, such as personal computers, software and ICT-based services, which revolutionized the production process in many industries and led to the growth of the service sector. At present, large firms are rationalizing themselves by restructuring, outsourcing or downsizing. Traditional corporate employment is on the decline. Businesses are forming strategic alliances with other businesses closely aligned to them or with someone who can add value.

In the OECD countries itself, the number of business owners increased from 29 million to 45 million between 1972 and 1998. Futurists envision a return to extended community living, with shared resources, but individual living and working relationships, where entrepreneurial activities form the basis of these communities. These changes have led to opportunities for new entrepreneurial initiative.

What is Entrepreneurship?
The definition of entrepreneurship has been debated among scholars, educators, researchers, and policy makers since the concept was first established in the early 1700’s. The term “entrepreneurship” comes from the French verb “entreprendre” and the German word “unternehmen,” both means to “undertake.” Bygrave and Hofer in 1891 defined the entrepreneurial process as ‘involving all the functions, activities, and actions associated with the perceiving of opportunities and the creation of organizations to pursue them’. Joseph Schumpeter introduced the modern definition of ‘entrepreneurship’ in 1934. According to Schumpeter, “the carrying out of new combinations we call ‘enterprise’,” and “the individuals whose function it is to carry them out we call ‘entrepreneurs’.” Schumpeter tied entrepreneurship to the creation of five basic “new combinations” namely: introduction of a new product, introduction of a new method of production, opening of a new market , the conquest of a new source of supply and carrying out of a new organization of industry. Peter Drucker (1985) proposed that ‘entrepreneurship’ is a practice. What this means is that entrepreneurship is not a state of being nor is it characterized by making plans that are not acted upon. Entrepreneurship begins with action, the creation of a new organization. This organization may or may not become self-sustaining and in fact, may never earn significant revenues. But, when individuals create a new organization, they have entered the entrepreneurship paradigm.

Entrepreneurship is multidimensional and it can occur in different contexts, economic or other, and in all types of organizations. Entrepreneurship is first and foremost a mindset. It covers an individual’s motivation and capacity, independently or within an organization, to identify an opportunity and to pursue it in order to produce new value or economic success. It takes creativity or innovation to enter and compete in an existing market, to change or even to create a new market. To turn a business idea into success, one requires the ability to blend creativity or innovation with sound management and to adapt a business to optimize its development during all phases of its life cycle. This goes beyond daily management: it concerns business ambitions and strategy.

Entrepreneurship can occur in any sector and type of business. It applies to the self-employed and to firms of any size throughout the various stages of business life cycle, from pre-start to growth, transfer or exit and restart. It is relevant to firms in all sectors, technological or traditional, for small and large firms, and for different ownership structures, such as family businesses, firms quoted on the stock exchange, social economy enterprises or non-profit – driven organizations, which often have significant economic activities. According to the Global Entrepreneurship Monitor (GEM) survey, 7 percent of new entrepreneurs create a significant niche in a new market or economic sector if their business is successful, whereas 70 percent of new enterprises are providing products or services in existing markets where there is already considerable competition and where the critical technology has been available for more than a year.

The influx of new enterprises has created a division between entrepreneurship and amateurism, which Tom Richman in “Creators of the New Economy” has referred to as the rise of the “professional entrepreneur” . Richman theorizes that the amateur entrepreneur is local, independent, secretive, self-reliant, and organizationally orthodox, among other things. On the other hand, the professional entrepreneur is global, innovative, inquisitive, virtual, and more career-oriented and prepared. Those individuals who repeatedly and successfully engage in entrepreneurship are referred to as ‘professional entrepreneurs’. They are distinct from the individuals that act once. Professional entrepreneurs develop and exploit a unique set of knowledge, skills, and abilities. Richman sees a rise in professional entrepreneurship because professional individuals are raising the bar for business management, knowledge, and skills.

Entrepreneurship is about people, their choices and actions in starting, taking over or running a business, or their involvement in a firm’s strategic decision-making. While entrepreneurs are a heterogeneous group and come from all walks of life, there are certain common characteristics of entrepreneurial behavior. Empirical studies have frequently listed some traits of entrepreneurs as being of greater influence in new venture formation, such as desire for independence, locus of control, creativity, risk taking propensity, need for achievement and credible role models. However, studies have also indicated that more than these traits, characteristics like prior managerial experience, prior start-up experience, prior management team experience, knowledge, skills and abilities and prior experience in that particular line of business are more important for successful venture formation and venture performance.

In their popular book “The Entrepreneurial Mindset”, Rita Gunther McGrath and Ian Macmillan define ‘habitual entrepreneurs’ as those who have made a career out of starting new businesses and launching new products. Habitual entrepreneurs find opportunities while others fail to act during times of uncertainty. In turbulent times, the habitual entrepreneur experiments intelligently, ruthlessly focuses on priorities and weeds out unprofitable ventures. They start with small exploratory forays into less challenging market niches and use the experiences gained as stepping stones to build competencies in the increasingly challenging but attractive market arenas that they discover in their journey ahead.

The Entrepreneurial Process
Jeffery Timmons’ who taught at the Harvard Business School and the Babson College has presented the Opportunity, Resources and Team Framework to help understand the entrepreneurial process for a new venture. The elements of the framework are:
The Opportunity: The entrepreneurial process is opportunity driven. Opportunities have to be found, shaped and created. They need to be recognized and evaluated.

“A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties”.
– Harry Truman.

Individuals who seek entrepreneurial opportunities usually generate a lot of ideas. They use their judgment to discard those that have low potential and concentrate on the few that require refinement and study. They further reflect on the adequacy of their ideas and their capacity to execute them. Entrepreneurs should also screen potential ventures for the risks and rewards offered in comparison to other opportunities. It may not be as structured as that. Dave Packard and Bill Hewlett decided to first start a firm and then find out what they should make. They stumbled along for nearly a year trying to sell a bowling foul-line indicator, a clock-drive for a telescope, an automatic urinal flush and a shock machine to help people lose weight, before making their first big sale of eight audio oscilloscopes to Walt Disney.

Opportunity can be understood in terms of market demand, market size and structure and margin analysis. A firm needs to garner sizable market share in its first five years to remain viable and in contention. The market should grow at a reasonable rate (20 percent and more), the products /services should be in demand for a long time to come (i.e., not a short time requirement). Customers should be reachable. They need to perceive payback value on their purchase within a year. Emerging markets provide better scope for growth while fragmented markets offer lesser competition. Patents, trademarks held by the firm that serve as barriers for entry to others, make the opportunity more attractive.

The Jeffrey Timmons Model
“The entrepreneur always searches for change, responds to it, and exploits it as an opportunity”.
– Peter Drucker.

Successful entrepreneurs develop the skill to transform an idea to a viable opportunity. All ideas are not necessarily opportunities. An opportunity has the qualities of being attractive, durable, timely and is anchored as a product or service, which creates or adds value for the customers. It can generate sustainable revenues and profits for the firm. Conversely, an idea is only a tool in the hands of the entrepreneur. Margin analysis helps to differentiate between an idea and an opportunity. Is there a good gross margin? Is the capital requirement low in comparison to competition? How fast is break – even? Does the value of business increase overtime? The answers to these questions aid in assessing the nature of the opportunity.

The Founder and the Entrepreneurial team: The lead entrepreneur is important to the success of the new business. However, the quality and diversity of the team are even more important. An individual may make a living, but it requires a team to create a business with substantial value and harvest the potential of the opportunity. The team has to be anchored in terms of values, goals and commitments and with a clear definition of individual roles and responsibilities. To succeed, there needs to be a fit between opportunity and the entrepreneurial team.

The following six attributes of the founder entrepreneur contribute dominantly towards entrepreneurial success:
1. Commitment and determination to overcome obstacles and compensate for others weaknesses.
2. Leadership: Successful entrepreneurs are self – starters with an internal locus of control. He should be able to transmit his vision and passion to the management team and other employees.
3. They are market driven and obsessed with value creation and enhancement.
4. They have high tolerance to risk and uncertainty. They thrive on chaos, having the ability to resolve problems and integrate solutions.
5. They are able to adapt to change and are creative problem solvers.
6. They are motivated to excel with a high need for achievement.

“The key to a leader’s impact is sincerity. Before he can inspire with emotion, he must be swayed by it himself. Before he can move their tears, his own must flow. To convince them, he must himself believe.”
– Winston Churchill.
The most important qualities for the team are:
Relevant industry experience: New businesses formed by teams with significant industry experience are generally more successful.
Opportunity Obsession: Team members should be obsessed with seeking out new opportunities and better ways of competing.
Passion for the new business, its product and the team: Success goes to those who are passionate about the new business.
“An ‘A’ team with a ‘B’ idea is better than a ‘B’ team with an ‘A’ idea”.
- An old adage.

Resources: The important resources for new venture creation are related to people, resources, assets, financial resources, customers, suppliers and knowledge. An entrepreneur who wants to retain control and ownership of a small entity should focus on minimizing the use of external resources.

Many firms during the dot-com boom focused on the ‘big-money’ model of entrepreneurship. Books and courses focused on raising of venture capital and attracting investors. Many tried to raise millions even before the first product had been sold. There are certain pitfalls in rushing in to raise external finance. It compromises the entrepreneur’s discipline and flexibility. Lack of money often reveals hidden problems and forces the firm to solve them. Normally more money is raised through venture capital than is actually required and gets burnt without producing profits or sales. Start-ups entering new industries seldom get it right at the first time. There are ample twists, turns and road blocks before success beckons. Outside investors can hinder entrepreneurs from this learning curve. Consequently, entrepreneurs might either destructively confront investors or might choose to remain blind to the twists and turns.

Firms such as Compaq Computer, which started with big funds and succeeded, are the exception rather than the rule. Most are bootstrappers who launched ventures with modest personal funds. Ross Perot started EDS with $1000 and turned it into a multi-billion dollar enterprise. Successful high-growth entrepreneurs intend to control resources rather than own it. They use boot-strapping techniques to minimize resources. By committing and de-committing quickly, they seize promising opportunities and abandon weak ones. They unleash their creativity to seek out all resources that can benefit the firm.

Entrepreneurial Culture
Why is culture important? There is a powerful connection between culture of people and its propensity to be entrepreneurial. Culture evolves and develops over a longer period of time.

The three basic questions that trigger an exploration of entrepreneurial nature are,
What is the propensity to be entrepreneurial? Are the required traits which reflect entrepreneurial behavior present? What are the motivation levels? How does society treat success and failure? Cultures can be rewarding, supportive, tolerant and hostile.

Are knowledge and skills necessary for practice of entrepreneurship in place? While business competency skills and knowledge are part of the entrepreneurial capacity, display of such capacity is much higher amongst those who live in families or communities where there are entrepreneurs.

What is the extent of success experienced by entrepreneurs? The Princeton economist Bill Baumol argues that entrepreneurs are everywhere, but the environment influences the allocation of entrepreneurship between productive and unproductive (rent-seeking) pursuits. While some countries reward innovations which do not contribute to growth, such as managing the government and creating monopolies; other countries create an eco-system for growth and job producing innovators that pulls everything together.

The GEM studies and other entrepreneurial work suggests that there are cultural traits that enables certain societies and people to be more or less entrepreneurial. The GEM 2000 Study highlights how the Japanese culture presents major barriers to entrepreneurial behavior by its members. Conversely, the same research explains how American culture enables, rewards and even celebrates entrepreneurial behavior. In simple terms, there is a strong connection between cultural characteristics and how entrepreneurial a society and economy is. The further correlation between economic performance and entrepreneurship builds the case for the importance of culture.

Country: The degree to which a country is entrepreneurial, is dependant on socio-economic conditions of that country. For example, Poland had a traditional peasant economy but turned entrepreneurial. When it failed to privatize, state owned firms went bankrupt and physical assets became cheap. Some basic factors such as favorable government policies, better reach of research and technology, quality and orientation of educational system, and the positive attitude of society to entrepreneurs contribute to a favorable entrepreneurial environment.

Entrepreneurial behavior has several dynamic dimensions to it. It changes from country to country. It is driven by necessity and opportunity. In opportunity driven activity, entrepreneurs take advantage of market opportunities; while necessity driven activity stems form absence of better options. Necessity driven entrepreneurship boosts economic growth while opportunity based entrepreneurship is not directly correlated with growth.

Firms and entrepreneurial culture: Firms encourage employees to become entrepreneurs for many reasons. There are individuals within the organization who are more entrepreneurial than the firm. This spirit, if leveraged, can help the firm create more value. In some cases, it helps in retention of key employees who are looking for better opportunities. It is also taken as an incentive scheme. The firm can benefit through acquiring new intellectual property rights and identify its business leaders. These entrepreneurs can later act as ambassadors for their earlier employers. For example, Ashok Wadhwa of Amit Finance recommended Arthur Anderson to any client seeking a global firm.

Failure of Ventures
Failure is a fundamental characteristic of Schumpeterian ‘creative destruction’. It is an integral element of an entrepreneur’s apprenticeship and should be considered as a ‘badge of honor’. Hewlett Packard learnt humility early, on account of a string of failed and moderately successful ventures. The same is the case with 3M which started with a failed corundum mine. The stock was regarded as almost worthless. Its second president did not draw a salary for the first eleven years of his tenure. Such examples are more the rule than the exception. Unfortunately, many societies stigmatize entrepreneurial failure.

Tom Peters, the renowned management consultant, stresses on the importance of failure. He points out that the American economy has become the most powerful on account of the availability of money, and for entrepreneurs to use the money. When a company fails, its best assets, human beings, are taken by somebody else who can put their expertise into use.

Most businesses fail to understand the market correctly. They enter an industry too late when it is overheated and cannot sustain any new entrants. At one point of time, induction finances were making a lot of money and was seen as an ideal venture opportunity. However, a study of the rolling mills industry revealed troubled times ahead. Soon rolling mills started winding up and induction finances also became sick.

Projects are often delayed thereby increasing the interest burden on the entrepreneurs, as also the pressure put by banks for repayment.

Entrepreneurs often choose wrong partners: Financing partner, co-promoter, bank, and supplier should be chosen carefully. It is wise to choose a practical, mature and nimble partner. The partner should have faith in the entrepreneur, should be willing to take risks and not be encumbered by set regulations or impractical guidelines.

Entrepreneurial leaders employ three important practices when confronted with a failure: constructive postmortems, recouping, and spotting entrapment.

Constructive Postmortems: Entrepreneurial leaders who are successful at promoting deep commitment to continuous entrepreneurial development, typically conduct constructive postmortems to distinguish projects that have failed because of bad luck from those that failed because of bad decision making.

Recouping: Recouping helps convey to those on the venture team – valuable talent whom the firm could ill afford to have crippled by a feeling of failure – that it was the venture that failed, and not them.

Spotting Entrapment: Often it is necessary to detect that the business development team is entrapped in a welter of optimism that precludes them from recognizing that the business is doomed. If a venture seems to be trapped in any of these signs of poor business logic, you may personally have to shut down the project.

On this Book
The book is divided into two sections: Concepts and Cases. The first section seeks to understand entrepreneurship as a practice, the entrepreneurial process and the entrepreneurial environment. The first article titled “The Practice of Entrepreneurship” , begins by seeking to understand the terms ‘entrepreneurship’ and ‘entrepreneur’ and what they do. It elaborates on guidelines that contribute to entrepreneurial success. It concludes with some perspectives on entrepreneurial behaviour.

While there are many types of firms, entrepreneurial firms stand apart. The next article, “Understanding How Businesses Start and Grow” differentiates entrepreneurial growth companies from other firms. It highlights the characteristics of such firms and challenges faced by them.

Firms often contribute to the growth of the entrepreneurial culture. The article, “Sowing Seeds of Entrepreneurship” looks at why and how firms, such as HCL and Wipro, have created many entrepreneurs.

There are many who dream of striking out on their own, but few who venture to do so. Many amongst these few lack clarity on their decision to turn independent. The article “Creating Your Own Future in Business” delves on the introspection needed to be done by an aspiring entrepreneur.

The launch of entrepreneurial careers are often interesting. Ideas need to be sifted to identify opportunities and opportunities need to be turned into viable businesses. The next article, “Turning Ideas into New Businesses” provides insights into common pitfalls encountered in this process of translating ideas into opportunities and into businesses.

A business plan is an essential component to the launch of any entrepreneurial venture. While literature abounds in how to prepare a business plan, often entrepreneurs do not understand the fundamentals in approaching a business plan. The article, “Steps to Making a Business Plan” delves on the thinking which precedes the preparation of one.

The article titled, “Lessons for the Bootstrap Entrepreneur”, looks at how entrepreneurial success can be achieved without big funding.

Entrepreneurial growth firms tend to have accelerated growth. The rate of growth is often of concern to the entrepreneur and the other stake-holders. The article, “How Fast is Too Fast?” ponders over the issues of concern and suggests factors based on which firms can decide on their speed of growth.

In the case of firms founded and led by entrepreneurs, everything seems to revolve around the entrepreneur. De Vries, Professor of Leadership Development at INSEAD, argues that often their decision making styles are centralized, lacking in conscious planning and impulsive. He suggests that the key for entrepreneurial firms is to capitalize on behaviors that promote growth, while balancing some of the destructive patterns. The article, “Rethinking the Role of the Entrepreneurial Leader” delves on how an entrepreneur can promote entrepreneurial culture within his organization, thereby becoming a leader of entrepreneurs.

Change is the only constant factor in today’s world. While there are guidelines and thumbrules on what entrepreneurs would and should not do, the article, “Entrepreneurship in a Turbulent Environment” looks at the experience of an entrepreneur on when to ignore conventional business wisdom.

The article “Entrepreneurship around the Globe: Adapting to Different National Environments” attempts to model the entrepreneurial environment in the different countries to evolve patterns which help to understand the nature of interaction between entrepreneurs ant the environment. This can serve as a template for prospective entrepreneurs seeking to explore opportunities in other countries.

The last article of this section “Entrepreneurship in India” portrays the dominance of necessity entrepreneurs in contrast to opportunity entrepreneurs in the Indian environment. It lists factors which can further the cause of entrepreneurs in this country.

The section on Cases begins with Indian examples. The first case portrays the launch of Infosys by the well educated and experienced N R Narayana Murthy along with a few colleagues and the building up of a role model firm is sought to be captured. The contrasting case of the highly ambitious Dhirubhai Ambani and his evolution from a petrol station attendant to the Chairman of India’s largest private sector enterprise, is traced in the next case. The defining challenges and Ambani’s response to these is sought to be captured. The third case looks at the success of the arguably India’s best techno-preneur, Dr. Anji Reddy and the growth of Dr. Reddy’s Laboratories into a premier research oriented pharmaceutical firm in India. The road to success of American entrepreneurs, William H Gates and the father-son duo of Thomas Watson Sr. and Jr., and the challenges faced by them, are illustrated in the next two cases. The next case on Joseph Cossman, an unusual American entrepreneur who achieved success at an early stage and portrayed the quintessential values that entrepreneurs need to have, namely a never say die spirit, high people orientation and an ablility to apply learning, is captured in an absorbing narration of his experiences. The maverick British entrepreneur Richard Branson who has made a practice of challenging established business leaders in their industry is narrated in another case. The case on late Japanese entrepreneur Konosuke Matsushita is yet another example of transition from humble beginnings and a small business into a world class firm.

The demonstration effect often proves to be a powerful catalyst. Eight people ran the four minute mile within six months of Roger Bannister. The successes of Bill Gates, Richard Branson and Matsushita overseas and that of Narayana Murthy, Azim Premji and Dr. Anji Reddy at home, may inspire many more to take the pilgrimage.

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