CHAPTER 1 ENTREPRNEURSHIP: A FIELD, AN ACTIVITY AND A WAY OF LIFE

Entrepreneurship is a process a chain of events and activities that takes place over time. - The process continues to bring an idea into reality. - Being an entrepreneur does not necessarily involve starting a particular kind of company. - The process of bringing something new to the marketplace. Three factors play important roles in every phase of the entrepreneurial process: individual, group, society.

The Field of Entrepreneurship: Its Nature and Roots Entrepreneurship seeks to understand how opportunities to create something new arise and are discovered or created by specific persons who then use various means to exploit or develop them, thus producing a wide range of effects. Identifying an opportunity - Does not have to be something new - Can be developing a new market, using a new raw material, new means of production, etc. Activities involved in actually exploiting or developing this opportunity - There must be a commercial application for the new creation. - It must be something people will want to own or use. McMullen and Shepherd note that entrepreneurship involves two things: 1. Using knowledge and personal strategies to obtain knowledge to recognize an opportunity that someone can develop. 2. Evaluating the opportunity to determine whether they have the knowledge and skills needed to actually develop it. Large companies can also be entrepreneurial: - they must develop a corporate culture receptive to new ideas - provide concrete rewards for innovation. Intrapeneurs individuals who create something new while inside an existing company. Innovation is essential for gaining and sustaining competitive advantage.
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Entrepreneurship: An Engine of Economic Growth Entrepreneurship statistics: Each year 600,000 new business are started in the United States alone. This has doubled in the past two decades. Corporations have downsized or eliminated more than six millions jobs in the past two decades. More than 900,000 new start-up companies were founded in the U.S. More than ten million individuals are now self employed in the U.S. The number of franchises sold each year in the United States has increased greatly from 274,000 in 2000 to 351,000 in 2005. US firms with fewer than 500 employees Account for 51% of private sector output Employ 51% of private sector workers Constitute 99% of all employers Companies owned by minorities increased 168 percent between 1987 and 1997. There are 3.25 million companies owned by minorities. As of 1999, they employed more than 4 million people and generated 495 billion dollars in revenues. What has caused this rise of entrepreneurs? Entrepreneurs have become the new heroes and heroines. Many individuals feel little loyalty to their current employers The allure of becoming an entrepreneur.

Entrepreneurship: Foundations in Other Disciplines To understand entrepreneurship, you must consider: 1. the economic, technological, and social conditions from which opportunities rise, 2. the people who recognize these opportunities (the entrepreneurs themselves) 3. the business techniques and legal structures they use to develop them 4. the economic and social effects produced by such developments.

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Economics, behavioral science and sociology are important to understanding entrepreneurship. Entrepreneurship does not exist in an intellectual vacuum. Macro and Micro Perspectives: Macro approaches to entrepreneurship 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 environmental factors. (economic, financial, industry, political variables). Micro approaches take a bottomup perspective, seeking to understand the entrepreneurial process by focusing primarily on the behavior and thoughts of individuals or groups of individuals. To get a full understanding of entrepreneurship, we must give careful consideration to both perspectives, as these two approaches are complementary. What Entrepreneurs Do Versus What, Perhaps, They Should Do: Where ResearchedBased Principles Meet Actual Practice Entrepreneurs who engage in the following activities are more likely to succeed than those who do not: Performing a careful feasibility analysis Develop clear business models Careful competitor analysis

Entrepreneurship: A Process Perspective Recognition of an opportunity: An opportunity is the potential to create something new that has emerged from a complex pattern of changing conditions changes in knowledge, technology, economic, political, social or demographic conditions. Opportunities that have the potential to generate economic value are desirable. Successful entrepreneurs perceive meaningful patterns in these changes and patterns.

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Expedia.com and other companies have realized that people on the same flights or staying in the same hotels often paid very different rates. Ideas almost always consist of a novel combination of elements that already exist. Deciding to Proceed and Assembling the Essential Resources: After you have an idea for a new produce to service, or recognize an opportunity: 1. assemble a wide array of required resources. Basic information Human resources Financial resources 2. prepare a formal business plan. Launching a New Venture: This involves a wide range of actions and decisions Legal form of the new venture, Developing the new product or service, Establishing the roles of top management team, etc. Building Success and Managing Growth: This is the start of another key phase of the entrepreneurial process: Running the new venture Building it into a growing, profitable business Developing effective strategies Management issues Harvesting the Rewards: There are many entrepreneurship. ways of reaping the benefits of successful

The above entrepreneurial activities tend to unfold over time in an orderly sequence. Avoid a static view of entrepreneurship View entrepreneurship as an ongoing process Be relatively willing to accept risk

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Levels of Analysis: Micro versus Macro Revisited At every stage of the entrepreneurial process, individual-level (micro) variables as well as group or interpersonal level variables along with societal-level (macro) variables all play a role. For example, while one person may develop the idea into a business, other people (friends, associates, etc.) often suggest the basis of an idea for the new produce or service. Possible role of genetic and other biological factors (micro): - There is a genetic component in how individuals brains react to high levels of risk. - Inherited tendencies to respond positively or negatively to risk. - How people react to overcoming obstacles or to engaging in the same activities for a long period of time. - Development of specific skills or abilities. Role of group level and societal level factors (macro). People receive encouragement from friends and family members. Individual-level, group-level and societal-level factors influence every action and every decision taken by entrepreneurs. Entrepreneurship: Individuals The Intersection of Valuable Opportunities and Enterprising

Mukesh Chatter, recipient of an Entrepreneur of the Year award, said To recognize an opportunity, it has to be there in the first place something must have changed so as to generate the opportunity. Then we have to recognize it and be able to tell that it is a good opportunity. Luck definitely plays a role, but after that, it is largely a matter of hard, mind-bending work. The intersection of valuable opportunities and enterprising individuals is the essence of entrepreneurship. Opportunities vary greatly in their potential value. Only for some opportunities is the ratio of risk-to-potential benefits sufficiently favorable to justify efforts to exploit them.

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There are specific characteristics that make some opportunities more promising than others. There is a nexus or connection between opportunities and people.

The Cutting Edge: Emerging Issues and Questions Entrepreneurs encounter change on a daily basis. Change is what entrepreneurship is all about creating something new a profitable new venture where none existed before.

University-Based Technology Transfer: How Universities Encourage Entrepreneurship Universities are a prime source of new knowledge. Many universities have established technology transfer offices. The Bayh-Dole Act has made it possible for universities to own patents on inventions that were developed under federal research grants. The quality of faculty and the level of industry research funding received by a university are both important predictors of the number of start-up companies formed on the basis of the discoveries of faculty research. Licensing is where the patent holder can grant rights to the patent to start-ups. Incubators and science parks are organizations focused on the mission of encouraging business growth in a specific region by combining and sharing knowledge. These organizations provide start-up ventures with a protected environment. Some support start-up companies are based on research by faculty or current and former students. Entrepreneurial Cognition: A Look Inside the Mind of the Entrepreneur Motives, skills, abilities, and experience are all important to a successful entrepreneur. Successful entrepreneurs may be different from others and may have better mental frameworks for identifying good opportunities than other persons.

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It may be that recognizing patterns in complex trends and changes plays an important role in opportunity recognition.

Sources of Knowledge About Entrepreneurship; How We Know What We Know There are three means of acquiring knowledge: experimentation. observation, reflection, and

Systemic observation we observe certain aspects of the world systematically, keeping careful records of what we notice. Then we use this information as a basis for reaching conclusions about the topics we wish to study and understand. Then, we can derive one or more hypotheses as yet untested prediction or explanation for a set of facts. Thereafter, we can test these predictions by collecting relevant data. Variables can be correlated changes in one factor are accompanied by changes in another factor. Correlations can range from - 1.00 to + 1.00. Negative numbers indicate that as one variable increases, the other decreases. Positive numbers indicate that as one increases, so does the other variable.

The case method. Reflection, which is the basis for the case method, involves gathering large amounts of data about one organization or specific persons, and then using this information to reach conclusions. Opportunity recognition does indeed involve perception of complex patterns. Chester Carlson understood both the strong need for improved means of making copies and several of the technical processes that might be used to meet this need. He decided to try to solve this problem. He restricted his efforts to technologies and processes he understood well, thereby enhancing his own

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ability to perceive ways of connecting several processes into a means of making dry, permanent copies. He was successful. Experimentation involves systematically changing one variable in order to see if such changes affect one or more other variables. It involves active interventions by the researcher. If we change one variable while holding everything else constant, and these changes affect another variable, we can conclude that changes in the first cause changes in the second. It is important to determine when a change in variables occurred. Something that occurs later in time cannot reasonably be the cause of something that occurred earlier. 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. The purpose of experimentation is to gain insights into the nature of complex processes, such as opportunity recognition. Because it is difficult to vary the factors of interest systematically, experimentation is not used very often in the study of entrepreneurship.

Theory: Answering the questions Why and How? Theory refers to efforts to go beyond merely describing various phenomena to the point at which we can explain them understanding why and how they happen or take place as they do. Theories are frameworks for explaining various events or processes. Entrepreneurship has largely borrowed theories from other fields. Once theories are formulated, hypotheses derived logically from them are tested through careful research. Even if initial predictions are confirmed, further tests of the theory are generally required. How are theories derived in the first place? 1. On the basis of existing evidence or observations, a theory reflecting this evidence is proposed.

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2. 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. 3. These predictions, known as hypothesis, are then tested by actual research. 4. If results are consistent with the theory, confidence in its accuracy is increased. 5. Ultimately, the theory is either accepted as accurate or rejected as inaccurate. Theories both organize existing knowledge and make predictions about how various events or processes will occur. Example of a theory: Assume a researcher formulates the following theory: Individuals who choose to become entrepreneurs (1) are more likely than other persons to be susceptible to several kinds of cognitive errors or biases, and (2) more likely than other persons to think about situations in terms of the gains they will give up if they do not launch a new venture, which causes them to be more accepting of risk. These predictions are then formulated as specific hypotheses and tested in actual research. If results are consistent with the predictions derived from the theory, confidence in it is increased. There would be increased basis for accepting the theorys premise that entrepreneurs do indeed think differently from other persons. On the other hand, if results are not consistent with predictions derived from the theory, confidence in it is reduced. Developing good theories is an important step toward attaining valuable, practical results. Theories are never proven in any ultimate sense. They are always open to test. Research should never be undertaken to prove or verify a theory; it is performed to gather evidence relating to the theory.

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A Users Guide To This Text Steps the authors have taken to make this one of the good books on entrepreneurship. 1. Reader aids. Each chapter begins with an Outline of the topic covered and a list of key learning objectives. a. Important terms are printed in dark type and are followed by a definition. b. Each major section is followed by a list of Key Points a brief summary of major points covered in that section. c. All figures and tables are clear and simple. d. Each chapter ends with a summary and review of the Key Points. 2. The text contains three special features designed to make it more useful. a. Danger! Pitfall Ahead! b. Qualifying Common Sense: What We Think We Know About Entrepreneurship And What We Really Do Know. c. Each chapter is followed by experiential exercise labeled Getting Down to Business 3. The text is divided into parts. a. Part I (Chapters 1-3) examines the field of entrepreneurship. b. Part II (Chapters 4-7) focuses on assembly of the resources needed to launch a new venture. c. Part III (Chapters 8-10) examines the actual launch of new ventures. d. Part IV (Chapters 11-12) - focuses on key aspects of growth. e. Part V (Chapter 13) focuses on the logical conclusion to the entrepreneurial process: alternative ways in which entrepreneurs can harvest the rewards of their efforts.

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ANSWERS TO END OF CHAPTER ONE DISCUSSION QUESTIONS

1. Is there any difference between an intrapreneur and an entrepreneur? If so, describe it. Answer: Yes. Intrapreneurs are people who work within an existing company to create something new, rather than going through the route of founding a new venture. They may face considerable barriers or obstacles, because some organizations are not committed to innovation to the extent that they will allow their employees to focus on searching for new opportunities and ideas. Entrepreneurs, on the other hand, take new ideas (inventions, innovations to existing ideas, etc.) and use various means to exploit or develop them for going business concerns. The entrepreneur recognizes an opportunity to create something new, develop a new market, use a new raw material, develop a new means of production, etc. Entrepreneurship requires creating or recognizing a commercial application for something new. Entrepreneurs recognize opportunities for something new that people will want to own or use and take vigorous steps to convert these opportunities into viable, profitable businesses.

2. Suppose that the government passed a series of laws that made it much easier to start a new business. What effect(s) do you think this would have on the economy? Answer In 1999 more than 900,000 new start-up companies were founded. More than 10 million people are self-employed (this is one out of every eight adults). Minority businesses alone total 3.25 million businesses, which employ over 4 million persons and generate $495 billion in revenues as of 1999. With such an impact on the economy, the passage of laws that make it easier to start a new business could have a favorable effect on the economy. During the 1990s, corporations downsized over 6 million jobs out of existence. If these 6 million workers without jobs could start their own businesses, they would be employed.

3. One basic question in the field of entrepreneurship is Why do some persons leave secure jobs and lives to become entrepreneurs? How would you study this from the micro perspective? From the macro perspective? Answer: The micro perspective is a bottom-up view that seeks to unders6and the entrepreneurial process by focusing on the behavior and thought of individuals or groups of individuals. You could use systematic observation in collecting data from individuals in response to questions and interviews. The data could then be organized and tabulated

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to determine the most frequently given response, the second most often mentioned reason, and so forth. The macro perspective is a top-down perspective that seeks to understand the entrepreneurial process by focusing largely on environmental factors such as economic, financial and political factors that are largely beyond the direct control of an individual. Since the question is Why? the theory approach would work well as discussed in the text.

4. In this chapter, we suggest that entrepreneurs are the new heroes and heroines in many cultures. Do you think this is really so? If it is, why do so many people see entrepreneurs as being heroic? If you think it is not accurate, why? Answer: Entrepreneurs are heroes in may peoples eyes. There are three reasons for this. First, the news media are filled with good reports of successful entrepreneurs. Secondly, many people do not feel the loyalty to their employer that was felt in times past. This encourages them to want to be on their own. Lastly, younger people prefer a more independent life style. With these three factors together, many people look at entrepreneurs as daring individuals, who take on the giants of industry and are able to become successful in the process.

5. Do you think that universities should own patents for inventions or scientific advances made by students? Why? Why not? Answer: This may be a difficult question to answer if the student has been using university resources to create the invention. On the one hand, universities with patents on frequently used products can earn substantial revenue from the royalties. This helps cover expenses that would otherwise need to be paid by increased tuition charges. Much, if not most, university research is funded from outside sources. This helps enable many new inventions and discoveries that might not otherwise come to fruition. At the same time, a student is not employed by the university and should receive the benefits from his or her intellectual property.

6. Suppose you came across an article in a magazine with the following title: FirstBorns Make the Best Entrepreneurs. Reading the article, you discover that it contends that entrepreneurs who are the oldest child in their family are more successful than ones who are the second or third born. What questions should you ask yourself about how the information was obtained in order to decide whether to view it was accurate or valid? Answer: As in all matters, the crucial question is how was the investigation conducted? Systematic observation must be used to determine the accuracy of the conclusion. What was the hypothesis what was examined? How was the systematic observation
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conducted? Was there any experimentation? If so, how was it accomplished and what were the results? What controls were imposed on the investigative process? If the case method was used, how were the data gathered and what conclusions were reached? What theories were considered and how were they verified? Once the data was gathered, how was it interpreted? Is the conclusion supported by the data?

ANSWERS TO GETTING DOWN TO BUSINESS QUESTIONS AT END OF CHAPTER

(1) Do companies that are first to market with a new product have a competitive edge over companies that enter the same market later? We will learn more of this later, but, depending on when they enter the market and the nature and extent of the market in the first place, these early comers generally have some advantage over later comers. But, this depends on a lot of factors, as we shall see in later chapters.

(2) Do repeat entrepreneurs (people who start one successful company after another) search for opportunities differently than entrepreneurs who found only one company? Yes, they seem to perceive meaningful patterns in changes and patterns. They are able to take elements that already exist and combine them in novel ways. Their experience in the first successful company can generally be applied to the second and subsequent companies they start.

(3) What factors lead individuals to give up secure and well-paid jobs to become entrepreneurs? Are these factors the same for women and men? They see opportunities to create something new, to fill an existing or newly created niche in the market place. They want to create a profitable new venture where none existed before.

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