Have you ever wanted to start your own business? This unit will give you the opportunity to consider and reflect on the personal aspects involved in transforming an innovative idea into an entrepreneurial product. You will also learn how to identify the requirements for building an appropriate entrepreneurial team. There are literally dozens and dozens of different definitions of ‘the entrepreneur’ and the concept of ‘entrepreneurship’. We have explicitly linked entrepreneurship to the capability for exploiting successfully innovative ideas in a commercially competitive market. Leaving to one side the fact that individuals working in the public and non-profit sectors can be very enterprising, in historic and policy making terms entrepreneurship refers to business behavior related to innovation and growth. For our purposes, entrepreneurs may be broadly defined as people who own and manage a business with the intention of expanding that business by applying some form of innovation and with the leadership and managerial capacity for achieving their goals, generally in the face of strong competition from other firms, large and small.
II. Economic function of the entrepreneur
Broadly, entrepreneurs have two vital roles to play in the economy (1) to introduce new ideas and (2) to energize business processes.
Figure 1. Business competition chain
Here, the role of the entrepreneur is to conceive a business idea in terms of an innovation to be brought successfully to the market and to find the wherewithal to make this happen. The entrepreneur does not necessarily need to have the design, production or delivery skills (this is the function of the firm) nor to shoulder all or most of the risk (this is often assumed by the providers of finance or investors). Indeed, the notion of the entrepreneur as a risk-taking trader, began to be challenged early on by the view of the entrepreneur as an adventurous self-employed manager capable of combining, to personal advantage, capital and labor. It would be wrong to state that the element of risk-bearing has completely disappeared from the modern concept of the entrepreneur. The successful management of risk is an important entrepreneurial attribute. However, it does seem true that a swift perception of opportunities and the ability to coordinate the activities of others emerge as the more central economic skills of the modern entrepreneur.
Austrian economist Joseph Schumpeter (1934), who has had a seminal influence on entrepreneurship, as well as innovation, placed the entrepreneur at the center of his theory of economic development. He defined the entrepreneur simply as someone who acts as an agent of change by bringing into existence a ‘new combination of the means of production’. New combinations include process, product and organizational innovations. The means of production includes capital, equipment, premises, raw materials, labor and, in recent times, information. Currently, knowledge has been added to the list as the indispensable ingredient for business success in the new millennium.
The essence of such an approach emphasizes that entrepreneurs are competitive and always strive to gain an edge over their competitors. When they begin to consolidate and slow down, they revert to being ordinary managers and, in Schumpeter’s terms, are no longer entrepreneurial. Thus attitudes to growth and the actual attainment of growth are essential elements of the concept of entrepreneurship. The attainment part of the concept, of course, implies a high level of managerial competence in all the five stages in Figure 1 and a high competence in social and commercial interactions outside the firm with other firms, regulators and, above all, customers and consumers. This implies that entrepreneurial firms that innovate successfully and encourage new innovations are likely to be different from most other firms. They appear to be more open and supportive of different opinions and ideas. The art of negotiation is a key entrepreneurial skill.
The characteristics of entrepreneurial firms that are successful at launching innovations have been widely studied. However, at this stage you may be a long way off starting, or helping to start, your own firm. The checklist should serve as a useful tool for gauging the innovative support from your current situation and as a guideline for the sort of atmosphere that needs to develop in a firm in order to maximize its entrepreneurial potential.
When faced with very real resource constraints, maintaining motivation to set up and run such a firm can be very tough. The main motivation for entrepreneurs to overcome the barriers of economic pressure and uncertainty, according to Schumpeter during the 1930s, were the prospects of upward social mobility into the capitalist class. At the start of the 21st century, with the almost universal dominance of market-based economic systems and a hugely increased middle class, the need to cope with the direct and indirect threats of ‘globalization’ is now often cited as the spur to innovation. For others, economic survival or the chance to create something of value are the driving motivators. Whatever the personal ambitions of entrepreneurial small firm owners, their role in introducing innovations and in improving overall economic development and efficiency is important.
Basically, the concept of development from an economic viewpoint means the growth of goods and services in an economy usually measured in total or per capita rates of growth in all goods and services, known as the Gross Domestic Product (GDP) or the Gross National Product (GNP) when nationally owned overseas goods and services are included. In advanced industrial economies such as Britain, France, Germany and so on, policy objectives tend to be targeted on improving economic performance rather than development per se. As an alternative to an economic approach, one of the best known psychologically based economic development models that is still very influential, David McClelland’s achievement motivation model, pays less attention to structural factors while the psychological determinants of economic behavior are more strongly emphasized:
Some wealth or leisure may be essential to development in other fields the arts, politics, science, or war but we need not insist on it. However, the question why some countries develop rapidly in the economic sphere at certain times and not at others is in itself of great interest, whatever its relation to other types of cultural growth. Usually, rapid economic growth has been explained in terms of ‘external’ factors favorable opportunities for trade, unusual natural resources, or conquests that have opened up new markets or produced internal political stability. But I am interested in the internal factors in the values and motives men have that lead them to exploit opportunities, to take advantage of favorable trade conditions; in short, to shape their own destiny. (McClelland 1968, p. 74)
McClelland’s preferred entrepreneurial motivator, the need for achievement or nAch as it is usually abbreviate – ‘a desire to do well, not so much for the sake of social recognition or prestige, but to attain an inner feeling of personal accomplishment’ – is a more psychologically-based theory. McClelland himself summarized an alternative economic development theory as ‘a society with a generally high level of nAch will produce more energetic entrepreneurs who, in turn, produce more rapid economic development’. However, McClelland was quite disparaging about the profit motive as the mainspring of entrepreneurial activity:
Since businessmen had obviously shifted their concern from intrinsic worth to money worth, Marx and other economists endowed man with a psychological characteristic known as the ‘profit motive’. The capitalist, at any rate, was pictured as being driven by greed, by the necessity of making money or keeping up his rate of profit. That such an assumption is a typical oversimplification of rational or armchair psychology has recently begun to be realized by historians in particular who have studied the lives of actual business entrepreneurs in the nineteenth century. Oddly enough, many of these men did not seem to be motivated by a desire for money as such or by what it would buy.
III. Entrepreneurial Qualities
It is now widely accepted that, apart from the start up phase, most small firms are more concerned about survival rather than growth and relatively few are especially entrepreneurial. Consequently, a lot of research in this field has focused on finding the characteristics that set entrepreneurs and their firms apart from others. Psychological aspects such as ‘entrepreneurial intention’ and the ‘ability to recognize opportunities’ are strongly linked to entrepreneurial behavior, the context in which the entrepreneur operates is also very important. Entrepreneurship reflects complex interactions between the individual and the situation, which has to be dynamic because business situations are always changing. Perceptions and judgment are, therefore, key elements in this process. Mark Casson (1982) identified ‘judgment’ as one of the qualities that distinguishes the successful entrepreneur from the much larger group of non-entrepreneurial SME owners. As mentioned before, business judgment can reflect an innate ability but most frequently it directly derives from experience (or, more accurately, learning from experience). However, past experience can also filter out our ability to spot new opportunities or threats. Cultural effects related to family, locality and friends can help us interpret the world but they can also color what we see.
The same may be true of the influences from various networks that business owners often belong to (ranging from business associations such as Chambers of Commerce, business clubs and so on, to more social links related to, say, sport or leisure activities). And, of course, our own expectations and motivations of what we hope for in life, at work and in terms of a career will affect both judgment and business behavior. 1. Business situations consist of real challenges, constraints and opportunities that directly impact on the business performance of a firm. 2. However, it is how entrepreneurs perceive these that guide their judgments and actions (which is why accurate market information, the ability to learn and experience are so important). 3. Business perceptions are also influenced by personal and business motivations, peer pressures and cultural influences (it could be argued that entrepreneur’s perceptions are more closely aligned with reality).
4. Entrepreneurial behavior is guided by the entrepreneur’s expectations rather than a rigid set of strategic objectives (again, it may be that the entrepreneur’s expectations are more realistic and, maybe, more ambitious than those of other business managers). 5. The process is not static but very dynamic with feedback and signals from the market consciously and indirectly affecting later decisions and actions. As each context and set of market signals reflect industry, regional and life-cycle influences, it is difficult to believe that each entrepreneur needs the same set of skills in order to achieve success. The model in Figure 2 reflects the uniqueness of the business situation facing each entrepreneur and the key areas where superior judgment will make a difference.
Figure 2: Model of entrepreneurial decision making
A. Behavioral Characteristics of Entrepreneurs (Jeffrey Timmons, 1977)
• drive and energy
• high initiative and personal responsibility
• internal locus of control
• tolerance of ambiguity
• low fear of failure
• moderate risk taking
• long-term involvement
• money as a measure not merely an end
• use of feedback
• continuous pragmatic problem solving
• use of resources
• self-imposed standards
• clear goal setting.
Perhaps a little less familiar is the quality that successful small business owners are said to have – high internal locus of control. This means that they believe that their behavior determines what happens to them and that they can control their own behavior. This is linked to the need for autonomy and personal independence expressed by many entrepreneurs as their prime motivation for setting up their own firms. Internal locus of control has featured fairly consistently in studies on the psychological characteristics of entrepreneurs. Essentially the concept implies three separate beliefs on the part of individuals that: 1. the outcome of events and situations are susceptible to intervention 2. individuals can intervene and influence the outcome of situations positively from their perspective 3. they themselves have the skills and capacity to intervene effectively in certain situations or to influence certain events. The self-confidence, energy flexibility and opportunism associated with entrepreneurial behavior suggests that entrepreneurs are individuals who are accustomed to getting involved and that they expect positive results from their involvement. In other words, they are prepared to expend energy and mental effort because they expect and often receive appropriate or, in their terms, valuable rewards.
Also, they are flexible and opportunistic because they believe they have the capacity to become involved across a broad range of situations. Internal locus of control beliefs are essential to the success of self-motivated behavior and form a central core of the entrepreneur’s self-concept. However, it is equally clear that entrepreneurs will not be the only people sharing these beliefs. Most reasonably successful students at all levels realize that their own efforts in studying have a lot to do with passing. Most people for whom sport is more than just an occasional leisure activity know the value of expending their own efforts on training and the importance of self-confidence. And in business, most chief executives and reasonably able mid-level to senior managers will be accustomed to obtaining positive responses from their personal interventions. It seems clear that people who believe that outcomes basically depended on their own behavior and that they can control their own behavior will generally believe that the control of events of importance to them ultimately rested internally in themselves. This is clearly linked to self-confidence and the ability to self-motivate.
However, people with internal locus of control beliefs are in the minority. For many people, their lives are deeply affected by the decisions of people in more powerful positions than themselves which, in business, can include strong partners, customers and suppliers; Even more pervasive than the belief that powerful others exert a determining control or influence are widespread beliefs that events are determined by chance or luck. IV. Entrepreneurial Work Style
The need for supportive, open and communicative policies, structures and cultures in effective entrepreneurial firms as the optimal crucible for successful innovations comes through very strongly from studies of innovation and successful entrepreneurship. However, the strong internal locus of control of successful entrepreneurs suggests there may be a difficulty in accepting the influence of others, powerful or not. And, the strong need for autonomy does not suggest a personality open to sharing of ideas or knowledge. Indeed, the popular image of a successful entrepreneur can sometimes be that of a determined autocrat who lets nothing stand in the way of success. How can these two conflicting pictures of successful entrepreneurship be reconciled? The answer is that, just as there is no one ‘entrepreneurial personality’ and people have different styles of learning, so too are there different management and leadership styles that vary between particular entrepreneurs, in their particular firms facing their own particular set of circumstances. Most definitions of the entrepreneur also stress the ability to organize and combine as the key distinguishing features.
This would emphasize the converger’s learning style, a conclusion that should find support from influential management writer Peter Drucker (1985). He maintains that innovation no longer results from chance activities but needs to be managed – whether in a big or small firm – as an organized and systematic process. This suggests that preferred learning styles will be directly related to the learning and skills needs perceived at the time and where they work in the enterprise value-cycle. Thus, learning styles are also likely to be linked to preferred management and leadership styles. Generally, management-orientation can be described in terms of three very broad, but not mutually exclusive areas – structure (organizational and bureaucratic), people (social and motivational) and change (entrepreneurial and innovative) (Ekvall, 1991). Management styles reflect the influences of the management orientation (the requirements of where they manage in the value chain and individual personality).
Very broadly, two main categories are often used to distinguish the main approaches – task-focused and people-focused – and the associated leadership styles contrast directive with participative styles. In fact, a basic two-way classification is far too simple. The brief discussion above suggests at least five broad management behavioral styles – structured (rules and procedures), delegative (happy for subordinates to take some direct responsibility for their own work) standards (set or agree quality and performance standards), merit (praise and reward good work) and supportive (helpful and enjoy the team’s trust). To get a better understanding of the sort of management style that might be the most suitable for the business that is to launch your idea, we need to go beyond different types of management and look to the role of the entrepreneur as leader. Many managers are mainly administrators or specialists in bounded areas whereas one of the key functions of an entrepreneur is to motivate and coordinate the firm in achieving its goals.
Accepting that the main management orientation of the entrepreneur must be to manage change and innovation, in some circumstances this means that the entrepreneur also has to be an extremely efficient manager of the day-to-day challenges of competition while, in other cases, administrative functions are delegated and the entrepreneur is required to be an ambassador and leader, with a longer-term perspective. The firm that best fits the focus of this course clearly has an innovative leadership style where there is a high focus on both people and tasks. The firm is generally seen as a team and is open to collaborating and sharing with external firms or sources of capabilities. However, research conducted over the years among small firm owners suggest that most like to see themselves in command (especially very small firms with, say, less than ten employees) and having a directive style. Interestingly, growth-oriented small firms that have a history of growth, and slightly larger small firms, are much more likely to see themselves as being ‘one happy family’ (paternalistic style) or having a participative style.
The firms that are governed by external rules and procedures, have a comparatively low people and task focus and generally have a structured management style that does not encourage innovation (though in some professions there can be a strictly limited delegation). In looking ahead to the launch of a successful entrepreneurial idea, we have already highlighted the importance of social process in innovation so it is important to avoid getting too fixated only on the role and capabilities of the entrepreneur. The overall capacity of firms, real and perceived, rather than just the individual abilities of their owners, managers or employees that determine the scope of their activities. Perceptions of their own and their staff’s capabilities plus their perceptions of competitors’ capabilities has an important part to play in determining small firm owners’ expectations of success. However, there are also likely to be cultural factors of a more general nature which influence perceptions of desired abilities, resources and skills. Entrepreneurs may well be able to identify crucial skills and tasks more accurately than other small business managers.
Entrepreneurs can also be defined in terms of their ability to perceive and to respond to these changes more quickly than other business managers. With reasonable feedback, it is relatively straightforward to discuss opportunities and to identify the gaps between reality and perception. However, customer and consumer needs are often ill defined, hidden from view and difficult to quantify Certainly, the perception of many lower level needs (either the needs of entrepreneurs or of customers) are even more strongly determined socially through broad cultural or more immediate occupational influences. It seems reasonable to hold that effective business judgment reflects the correspondence of an individual’s perceived capacities, opportunities and threats to their objective possibilities and the individual’s ability competence) to act upon that information.
It is not too difficult to then interpret the list of common entrepreneurial behavioral characteristics in terms of business competence. The successful entrepreneurial firm needs the right balance of competences in the team as a whole rather than seeking them in a single individual. Modern management theory is certainly moving in this direction and away from older hierarchical, scientific management or management-by-objectives models. In reality, your leadership and management styles will be determined by what you feel most comfortable with and what you feel is the norm in the circumstances (but remember that the people you are dealing with also have their feelings about what is a ‘normal’ management or communications style for the circumstances). By now we shall assume that you have worked out many of these issues to your own satisfaction but, if you need more help, the following activity on teamwork issues may help you consider them more systematically.