Professional Documents
Culture Documents
entrepreneurship
2e
a process perspective
Robert A. Baron
Wellington Professor of Management, Lally School of Management & Technology, Rensselaer Polytechnic Institute, Troy, NY
Scott A. Shane
Professor of Economics and Entrepreneurship, Weatherhead School of Management, Case Western Reserve University, Cleveland, OH
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Entrepreneurship: A Process Perspective, 2nd Edition Robert A. Baron and Scott A. Shane
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chapter 1
1 2 3 4 5 6 7 8
Dene entrepreneurship as a eld of business. Explain why the activities of entrepreneurs are so important to the economies of their countries, and why entrepreneurship is an increasingly popular career choice. Describe the process perspective of entrepreneurship, and list the major phases of this process. Explain why entrepreneurship can be viewed as arising out of the intersection of enterprising people and opportunities. Understand why this text will both describe what entrepreneurs actually do and what, perhaps, they should do! Describe several issues and questions about entrepreneurship that are currently receiving greater attention in the eld (e.g., university-based technology transfer). Explain why certain sources of knowledge about entrepreneurship are more reliable and useful than others. Describe the nature of three basic means for obtaining knowledge about entrepreneurshipsystematic observation, the case method, and experimentation and the role of theory in the eld of entrepreneurship.
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Anyone who has invented a better mousetrap, or the contemporary equivalent, can expect to be harassed by strangers demanding that you read their unpublished manuscripts or undergo the humiliation of public speaking, usually on remote college campuses.
Barbara Ehrenreich (1985)
Why do we start with these examples of what might be termed non-earthshaking products? Because they illustrate several key points about entrepreneurship that we will make throughout this text. First, these entrepreneurs and their companies indicate that entrepreneurship is denitely a processa chain of events and activities that takes place over timesometimes, considerable periods of time. It begins with an idea for something newoften, a new product or service. But the idea is only the start: Unless the process continues
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Courtesy, TissueKups
If you have ever been an entrepreneuror plan to become one in the futureyou will certainly come to appreciate the accuracy of these words. One of us has been an entrepreneur (Baron) and the other has worked closely with them for many years (Shane), so we know that many people seem to believe that entrepreneurs have extraordinary powersabilities that are almost magical in nature. This belief, in turn reects the widely held view that entrepreneurs are unusual people. Think about it for a moment. When we say the word entrepreneur, what names come to mind? Bill Gates? Michael Dell? Julie Aigner-Clark (founder of Baby Einstein)? Jeff Bezos (founder of Amazon.com)? Probably, because the fame of these entrepreneurs has spread around the globe. But in fact, entrepreneurship, as well describe it in this book, is denitely not restricted to this kind of awe-inspiring success in one of a handful of industries. On the contrary, the entrepreneurial spirit can be observed in much smaller companies and in an almost endless array of contexts. For instance, consider Lorraine Santoli. Growing tired of trying to nd a facial tissue while driving, she came up with a new ideaa cup that holds and dispenses tissues one at a time and that can t in the cup holders found in almost every vehicle (see Figure 1.1). The company she founded to develop this ideaTissueKups Inc.is now humming along with sales in the millions. High tech? No. Sexy? No. Effective and appealing to many potential customers? Something new that did not exist before? Yes! Or, for another example, consider Victoria Malmer who, like many millions of people in the United States and other countries, wanted to drink more liquids because doing so is good for personal health. Moreover, like many people, she wanted her beverages to have a avor she
liked. One solution is to carry around heavy bottles containing preferred drinks. But Ms. Malmer didnt like doing that, so she and her friend Paul Staunton came up with another idea: why not produce avorings in small containers that people can easily carry with them and add to any beverage to get the taste they like? The company they started to produce this and similar products Flavor2Gois now riding a wave of sharply rising sales.
so that the idea is converted into reality (actually brought to market through a new business venture, licensing to existing companies, etc.), it is not entrepreneurship. Rather, it is just an exercise in creativity or idea generation. Second, these examples underscore the fact that being an entrepreneur does not necessarily involve starting a particular kind of company, working in a particular industry or sector (e.g., high-tech), or coming up with a dramatic new product. On the contrary, as well see over and over again, the heart of the process involves bringing something newsomething that is not now being produced or exploited by othersto the marketplace. Well have more to say about this, the heart of entrepreneurship, later; here, we simply want to break the mind-set with which many people enter their rst course in entrepreneurship an approach reecting several major myths about entrepreneurship (e.g., it cant occur without large amounts of capital, it must be based on new technology, must tap a really hot market, and so on). Well be discussingand refutingthese and other false ideas throughout this book, so stay tuned for more about this point because our goal is to present an accurate picture of what entrepreneurship really is, rather than a repetition of what many people think it is. Having claried these important points, we now turn to several tasks that we want to accomplish in this initial chapter. First, we present a denition of entrepreneurship as an activity, a eld of study in business, and a way of life. Next, well offer a framework for understanding entrepreneurship as a process one that unfolds over time. As well soon see, this process is affected by many different factors, some relating to individuals (i.e., entrepreneurs), some to their relations with other people (e.g., partners, customers, venture capitalists), and some to society as a whole (e.g., government regulations, market conditions). A major theme of this book will be that all three kinds of factors (individual, group, societal) play an important role in every phase of the entrepreneurial process. As part of this discussion, we emphasize yet another key theme: At the heart of the entrepreneurial process lies the intersection of opportunities generated by changing economic, technological, and social conditions, as well as enterprising people capable of recognizing and actively exploiting them. This theme will be examined in more detail in Chapter 2, which focuses on the emergence of opportunities, and Chapter 3, which focuses on the cognitive foundations of entrepreneurship (e.g., where ideas for new products or services originate and how individuals actually perceive or recognize opportunities). Third, well comment briey on current trends in the eld of entrepreneurshiptopics and questions that are receiving growing attention because they are increasingly recognized as playing an important role in the entrepreneurial process. After that, we consider the question of how we know what we currently know about entrepreneurshipin other words, how the information presented in this book was obtained. We think this point is important because, in general, it is dangerous to accept any information as accurate without knowing something about its source and how it was obtained. Finally, we provide you with an overview of the contents of this book and a description of its special features. Now, to begin at the beginning, we offer a denition of entrepreneurshipa denition that will be reected in the contents of every chapter.
learning objective
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a denition offered by Shane and Venkataraman1 has received increasing acceptance. Broadly paraphrased, their denition suggests the following: Entrepreneurship, as a eld of business, seeks to understand how opportunities to create something new (e.g., new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specic individuals, who then use various means to exploit or develop them, thus producing a wide range of effects. By implication, this denition suggests that entrepreneurship, as an activity carried out by specic individuals, involves the key actions we mentioned earlier (identifying an opportunity that is potentially valuable in the sense that it can be exploited in practical business terms and yield sustainable prots), and the activities involved in actually exploiting or developing this opportunity. In addition, as we note in a later section of this chapter, the process does not end with the launching of a new venture; it also involves being able to run a new business successfully after it comes into existence. We believe that this denition is a clear and useful one, and does indeed capture the essential nature of entrepreneurship. Although it helps to clarify many important questions, perhaps the most central of these is: Just what makes someone an entrepreneur? To see how the denition offered by Shane and Venkataraman helps signicantly in this respect, consider the following individuals. For each, ask yourself the following question: Is this person an entrepreneur?
n
A woman who enjoys making appetizers for parties in her home, and who is often praised by her friends who tell her how delicious these are, starts a company to make and sell them. A university scientist engaged in basic research on the biochemistry of life, makes important discoveries that advance the frontiers of his eld; however, he has no interest in identifying practical uses of his discoveries and does not attempt to do so. After being downsized from his management level job, a middle-aged man discovers a special way of processing old tires to make edging for gardens (borders that keep different kinds of plants separate). A retired army ofcer purchases obsolete amphibious vehicles from the government and uses them to start a company that specializes in tours of remote wilderness areas. A man who has often forgotten the numbers needed to open combination locks comes up with a new idea: why not build a lock that uses letters instead of numbers? He enters the idea (which he previously patented) in a contest for new inventions, and wins. The retailer that runs the contest signs a contract with him to sell this new kind of lock at all of its 1,200 stores.
Which of these individuals are entrepreneurs? At rst glance, you might be tempted to conclude that only the last two are really entrepreneursonly they brought something new to market. We suggest, however, that all of these individuals with the exception of the university scientist are entrepreneurs. Why? Recall our denition: Entrepreneurship involves recognizing an opportunity to create something new. It does not have to be a new product or service; on the contrary, it can involve recognizing an opportunity to develop a new market, to use a new raw material, or to develop a new means of production, to mention just a few possibilities. According to this denition, the appetizerbaking woman is acting as an entrepreneur because she recognized a new marketone that will pay a premium price for appetizers that taste truly homemade. In fact, this is just what Nancy Mueller did when she started Nancys Quichea company she recently sold for several hundred million dollars.
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Similarly, the downsized executive is using an existing raw material old tiresin a new way. This activity, too, qualies as entrepreneurship. The retired Army ofcer and the inventor are also entrepreneurs: Both identied opportunities for new products or services, and both took active steps to exploit these ideas in ways that generate economic gains. In contrast, the university scientist is not an entrepreneur according to our denition. Even though his research does add appreciably to human knowledge, the fact that he makes no effort to apply his discoveries to the development of new products, services, markets, or means of production, suggests that he not an entrepreneur. Certainly, he is playing a valuable role in society; but no, he is not an entrepreneur. In fact, scientists often can be entrepreneurs. For instance, one of us (Baron) is privileged to teach, from time to time, with a Nobel-prize winning physicist, Ivar Giaever. Prof. Giaever used his scientic knowledge to develop a new productone that can help physicians identify cancer cells not by looking at them through a microscope (what they typically do), but in terms of the electrical activity of the cells. Professor Giaever found that cancer cells and normal cells differ in this respect, and his productwhich he patentedmay well soon become a commercial as well as a scientic device. Whether it does or not, the fact that he has attempted to bring this new product to market makes him an entrepreneur as well as a world-class scientist. In essence, then, entrepreneurship requires creating or recognizing a commercial application for something new. The new commercial application can take many different forms, but simply inventing a new technology, product, or service, or generating a new idea is not, in itself, enough. As shown in Figure 1.2, many inventions never result in actual products for the simple reason that they offer no commercial benets (or, alternatively, no one can think of a marketable use for them), and so they cannot really serve as the basis for a protable new business. In sum, we agree with Shane and Venkataraman Figure 1 . 2
Newness Is Not Enough! As shown here, the fact that a product is new is not sufcient to assure that it will be developed and brought to market. We doubt, for instance, that the product shown here will ever really exist outside the cartoonists imagination.
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and with other theorists2 that entrepreneurship emerges out of the intersection of what might be termed inspiration and activationrecognizing opportunities for something new that people will want to own or use, and taking vigorous steps to convert these opportunities into viable, protable businesses.
A Note on Intrapreneurship
Before turning to other topics, we should note, briey, that recognizing opportunities for creating or developing something new can occur within existing organizations as well as outside them.5 In fact, many successful companies are deeply concerned with encouraging innovations and take active steps to provide an environment in which it can ourish.6 These companies work to develop a corporate culture that is receptive to new ideas rather than one that routinely rejects them, and provide concrete rewards for innovation.7 For instance, General Electric offers employees who come up with innovative ideas a share of the prots resulting from them. Although we cant say for certain that this policy increased innovation at GE, the company obtained more patents during recent decades than any other U.S. company; in fact, it holds more 51,000 in total! Individuals who act like entrepreneurs inside a company are often described as being intrapreneurspeople who create something new, but inside an existing company rather than through the route of founding a new venture. Unfortunately, they often face formidable barriers or obstacles, because not all organizations are as committed to innovation as General Electric. However, innovation is truly essential for gaining and sustaining competitive advantage, so it is something all organizations should seek.8 Although our focus will be rmly on entrepreneurs throughout this book, we do want to note that individuals can act entrepreneurially in several different contexts, including large, existing companies.
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learning objective
Explain why the activities of entrepreneurs are so important to the economies of their countries, and why entrepreneurship is an increasingly popular career choice.
During the past two decades, large corporations in the United States have downsized (a kind word for eliminated) more than 6 million jobs, yet unemployment fell to record-low levelsmainly as a result of new companies started by entrepreneurs. In recent years, more than 900,000 new start-up companies were founded in the United States (U.S. SBA, 1999, 2001). Currently, more than 10 million individuals are self-employed in the United States (U.S. SBA 1998, 2002)about one in eight adults! And taken together, U.S. rms with fewer than 500 employees (many of which were started by entrepreneurs), account for 51 percent of private sector output, employ 51 percent of private sector workers, and constitute 99 percent of all employers (U.S. SBA, August 2001). Even though the number of new businesses started each year has increased steadily, the number started by women and minorities rose even more dramatically; for instance, the number of companies owned by minorities increased 168 percent between 1987 and 1997, to a total of 3.25 million businesses employing more than 4 million and generating $495 billion in revenues (U.S. SBA, 1999).
These statistics suggest that the activities of entrepreneurs have a truly major impact on the economies of their societies. Even a casual glance backward at history suggests that entrepreneurs have always existed and always made waves in their societies: Vast fortunes were certainly amassed by entrepreneurs of the past such as John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt. Yet, more people than ever are pursuing, or considering, this role. For instance, look at Figure 1.3; it shows the number of franchises sold each year from 2000 to 2005. (Many people who want Figure 1 . 3
Interest in Entrepreneurship: On the Rise As shown here, the number of franchises sold each year in the United States increased greatly. Because franchising is one means for individuals to become entrepreneurs (or, sometimes, to get ready to become entrepreneurs by gaining important kinds of experience), this trend reects growing interest in entrepreneurship.
The number of franchises sold rose sharply in recent years. 342,000 338,000
351,000
270,000 250,000
2000
2001
2002 Year
2003
2004
2005
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to become entrepreneurs use franchises as a means of attaining this dream; see Chapter 8.) As you can see, the numbers are both amazing and rising rapidly. What factors are responsible for this trend? Many appear to be playing a role. First, the media are lled with glowing accounts of successful entrepreneurs such as Howard Schultz (Starbucks), Pierre Omidyar (eBay; see Figure 1.4), and Scott Cook (Intuit). As a result, the role of entrepreneur has taken on a positive and attractive aura. In an age when political and military heroes are few and far between, entrepreneurs, in a sense, become the new heroes and heroines, so it is far from surprising that growing number of individuals are choosing to pursue this kind of career. Second, there has been a fundamental change in what has often been termed the employment contractthe implicit understanding between employers and employees.10 In the past, this implicit agreement suggested that as long as individuals performed their jobs well, they would be retained as employees. Now, in an era of downsizing and rightsizing, this agreement has been rewritten, with the result that many individuals feel little loyalty to their current employers. It is just one small step from such feelings to the conclusion, Id be better off working for myself! A third factor is a change in basic values. In the past, job or career security was a dominant theme for many people: They wanted a secure job with steady increments in salary. Now, surveys indicate that young people, especially, prefer a more independent lifestyleone that offers choice in place of certainty or predictability.11 Together, these and many other factors combine to bolster the allure of becoming an entrepreneur and, as noted previously, translate into the creation of hundreds of thousands of new businesses employing millions of people. This trend is stronger in the United States than elsewhere, but seems to picking up steam around the world as government leaders in many countries recognize that entrepreneurs do matterand matter greatly.
Bettmann/CORBIS
Bettmann/CORBIS
entrepreneurshipa eld of study that seeks to understand how opportunities to create new products or services, new markets, production processes, ways of organizing existing technologies, or raw materials arise and are discovered by specic individuals, who then use various means to develop them. This denition implies that in order to understand entrepreneurship as a processand as an activity in which entrepreneurs engageit is essential to consider (1) the economic, technological, and social conditions from which opportunities arise, (2) the people who recognize these opportunities (entrepreneurs), (3) the business techniques and legal structures they use to develop them, and (4) and the economic and social effects produced by such development. All of these elements play a role in entrepreneurship, and all must be taken into account if we are ever to fully understand this complex process. These elements, in turn, imply that the eld of entrepreneurship is closely linked to older disciplines such as economics, behavioral science (psychology, cognitive science), and sociology. The ndings and principles of these elds can shed much light on many aspects of entrepreneurship and provide valuable frameworks for understanding key questions addressed by the eldquestions such as How do opportunities arise? (see Chapter 2), Why do some individuals but not others recognize them? (see Chapter 3), and What factors inuence the success of new ventures after they are launched? (see Chapters 10, 11, and 12). Admittedly, these questions are somewhat abstract, so perhaps a concrete example will be helpful. Consider the rapid growth of one successful high-tech company: Expedia.com. Expedia is an online travel service that allows users to book ights, hotel rooms, and rental cars from any computer with access to the Internet. The companys growth has been swift, so it seems clear that its founders recognized an excellent opportunity and went on to exploit it well. But now consider the following question: Could Expedia.com have been launched 10 years ago? The answer is Almost certainly no. And the reason it could not is straightforward: technological, economic, and social forces had not yet generated the opportunity that the founders of Expedia.com recognized. From a technological point of view, an online travel service could not exist until many millions of people had access to the Internet, and until software capable of integrating the schedules of dozens of airlines and the rates of thousands of hotels existed. From an economic point of view, such a service could not be viable until a safe and reliable way of making payments over the Internet existed and unless airlines and hotels were willing to pay commissions to an Internet company instead of, or in addition to, traditional travel agents. Finally, from a social perspective, an online travel service could not exist and prosper until large numbers of people had enough condence in online information and transactions to entrust their travel plans to it, and until large numbers of people became aware of the fact that travelers on the same ights often paid hugely different fares (see Figure 1.5). In sum, the opportunity for founding Expedia.com did not always exist; rather, it emergedand became available for discovery by specic individualsout of a combination of many factors, economic, technological, and social. In a similar manner, the disciplines of economics, behavioral science, and sociology can help to provide answers to other basic questions addressed by the eld of entrepreneurship, questions such as: Why do some individuals but not others recognize opportunities? Why are some entrepreneurs so much more successful than others? and Why are some means for developing opportunities more effective than others? Clearly, then, the eld of entre preneurship does not exist in an intellectual vacuum; rather, its roots rest rmly in several older disciplines that, together, provide it with a rm foundation for understanding one of the most complexand importantbusiness processes in existence. One nal comment: Are some of these disciplines more useful than others in our efforts to understand entrepreneurship as a process? In other words, should we focus primarily on economic factors, on factors relating to entrepreneurs, or on factors relating to society as a whole in our efforts to
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Figure 1 . 5
Opportunities Often Emerge from Change In recent years, increasing numbers of persons have become aware of the fact that people on the same ights or staying in the same hotels often pay different rates. This awareness was one factor that created the opportunity Expedia.com and similar companies have exploited.
understand the entrepreneurial process? This issue has sometimes been debated in the context of a distinction found in several other branches of management: macro versus micro approaches.12 Macro approaches take a top-down perspective, seeking to understand how and why new ventures are founded, and why they succeed or fail, by focusing largely on what are often termed environmental factorseconomic, nancial, industry, and political variables. Presumably, these factors, which are largely beyond the direct control of individuals, shape the behavior and decisions of individual entrepreneurs, so understanding their impact is crucial. In contrast, micro approaches take a bottom-up perspective, seeking to understand the entrepreneurial process by focusing primarily on the behavior and thoughts of individuals or groups of individuals (e.g., founding partners). Presumably, it is the way in which individuals behave that is the key to understanding the entrepreneurial process. Is either view more accurate or more useful than the other? Absolutely not. We believe that full understanding of entrepreneurship can only be gained through careful consideration of both perspectives. In fact, we agree strongly with one colleague who recently noted that a key dening aspect of entrepreneurship is that it involves efforts to understand how micro factors (e.g., the ideas, thoughts, and actions of individuals) interface with environmental factors (technology, life cycle of a given industry, economic conditions, etc.).13 In other words, a central question in the eld of entrepreneurship is: How are the motives, ideas, and intentions of individual entrepreneurs and the environmental conditions they face (e.g., conditions in specic markets of industries) reected in the kind of companies they start? In essence, the two approaches are complementary, and both are needed to gain a full understanding of entrepreneurial process. For this reason, both will be represented throughout this book.
What Entrepreneurs Do Versus What, Perhaps, They Should Do: Where Research-Based Principles Meet Actual Practice
As we mentioned earlier, one of us (Baron) has been an entrepreneur; in fact, he has started and run two different companies. These experiences were, by and large, very good ones, but when Prof. Baron thinks about them, he often ponders this thought: How great it would have been to have had the knowledge in this
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book when he started those companies! Looking back, he now realizes that he made virtually every mistake that lies in wait for unsuspecting entrepreneurs mistakes that experienced ones generally avoid. From choosing a partner (not well!) to signing a licensing agreement (too favorable to the large company that licensed Prof. Barons technology), he made one serious error after another. Despite this, both companies survived and were protable, but how well might they have done if he had known how to avoid these mistakes? Well never know, but it seems possible that the answer is that these companies would have been much more successful. We mention these personal experiences here because they illustrate what we think is the real and lasting value of this bookone reason you may want to keep it on your bookshelf in the years ahead. In the pages that follow, we dont simply describe what entrepreneurs dohow they recognize opportunities, obtain nancing, start companies to exploit these opportunities, and so on. In addition, we will also try to indicate what, perhaps, they should be doing during each phase of the entrepreneurial process. In other words, we will try to tread the ne line between actual practicewhat goes on in the hectic and turbulent world entrepreneurs face each dayand steps that, according to the ndings of careful research, would be helpful to them in their efforts to start and run successful new ventures. For this reason, well cover many practices and activities that entrepreneurs do not always recognize and adopt but which, we believe, can be highly benecial. For instance, research ndings suggest that entrepreneurs who engage in such activities as performing a careful feasibility analysis (a preliminary evaluation of a business idea to determine whether it seems worth pursuing; see Chapter 3), developing clear business models (a companys plans for how it will compete, use its resources, deal with customers, and generate prots; see Chapter 7), and engaging in careful competitor analysis (detailed analysis of a companys competitors, as an initial step in planning how to gain competitive advantages over them; see Chapter 4) are more likely to succeed than those who do not.14 Sad to say, Professor Baron did not perform these activities when he started his own companies, and he is now convinced that not doing so had negative consequences for the success of these new ventures. In short, after reading this book and making the concepts and ideas it presents your own, you will, we rmly believe, be much better prepared to meet the challenges of starting a new venture than was true for Prof. Baron and perhaps a majority of all rst-time entrepreneurs. So no, we denitely do not have all the answers, at least not perfect or complete ones; the eld of entrepreneurship is still too young for that. But we can offer advice for actions and procedures that will help tip the balance in your favor as an entrepreneur. So please read on; the new ventures that benet will be your own!
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KEY POINTS
Entrepreneurship, as a eld of business, seeks to understand how opportunities to create something new (new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specic individuals, who then use various means to exploit or develop them, thus producing a wide range of effects. In recent years, the allure of entrepreneurship has increased, with the result that more people than ever before are choosing this activity as a career.
Entrepreneurship, as a branch of business, has important roots in economics, behavioral science, and sociology. The eld of entrepreneurship recognizes that both the micro perspective (which focuses on the behavior and thoughts of individuals) and the macro perspective (which focuses primarily on environmental factors) are important for obtaining a full understanding of the entrepreneurial process. This book will do more than describe what entrepreneurs do (common practice); it will go further and describe actions and procedures entrepreneurs can perform to increase the likelihood that their companies will succeed.
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learning objective
Describe the process perspective of entrepreneurship, and list the major phases of this process.
Recognition of an Opportunity: The entrepreneurial process often begins when one or more individuals recognize an opportunitythe potential to create something new (new products or services, new markets, new production processes, new raw materials, new ways of organizing existing technologies, etc.) that has emerged from a complex pattern of changing conditionschanges in knowledge, technology, economic, political, social, and demographic conditions.16 Opportunities have the potential to generate economic value (i.e., prot) and are viewed as desirable in the society in which they occur (i.e., development of the opportunity is consistent with existing legal and moral standards, and would, therefore, not be blocked or constrained by these standards). We will examine the emergence of opportunities in Chapter 2 and the cognitive roots of entrepreneurship in Chapter 3, but for the moment, we want to emphasize just one point: in a sense, there really is nothing entirely new under the sun. Ideas do not emerge out of a void; on the contrary, they almost always consist of a novel combination of elements that already exist. What is new is the combination and the recognition of links or connections between the various elements of which the ideas are composed. To take a striking example from history, Alexander Graham Bell did not invent the telephone out of sheer creative genius. Rather, he combined component ideas that already existed and had been generated by other people (e.g., electric batteries, basic research on the nature of sound, etc.) in a new way and invented a product that revolutionized human communication. Similar argument holds for recognizing opportunities. The opportunities themselves often emerge from changes in economic, technological, governmental, and social factors. When entrepreneurs notice links or connections between these changes (i.e., when they notice patterns in these changes), ideas for new ventures may quickly follow. For instance, consider Bill and Cheryl Brown, who recently started The Second Time Around, Inc., a company that helps people getting married for the second (or third or fourth) time plan their weddings (see Figure 1.6).17 The company experienced tremendous growth because, in essence, its competitorsexisting wedding servicesfocus entirely on young people getting married for the rst time. Bill and Cheryl Brown noticed, however, that several recent trends converge to suggest the need for a company like theirs. First, the number of people getting married who have been married before has increased dramatically. Second, because these individuals tend to be older than people marrying for the rst time, they often have greater nancial resources. Another, and seemingly unrelated trend is that
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Figure 1 . 6
Connecting the Dots To Recognize New Business Opportunities Opportunities for new ventures often emerge out of changes in a wide range of economic, technological, governmental, and social factors. Even though these trends and changes may seem, at rst glance, to be unrelated, successful entrepreneurs perceive meaningful patterns that point to potentially protable business opportunities. This was certainly true for Bill and Cheryl Brown who recognized the fact that millions of people in the United States who are getting married for the second or third time might need the help of a wedding service specically focused on their needs. The company they founded, The Second Time Around, has been highly successful.
older people in many societies seem increasingly willing to indulge themselvesthey do not want to miss out on experiences simply because they are in their forties or fties instead of their twenties and thirties. At rst glance, these trends and events might seem to be unrelated, but when considered together, a striking pattern emerges: Millions of people in the United States who need help planning their second or third wedding. The idea for Second Time Around was suggested by this emergent pattern, and the company provides a clear illustration of how diverse events and trends can combine to produce a new and potentially protable business opportunity. n Deciding to Proceed and Assembling the Essential Resources: Having an idea for a new product or service or recognizing an opportunity is only, of course, the rst step in the process. At that point, an initial decision to proceedto do something active about the idea or opportunityis required. As Shane, Locke, and Collins suggest, the entrepreneurial process occurs because specic individuals make this decision and act upon it.18 So, in their view, understanding entrepreneurs motives is crucial to comprehending the entire process. Deciding to start a business is one thing; actually doing so is quite another, and would-be entrepreneurs quickly discover that they must assemble a wide array of required resources: basic information (about markets, competitors, environmental and legal issues), human resources (partners, initial employees), and nancial resources. Gathering these resources is one of the most crucial phases of the entrepreneurial process, and unless it is completed successfully, opportunities, no matter how attractive, or ideas for new products and services, no matter how good, die on the vine, so to speak. It is at this stage, and especially when seeking nancial backing, that entrepreneurs typically prepare a formal business plana detailed description of how they plan to develop their new venture. (Assembly of required resources will be covered in Chapters 48.) Launching a New Venture: Once the required resources are assembled, the new venture can actually be launched. Doing so involves a wide range of actions and decisions: choosing the legal form of the new venture, developing the new product or service, establishing the roles of the top management team, and so on. Sadly, many new entrepreneurs do not fully grasp the complexities of starting a new venture, and as we will note in later chapters, this can burden them with problems that could, in fact, have been avoided. (The issues involved in actually launching a new venture will be covered in Chapters 811). Building Success and Managing Growth: Although moving from an idea to an actual, going concern represents major progress, it is just the start of another key phase in the entrepreneurial process: running the new venture and building it into a growing, protable business. Many entrepreneurs recognize that this phase requires additional nancial resources. However, in our experience, a smaller proportion fully recognizes the importance of two key factors in the process: developing effective strategies for encouraging and managing growth, and management issues relating to growth (e.g., being able to attract, motivate, and retain high-quality employees; building effective relationships among founders of the new venture). We cover both of these aspects of building growth in Chapters 12 and 13. Harvesting the Rewards: In this nal phase, founders choose an exit strategy that allows them to harvest the rewards they have earned through their time, effort, and talents. Individual entrepreneurs must choose
Courtesy, Twice is Nice Encore Bridal Creations LLC
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carefully among the many ways of reaping the benets of successful entrepreneurship (see Chapter 14) so as to maximize the benets they gain from, in many cases, years of sacrice and commitment. One additional comment: We do not mean to imply here that entrepreneurship can be readily divided into neat and easily distinguished phases. In fact, the process is far too complex for that to be true. But the activities just described do tend to unfold over time in an orderly sequence, with idea generation or opportunity recognition occurring rst, an active decision to proceed, next, and so on. We believe that viewing entrepreneurship in this manner offers several benets. First, it helps avoid a static view of entrepreneurshipone that sees it as a specic act (launching of a new venture) that occurs and is then complete. Such a view ignores the fact that entrepreneurs face an everchanging array of tasks and challenges, and that they often think and feel differently about these tasks and challenges as they change and unfold. Second, viewing entrepreneurship as an ongoing process draws attention to the key activities entrepreneurs must perform as they proceed with their efforts to convert ideas for new products or services into successful businesses. How well entrepreneurs perform these activities is often more central to their success than their personal characteristics or backgroundalthough, of course, these are important, too.19 Attention to the tasks entrepreneurs perform, in turn, gives us a good handle on identifying the skills, knowledge, and characteristics they need to function effectively in this role. So from this angle, too, a process perspective is useful. Finally, viewing entrepreneurship as a process suggests very strongly that different factors may affect it at different points in time, and that the effects or importance of specic factors may well change over the course of new venture creation. For example, consider the question of whether entrepreneurs are more risk prone than other peoplea question that has received a great deal of attention in recent years. Some research ndings suggest that entrepreneurs are indeed riskier than other people,20 while other ndings from equally careful research point to the opposite conclusionthat entrepreneurs are less willing to take risks than other groups, such as managers.21 How can both ndings be true? One possibility is that whether entrepreneurs are more or less risk-prone than other people depends on which phase of the entrepreneurial process we are considering. For instance, early on, entrepreneurs must, almost by denition, be relatively willing to accept risk: If they were not, they would never give up secure jobs to start new ventures. But later on, once they have launched a new venture and must pay bills, meet payrolls, and manage limited resources, they may shift toward becoming much less accepting of risk. In essence, entrepreneurs behaviorand the role of risk in their decisions and strategiesmay change considerably over the entrepreneurial process. Recent ndings suggest that as this logic suggests, the impact of many factors on entrepreneurs behavior and success does indeed change over the course of new venture creation.22 An overview of the major phases of new venture creation is shown in Figure 1.7; please examine it carefully, because it provides a basic framework for understanding much of what follows in later chapters.
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Individual-Level Variables (skills, motives, characteristics of entrepreneurs) Group-Level Variables (ideas, input from others; effectiveness in interactions with venture capitalists, customers, potential employees) Societal-Level Variables (government policies, economic conditions, technology)
Figure 1 . 7 Entrepreneurship as a Process: Some Key Phases The entrepreneurial process unfolds over time and moves through a number of different phases. Events and outcomes during each phase are affected by many individual-level, group-level, and societal-level factors. guess from our earlier comments on the macro/micro issue, we view this question as largely irrelevant. We believe that at every stage of the entrepreneurial process, individual-level (i.e., micro) variables, group or interpersonal-level variables, and societal-level (macro) variables all play a role (please refer again to Figure 1.7.) For instance, consider the question of opportunity recognition. Certainly, this crucial process occurs in the minds of specic individuals and must, therefore, reect the impact of individual-level variables such as the existing knowledge structures and the unique life histories of these individuals. But nothing that has to do with peoplenot even basic aspects of cognition occurs in a social vacuum. The kind of ideas people generate reect the times in which they live, the current state of technological knowledge, and many other aspects of the societies. Further, other people with whom the entrepreneur has contactfriends, associates, or even gures in the mass mediaoften suggest the basis of an idea for a new product or service. For instance, recent ndings indicate that entrepreneurs who have a mentoran older and more experienced person with whom they work and who inuences their career tend to recognize more opportunities than entrepreneurs who do not enjoy the benets of having a mentor.24 In short, all three levels of analysis (individual, group, societal) are relevant and must be considered in order to understand idea generation fully. Heres another example of the importance of considering both micro and macro factors (individual-level, group-level, and societal-level variables) in our efforts to understand entrepreneurship: Why do some individuals, but not others, choose to become entrepreneurs? Again, all three categories of variables play a role. With respect to individual factors, some individuals have higher energy, are more willing to accept risk, and have greater selfcondence (self-efcacy) and greater tolerance for stress than others; those high on these dimensionsand especially self-efcacy25are probably more likely to choose the entrepreneurial role.26 Direct evidence for the role of individual-level factors in choosing to become an entrepreneur is provided by many studies. Among these studies, one of the most unusual27 compared the levels of testosterone shown by male MBA students who had previously started new ventures and those who had not. Results indicated that those who had previously chosen to become entrepreneurs had higher levels of this male
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hormone! Further evidence suggested that this difference stemmed from a greater tendency toward risk on the part of the entrepreneurs, at least early in the process.
The Possible Role of Genetic and Other Biological Factors: The Micro Perspective Carried to the Limit
The ndings we just described, surprising as they may be, are actually related to a suggestion you may well nd even more provocativethe idea that genetic or biological factors, too, may play a role in entrepreneurship! How can this be? The authors who propose this idea28 note that genetic factors have been found to play a role in several tendencies and predispositions that have been found, in turn, to be closely related to entrepreneurship. For instance, a genetic component is a factor in how individuals brains react to high levels of risk; some people nd such conditions more pleasant or acceptable than others because, in part, they have genetically inherited tendencies to respond positively or negatively to risk. Some enjoy it, while others dislike it, which, in part, reects differences in how their brains function. Similarly, genetic factors play a role in how people react to overcoming obstacles or to engaging in the same activities for a long period of time. These factors, too, have been found to be related to entrepreneurship: Entrepreneurs show greater persistence than most people in overcoming obstacles and in engaging in the same activity for long periods of time.29 Third, it is well established that genetic factors play a role in the development of specic skills or abilities. These skills and abilities, in turn, lead individuals to pursue different kinds of careers and to seek employment in different industries. For instance, people with high mathematical or quantitative abilities may choose to work in technical or scientic elds. Because these areas offer greater opportunity for engaging in entrepreneurship than other elds or industries, the likelihood that such individuals will become entrepreneurs is enhanced. So, through this indirect route, genetic factors can inuence entrepreneurship. We could continue because several other factors found to play a role in entrepreneurship are ones that are determined, at least in part, by genetic factors.30 Please dont misunderstand: There is no suggestion here that genetic factors directly lead individuals to become entrepreneurs. Rather, the basic idea is that genetic and biological factors predispose individuals to develop certain characteristics, skills, or preferences, which in turn lead them to be more or less attracted to the kind of activities entrepreneurs perform and the kinds of environments in which they operate (see Figure 1.8). This intriguing possibility is just now becoming the focus of careful research. Stay tuned: The ndings promise to be both interesting and surprising.
Figure 1 . 8
Are Entrepreneurs Born? The Possible Role of Genetic Factors in Entreprneurship Recently, it has been proposed that genetic factors may play a role in entrepreneurship. One mechanism through which genetics may exert such effects is indirect in nature. Genes have been found to strongly inuence several characteristics personal dispositions that have also been shown to increases the likelihood that people will become entrepreneurs. In essence, then, some individuals may be predisposed to become entrepreneurs by their own genetic nature.
The Development of Various Predispositions Characteristics, Preferences Genetic Factors Development of Various Skills and Abilities
Entrepreneurship
Source: Based on suggestions by Nicolaou and Shane, 2006; see note 23.
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exposed to entrepreneurs in their own lives are more likely to proceed than ones who do not receive encouragement and have not been exposed to models of entrepreneurs. For instance, when Enron, a huge energy company based in Houston imploded as a result of a series of accounting scandals (October 2001), members of the local business community feared that a large number of highly talented people would leave the Houston area. To keep them around, they organized Resource Alliance Group, a company whose sole mission was that of helping formerand highly talentedEnron employees to become entrepreneurs. They succeeded to an amazing degree: Within just three months, they had helped 25 senior Enron employees to found new ventures. Just a few short years later, several of these companies became protable and were adding good jobs to the Houston-area economy. So clearly, group-level (i.e., social) factors such as help and encouragement from others can play a key role in the entrepreneurial process. Societal-level factors, too, are important. Individuals who come from certain social and economic backgrounds, or who live in countries where government policies are favorable to starting new ventures, are more likely to choose this role than individuals from other backgrounds or who live in other countries. We could continue with other examples, but by now, the main point should be clear: Individual-level, group-level, and societal-level factors inuence every action and every decision taken by entrepreneurs during all phases of the entrepreneurial process. Taking note of this fact, we will employ all three levels of analysis throughout this text. Although this approach adds complexity to our discussions of many topics, it will also offer a more complete, accurate, and useful picture of what we know about the process of entrepreneurship and how, perhaps, it can be made to run more smoothly for entrepreneurs. If those are not the ultimate goals of any text, then we, as authors, researchers, and entrepreneurs, have no idea as to what they should be!
learning objective
Explain why entrepreneurship can be viewed as arising out of the intersection of enterprising people and opportunities.
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Figure 1 . 9
Enterprising Individuals (people willing to accept risk, etc.)
Entrepreneurship
an important point: Opportunities vary greatly in their potential value, with the result that only some are worth pursuing. In other words, only for some opportunities is the ratio of risk-to-potential benets sufciently favorable to justify efforts to exploit them. As you have probably observed yourself, some business opportunities are superior to others. They occur in industries that are faster growing or ones in which customer needs are easier to identify or satisfy. Further, some opportunities are easier to protect against competition. In Chapter 2, we carefully examine the specic characteristics that make some opportunities more promising than others. The key point we wish to make here, however, should be obvious: At the very heart of entrepreneurship is a nexus (connection) between opportunities and people (see Figure 1.9). It is this connection or intersection that starts the processand sometimes changes the world!
Entrepreneurship: What Sometimes Happens When Enterprising Individuals Meet New Opportunities What is the essential nature of entrepreneurship? Shane (2003) suggests that it occurs when individuals willing to assume some risk recognize new business opportunitiesand decide to act on them.
KEY POINTS
Entrepreneurship is a process that unfolds over time and moves through distinct but closely interrelated phases. The entrepreneurial process cannot be divided into neat and easily distinguished stages, but in general, it involves generation of an idea for a new product or service and/or recognition of an opportunity, assembling the resources needed to launch a new venture, launching the venture, running and growing the business, and harvesting the rewards.
Individual, group, and societal factors inuence all phases of the entrepreneurial process. Thus, there is no reason to choose between a micro and a macro approach to entrepreneurship; both perspectives are necessary. It is the nexus of valuable opportunities and enterprising individuals that is the essence of entrepreneurship.
learning objective
Understand why this text will both describe what entrepreneurs actually do and what, perhaps, they should do!
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learning objective
Describe several issues and questions about entrepreneurship that are currently receiving greater attention in the eld (e.g., university-based technology transfer).
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Figure 1 . 10
Incubators and Science Parks: Encouraging Economic Growth Through Entrepreneurship All over the world, the number of incubators and science parks is increasing rapidly. These organizations seek to enhance regional or even national economic growth by providing start-up ventures with a protected environmentone in which they can benet from reduced costs and the proximity of many scientists and engineers. Shown here is the incubator center at Rensselaer Polytechnic Instituteone of the rst incubators in the United Statesthat continues to support start-up companies based on research by faculty or current and former students.
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Research is currently being conducted to determine the best ways for incubators and science parks to achieve their primary mission of helping to move advances in science and technology into useful products and services as quickly as possible.34 Incubators and science parks may well play an increasing role in the founding of many new ventures in the future, so again, it is far from surprising that studying them is another cutting-edge topic in entrepreneurship research.
KEY POINTS
The eld of entrepreneurship is broad in scope and reects the wide range of factors that affect the founding and success of new ventures. One topic receiving a great deal of current attention is university-based technology transferthe ways in which universities sometimes encourage entrepreneurial activities by faculty members and others. Another, closely related topic is the role of incubators and science parks organizations that seek to encourage
n
economic development in a region by encouraging the sharing of knowledge. Incubators are associated with universities, while science parks may be entirely independent. Recent research has also attempted to understand the ways in which entrepreneurs think, reason, and make decisions: entrepreneurial cognition. Findings indicate that entrepreneurs do indeed think differently in several respects, and that their cognitive processes often play a key role in the founding and success of new ventures.
learning objective
Explain why certain sources of knowledge about entrepreneurship are more reliable and useful than others.
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learning objective
Describe the nature of three basic means for obtaining knowledge about entrepreneurship systematic observation, the case method, and experimentationand the role of theory in the eld of entrepreneurship.
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Figure 1 . 11
Chester Carlson: A Case Study in Entrepreneurship Why was Chester Carlson able to come up with a practical and costeffective technology for making dry, permanent copiesan invention with far-reaching effects? Detailed study of his life and activities through the case method offers some intriguing possibilities and in this way, sheds important new light on the basic nature of opportunity recognition.
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Bettmann/CORBIS
changes affect another variable, we can conclude that changes in the rst cause changes in the second. Can this method actually be used to study entrepreneurship? In many instances, not very readily, because researchers simply cannot change many variables that are of interest to them. For instance, they cannot alter government policies or demographic trends, or change amount of capital available in economic markets. But in some contexts especially in research relating to the behavior of individual entrepreneursit is possible to use experimentation. For example, consider, again, the possibility that recognizing opportunities involves connecting the dots between seemingly unrelated events or trends so that meaningful patterns emerge and point to ideas for new products or services. This suggestion could be studied by experimentation. For instance, one group of individuals could be given training in recognizing patternsthat is, they would be trained in techniques that help in searching for and noticing patterns in complex events or trends. Another group, carefully matched to the rst in as many respects as possible (e.g., education, age, work experience), would not receive such training. Then, both groups would be asked to read materials carefully designed to contain information that can be combined into patterns pointing to new business opportunities. For instance, these materials could 8 be based on new ventures that actually developed Individuals Given Training Do Better 7 in Recognizing Opportunities in the past, but about which the participants in 7 the study do not know. If recognizing patterns does indeed play a role in identifying opportu6 nities, then the individuals given training in pattern recognition would be more successful at 5 this task than those not given such training (see Figure 1.12). 4 We realize that this scenario may seem very far removed from the chaotic, ever-changing 3 3 world in which entrepreneurs normally operate. However, the purpose of experimentation is not 2 to simulate or reproduce these conditions; rather, it is to gain insights into the nature of complex 1 processes such as opportunity recognition insights that cannot readily be gained through 0 the case method or systematic observation. Training No Training Experimentation offers one additional imporTraining in Recognizing Patterns tant advantage: It is useful for establishing causality. When changing one variable in an experiment produces changes in another, it provides strong evidence that Figure 1 . 12 the rst variable caused changes in the second. In the experiment we just Experimentation in described, differences in the performance of the two groups (one with training Entrepreneurship Research: in pattern recognition and the other without such training) would point clearly an Example to the potential role of connecting the dots in opportunity recognition. In the study illustrated here, one Moreover, this evidence would be stronger and more conclusive than that group of participants was given obtained by other methods. training in recognizing patterns Because of practical constraints (e.g., it is difcult to vary the factors of while the other was not. When interest systematically), experimentation is not often used in the study of both groups then read materials containing potential opportunities entrepreneurship. Instead, researchers employ a wide range of statistical for new ventures, the group given techniques to help determine causality on the basis of other methods, such as training was more successful in systematic observation. One approach is to determine whether one variable or recognizing these opportunities. change occurs before another. Something that occurs later in time cannot This research suggests that reasonably be the cause of something that occurred earlier. This concept, called recognizing patterns in complex Granger causality, can be used to establish the direction of causality in trends and changes may indeed systematic observation. So, for instance, suppose that research ndings play an important role in opportunity recognition. indicate that the more varied individuals work experience, the more
Success in Recognizing Opportunities
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opportunities they later recognize. Because work experience precedes recognizing opportunities, it makes sense to conclude that the experience produced (caused) opportunity recognition. The oppositethat discovering opportunities produces varied work experiencemakes little or no sense. In sum, there are several different methods for gathering usefuland accurateinformation about various aspects of entrepreneurship. None are perfect, but it is our strong conviction that all are very useful, and are greatly superior to the kind of informal, shoot from the hip approach taken in many popular books on entrepreneurship. Dont misunderstand: We do not mean to imply that the people writing such books are ill-intentioned or totally lacking in useful insights about the entrepreneurial process. Rather, we only wish to note that the information they communicate is based almost entirely on their own experience and other informal sources. Although these sources may sometimes provide important insights, they rest on less certain (i.e., reliable) foundations than information gathered through the use of systematic observation, experimentation, or the case method. For that reason, we will emphasize information gathered through those methods throughout this book.
thus allowing greater latitude for the impact of economic factors such as pay incentives.44 In situations like this, we say that the effects of one variable are moderated by another variable. In this case, the effects of pay incentives are strong when family members expect the business to remain with the family, but are weak when they expect that the business will be sold. In other words, the effects of pay incentives are moderated (changed, affected) by expectations about ownership of the business. We will encounter many instances in this book when one variable moderates the effects of another; thats why we introduce this concept here. As you can see, theories are extremely useful because they help explain why certain events or processes occur as they do. For instance, as the preceding example suggests, why pay incentives improve the performance of family businesses under some circumstances but not under others. So, how are theories derived in the rst place? Briey, the process goes something like the following: 1. 2. On the basis of existing evidence or observations, a theory reecting the evidence is proposed. The theory, which consists of basic concepts and statements about how these concepts are related, helps to organize existing information and makes predictions about observable events. For instance, the theory might predict the conditions under which individuals recognize or do not recognize opportunities. These predictions, known as hypotheses, are then tested by actual research. If results are consistent with the theory, condence in its accuracy is increased. If they are not, the theory is modied and further tests are conducted. Ultimately, the theory is either accepted as accurate or rejected as inaccurate. Even if it is accepted as accurate, however, the theory remains open to further renement as improved methods of research are developed and additional evidence relevant to the theorys predictions is obtained. (Please see Figure 1.13 for a summary of these steps.)
3. 4.
5.
Perhaps another concrete example will help clarify the importance of theory. Suppose that on the basis of careful observations and existing ndings, an entrepreneurship researcher formulates the following theory: Individuals Figure 1 . 13
Predictions are confirmed Confidence in the theory is increased
Additional research designed to test other predictions based on the theory is conducted
Theory is modified
The Role of Theory in Entrepreneurship Research Theories both organize existing knowledge and make predictions about how various events or processes will occur. Once theories are formulated, hypotheses derived logically from them are tested through careful research. If results agree with predictions, condence in the theory is increased. If results disagree with such predictions, the theory may be modied or ultimately rejected as false. Even if initial predictions are conrmed, further tests of the theory are generally required.
Theory is rejected
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who choose to become entrepreneurs think differently, in various ways, from people who do not choose this role.45 Specically, individuals who choose to become entrepreneurs are (1) more likely than others to be susceptible to several kinds of cognitive errors or biases (e.g., they are more likely to be overly optimistic and to suffer from the illusion of controlthey overestimate their ability to control the outcomes they experience, etc.), and (2) more likely than others to think about situations in terms of the gains they will give up if they do not launch a new venture, which, in turn, causes them to be more accepting of risk. These predictions are then formulated as specic hypotheses and tested in actual research. For instance, actual or would-be entrepreneurs could be compared with people who have no interest in starting new ventures in terms of their susceptibility to cognitive errors and their tendency to think about various situations in terms of losses. Measures of all these variables already exist and have been used in previous studies, so designing research to test these hypotheses is quite feasible. If results are consistent with predictions derived from the theory, condence in it is increased: there would be a stronger basis for accepting the theorys premise that entrepreneurs do indeed think differently from other people. On the other hand, if results are not consistent with predictions derived from the theory, condence in it is reduced. Why should the eld of entrepreneurship, which is eminently practical in orientation, be interested in theory? Because, as one social scientist remarked many years ago, There is nothing as practical as a good theory.46 By this statement he meant that having a good theorya clear understanding of why or how a process occurs as it doesis very useful from the point of view of intervening in it in benecial ways. In other words, if we have good and wellveried theories about entrepreneurship, we will understand this process in ways that enhance our ability to assist entrepreneurs in their efforts to start new ventures. And that, of course, would be a very positive outcome. In short, developing good theories is more than an exercise in basic science: It is an important step toward attaining valuable, practical results. Two nal points: First, theories are never proven in any ultimate sense. Rather, they are always open to testing and are accepted with more or less condence depending on the weight of available evidence relating to them. Second, research should never be undertaken to prove or verify a theory; it is performed to gather evidence relating to the theory. If a researcher sets out to prove her or his pet theory, the researcher commits a serious violation of the methods that should be followed to gather accurate information about any topic. Why? Because in this case, the researcher may lose objectivity, and either unconsciously (or even consciously) design her or his research so that it tips the balance in favor of the theory. Clearly, any results obtained under these conditions are on shaky ground.
KEY POINTS
Many potential sources of knowledge about entrepreneurship exist, but the most accurate and reliable knowledge is provided by methods found to be useful for this purpose in other elds: systematic observation, experimentation, and reection. Systematic observation involves careful measurement of variables of interest in order to determine whether they are related (correlated) in any orderly manner. To the extent they are, one can be predicted from the other. In the case method, large amounts of information are gathered about one organization or
specic individuals, and this information is then used to reach conclusions about what factors inuenced important outcomes such as economic success.
n
Experimentation involves direct interventions: One variable is changed systematically in order to determine whether such changes affect one or more additional variables. Theory involves efforts to explain rather than merely describe various phenomenato understand why and how they occur. Research is conducted to obtain data relevant to theoriesnot to prove them.
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Copyright 2008 Thomson Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Figure 1 . 14
Entrepreneurs: Key Contributors to Society Entrepreneurs do not merely add to their own personal fortunes; they often also improve the lives of millions through the new products and services they bring to market. Moreover, they often make generous donations to worthy causes. For instance, the breathtakingly beautiful Getty Museum, located outside Los Angeles, was funded by a gift of several billion dollars from the John Paul Getty Foundation.
entrepreneurship as a process. In closing, we wish to add that we agree with the English author Lady Mary Montagu who, in writing about personal wealth, once remarked: Tis a sort of duty to be rich, that it may be in ones power to do good. . . . We believe that successful entrepreneurs do indeed do good: true, they add to their own wealth. But in addition, they do much more: The products and services they bring into being improve the lives of countless millions of people; and on top of this, they are often extremely generous in donating substantial portions of their wealth to eminently worthy causes. For instance, a few years ago, one of us (Baron) visited the beautiful art museum in Los Angeles funded by the John Paul Getty Foundation (see Figure 1.14). What a gift to all humanity! And both of us work in Schools of Management that are named after the entrepreneurs who made generous donations to support them and the universities in which they are located. If this book helps emerging entrepreneurs to succeed in attaining their dreamsand therefore enhances their ability to do good with the wealth they acquirewe will feel that as authors, we have done our part.
Entrepreneurship, as a eld of business, seeks to understand how opportunities to create new products or services arise and are discovered or created by specic individuals, who then use various means to exploit or develop them, thus producing a wide range of effects. In recent years, the allure of entrepreneurship has increased, with the result that more people than ever before are choosing this activity as a career. Entrepreneurship, as a branch of business, has important roots in economics, behavioral science, and sociology. The eld of entrepreneurship recognizes that both the micro perspective (which focuses on the behavior and thoughts of
individuals) and the macro perspective (which focuses primarily on environmental factors) are important for obtaining a full understanding of the entrepreneurial process.
n
This book will not simply describe what entrepreneurs do (common practice); it will go further and describe actions and procedures entrepreneurs can perform to increase the likelihood that their companies will succeed. Entrepreneurship is a process that unfolds over time and moves through distinct but closely interrelated phases. The entrepreneurial process cannot be divided into neat and easily distinguished phases, but in general, it involves generation
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Robert Landau/CORBIS
of an idea for a new product or service and/or recognition of an opportunity, assembling the resources needed to launch a new venture, launching the venture, running and growing the business, and harvesting the rewards.
n
indicate that entrepreneurs do indeed think differently from other people in several respects, and that their cognitive processes often play a key role in the founding and success of new ventures.
n
Individual, group, and societal factors inuence all phases of the entrepreneurial process. Thus, instead of choosing between a micro and a macro approach to entrepreneurship, both perspectives are necessary. It is the nexus of valuable opportunities and enterprising individuals that is the essence of entrepreneurship. The eld of entrepreneurship is broad in scope and reects the wide range of factors that affect the founding and success of new ventures. One topic receiving a great deal of current attention is university-based technology transferthe ways in which universities sometimes encourage entrepreneurial activities by faculty members and others. Another, and closely related topic, is the role of incubators and science parksorganizations that seek to encourage economic development in a region by encouraging the sharing of knowledge. Incubators are associated with universities, while science parks may be entirely independent. Recent research has also attempted to understand the ways in which entrepreneurs think, reason, and make decisions: entrepreneurial cognition. Findings
Many potential sources of knowledge about entrepreneurship exist, but the most accurate and reliable knowledge is provided by methods found to be useful for this purpose in other elds: systematic observation, experimentation, and reection. Systematic observation involves careful measurement of variables of interest in order to determine whether they are related (correlated) in any orderly manner. To the extent they are, one can be predicted from the other. In the case method, large amounts of information are gathered about one organization or specic individuals, and this information is then used to reach conclusions about what factors inuenced important outcomes such as economic success. Experimentation involves direct interventions: One variable is changed systematically in order to determine whether such changes affect one or more additional variables. Theory involves efforts to explain rather than merely describe various phenomenato understand why and how they occur. Research is conducted to obtain data relevant to theoriesnot to prove them.
Glossary
Business Plan: A detailed description of the entrepre-
neurs vision for converting ideas into a protable, going business. Case Method: A research method in which large amounts of data about one organization or specic individuals are gathered and then used to reach conclusions about what factors inuenced important outcomes, such as economic success. Experimentation: A research method in which one variable is systematically changed in order to determine whether such changes affect one or more other variables. Hypothesis: An as-yet untested prediction or explanation for a set of facts. Intrapreneurs: Individuals who create something new, but inside an existing company rather than through founding a new venture. Macro (Perspective): A top-down perspective that seeks to understand the entrepreneurial process by focusing largely on environmental factors (i.e.,
economic, nancial, political) that are largely beyond the direct control of an individual. Micro (Perspective): A bottom-up perspective that seeks to understand the entrepreneurial process by focusing on the behavior and thought of individuals or groups of individuals (e.g., founding partners). Opportunity: The potential to create something new (new products or services, new markets, new production processes, new raw materials, new ways of organizing existing technologies, etc.) that emerges from a complex pattern of changing conditionschanges in knowledge, technology, economic, political, social, and demographic conditions. Systematic Observation: A research method in which certain aspects of the world are observed systematically and careful records kept of what is detected. This information is then used as a basis for reaching conclusions about the topics under investigation.
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sities charged with the task of helping to move scientic and technological discoveries by faculty from the laboratory to the marketplace.
values.
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4.
Getting Down
TO BUSINESS
1. Can you handle uncertainty? Is security (e.g., a regular paycheck) important to you, or are you willing to live with uncertaintyeconomic and otherwise? Are you energetic? Do you have the vigor and good health required to work long hours for long periods of time in order to reach goals that are important to you? Do you believe in yourself and your abilities? Do you believe that you can accomplish whatever you set out to accomplish, learning what you need along the way? Can you handle reversals and failures well? How do you react to negative outcomeswith discouragement, or with renewed commitment to succeeding the next time around and learning from your mistakes? Are you passionate about your goals and vision? Once you establish a goal or a vision of where you want to be, are you willing to sacrice almost everything else to get there, because you are truly passionate about doing so?
2.
3.
4.
5.
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6.
Are you good with other people? Can you persuade them to see the world the way you do? Can you get along with them well (e.g., handle conicts, build trust)? Are you adaptable? Can you make midcourse corrections easily? For instance, can you admit that you made a mistake and reverse course to correct it? Are you willing to take risks or leaps of faith? Once you establish a goal, are you willing to take reasonable risks to reach it? In other words, are you willing to do what you can to minimize the risks, but then, once you have done so, proceed?
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other people.48 They can handle uncertainty, are energetic, believe in themselves, react well and exibly to reversals, are passionate about their beliefs, are good with other people, are highly adaptable, and are willing to accept reasonable levels of risk. To the extent you possess these characteristicsor a least most of themyou may be well-suited for the role of entrepreneur. We suspect that if you are reading this book, you t this description, or you would not be in this course! But if you nd that you are relatively low on several of these characteristics, you might want to reconsider; perhaps becoming an entrepreneur is not really your particular cup of tea.
Current evidence suggests that successful entrepreneurs are high on all these dimensionshigher than
each, try to specify clearly the variables you would study and the ways in which you would gather information about these variables. Also try to formulate specic hypotheses about how your results will turn out. Finally, consider the implications for entrepreneurs if your ndings conrm, or do not conrm, you initial hypothesis. 1. Do companies that are rst to market with a new product have a competitive edge over companies that enter the same market later? Do repeat entrepreneurs (people who start one successful company after another) search for opportunities differently from entrepreneurs who found only one company? What factors lead individuals to give up secure and well-paid jobs to become entrepreneurs? Are these factors the same for women and men?
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case one
Entrepreneurship: A Field, an Activity, and a Way of Life
In 1996, Mario Morino launched the Netpreneur program, aimed at fostering high-tech, Internet-related entrepreneurship in the greater Washington, D.C., region, and to provide a learning community for entrepreneurs and their stakeholders. Morino was himself a successful entrepreneur, having taken an initial $600 investment in Morino Associates, founded in 1973 to develop software for mainframe computers, all the way to an initial public offering. The company then executed a merger to form Legent Corporation, which was in turn acquired in 1995 by IT giant Computer Associates for $1.7 billion, with Morinos share of the deal some $80 million. The Washington, D.C., area is a major metropolitan center and, as home to the federal government, globally known. Those elements do not make it a hub of entrepreneurism, however. When Morino launched his program, D.C. lagged far behind the Silicon Valley region,
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Boston, and other urban centers as a locus for entrepreneurial IT innovation. Arguably, the regions major businessesgovernment, major nonprots such as federally chartered mortgage lender Fannie Mae, traditional telecommunications companiesarent the sort to draw the entrepreneurialminded. The one major dot-com in the region at the time, America Online, employed far more administrative workers than high-tech inventors (compared to Silicon Valleys Google, which scours the market for technology Ph.D.s, needed to engineer its high-tech search services). Even so, many nascentand in some cases, accomplishedentrepreneurs worked in the area, and Morinos program gave them a means to meet, learn, and leverage each others resources. The program staged regular Coffee and Doughnets mixers, with local and national entrepreneurs as speakers, for face-to-face (or, in Internet parlance, f2f) interactions, and established a Web site (http://www.netpreneur.org) and mailing lists. Over the course of the program, the Netpreneur e-mail newsletter grew from 35 subscribers to more than 12,000. The Netpreneur program wasnt the only, nor even the rst, effort in the area to promote entrepreneuring, though it was the rst to focus on the Internet, and to broadly target newbies to the eld. Organizations such as the Mid-Atlantic Venture Association (MAVA), formed a decade before Morino chartered Netpreneurs, were working to introduce entrepreneurs to sources of capital, and to strategic partners and relevant service providers. According to its Web site, MAVA offers the following:
n
Facilitates the ow of capital by creating opportunities for membership interaction and investment. Hosts an annual venture fair, which showcases premier companies for private equity investment opportunities. Provides members with additional opportunities for deal ow and interaction during numerous annual luncheons, topical programming receptions, and other events featuring speakers and/or business discussions regarding entrepreneurial concerns, investment trends, company nancing, tax matters, IPOs and public policy issues.
The Netpreneur program casts a far wider net, and helped prospective entrepreneurs take the initial rst steps toward forums like MAVA. Even though the D.C. area most clearly wasnt Silicon Valley, Netpreneur and other area ventureoriented forums and groups did spawn, inspire, or
otherwise facilitate a number of successful entrepreneurial ventures. D.C. netpreneur Trevor Cornwell founded Skyjet in 1997 to serve as an aggregator for the highly fragmented market for charter jets. Corporate jets are expensive to own and operate, and sit idle a good deal of the time. Cornwells innovation was to provide a means for jet owners to advertise the availability of those jets to other corporations and individuals needing the exibility afforded by an executive jet, but unwilling to bear the full cost of one of their own. Here the contribution of the Internet was to facilitate an inexpensive platform for elding inquiries and registering notices of availability. Cornwell sold his company to publicly traded Canadian aircraft manufacturer Bombardier in 2000. Raj Khera became an entrepreneur after a career at the National Institute of Standards and Technology, an arm of the Department of Commerce, as an electrical engineer and technology transfer specialist. Forming Khera Communications with his brother, he turned his knowledge of working with the government into the development of GovCon.com, a business portal for government contractors, which was ultimately sold to VerticalNet, which specialized in portals for vertical markets. For every success, more than a few less-thansuccessful efforts were made, from start-ups that never quite gelled, to companies that successfully sought seed capital and even institutional rounds of venture funding, but went bankrupt. Susan DeFife, for example, created WomenConnect.com as a site for women professionals, launching it from the sunroom of her suburban home, and growing to a staff of 25, while securing some $5.5 million in venture funding. WomenConnect.com declared bankruptcy in 2000, when the dot-com bubbles burst took down a great many start-ups. DeFife has moved on; shes now one of the team at the helm of Backfence, a new service to create geographically local Web-based communities. At the end of 2002, Morino himself moved on, redirecting the efforts of the Morino Institute toward venture philanthropy and helping children of low-income families in the D.C. region. He handed off the Netpreneur program to a new team that pledged to keep it alive and fostering entrepreneurial development. The Washington, D.C., economy, meanwhile, is booming as a result of increased government spending, especially in the defense and intelligence communities, for homeland security, and for the war on terror.
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Questions
1. The Morino Netpreneur program sought to create a learning community for entrepreneurs and their stakeholders. Its pretty clear who entrepreneurs are, but who are their stakeholders? What sort of entrepreneurial ventures would you expect to come out of the Netpreneurial community located in the Washington, D.C., area? 3. How might D.C.s current booming economy affect its entrepreneurial community?
2.
Notes
1 Shane, S., & Venkataraman, S. (2000). The promise of entrepreneurship as a eld of research. Academy of Management Review, 25, 217226. 2 Sarason, Y., Dean, T., & Dillard, F. (2006). Entrepreneurship as the nexus of individual and opportunity: A structuration view. Journal of Business Venturing, 21, 286305. 3 McMullen, J.S., & Shepherd, D.A. (2006). Entrepreneurial action and the role of uncertainty in the theory of the entrepreneurs. Academy of Management Review, 31, 132 152. 4 Sarasvathy, S.D. (2004). The questions we ask and the question we care about: Reformulating some problems in entrepreneurship research. Journal of Business Venturing, 2004, 19, 707717. 5 Lumpkin, G.T. (In press). Intrapreneurship and innovation. In R. Baum, M. Frese, and F. Baron (Eds.), The Psychology of Entrepreneurship. Mahwah, NJ: Erlbaum. 6 Ricchiuto, J. (1997). Collaborative Creativity. New York: Oakhill. 7 Koen, P.A., & Baron, R.A. (2003). Predictors of resource attainment among corporate entrepreneurs: Executive champion versus team commitment. Paper presented at the Babson-Kaufman Entrepreneurship Research Conference, Babson Park, MA, June 2003. 8 Rauch, A., Wiklund, J., Frese, M., & Lumpkin, G.T. (2004). Entrepreneurial orientation and business performance: Cumulative empirical evidence. Paper presented at 2004 Babson Kauffman Entrepreneurship Research Conference, Wellesley, MA. 9 Dunn & Bradstreet (1999). 10 OReilly, B. (1994). The new deal: What companies and employees owe each other. Fortune, June 13, 4447, 50, 52. 11 Bedian, A.G., Ferris, G.R., & Kacmar, K.M. (1992). Age, tenure, and job satisfaction: A tale of two perspectives. Journal of Vocational Behavior, 40, 3348. 12 Greenberg, J., & Baron, R.A. (In press). Behavior in Organizations, 9th ed. Upper Saddle River, NJ: PrenticeHall. 13 See note 4. 14 Bhide, A.V. (2000). The Origin and Evolution of New Businesses. Oxford: University Press. 15 Baron, R.A., & Markman, G.D. (2005). Toward a process view of entrepreneurship: The changing impact of individual level variables across phases of new venture development. In M.A., Rahim, R.T., Golembiewski, R.T., & K.D. Mackenzie (Eds.), Current Topics in Management, vol. 9. New Brunswick, NJ: Transaction Publishers, 4564. 16 Ardichvilli, A., Cardozo, R., & Ray, S. (2003). A theory of entrepreneurial opportunity identication and development. Journal of Business Venturing, 18, 105124. 17 Hagenbaugh, B. (2004). Couple says celebrate second trip down the aisle. USA Today, August 9, 7B. 18 Shane, S., Locke, E.A., & Collins, C.J. (2003). Entrepreneurial motivation. Human Resource Management Review, 13, 257280. 19 Gartner, W.B. (1990). What are we talking about when we talk about entrepreneurship? Journal of Business Venturing, 5, 1528; Verheul, I., Uhlaner, L., & Thurik, R. (2005). Business accomplishments, gender, and entrepreneurial self-image. Journal of Business Venturing, 20, 483518. 20 Stewart, W.H., Jr., & Roth, P.L. (2001). Risk taking propensity differences between entrepreneurs managers: A meta-analytic review. Journal of Applied Psychology, 86, 145153. 21 Miner, J.B., & Raju, N.S. (2004). When science divests itself of its conservative stance: The case of risk propensity differences between entrepreneurs and managers. Journal of Applied Psychology, 89, 313. 22 See note 15. 23 Nicolaou, N., & Shane, S. (2006). Born entrepreneurs? The genetic foundations of entrepreneurship. Unpublished manuscript under review, Tanaka Business School, Case Western Reserve University. 24 Ozgen, E., & Baron, R.A. (In press). Social sources of information in opportunity recognition: Effects of mentors, industry networks, and professional forums. Journal of Business Venturing. 25 Zhao, H., Seibert, S.E.., & Hills, G.E. (2005). The mediating role of self-efcacy in the development of entrepreneurial intentions. Journal of Applied Psychology, 90, 12651271.
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36
PART 1
Entrepreneurship: Who, What, Why? 38 Baron, R.A., & Ensley, M.D. (Under review). Opportunity recognition as the detection of meaningful patterns: Evidence from the prototypes of novice and experienced entrepreneurs. 39 Baron, R.A. (2006). Opportunity recognition as pattern recognition: How entrepreneurs connect the dots to identify new business opportunities. Academy of Management Executive. 40 Evans, D., & Leighton, L. (1989). Some empirical aspects of entrepreneurship. American Economic Review, 9, 519 535. 41 See note 1. 42 Plous, S. (1993). The Psychology of Judgment and Decision Making. New York: McGraw-Hill. 43 See note 20. 44 Schultze, W.S., Lubatkin, M.H., & Dino, R.N. (2003). Toward a theory of agency and altruism in family rms. Journal of Business Venturing, 18, 473490. 45 Krueger, N.F., Jr. (2003). The cognitive psychology of entrepreneurship. In Z. Acs & D.B. Audretsch (Eds.), Handbook of Entrepreneurial Research. London: Kluwer Law International. 46 Lewin, K. (1951). Field Theory in Social Science. New York: Harper & Row. 47 Chen, C.C., Green, P.G., & Crick, A. (1998). Does entrepreneurial self-efcacy distinguish entrepreneurs from managers? Journal of Business Venturing, 13: 295 316. 48 Stewart, W.H., Jr., Watson, W.E., Carland, J.C., & Carland, J.W. (1999). A proclivity for entrepreneurship: A comparison of entrepreneurs, small business owners, and corporate managers. Journal of Business Venturing, 14, 189214.
26 Markman, G.D., Balkin, D.B., & Baron, R.A. (2002). Inventors and new venture formation: The effects of general self-efcacy and regretful thinking. Entrepreneurship Theory & Practice, 20, 149165. 27 White, R.E., Thornhill, S., & Hampson, E. (2005). Entrepreneurs and evolutionary biology: The relationship between testosterone and new venture creation. Paper currently under review. 28 See note 23. 29 Baum, R., & Locke, E. (2004). The relationship of entrepreneurial traits, skill, and motivation to new venture growth. Journal of Applied Psychology, 89, 587598. 30 See note 23. 31 Shane, S. (2004). Encouraging university entrepreneurship? The effect of the Bayh-Dole Act on university patenting in the United States. Journal of Business Venturing, 19, 127151. 32 Powers, J.P., & McDougall, P.P. (2005). University startup formation and technology licensing with rms that go public: A resource-based view of academic entrepreneurship. Journal of Business Venturing, 20, 291311. 33 Phan, P., Siegel, D.S., & Wright, M. (2005). Science parks and incubators: Observations, synthesis, and future research. Journal of Business Venturing, 20, 165182. 34 Markman, G.D., Phan, P.H., Balkin, D.B., & Gianoidis, P.T. (2005). Entrepreneurship and university-based technology transfer. Journal of Business Venturing, 10, 241263. 35 Mullins, J.W., & Forlani, D. (2005). Missing the boat or sinking the boat: A study of new venture decision making. Journal of Business Venturing, 20, 4769. 36 Mitchell, R.K., Buseniz, L., Lant, T., McDougall, P.P., Morse, E.A., & Smith, J.B. (2004). The distinctive and inclusive domain of entrepreneurial cognition research. Entrepreneurship Theory and Practice, 28, Winter, 505518. 37 Gaglio, C.M. (2004). The role of mental simulations and counterfactual thinking in the opportunity identication process. Entrepreneurship Theory and Practice, 28, Winter, 533552.
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