Entrepreneurs have been catapulted into the consciousness of the wider media through their high profile activities, which help change fundamentally the rules of the game in a market. Prime-time TV programs showing entrepreneurs and inventors pitching their ideas to rich investors have helped popularized entrepreneurs to a wide audience.
“Adventurer, he that seeks occasion of hazard; he that put himself in the hand of chance.” Over time, the concept of entrepreneur in English became more broadly defined, and related to “situations where one person engaged in projects involving risk where the profit was uncertain.”
This competition encourages more efficient use of resources and the displacement of non-viable inefficient businesses. Viable businesses that are more efficient users of resources will be associated with superior levels of productivity, which can enable them to sustain competitive advantage in local and international markets.
Few firms are engaged in truly innovative activities. Most new and small firms are imitative, or firms introduce incremental innovations to sustain their competitive advantage. A very small subset of entrepreneurs with unique scientific or technological knowledge creates radical innovations leading to the creation of new industries that promote economic development associated with the destruction of some old industries.
Most entrepreneurial firms are engaged in servicing private consumers or other enterprises. The servicing relationship between an entrepreneurial firm and its customers can range from cooperation to dependency and exploitation. Many large firms would not be able to remain profitable without the service provided by new and small firms in their supply chain.
Only 4% of firms generate 50% of job generation by the firms over a decade. The majority of new firms are born to die young as most cease to trade within 3 years of inception. Most firms that survive are born small and stay small. Many small firms are more interested in maintaining their current level of profit than in expansion. One reason for firms wishing to stay small is that the ownership and management reside in the same person or persons; so future firm goals are determined not only by commercial considerations but by personal lifestyles and family factors relating to the individuals or teams of individuals who own and manage them. Firm development can be restricted by entrepreneurs who want to maintain ownership and control of their firms, and who many only grow their ventures to an internal management comfort zone, which allows owners to maintain control and ownership. But it seems that the proportion of small businesses that wan to grow is greater than the numbers that actually grow.
For Knight, the function of an entrepreneur is to be a calculated risk taker. Knight recognized that entrepreneurs require foresight and command over resources if they are to back their judgments. He suggests entrepreneurs have a low aversion to risk because they self-finance their own judgments.
Schumpeter suggests that the entrepreneur is not a risk bearer. Rather, risk bearing is the function of capitalists who provide finance to entrepreneurs. Entrepreneurs bear risk only if they act as capitalists. He asserts that entrepreneurs are the creators and catalysts of dynamic change. Entrepreneurs are special people because they are visionaries. Anyone who fulfills the function of an innovator or conducts new combinations is an entrepreneur. The precursors of innovation are imagination and creativity.
Some entrepreneurs discover business opportunities by being alert to gaps in the market. Such alertness involves noticing opportunities that have been hitherto overlooked, and to do so without searching for them.
At the start of the 20th century, Reed noticed that growing numbers of white-collar workers descending on the City of London wanted to dress as smartly as their masters, at affordable prices.
Shi spotted the huge potential of the domestic furniture market in China and, with her husband, established a small furniture factory that produced low-cost Western-style furniture, with generated instant customer recognition.
At the start of the opportunity-creation process, entrepreneurs are assumed to have incomplete information. Markets cannot be defined, and consumers are not aware of their future preferences. However, new technologies can emerge, regulatory conditions may change, and available data can be confusing and conflicting.
Effectuators do not wait for the perfect opportunity. It is assumed that they create and transform existing resources in order to generate opportunities from mere possibilities. Action is based on what is readily available, and they set limits on the amount of resources that can be used to make an opportunity. It is also assumed that the creation of a new market might be result of an accident or serendipity. Effectuators produce a new market even when they did not intend to as an initial goal. Venture goals emerge during the transformation process.
Entrepreneurs face major challenges in assembling and configuring the resources they need to exploit opportunities to become revenue-generating products or services. These resources include entrepreneurial resources relating to human capital skills, capabilities, and knowledge, as well as resources with regard to technology, finance, reputation, networks of contacts, and social capital. The challenges arise partly because entrepreneurs generally initially possess very few resources.
Human capital is the set of idiosyncratic skills, capabilities, experience, and knowledge related to a task, and the ability to increase this capital through learning by entrepreneurs. Individuals’ motivations, abilities, skills, knowledge, and learning shape their ability to exploit an opportunity and achieve advantage for their firms. Psychological capital relates to the resources possessed by entrepreneurs relating to confidence, goal-oriented energy and planning to meet goals, optimism, and resilience (i.e. ability to bounce back). An individual’s cognition and knowledge structure can also shape the process of opportunity associated with varying degrees of risk involved.
Social capital relates to resources of trust, relationships, and contact networks. A firm’s social capital is the sum of its internal social capital (i.e. relationships between individuals) and its external social capital.
An entrepreneurial perspective can be defined as opportunity-seeking behavior, while a strategic perspective is an advantage-seeking behavior that involves creating and sustaining one ore more competitive advantages as the path through which opportunities are exploited.
Young entrepreneurial firms that internationalize can be vulnerable if they make significant errors due to a lack of experience. Forming partnerships and alliances with VC firms and customers that have international experience is a way to compensate for this lack of experiential learning.
Firms may create new technologies or develop radical innovations with value-creating potential that enables them to achieve competitive advantage. After firms capture a market-leading position they often engage in incremental innovation to improve their product in order to stay ahead of competitors.
Although business plans are widely used by entrepreneurs, their usefulness is debatable. One potential problem is that they are static documents, which may have severe shortcomings for early-stage firms, where neither the product nor the market is well defined. The assumptions on which the business plan is based can be seriously misleading when the entrepreneur comes into contact with the reality of the marketplace.
Debate surrounds whether entrepreneurs are born or made. Why this should be more of an issue for entrepreneurs than for, say, physicists or accountants is frankly puzzling.
Habitual entrepreneurs account for high proportions of owners of private firms in countries such as the UK (52%), US (51-64%), Finland (50%), Australia (49%). Experienced entrepreneurs, armed with resources and learning gleaned from PBOE, may more easily overcome obstacles to starting, purchasing, and growing their businesses than do first-time entrepreneurs.
Risk-taking propensity, strong need for achievement, high tolerance for ambiguity, and or high internal locus of control.
Need for achievement: An individual’s desire for significant accomplishment, mastering of skills, control, or high standards, and several actions, such as intense, prolonged, and repeated efforts to accomplish something difficult, to work with singleness of purpose towards a high and distant goal, and to have the determination to win.
They prefer striving to achieve moderately difficult targets that are challenging but not beyond their capabilities. The prospect of achievement satisfaction rather than financial gain can promote enterprise behavior. In contrast, low achievers may select very easy tasks in order to minimize risk of failure, or highly difficult tasks, such that a failure would not be embarrassing. Strong need for achievement is fostered by: parents that encourage independence in childhood; praise and reward as compensation for success; achievement generating positive feelings; and achievement being perceived to be linked to individual competence and effort rather than luck.
Entrepreneurs use heuristics more extensively than non-entrepreneurs. Heuristics are rule-of-thumb shortcuts to simplify the contexts for discovering or creating opportunities, which are often complex, highly uncertain, and lacking in information about the size and profitability of the market for a product that may not yet exist.
Cognitive heuristics and biases:
- Representativeness: Individual’s willingness to generalize from few observations.
- Overconfidence
- Over-optimism
- Availability: Individual is guided by readily available information
- Illusion of control
- Anchoring and adjustment
- Confirmation bias: Individual’s tendency to notice any information that conforms with their views
- Planning fallacy
- Escalation of commitment
- Intrinsic motivation
- Perceived self-efficacy: Individual’s beliefs about their own capabilities to achieve a goal
- Success syndrome: A post-success disorder caused by the burdens of having made it
- Blind spots
- Hubris: An individual has lost contact with reality and overestimates their competence or capabilities
- Denial
- Law of small numbers
People with a high level of self-efficacy approach difficult tasks as challenges to be mastered rather than issues to be avoided. On the other hand, people with a low self-efficacy shy away from difficult tasks, which are perceived as personal threats. Individual with high level of self-efficacy maintain a strong commitment to achieving difficult goals and persisting with them even in the face of failure. They also tend to attribute failure to insufficient effort and poor knowledge. In contrast, individuals with low self-efficacy have a low level of aspiration and commitment to their chosen goals, do not maintain any analytical focus, and give up easily. Failure is attribute to external obstacles and personal deficiencies. As a consequence they rapidly lose faith in their own capabilities. A person’s level of self-efficacy is often the result of previous successful or unsuccessful experiences (either personal experiences or those of role models).
Entrepreneurs who are utilizing what they have learnt from their past experiences can find it becomes harder to recognize industry, technology, regulatory, or market changes. Instead of adapting heuristics that worked in the past to the new context, they may attempt to repeat the same recipes, with fairly predictable consequences. This liability of staleness arising from a feeling that they know how things are done.
Some habitual entrepreneurs can become demotivated. Previously successful habitual entrepreneurs may not put the same amount of effort and risk taking into running a subsequent firm. This is because they have now amassed significant personal wealth. Previous success may also result in the success syndrome, illusion of control, blind spots, and overconfidence.
The value of experience, therefore, depends not just on the knowledge gained but also on how this knowledge is subsequently used. Mindful use of prior experience is required. Entrepreneurs need to recognize when it is necessary to switch away from heuristic information processing toward more systematic information processing to guide decision-making.
About one-third of family firms survive to the second generation, and around 10% make it to the third generation.
Seagate Technology was initially taken private from its public listing in 2000. This was to enable the company to restructure and develop new innovative products with higher margins away from the short-term demands of the stock market. By 2002, the company successfully returned to the stock market, and by August 2003 was named the number one company for innovation and enterprise in disk drives.
For entrepreneurship to make a contribution to society, it is important to go beyond a focus on the creation of firms, many of which close quite quickly after formation. Rather, greater impact involves addressing questions of how exploitation of an opportunity leads to growing and sustainable businesses.