FOUNDATIONS OF ENTREPRENEURSHIP

NATURE OF ENTREPRENEURSHIP

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NATURE AND DEVELOPMENT OF ENTREPRENEURSHIP

Entrepreneur – An individual who takes initiative to bundle resources in innovative ways and is willing to bear the risk and/or uncertainty to act.

Being an entrepreneur today:

• Involves creation process.• Requires devotion of time and effort. • Involves rewards of being an entrepreneur. • Requires assumption of necessary risks.

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NATURE AND DEVELOPMENT OF ENTREPRENEURSHIP (CONT.)

Entrepreneurial action - Behavior in response to a judgmental decision under uncertainty about a possible opportunity for profit.

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TABLE 1.1 - ASPECTS OF THE ENTREPRENEURIAL PROCESS

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THE ENTREPRENEURIAL PROCESS

Opportunity identification - The process by which an entrepreneur comes up with the opportunity for a new venture.

Market size and the length of the window of opportunity are the primary bases for determining risks and rewards.

Window of opportunity - The time period available for creating the new venture.

Business plan - The description of the future direction of the business.

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HOW ENTREPRENEURS THINK

Entrepreneurs in particular situations may think differently when faced with a different task or decision environment.

Given the nature of their decision-making environment, entrepreneurs need to sometimes:

• Effectuate.• Be cognitively adaptable.• Learn from failure.

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Causal process

• Starts with a desired outcome.• Focuses on the means to generate that outcome.

Effectuation process

• Starts with what one has (who they are, what they know, and whom they know).

• Selects among possible outcomes.Entrepreneurial mind-set involves the ability to rapidly sense, act, and mobilize, even under uncertain conditions.

How Entrepreneurs Think (cont.)

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Cognitive adaptability describes the extent to which entrepreneurs are:

• Dynamic, flexible, self-regulating and engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environments and then acting on them.

It reflects in an entrepreneur’s metacognitive awareness.

How Entrepreneurs Think (cont.)

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• Achieving cognitive adaptability • Comprehension questions – Aids understanding of the nature of the

environment before addressing an entrepreneurial challenge.

• Connection tasks – Stimulates thinking about the current situation in terms of similarities and differences with situations previously faced and solved.

• Strategic tasks – Stimulates thoughts about which strategies are appropriate for solving the problem (and why) or pursuing the opportunity (and how).

• Reflection tasks – Stimulates thinking about their understanding and feelings as they progress through the entrepreneurial process.

How Entrepreneurs Think (cont.)

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• Entrepreneurs who are able to increase cognitive adaptability have an improved ability to:

• Adapt to new situations.

• Be creative.

• Communicate one’s reasoning behind a particular response.

How Entrepreneurs Think (cont.)

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Learning from Business Failure

• Uncertainty, changing conditions, and insufficient experience can contribute to failure among entrepreneurial firms.

• An entrepreneur’s motivation is not simply from personal profit but from:

• Loyalty to a product.

• Loyalty to a market and customers.

• Personal growth.

• The need to prove oneself.

How Entrepreneurs Think (cont.)

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• Loss of a business can result in a negative emotional response from the entrepreneur.

• It can interfere with:• Entrepreneur’s ability to learn from the failure.

• Motivation to try again.

How Entrepreneurs Think (cont.)

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Recovery and Learning Process

• Emotional recovery from failure happens when thoughts about the events surrounding, and leading up to the loss of the business, no longer generate a negative emotional response.

• Primary descriptions of the process of recovering are:• Loss-orientation.

• Restoration-orientation.

How Entrepreneurs Think (cont.)

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• Loss-Orientation• Involves working through, and processing, some aspect of the loss

experience and, as a result of this process, breaking emotional bonds to the object lost.

• This process gradually provides the loss with meaning and eventually produces a changed viewpoint.

• Involves confrontation, which is physically and mentally exhausting.

• Characterized by feelings of relief and pain that wax and wane over time.

How Entrepreneurs Think (cont.)

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• Restoration-Orientation• Based on both avoidance and a proactiveness toward secondary

sources of stress arising from a major loss.

• Involves suppression, which requires mental effort and presents potentially adverse consequences for health.

• Provides an opportunity to address secondary causes of stress.

• May reduce emotional significance of the loss.

How Entrepreneurs Think (cont.)

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A Dual Process for Learning from Failure

• The dual process of oscillating between the loss-orientation and restoration-orientation enables a person to:

• Obtain the benefits of each.

• Minimize the costs of maintaining one for too long.

• This dual process speeds the recovery process.

How Entrepreneurs Think (cont.)

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HOW ENTREPRENEURS THINK (CONT.)

• Practical implications of the dual process:• Knowledge that feelings and reactions being experienced are

normal.

• Realizing that psychological and physiological outcomes caused by the feelings of loss are “symptoms” can reduce secondary sources of stress.

• There is a process of recovery to learn from failure, which offers some comfort that current feelings of loss will eventually diminish.

• Recovery and learning process can be enhanced by some degree of oscillation.

• Recovery from loss offers an opportunity to increase one’s knowledge of entrepreneurship.

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ETHICS AND SOCIAL RESPONSIBILITY OF ENTREPRENEURS

Entrepreneurs usually develop an internal ethical code.

Personal value systems tend to be influenced by:

• Peer pressure.• General social norms in the community.• Pressures from their competitors.

Business ethics - The study of behavior and morals in a business situation.

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ROLE OF ENTREPRENEURSHIP INECONOMIC DEVELOPMENT

Innovation is depicted as a key to economic development.

• Product-evolution process - Process through which innovation is developed and commercialized.

• Iterative synthesis - The intersection of knowledge and social need that starts the product development process.

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ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT (CONT.)

Three types of innovation:

• Ordinary - New products with little technological change.• Technological – New products with significant technological

advancement.• Breakthrough – New products with some technological

change.

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Figure 1.1 - Product Evolution

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SOCIAL FACTORS IN NURTURING ENTREPRENEURSHIP

SOCIAL CONDITIONS

1.Legitimacy of Entrepreneurship

2.Social Mobility

3.Marginality

4.Security

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LEGITIMACY OF ENTREPRENEURSHIP

The relevance of a system of norms and values within a socio-

cultural setting for the emergence of entrepreneurship.

In which the degree of approval or disapproval granted

entrepreneurial behavior influences its emergence and

characteristics if it does emerge.

Schumpeter recognizes the importance of such legitimacy in

terms of appropriate social climate for entrepreneurship.

Entrepreneurship will be more likely to emerge in a setting in

which legitimacy is high.

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SOCIAL MOBILITY

Social mobility involves the degree of mobility, both social and

geographical, and the nature of mobility channels within a system.

High degree of social mobility is conducive for entrepreneurship.

Both Hoselitz’s need for ‘openness’ of a system and McClelland’s

need for ‘ flexibility’ imply the need for possibility of mobility

within a system for entrepreneurship development.

Brozen: According to him if it is too flexible, then individual will

gravitate towards other roles and if it is too rigid, entrepreneurship

will be restricted along with other activities.

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MARGINALITYIndividuals or groups on the perimeter of a given social system or between

two social systems provide the personnel to assume the entrepreneurial

roles.

They may be drawn from religious, cultural, ethnic or migrant minority groups

and their marginal social position is generally believed to have psychological

effects which make entrepreneurship particularly attractive for them.

Several factors are attributed to the increase in the likelihood of marginals

becoming entrepreneurs.

Ex: Presence of positive attitude towards entrepreneurship within the group.

High degree of group solidarity or cohesion

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SECURITY

Security is a significant factor for entrepreneurship development.

This is reasonable too because if individuals are fearful of loosing their economic assets or of being subjected to various negative sanctions, they will not be inclined to increase their insecurity by behaving entrepreneurially.

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THEORIES OF ENTREPRENEURSHIP

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Entrepreneurship is an evolved thing. With the advancement of science and technology it has undergone metamorphosis change and emerged as a critical input for socio-economic development.

Various writers have developed various theories on entrepreneurship and popularized the concept among the common people.

The theories propounded by them can be categorized as under

Sociological theories

Economic theories

Cultural theories

Psychological theories

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SOCIOLOGICAL THEORIES

Sociological Theories: The following theories explain how sociological factors accelerate the growth of entrepreneurs:

1-Theory of religious beliefs

2- Theory of social change

Theory of religious beliefs

Max Weber has propounded the theory of religious belief. According to him, entrepreneurism is a function of religious beliefs and impact of religion shapes the entrepreneurial culture. He emphasized that entrepreneurial energies are exogenous supplied by means of religious beliefs. The important elements of Weber’s theory are discussed further-

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1. Spirit of Capitalism- in the Weberian theory, spirit of capitalism is highlighted. We all know that capitalism is an economic system in which economic freedom and private enterprise are glorified, so also the entrepreneurial culture.

2- Adventurous Spirit- Weber also made a distinction between spirit of capitalism and adventurous spirit. According to him, the former is influenced by the strict discipline whereas the latter is affected by free force of impulse. Entrepreneurship culture is influenced by both these factors.

3- Protestant ethic- according to Max Weber the spirit of capitalism can be grown only when the mental attitude in the society is favorable to capitalism

4 -Inducement of profit- Weber introduced the new businessman into the picture of tranquil routine. The spirit of capitalism intertwined with the motive of profit resulted in creation of greater number of business

enterprises.

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In fact, this theory suited the British rulers, who desired to encourage European Entrepreneurship in India. This theory was vehemently criticized by many researchers because of the unrealistic assumptions.

Theory of Social Change Everett E. Hagen, in his theory of social change propounded how a traditional society becomes one in which continuing technical progress takes place. The theory exhorts the following feature which presumes the entrepreneur’s creativity as the key element of social transformation and economic growth.

Presentation of general model of the society- the theory reveals a general model of the society which considers interrelationship among physical environment, social structure, personality and culture.

Economic Growth : product of social change and political change : According to Hagen, most of the economic theories of underdevelopment are inadequate.

Rejection of followers syndrome : Hagen rejected the idea that the solution to economic development lies in imitating western technology. So the followers syndrome on the part of the entrepreneur, is discouraged.

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Historic shift as a factor of initiating change- Hagen in his book, How Economic Growth Begins, depicts historic shift as the crucial force which has brought about social change technological progress thereby leading to the emergence of entrepreneurial class from different castes and communities.

Withdrawal of status respects as the mechanism for rigorous entrepreneurial activity- Closely consistent with the historic shift it is the social group that plunges into rigorous entrepreneurism which experiences the status withdrawal or withdrawal of status respects.

Hence, Hagen’s creative personality is the admixture of Schumpeters innovation and McClellands high need for achievement, but Hagen’s analysis fails to give policy measures for backward countries which are striving for economic development as he identifies status withdrawal as the causal factor in the emergence of creative personality. Hagen’s thesis of disadvantaged minority groups has its own limitations. There are many disadvantaged minority groups in India which have not supplied a good number of entrepreneurs.

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ECONOMIC THEORIES

Entrepreneurship and economic development are interdependent.

Economic development takes place when a country' real rational income increases overall period of time wherein the role of entrepreneurs is an integral part.

Schumpeter’s Theory of Innovation Schumpeter’s theory of entrepreneurship is a pioneering work of economic development. development in his sense, implies that carrying out of new combination of entrepreneurship is basically a creative activity

According to Schumpeter an entrepreneur is one who perceives the opportunities to innovate, i.e. to carry out new combinations or enterprise.

In his views, the concept of new combination leading to innovation covers the following 5 cases-

1- The introduction of new goods, that is the one with which consumers are not yet familiar, of a new quality.

2- The introduction of new method of production

3- The opening of new market

4- the conquest of new source of supply of raw material

5-The carrying out of new organization

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In view of the above, Schumpeterian theory of entrepreneurship has got the following features-

1- Distinction between invention and innovation :Schumpeter makes a distinction between innovation and invention. Invention means creation of new things and innovation means application of new things onto practical use

2- Emphasis on entrepreneurial function- Schumpeter has given emphasis on the role of entrepreneurial functions in economic development.in his views, development means basic transformation of the economy that is brought about by entrepreneurial functions.

3- Presentation of disequilibrium situation through entrepreneurial activity-the entrepreneurial activity represents a disequilibrium situation, a dynamic phenomenon and a break from the routine or a circular flow or tendency towards equilibrium.

4- Eentrepreneurialism dream and the will to found a private kingdom- the motives of creating things and applying these things into practice inspire the entrepreneur to undertake innovation.

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CRITICAL EVALUATION OF SCHUMPETER’S THEORY OF INNOVATION

1- THE THEORY HAS THE SCOPE OF ENTREPRENEURISM IN THE SENSE THAT IT HAS INCLUDED THE INDIVIDUAL BUSINESSMAN ALONG WITH THE DIRECTORS AND MANAGERS OF THE COMPANY.

2- Schumpeters innovating entrepreneurs represents the enterprise with the R & D and innovative character. But developing countries lack these character.

3 The theory emphasizes on innovation and excludes the risk taking and organizing aspects.

4. Schumpeter’s entrepreneurs are large scale businessman who introduce new technology, method of production.

5- Schumpeter remained silent about as to why some economics had more entrepreneurial talent than others. However, despite the above criticisms, Schumpeterian theory is regarded as one of the best theories in the history of entrepreneurial development.

 

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CULTURAL THEORIES

Advocates of cultural theories point out that entrepreneurship is the product of culture. Entrepreneurial talents come from cultural values and cultural system embedded into the cultural environment.

Hoselitz’s Theory : Hoselitz explains that the supply of entrepreneurship is governed by cultural factors, and culturally minority groups are the spark-plugs of entrepreneurial and economic develoment.in many countries, entrepreneurs have emerged from a particular socio-economic class.

He emphasized the role of culturally marginally groups like Jews and the Greeks in medieval Europe, the Chinese in south Africa and Indian in east Africa in promoting economic development.

PSYCHOLOGICAL THEORIES

Psychological theories center's around the psychological characteristic of the individual in a society. Psychological characteristics affect the supply of entrepreneurs in the society.

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DRUCKER ON ENTREPRENEURSHIP

Peter F. Drucker opined that “an entrepreneur is one who always searches for change, responds to it and exploits it as an opportunity.” he laid emphasis on two important factors – innovation and resource- that led to emergence of entrepreneurship.

According to him, innovation is the real hub of entrepreneurship which creates resource. A thing is regarded as resource when its economic value is recognized. For example, mineral oil was considered worthless until the discovery of its use. Similarly, purchasing power was considered an important resource by an American innovative entrepreneur who invented installment buying.

According to Drucker, successful entrepreneurship involves the following things- Value and satisfaction obtained from resource by the consumer are increased New values are created Material is converted into a resource or exiting resources are combined in a new or more productive configuration Entrepreneurship is the practice which has a knowledge base. Entrepreneurship is not confined to big businesses and economic institutions, it is equally important to small business and non-economic institutions Entrepreneurship behavior rather than personality trait is more important to enhance entrepreneurship The foundation of entrepreneurship lies in concept and theory rather than in intuition.

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Thus, Drucker has given his views that “an entrepreneur need not be a capitalist or an owner.

A banker who mobilizes other’s money and allocates it in areas of higher yield is very much an entrepreneur though he is not the owner of the money.