Professional Documents
Culture Documents
PERSPECTIVE
CHAPTER
CHAPTER
CHAPTER
3
Entrepreneurial Strategy: Generating and Exploiting New Entries
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PART
laundry business but also on patents. one of which was a form fit for the collar of a
shirt that would hold the shape of the shirt. He showed his young protg that one
could make money with brains as well as brawn. Kauffman commented, "He was quite
a man and had qute an influence on my life."
Kauffman's sales ability was also useful during his stint in the Navy, which he joined
shortly after Pearl Harbor on January 11, 1942. When designated as an apprentice seaman, a position that paid $21 per month, he responded, "l'm better than an apprentice
seaman, because I have been a 5ea Scout. l've sailed ships and l've ridden in whale
boats." His selling ability convinced the Navy that he should instead start as a seaman
first class, with a $54 monthly salary. Kauffman was assigned to the admiral's staff,
where he became an outstanding signalman (a seaman who transmitted messages from
ship to ship), in part because he was able to read messages better than anyone else due
to his previous intensive reading. With his admiral's encouragement. Kauffman took
correspondence navigator3 course and was given a deck commission and made a nav-
igation officer.
After the war was over in 1947, Ewing Kauffman began his career as a pharrnaceutical salesperson after prforming better on an aptitude test than 50 other applicants.
The job involved selling supplies of vitamin and liver shots to doctors. Working on
straight commission, without expenses or benef its, he was earning pay higher than the
president's salary by the end of the second year; the president promptly (ut the commission. Eventually, when Kauffman was made Midwest sales managec he made 3 per-
cent of everything his salespeople sold and continued to make more money than the
president. When his terrtory was cut, he eventually quit and in 1950 started his own
product. The second pharmaceutical product it developed, oyster shell calcium, also
sold well.
To expand the company, Kauffman borrowed $5,000 from the Commerce Trust
Company. He repaid the loan, and the company continued to grow. After several years,
outside investors could buy $1,000 worth of common stock if they loaned the company
$1,000 to be paid back in five years at $1,250, without any intermittent interest. This
initial $1,000 investment, if held until 1993, would have been worth $21 million.
Marion Laboratories continued to grow and reached over $1 billion per year in
sales, due primarily to the relationship between Ewing Kauffman and the people in
CHAPTE R 1
the"company, who were called associates: not'employees. "They are all stockholders,
they build this company, an'd they me~n so much to us," said Kauffman. The concept
of assoiates was atso a parf of t he twp basic philos9phies of the company: Those who
produce should share in the results or profits, and treat others as you would fike to be
tret~d. .
"
'
"
- ' .
The company went publi~throughSmith Barey on August 16, 1965, at $21 per share,
The st()ck jumped to $28 pershre immdiately ad has !lever dropped below that level,
sometim~s selling at a 50 to 60 price/earnings in~ltiple. The associates of the company
wereoffered a profit-sharing pln;where ceach {:ould own stock in the company, In
1968 K~uffman brought Ma~r Lea~~eBase~~il ~!'Ikto (ansas City bypurchasing the
Kansas City Royals. This boost~d the ci1fs economic base, comrrlUnity profile, and civic
pride. VVhen Marion Laboratories merged with Merrill Dow in 1989, there were 3,400
associates, 300 of whom became millionaires as a result of the merger, The new company, Marion Merrilf Dow, 'Ine., g'e~ to 9,000 associats and sales of $4 billion in 1998
whe'n it was acquired by lioechst, a "European pharmaceuticat company, Hoechst Marion
Roussel became a world leader in pharmaceutical-based health care involved in the discoliery, developm~nt, m amifactu re; and sale
ph~rrnaceutical products, In late 1999
the company was again merged with Aventis Pharma, a global pharmaceutical company
focusing on human medicines (prescription pharmaceuticals and vaccines) and animal
health, In 2002, Aventis's sales reached $16.634 billion, an increase of 11.6 percent
from 2001, while earnings per share grew 27 perce,nt from the previous year.
, Ewing Marion Kauffman 'was an entrepreneur, a Major League Baseball team
owner, and a philanthropist who believed his success was a direct result of one fundamental philosophy: Treat others as you would like to be treated. "It is the happiest
principie by which to live 'and the most intelligent principie by which to do business
and make money," he said.
Ewing Marion Kauffman's philosophies of associates, rewarding th05e who produce,
and allowing decision making throughout the organization are the fundamental concepts underlying what is now called corporate entrepreneurshp in a company. He
went even further and illustrated his befief in entrepreneurship and the spirit of giving
back when he established the Kauffman Foundation, which supports programs in two
areas: youth development and entrepreneurship, Truly a remarkable entrepreneur,
Mr. K, as he was affectionately called by his employees, will now produce many more
successful "associate entrepreneurs,"
Like Ewing Marion Kauffman, many other entrepreneurs and future entrepreneurs
frequently ask themselves, .. Am 1really an entrepreneur? Do I have what it takes to be
a success? Do 1 have sufficient background and experience to start and manage a new
venture?" As enticing as the thought of starting and owning a business may be, the
problems and pitfalls inherent to the process are as legendary as the success stories.
The fact remains that more new business ventures fail than succeed. To be one of the
few successful entrepreneurs requires more than just hard work and luck, It requires
the ability to think in an environment of high uncertainty, be flexible, and learn from
one's failures,
oi
PART
.I
ture capitalists, university professors and stuTo an economist, an entrepreneur is one who
brings
assets into combinations that make their value
greater than before, and also one who introduces changes, innovations, and a new order. To
apsychologist, such a person is typically driven by crtain forces-the need to obtain or af-
resources,
tai
To
to
rperhap
a theat,
may be
tomer, or someone who creates wealth for others, as well as finds better ways to utilize resources, reduce waste, and produce jobs others ae glad to get. I
enlrepreneur An
individual who takes
initiative to bundle
resorrcs in innovative
novative ways, and (3) the acceptance of rislg uncertainty, anor the potential for failure.2
Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is
created by individuals who assume the major risks in terms of equity, time, and/or career
commitment to provide value for some product or service. The product or service may or
may not be new or unique, but the entrepreneur must somehow infuse value by receiving
and bundling the necessary skills and resources.3
To be inclusive of the many types of entrepreneurial behavior, the following definion
of entrepreneurship will be the foundation of this book:
Entrepreneurship is the process of creating something new with value by devong the necessary time and effort; assuming the accompanying financial, psychic, and social risks and uncertainties; and receiving the resulting rewards of monetary and personal satisfaction.a
This definition stresses four basic aspects of being an entrepreneur. First, entrepreneurship involves the creation process----creating something new of value. The creation has to
have value to the entrepreneur and value to the audience for which it is developed. This audience can be (l) the market of organizational buyers for business innovation, (2) the hospital's administration for a new admitting procedure and softwae, (3) prospective students
for a new course or even college of entrepreneurship, or (4) the constituency for a new service provided by a nonproht agency. Second, entrepreneurship requires the devotion ofthe
necessuy time ard effort.
the signihcant amount of
erational. As one new en
many hours in the ofFrce while I was in industry, as an entrepreneur I never stop thinking
The third part of the defrnition involves the rewards of being an entrepreneur. The most
important of these rewards is independence, followed by personal satisfaction, but monetary reward also comes into play. For some entrepreneurs, money becomes the indicator of
the degree of success achieved. Assuming the necessary risks and uncertainties is the final
aspect of entrepreneurship. Because action takes place over time, and the future is unknowable, action is inherently uncertain.s This uncertainty is furlher enhanced by the novelty intrinsic to entrepreneurial actions, such as the creation of new products, new services,
and new ventures.6 Entrepreneurs must decide to act even in the face of uncertainty over the
outcome of that action- Therefore, entrepreneurs rcspond to, and create, change through
CHAPTER
Refers to behavior in
response to a judgmental
decision under uncertainty
their
a jud
offer
al actionrefers to behaviorin
response to
possible opportunity for proht.T We now
on.
about a possible
nlre p re ne u ral
p ro
e e ss
by devoting the
necessary
effoc
assuming
time and
the accompanying
financial, psychic,
and social risks and
uncertainties, ad
recelving the resulting
process
embodied
involves mo
in a typical
neur must fi
spportunity
the creation of something new. The process has four distinct phases: (l) identification
and evaluation of the opportunity, (2) development of the business plan, (3) determination
of the required resources, and (4) management of the resulting enterprise (see Table l.l).
Although these phases proceed progressivelf no one stage is dealt with in isolation or is
n other phases occurs. For example, to successfully iden(phase l), an entrepreneur must have in mind the type of
r tu n
iE
Opportunity identification and evaluation is a very difficult task. Most good business
opportunities do not suddenly appear, but rather result from an entrepreneur's alertness to
possibilities or, in some cases, the establishment of mechanisms that identify potential opportunities. For example, one entrepreneur asks at every cocktail party whether anyone is
using a product that does not adequately fulfill its intended purpose. This person is constantly looking for a need and an opportunity to create a better product. Another entrepreneur
:;1;
PART
h,indow of opportunitt
The time period available
for creating the new
ventufe
always monitors the play habits and toys of her nieces and nephews. This is her way of
looking for any unique toy product niche for a new venture.
Although most entrepreneurs do not have formal mechanisms for identifying business
opportunities, some sources are often fruitful consumers and business associates, members
of the distribution system, and technical people. Often, consumers are the best source of
ideas for a new venture. How many times have you heard someone comment, "If only there
was a product that would . . ." This comment can result in the creation of a new business.
One entrepreneur's evaluation of why so many business executives were complaining about
the lack of good technical writing and word-processing services resulted in the creation of
her own business venture to fill this need. Her technical writing service grew to l0 employees in two years.
Because of their close contact with the end user, channel members in the distribution
system also see product needs. One entrepreneur started a college bookstore after hearing
all the students complain about the high cost of books and the lack of service provided
by the only bookstore on campus. Many other entrepreneurs have identified business
opportunities through a discussion with a retailer, wholesaler, or manufacturer's representative. Finally, technically oriented individuals often conceptualize business opportunities when working on other projects. One entrepreneur's business resulted from seeing
the application of a plastic resin compound in developing and manufacturing a new type
of pallet while developing the resin application in another totally unrelated ae---casket
moldings.
Whether one identifies the opportunity by using input from consumers, business associates,
channel members, or technical people, each opportunity must be carefully screened and
evaluated. This evaluation of the opportunity is perhaps the most critical element of the
entrepreneurial process, as it allows the entrepreneur to assess whether the specific
product or service has the returns needed compared to the resources required. As indicated in Table 1.1, this evaluation process involves looking at the length of fhe opportunity, its real and perceived value, its risks and returns, its fit with the personal skills and
goals of the entrepreneur, and its uniqueness or differential advantage in its competitive
envlronment.
The maket size and the length of the window of opportaniry are the primary bases for
determining the risks and rewards. The risks reflect the market, competition, technology,
and amount of capital involved. The amount of capital needed provides the basis for the return and rewards. The methodology for evaluating risks and rewards, the focus ofChapters 7 and 10, frequently indicates that an opportunity offers neither a financial nor a personal rewad commensurate with the risks involved. One company that delivered bark
mulch to residential and commercial users for decoration around the base of trees and
shrubs added loam and shells 0o its product line. These products were sold to the same custorner base using the same distribution (delivery) system. Follow-on products are important
for a company expanding or diversifying in a particular channel. A distribution channel
member such as Kmart, Service Merchandise, or Target prefers to do business with multiproduct, rather than single-product, hrms.
Finally, the opportunity must ht the personal skills and goals of the entrepreneur. It is
particularly important that the entrepreneur be able to put forth the necessay time and effort required to make the venture succeed. Although many entrepreneurs feel that the desire
can be developed along with the venture, typically it does not materialize. An entrepreneur
must believe in the opportunity so much that he or she will make the necessary sacrihces
to develop the opportunity and manage the resulting organization.
Opportunity analysis, or what is frequently called an opportunity assessment plan, is one
method for evaluating an opportunity. It is not a business plan. Compared to a business
CHAPTER
growth. The assessment of the opportunity requires answering the following questions:
.
'
.
'
.
'
.
.
.
What competition exists in this maket? How would you describe the behavior of this
competition?
What does the international maket look like?
plan
The
A goodbusiness plan must be developed to exploit the dehned oppofunity. For example, a
business plan is often required to obtain the resources necessary to launch the business.
Writing a business plan is a very time-consuming phase of the entrepreneurial process. An
entrepreneur usually has not prepared a business plan before and does not have the resources available to do a goodjob. Although the preparation of the business plan is the focus of Chapter 7, it is important to undersland the basic issues involved as well as the three
major sections of the plan (see Table I . I ). A good business plan is essential to developing
the opportunity and determining the resources required, obtaining those resources, and successfully managing the resulting venture.
This process starts with an appraisal of the entrepreneur's present resources. Any resources that are critical need to be differentiated from those that are just helpful. Care
must be taken not to underestimate the amount and variety of resources needed. The entrepreneur should also assess the downside risks associated with insufcient or inappropriate resources.
The next step in the entrepreneurial process is acquiring the needed resources in a timely
manner while giving up as little control as possible. An entrepreneur should strive to maintain as large an ownership position as possible, particularly in the start-up stage. As the
business develops, more funds will probably be needed to finance the growth ofthe venture, requiring more ownership to be relinquished. The entrepreneur also needs to identify
alternative suppliers of these resources, the focus of Chapter I l, along with their needs and
desires. By understanding resource supplier needs, the entrepreneur can structure a deal
that enables the resources to be acquired at the lowest possible cost and with the least loss
of control.
10
PART
IHE ENTREPRENEURIALPERSPECIVE
After
of a problem is well understood and we have time and rational procedures at hand to solve
it. Given the nature of an entrepreneur's decision-making environment, he or she must
sometimes (1) effectuate, (2)be cognitively adaptable, and (3) learn from failure. We now
discuss the thought process behind each of these requirements.
Etfectuation
As potential business leaders you are trained to think rationally and perhaps admonished
if you do not. This admonishment might be appropriate given the nature of the task, but it
appeus that there is an alternate way of thinking that entrepreneuts sometimes use, especially when thinking about opportunities. Professor Saras Sarasvathy (from Darden,
University of Virginia) has found that entrepreneurs do not always think through a problem
process A
effecluation process A
process that starts with
come. Such a process is referred to as a causal process. Our description of the entrepreneurial process in the preceding section reflects a causal explanation. But, entrepreneurs
sometimes ase an effectuation process, which means they take what they have (who they
are, what they know, and whom they know) and select among possible outcomes. Professor Saras is a great cook, so it is not surprising that her examples of these thought processes
revolve around cooking.
Imagine a chef assigned the task of cooking dinner. There are two ways the task can be organized. In the first, the host or client picks out a menu in advance. All the cbef needs to do is list
the ingredients needed, shop for then and then actually cook the meal. This is a process of
causation. It begins with a given menu and focuses on selecting between effective ways to prepare the meal.
In the second case, the host asks the chefto look through ttre cupboards in the kitchen for
possible ingredients and utensils and then cook a meal. Here, the chef has to imagine possible
menus based on the given ingredients and utensils, select the menu, and then prepare the meal.
This is a process of effectuation. It begins with given ingredients and utensils and focuses on
preparing one of many possible desirable meals with them.e
CHAPTER
simpreassumptions
it
11
as
:.ffi"Jf#:trffi#ff:f,1
l.
programs.
12
PART
THEENTREPRENEURIALPERSPECNVE
nonatively superior one). For example, instead of stting with the assumption of an existing
market and investing money and other resources to design the best possible restaurant for the
given market, she would begin by examining the particular set of means or causes available to
her. Assuming she has extremely limited monetary resources-say $20,@G-she should think
creatively to bring the idea to rnarket with as close to zero resources as possible. She could do
this by convincing an established restaurateur to become a strategic partner or by doing just
enough market research to convince a financier to invest the money needed to start the restaurant. Another method of effectuation would be to convince a local Indian resturant or a local
fast food resturant to allow her to put up a counter where she would actually sell a selection
of Indian fast food. Selecting a menu and honing other such details would be seat-of-the-pants
and tentative, perhaps a process of satiscing.10
Several other courses of effectuation can be imagined. Perhaps the course the entrepreneur
actually pursues is to contact one or two of her friends or relatives who work downtown and
bring them and their offrce colleagues some of her food to taste. If the people in the office like
her food, she might get a lunch delivery service going. Over time, she might develop enough
of a customer base to start a restaurant or else, after a few weeks of trying to build the lunch
business, she might discover that the people who said they enjoyed her food did not really
enjoy it so much as they did her quirky personality and conversation, particularly her rather unusual life perceptions. Our imaginary entrepreneur might now decide to give up the lunch business and start writing a book, going on the lechre circuit and eventually building a business in
the motivational consulting industry!
Given the exact same starting point-but with a fferent set of contingencies-the entrepreneur might end up building one of a variety of businesses. To take a quick tour of some possi-
bilities, consider the following: Whoever first buys the food from our imaginary Curry in a
Hurry entrepreneur becomes, by definition, the fust carget customer. By continually listening
to the customer and building an ever-increasing network of customers and strategic partners,
the entrepreneur can then identify a workable segment profile. For example, if the first customers who actually buy the food and come back for more are working women of varied ethnic origin, this becomes her target segment. Depending on whal the first customer really wants,
she can start defrning her market. Ifthe customer is really interested in the food, the entrepreneur can start targeting all working women in the geographic location, or she can think in
terms of locafing more outlets in areas with working women of similar profiles-a "Women in
Hurry" franchise?
Or, if the customer is interested primarily in the idea of ethnic or exotic entertainment,
rther than merely in food, the entrepreneur might develop other products, such as catering
services, party planning, and so on-'Curry Favors"? Perhaps, if the customers buy food from
her because they actually enjoy learning about new cultures, she might offer lectures and
classes, maybe beginning with Indian cooking and moving on to cultural aspects, including
concerts and ancient history and philosoph and the profound idea that food is a vehicle of
cultural exploration-"School of Curry"? Or maybe what really interests them is theme tours
a
and other travel options to India and the Far East-"Cunyland Travels"?
In a nutshell, in using effectuation processes to build her firm, the entrepreneur cn build
several different types of firms in completely disparate industries. This means that the original
idea (or set of causes) does not imply any one single strategic universe for the firm (or effect).
Ins[ead, the process of effectuation allows the entrepreneur to create one or more several pos-
sibte effects irrespective of the generalized end goal with which she started- The process not
only enables the realization of several possible effects (although generally one or only a few
are actually realized in the implementation) but it also allows a decision maker to change his
or her goals and even to shape and construct them over time, making use of contingencies as
they arise.ll
Our use of direct quotes from Sarasvathy on effectuation is not to make the case that it
is superior to thought processes that involve causation; rather, it represents a way that entrepreneurs sometimes think. Effectuation helps entrepreneurs think in an environment of
CHAPTER
MIND-SE
.I3
e nlre p
r e ne urial m ind-s e I
Involves the ability to
charr,ges.r3
cognive adaptabihty
Describes the extent to
eog
decision frameworks
focused on sensing and
processing changes in
re h e n s io n q ue stio ns
Questions designed to
lncrease entrepreneufs'
understanding ofthe
oature of the envionment
'
A5 SEEI\ IN
E/VTR.E.FRENE(JR
is:
of
"l
business.
I first
failure."
plCK yOUR
pARANOIA
pre
into
Instea.d
missed it as a merg blip. lnstead
watched until 'he sptted a' to
turned out one of my employq.e
negatve attitude, and it was aff
Lakhani says. "As soon as I let hi
L! lz ttn
back up."
The mainfocusesof moste
howeveq are not so much everyday
doing
about things that could 90 wrong or opthat could be missed' she's always keepe out for the business equivalent of a bent
you are paranoid enough' if you're good
t picking up all those clues' you don't have
act"' says Paine' "you get to proact and be
head of the curve"'
es
.,, -:.:'.-:-..-=:,.
-, .:'
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ownetS.
heads of far-flung enterprises, some say entrepreneurs are already too paranoid. lt,s all too easy for
turn it in
tut
itute of
the
at
Smal
that.
do-"
noia
uch abot.i|'s
o the point- of
and even cus_
tomers. he says. "They're seeing ghosts where ghosts
don't exist," warns Barbato.
That's especially risky when it comes to dealing with
PRACTICAL PARANOIA
No matter how useful it is, paranoia may be too
loaded a label for some entrepreneurs. lf so, critical
evaluation or critical analysis are the preferred terms of
Stephen Markowitz, director of governmental and
connectitn
tasks
Tasks
designed to stimulate
entrepreneurs to think
about the current situation
in terms of sirnilrities to
and differences
from
situations previously
faced and solved
ADVICE TO AN ENTREPRENEUR
A friend who has just become an entrepreneur has
read the above article and comes to you for advice:
1. I worry about my business; does that mean that
am paranoid?
queshons are more likely to include: What is this maket all about? What is this technology all about? what do we want to achieve by creating this new firm? what are the
key elements to effectively pursuing this opportunity?
Z- Connection tasks are designed to stimulate entrepreneurs to think about the current
situation in terms of similarities to and differences from situations previously faced and
solved. In other words, these tasks prompt the entrepreneur to tap into his or her
knowledge and experience without overgeneralizing. Generally, connection tasks
focus on questions like: How is this problem similar to problems I have already
15
16
PART
THEENTREPRENEURIALPERSPECNVE
CHAPTER
Result-A higher
awre of
yu
Source: M
and D. shepherd, 'A Measure of Adaptive Cognition for Entrepreneurship Re
.Haynie
Theory md Practice 33, no. 3 (2009), pp . 695_j 14.
lwch:.
Erepreneurshry,
solved? why? How is this problem different from what I have already solved?
why?
specific to entrepreneurs, the questions are more likely to include: Htw is this new
environment similar to others in which I have operated? How is it different? How is
this new organization similar to the established organizations I have managed? How
is it different?
17
18
PART
strategt
lasks
THEENTREPRENEURIALPERSPECTIVE
Tasks
3. Strategic tasks
designed to stimulate
entrepreneurs to think
about which strategies are
appropriate for solving
the problem (and
why) or
reflectian
tasks 'lasks
4. Reflection tasks
are designed to stimulate entrepreneurs to think about their understanding and feelings as they progress through the entrepreneurial process. These tasks
prompt entrepreneurs to generate their own feedback (create a feedback loop in their
solution process) to provide the opportunity to change. Generally, reflection questions
include: What am I doing? Does it make sense? What difhculties am I facing? How do
I feet? How can I verify the solution? Can I use another approach for solving the task?
Specihc to the entrepreneurial context, entrepreneurs might ask What difficulties will
we have in convincing our stakeholders? Is there a better way to implement our strategy? How will we know success if we see it?
designed to stimulate
entrepreneurs to think
about their understarding
and feelings as they
progress through the
entrepreneurial process
to
(I
ll
bankmptcy
(Chapter I I provides for a business to continue operations while formulating a plan to repay its creditors) and23,372 U.S. frrms filed for Chapter 7 bankruptcy (Chapter 7 is designed to allow individuals to keep certain exempt property while the remaining property
is sold to repay creditors) (www.uscourts.gov). Business failure occurs when a fall in revenue and/or a rise in expense is ofsuch magnitude that the hrm becomes insolvent and is
unable to attract new debt or equity funding; consequentl it cannot continue to operate
under the current ownership and management. Projects also fail, such as failure of a new
product development effort, the entry into a new market, or an alliance with a former
CHAPTER
ENTREPRENEURSHIP
MIND-SE
19
conditions.
of projects w
benefits socie
Other busines
our economy.
Does failure always lead to learning? Perhaps, but it would seem that the issue is more
cos
atn
to
preneurs use their ventures to "create a product that flows from their own internal
desires
PART
20
THEENTREPRENEURIALPERSPECNVE
loss-orienfton An
approach to negative
of this
process, breaking
re
s to
An approach to negative
emotions based on both
avoidance and a
proactiveness toward
secondary sources
stress arising
major loss
from
of
a
An individual has emotionally recovered from the failure when thoughts about the events
surounding, and leading up to, the loss ofthe business no longer generate a negative emotional response. The two primary descriptions ofthe process of recovering from feelings
arising from failure are classifiable as either loss-oriented or restoration-oriented.
Loss-orientationrefers to working through, and processing, some aspct of the loss
experience and, as a result ofthis process, breaking emotional bonds to the object lost.
This process of constructing a series of accounts about the loss gradually provides the
loss with meaning and eventually produces a changed viewpoint of the self and the
world. Changing the way that an event is interpreted can allow an entrepreneur to regulate emotions so that thoughts of the event no longer generate negative emotions.
Entrepreneurs with a loss-orientation might seek out friends, family, or psychologists to
talk about their negative feelings. But they may also focus their thoughts on the time
spent in creating and nurturing the business and may ruminate about the circumstances
and events surrounding the loss. It appears that such thoughts could evoke a sense of
yearning for the way things used to be or foster a sense of relief that the events surrounding the loss (e.g., arguing with creditors, explaining to employees, family, and
friends the business has failed) :ue nally over. While these feelings of relief and pain
wax and wane over time, in the early periods after the failure, painful memories are
likely to dominate.3r
Restoration-orientation is based on both avoidance and a proactiveness towad secondary sources of stress arising from failure. For avoidance, it is possible that entrepreneurs
can distract themselves from thinking about the loss of the business or project to speed recovery. For the entrepreneur, founding a new venture might enhance recovery from the negative emotions over the loss of the previous business (although there is the possibility that
the same mistakes will be replicated because these entrepreneurs have not sufficiently
learned from their experience).
CHAPTER
ENTREPRENEURSHIPANDTHEENTREPRENEURIALMIND.SET
21
stress, the entrepreneur is able to eventually reduce the negative emotions associatd with
thoughts ofthe events surrounding the loss ofthe business.
dud
process
for coping
suppression, which requires mental effort and presents potentially adverse consequences for
health. Oscillation between the two orientations enables an entrepreneur to obtain the benefits of each and to minimize the costs of maintaining one for too long-thi s dual pmcess
speeds the recovery process.32 Speeding the recovery process is important because it more
quickly reduces the emotional inerference with learning.
For example, starting with a loss-orientation provides an individual the ability to f,rrst
focus on aspects of the loss experience and begin processing information about the business loss as well as breaking the emotional bonds to the failed business or project. When
the entrepreneur's attention begins to shift from the event to aspects of the emotions
themselves, then learning is likely reduced by emotional interference and the entrepreneur
should switch to a restoration-orientation. Switching to a restoration-orientation encourages individuals to think about other aspects of their lives. It also breaks the cycle
of continually thinking about the symptoms arising from the failure; such thoughts can
increase negative feelings.33 This restoration-orientation also provides the opportunity
to address secondary causes of stress, which may reduce the emotional signifrcance of
the failure. when information processing capacity is no longer focused on the symptoms, the entrepreneur can shift back to a loss-orientation and use his or her information
processing capacity to generate further meaning from the loss experience and also further reduce the emotional significance of the loss of the business. Oscillation should
continue until the entrepreneut has emotionally recovered and been able to fully learn
from the experienceThe dual process of learning from failure has a number of practical implications. First,
knowledge that the feelings and reactions being experienced by the entrepreneur are normal for someone dealing with such a loss may help to reduce feelings of shame and embarrassment- This in turn might encourage the entrepreneur to articulate her feelings, possibly speeding the recovery process. Second, there are psychological and physiological
outcomes caused by the feelings of loss. Realizing that these are "symptoms" can reduce
secondary sources of stress and may also assist with the choice of treatment. Third, there is
a process of recovery to learn from failure, which offers entrepreneurs some comfort that
their current feelings of loss, sadness, and helplessness will eventually diminish. Fourth,
the recovery and leaming process can be enhanced by some degree of oscillation between
a loss'and a restoration-orientation. Finally, recovery from loss offers an opportunity to
increase one's knowledge ofentrepreneurship. This provides benehts to the individual and
to society.
PART
THEENTREPRENEURIALPERSPECTIVE
exigencies, economic expediency, and social responsibility-a balance that differs from the
point where the general business manager takes his or her moral stance.34
A manager's attitudes concerning corporate responsibility are related to the organizational climate perceived to be supportive of laws and professional codes of ethics. On the
other hand, entrepreneurs with a relatively new company who have few role models usually
develop an internal ethical code. Entrepreneurs tend to depend on their own personal value
systens much more than other nranagers do when determining ethically appropriate courses
of action.
business
ethics The
situation
Although drawing more on their own value system, entrepreneurs have been shown
to be particularly sensitive to peer pressure and general social norms in the community,
as well as pressures from their competitors. The differences between entrepreneurs n
different types of communities and in different countries reflect, to some extent, the
general norms and values of the communities and countries involved. This is clearly the
case for metropolitan as opposed to nonmetropolitan locations within a single country.
Interlationally, there is evidence to this effect about managers in general. U.S. managers seem to have more individualistic and less communitarian values than their
German and Austrian counterparts.
The significant increase in the number of internationally oriented businesses has impacted the increased interest in the similarities and differences in business attitudes and
practices in different countries. This area has been explored to some extent within the context of culture and is now beginning to be explored within the more individualized concept
of ethics. The concepts of culture and ethics are somewhat related. Whereas ethics refers to
the "study of whatever is right and good for humans," business ethics concerns itself with
the investigation of business practices in light of human values. Ethics is the broad field of
study exploring the general nature ofmorals and the specific moral choices to be made by
the individual in his or her relationship with others.
A central question in business ethics is, "For whose benefit and at whose expense should
the firm be managed?"35 In addressing this question we focus on the means of ensuring that
resources are deployed fairly benveen the hrm and its stakeholders-the people who have
a vested interest in the firm, including employees, customers, suppliers, and society itself.
If resource deployment is not fair, then the firm is exploiting a stakeholder.
Entrepreneurship can play a role in the fair deployment ofresources to alleviate the
exploitation of certain stakeholders. Most of us can think of examples of frrms that have
benefited financially because their managers have exploited certain stakeholders-receiving
more value from them than they supply in return. This exploitation of a stakeholder
group can represent an opportunity for an entrepreneur to more fairly and efficiently redeploy the resources of the exploited stakeholder. Simply stated, where current prices
do not reflect the value of a stakeholder's resources, an entrepreneur who discovers the
discrepancy can enter the market to capture profit. In this way the entrepreneurial
process acts as a mechanism to ensure a fair and efficient system for redeploying the
resources of a "victimized" stakeholder to a use where value supplied and received is
equilibrated.36
Therefore, while there is evidence that some use the entrepreneurial process to exploit
others for profit, it is important to understand that the entrepreneurial process can be
an important means of helping exploited stakeholders and at the same time setting up a
viable business. Think of the entrepreneurial process as a tool that can be used effectively
to achieve outcomes for the benefit of others (and the entrepreneur) rather than to the
detriment of others. Some aspects of business ethics are indicated in the Ethics box in
each chapter. Ethics is not only a general topic for conversation but also a deep concern
of businesspeople.
entare
e to
#'i;-
program:
Leade rs set th e Exampre:
.'- '
an effective
Emproyees
which people feel they can deliver bad ews to managment without fea of repercussions. In an ethicsdliven to-Tp."ny, *:ff.1"Tb:1c;9-l.:11oott any type
of wrongdoing-whether it is fals'iformation on
an expense.report or major finatial {iaud-and feel
man-
so.
companies known
for their ethical business practices make ethics a key element of their corporate culture' conducting yourself
with integrty
is considered as
important
as
bottom-
PART
THEENTREPRENR'RIALPERSPECNVE
product-evolutian
the new capacify and ouq)ut (demand side)- This is reflected tn the product-evolution
process, a process through which innovation is developed and commercialized through
entrepreneurial activit which in turn stimulates economic growth.
The product-evolution process, illustrated in Figure l.l as a cornucopia, the traditional
symbol of abundance, begins with knowledge in the base echnology and science-such
Science
\/
feeling ---\
Knowredse
Gut
lFJ
L=_
I
lll
lV
Development phase
to
Industrial phase
CHAPTER
25
a
iteralive synthesis The
intersection of knowledge
and social need that starts
the product development
process
ordinary innovations
New products with little
technological change
technolagical
innovatiotts New
products with signifi cant
technological
p
p
a marketable innovation and is where the entrepreneur needs to concentrate his or her
efforts. The lack of expertise in this area-matching the technology with the appropriate
market and making the needed adjustments-is an underlying problem in any technology
transfer.
The innovation can, of coutse, be of varying degrees of uniqueness. Most innovations
introduced to the market are ordin
nology. As expected, there are fewer
with the number of actual innovat
Regardless of its level of uniqueness or technologf each innovation (particularly the latter
two types) evolves into and develops toward commercialization and generates economic
advancement
wealth.
breaklhrough
Entrepreneurship has assisted in revitalizing areas of the inner city. Individuals in innerareas can relate to the concept and see it as a possibility for changing their present situation. One model project in New York City changed a depressed area into one that now
has many small entrepreneurial companies.
innovalions New
products with some
technological change
city
IN REVIEW
SUMMARY
The definition of an entrepreneur has evolved over tme as the wofld3 economic structure has changed and become more complex. In this text, entrepreneurship is defined
as the process of creating something new with value by devoting the necessary time
and effort; assuming the accompanying financial, psychological, and iocial risks and
uncertanties; and receiving the resultant rewards of monetary and personal satisfac-
The entrepreneur then goes through the entrepreneurial process, which involves
a new venture. Each
step is essential to the eventual success of the new venture and is closely related to the
other steps. There are both format and informal mechansms for identifying business
opportunities. Although formal mechanisms are generally found within a more established company, most entrepreneurs use nformal sources for their ideas, such as being
sensitive to the complaints and chance comments of friends and assocates. Once the
opportunity is identified, the evaluation process begins. Basic to the screening process
is understanding the factors that create the opportunity: technology, rnarket changes,
competition. or changes in government regulations. From this base, the market size
and time dimension associated with the idea can be estimated. lt is irnportant that the
idea fit the personal skills and goals of the entrepreneur; and that the entrepreneur
have a strong desire to see the opportunity brought to fruition. In the process of eval-
uating an opportunity, the required resources should be clearly defined and obtained
at the lowest possible cost.
26
PART
This process requires that the individual and the firm have an entrepreneurial mindset. We started our discussion of this mnd-set with the concept of effectuation, which
challenges traditional notions of the way that entrepreneurs think about their tasks.
Although entrepreneurs think about some tasks in a causal way, they also are likely to
think about some tasks effectually (and some entrepreneurs more so than other en-
trepreneurs). Rather than starting with the desired outcome in mind and then focusing on the means to achieving that outcome, entrepreneurs sometimes approach tasks
by looking at what they have-their means-and selecting among possible outcomes.
Who is to say whether the "causal chef " who starts with a menu or the "effectual
chef" who starts with what is in the cupboard produces the best meal? But we can say
that some expert entrepreneurs think effectually about opportunities.
Thinking effectually helps entrepreneurs make decisions in uncertain environments.
When dealing with uncertanty, entrepreneurs must remain flexible in the way that
they think and in their actions. In this chapter we introduced the notion of cognitive
flexibility and emphasized that it is something that can be measured and learned. By
asking questions related to comprehension, connection, strategy, and reflection, entrepreneurs can maintain an awareness of their thought process and in doing so develop greater cognitive adaptability.
Despite the way that he or she thinks (causally or effectually) and despite being cognitively flexible, an entrepreneur's firm or project may still fail. Failure represents an
opportunity to learn, but that learning is typically not automatic or instantaneous.
Rather, learning from failure is
entrepreneur. Most are likely to feel bad, which interferes with the learning process.
Entrepreneurs who are able to recover from their negative emotional reaction to the
loss more quickly will be in a better position to learn from the experience. The good
news is that there is something that entrepreneurs can do to enhance their recovery
and learning process. By using a dual process that oscillates between a loss- and a
restoration-orientation, entrepreneurs can maximize their processing of information
and minimize the emotional interference to that process. Obviously, the feelings associated with failure are more complicated than we have presented here, but there are
benefits to be gained in simply knowing that it is natural to feel bad when something
important is lost, that most people recover, and that there is a process that can enhance
that recoverv.
fhe study of entrepreneurship has relevance today, not only because it helps entrepreneurs better fulfill their personal needs but because of the economic contribution
of the new ventures. More than increasing national income by creating new jobs, entrepreneurship acts as a positive force in economic growth by serving as the bridge
between innovation and the marketplace. The study of entrepreneurship and the education of potential entrepreneurs are essential parts of any attempt to strengthen
this link so essential to a country's economic well-beinq.
RESEARCH TA5K5
1. Speak to people from five different countries and ask what entrepreneurship
means to them and how their national culture helps and/or hinders
entrepreneursh ip.
2. Ask an entrepreneur about his business today and ask him to describe the
decisions and series of events that led the business from start-up to its current
form. Would you classify this process as causal, effectual, or both?
,-..
cHAPrR
ENTR:PRENEURSHTPANDTHEENTREPRENEURTALMTND-SEI
27
ent
oi
"Measure
lscussroN
1. List the content that you believe is necessary for an entrepreneurship course.
prepared to justfy your answer.
Be
2.
Do you really think that entiepreneurs think effectually? What about yourself--do
you sometimes think effectually? In what ways is it good? Then why are we faught
' in business classes to always think causally? Are there particular problems ortasks
' in which thinking causally is likely to be superior to effectuation? When might
effctuation be superior to cusal thinking?
SELECTE
D READINGS
Baron, Robert. (1998). Cognitive Mechanisms in Entrepreneurship: Why and When
Entrepreneurs Think Differently Than Other People. Journal of Business Venturing,
vol. 13, no. 4, pp. 275-95.
ln this conceptual article, the author presents information on a study that examined
the possible differences in the thinking of entrepreneurs and other people. This paper offers a number of implications of a cognitive perspective for entrepreneurship
research.
Busenitz, Lowell; and Jay Barney. (1997). Differences between Entrepreneurs and
Managers in Large Organizations: Biases and Heuristics in Strategic Decision Making.
Journal of Business Venturing, vol. 12, no. 1. pp. 9-30.
28
PART
THE ENTREPRENEURIALPERSPECTIVE
ln this article the authors explore the differences in the decision-making processes
between entrePreneurs and managers in large organizatons. ln particular they
focus on a number of biases, such as the overconfidence bias,
some benefits from the use of biases and heuristics.
but
Gaglio, connie Marie; and Jerome Katz. (2001). The psychological Basis of opportunity dentification: Entrepreneurial Alertness. small Business Economics, vol. 16,
f
pp. 95-1
1.
Hayton. James c.; Gerard George; and Shaker A. Zahra. (Summer 2002). National culture and Entrepreneurship: A Review of Behavioral Research. Entrepreneurial Theory
and Practice, pp. 33-52.
The article reviews and synthesizes the findings of 21 empirical studies that examine
the association between national cultural characteristics and aggregate measures of
entrepreneurship, individual characteristics of entrepreneurs, and aspects of corporate entreprene ursh ip.
Hitt. Michael; Barbara Keats; and Samuel DeMarie. (199S). Navigating in the New Com:
The article cites the importance of building strategic flexibility and a competitive
advantage for organizations to survive in the face of emerging technical revolution
and increasing globalization. The nature of the forces in the new competitive landscape requires a continuous rethinking of current strategic actions, organization
structure, communication systems, corporate culture, asset deployment, and investment strategies-in short, every aspect of a firm's operation and long-term health.
lreland, R. Duane; and Michael Htt. (1999). Achieving and Maintaining Strategic Competitiveness in the 21st Century: The Role of Strategic Leadership. Academy of Management Executive, vol. 13, pp. 43-55.
ln this article the authors acknowledge that effective strategic leadership practices
can help frms enhance performance while competing in turbulent and unpredictable environments. They then describe six components of effective strategic
Ieadership. When the activities called for by these components are completed successfully, the firm's strategic leadership practices can become a source of competitive advantage. ln turn, use of this advantage can contribute signifcantly to
achieving strategc competitiveness and earning above-average returns in the
next century.
Keh, Hean; Maw Der Foo; and Boon Chong tim, (2002). Opportunity Evaluation under
Risky Conditions: The Cognitive Processes of Entrepreneurs. Entrepreneurship: Theory
& Practice, vol. 27, pp. 1 25-48.
This study uses a cognitive approach to examine opportunty evaluation, as the perception of opportunity is essentially a cognitive phenomenon. The authors present
CHAPTER
ENTREPRENEURSHIPANDTHEENTREPRENEURIALMIND-SET
29
and belief in the law of small numbers are related to how entrepreneurs evaluate
opportunities. Their resulb also indicate that risk perception mediates opportunity
evaluation.
McGrath, Rita. (1999). Falling Forward: Real options Reasoning and Entrepreneurial
Faif
In this book the authors provide tips on how to achieve an entrepreneuria! mindset. For example, they discuss the need to focus beyond incremental improvements
assess a business\ current performance to estabtish the
entrepreneurial framework, and formulate challenging goals by using the components of the entrepreneurial framework.
to entrepreneurial actions,
McMullen, Jetfery s.; and Dean Shepherd. (2006). Entrepreneurial Action and the Role
n the Theory of the Entrepreneur. Academy of Management Review,
of uncertainty
vol.3'1, pp.'132-52.
neurship scholars.
Mitchell, Ron; lowell Busenitz; Theresa Lant; patricia McDougall; Eric Morse; and
Brock smith. (2002',. Toward a Theory of Entrepreneurial Cognition: Rethinking the
Peopfe Side of Entrepreneurship
no.2, pp.93-105.
Research
ln this article
the authors reexamine "the peopte side of entrepreneurship" by summarizing the sfate of play within the entrepreneurial cognition research stream,
and by integrating the five articles accepted for publication in a special issue focusing on this ongoing narrative. The authon propose that the constructs, variables,
and proposed relatonships under development within the cognitive perspective
offer research concepts and techniques that are well suited to the analysis of
problems that require better explanations of the distinctly human contributions to
entrepreneurship.
Sarasvathy, Saras. (2001). Causation and Effectuation: Toward a Theoretical Shift
from Economic Inevitability to Entrepreneurial conting ency. Academy of Management
Review, vol.26. no.2, pp. 243-64.
30.
PART
THEENTREPRENEURIALPERSPCflVE:
' ':
gh business exa
ought experi_
ns
evidence, and
with
existing
fectuaton: -'-''
Elements of Entrepreneurial Expertise.
p;;t;;;;;:'
and provides
',5a
shephgrd, Dean. (2003). Learning from Business Failure: propositions
about the Grief
.
.
uses
of Mangement
Review, vol.2g,
..
failure can
i. -
The author
that inter_
1..
to pedagogy
to
iscusses sorne
of the challenges
help students
theiabifiy
hetp individ_
theories of grief
rstanding of the
d practical implShepherd, Dean. (2009b). From Lemons
Success
CHAPTER
END
ENTREPRENEURSHIPANDTHEENTREPRENEURIALMIND-SET
31
OTES
1
-2
PART
20.
21
F. E.
Weinert and
of Metacognitive
Adaptability."
24. S-B.5itkin, "Learning through Failure: The 5trategy of Small Losses,,. Research
in Organizational Behavior 14 (1992), pp. 231-66.
25. R. McGrath, "Falling Forward: Real Options Reasoning and Entrepreneurial Failure," Academy of Management Review 24 (1999),
pp. 13-30.
26. A. V. Bruno, E. F. McQuarrie, and C. G. Torgrimson, "The Evolution of New
Technology Ventures over 20 Years: Patterns of Failure, Mergel and Survival.,,
Journal of Business Venturing 7 (1992), pp. 291-302.
27. B. Cova and C. Svanfeldt, "Societal Innovations and the postmodern Aestheticization of Everyday Life," lnternational Journal of Research in Marketing 1O
(1 993), pp. 297-310 (quote from page 297).
28. Interviews with employees of organizations that have died reveal negative
emotions such as those associated with grief. See S. G. Harris and R. L Sutton,
"Functions of Parting Ceremonies in Dying Organizations," Academy of
Management lournal 29 (1986), pp. 5-30.
29. A. Gilbert, "Lessons Learned from Failure," lnformation Week Sl7 (2OOO),
p.111.
30.
G. H. Bower, "How
pp.569-82.
CHAPTER
ENTREPRENEURSHIPANDTHEENTREPRENEURIALMIND-SET
Cliffs, NJ: Prentice Hall, 1994), pp. 66-76 (quote from p. 67).
the Entrepreneurial
Process," in R. E. Freeman and S. Venkataraman (eds.), Ethics and Entrepreneurshp-The Ruffin Seriet Volume 3 (2002).
37. This process is discussed in Yao TzuLi, David G. Jansson. and Ernest G.
cravaf ho, Technological lnnovation in Education and Industry (New york:
33