www.handels.gu.se lecture 2 - the entrepreneur johan brink entrepreneurship and new business...
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Lecture 2 - The EntrepreneurJohan Brink
Entrepreneurship and New Business Development
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Origin of Entrepreneurship research
Cantillon 1755Interact with suppliers at known prices in
order to produce goods that could later be sold at unknown prices, Risk takerMill 1848
Risk is asserted as a key in entrepreneurial activitiesNeoclassical Menger, Jevons, Walras –
Price mechanism and allocationBaumol 1968
Critique neoclassical omission of the entrepreneur – models of constrained optimization, exogenous factorsBrich 1979)
Job creation
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Who is the entrepreneur?
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An entrepreneur?
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An entrepreneur?
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Individuals - Personal traits
• How should an Entrepreneur be?– Discuss 2 and 2
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The myth of the individual
Of the 10 years sampled, 480 articles were studied and all portrayed the entrepreneur as an individual. (Nicholson and Anderson,2005)
FlamboyantMy heroGentle giant Masters of time and spaceLikable rogue Polite rebel Ultimate outsider
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Individuals - Personal traits• Need for achievement • Locus of control • Risk taking • Tolerate ambiguity• Self efficacy • Goal setting • Regretful thinking
• Rely on low representativeness
• E and High achievers• E and High achievers• No difference!• No difference!• E! (Weak)• E and High achievers• E! (Weak) • E! (Weak)
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Risk and Uncertainty
Risk as: – Variance– Downside loss–Opportunity cost–Near or distant in time
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Risk and Uncertainty
– Assumed that everyone agrees on the level of risk involved, and that some people (entrepreneurs) are constitutionally more willing to take the chance than are other people (non-entrepreneurs).
– Research have often failed to find risk-taking propensity associated with success in new venture creation (e.g., Brockhaus, 1980, 1987).
– Perhaps those who found businesses do not think about the risks in these statistical terms!!!
– Resent research actually points toward Entrepreneurs being more risk averse! - Thus other motivations than profit/pecuniary!
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Risk as: – Variance– Downside loss–Opportunity cost–Near or distant in time
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Entrepreneurs and managers
• How do they think different from managers? Discuss 2 and 2
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Modern Entrepreneurship Theories
Psychological/managerial•How do they think?•Opportunity & Alertness (Kirzner, 1979)
Sociological & Economics•What do they do?•Resources & Foundation of organizations (Gartner, 1988)
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Entrepreneurial Alertness
Kirzner (1979, 73, 85) entrepreneurial alertness, a distinctive set of perceptual and cognitive processing skills.– “the ability to notice without search opportunities that have
hitherto been overlooked” (1979, p. 48) – “a motivated propensity of man to formulate an image of the
future” (1985, p. 56).
If Kirzner is correct, alert individuals have:
–More accurate mental models
– A better grip on reality because they perceive it more accurately
– Are better at inferring the likely implications and consequences
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Cognitive Theories
Schemata & Heuristics •Human beings simply do not have the cognitive capacity to process and remember all information stimuli that arise from complex situations (Komatsu 1992). •Effective under uncertainty – bounded rationality Learning knowledge:•Unlike personal traits, cognitive processes can be changed!•Experts have more complex schema characterized by extensive cross- links to other schema
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A Simple Cognitive Entrepreneurial model
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Prior knowledge
Source of knowledge•Work experience•A similar business – stolen with pride!•Hobby /Personal interest
Cognitive schemata
Information •Interpretation of opportunity - people recognize those opportunities related to information that they al- ready possess (Venkataraman1997).
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Cognitive bias - Entrepreneurship• Availability bias– Noticeable in the past, spectacular: A person who just read about another
restaurant's closing in the morning paper will give a higher estimate of failures than will a person who has not seen such a story in a long time
• Representativeness bias– Comparative to previous: A person for whom Restaurant X is typical of
successful establishments will make a lower guess about failure than will a person for whom the Restaurant X resembles failures
• Anchoring bias– Relative to given reference point: A perceiver who knows that three local
restaurants have failed will make a smaller estimate than a perceiver who has been told that 10,000 restaurants have failed nationally
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Cognitive bias - Entrepreneurship• Confirmation bias– Attach greater weight to information which confirms rather than
disconfirming info. A person who just started a restaurant have a higher tendency to pay attention to another restaurant's success than failure
• Hindsight – Past events as having higher probabilities than actually are, A person who
has worked within a successful restaurant will overestimate the success rate of restaurants
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Entrepreneurial bias
• Over confident– Availability, anchoring,
confirmation, hindsight, confirmation
– People do not know what they do, and do not do – the paradox of the uninformed!
– Entrepreneurs personal experience - But its rational to collect less information while being over-confident!
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Entrepreneurial bias
• Belief in small numbers– Representative, Hindsight– But its rational to do this
while entrepreneurs lack resources!
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Entrepreneurial bias
• Over optimism
–Over positive self evaluations
–Over optimism about future plans
• Failure to break down tasks–Over optimism about control• Judge the relative
importance of skill and chance
• Motivated to control their environment
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Motivation
Often•Flexibility•Income - Necessity•Learn and develop as a personOccasionally•Wealth•Product- to develop a ideaRarely•Recognition•Admiration•Power•Family – continuation a tradition
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What about having fun? Persons experiencing positive affect… •Tend to be persistent•Tend to perceive objects, other persons, ideas, and almost anything else more positive•Productive working relationships•Tend to base decision making on satisfying condition rather than maximizing & optimizing•Rely on low representativeness•Enhance creativity
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Opportunities:Underlying changesEntrepreneurial opportunities are those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production (Casson, 1982).
(1) the creation of new information, as occurs with the invention of new technologies; (2) the exploitation of market inefficiencies that result from information asymmetry, as occurs across time and geography; and(3) the reaction to shifts in the relative costs and benefits of alternative uses for resources, as occurs with political, regulatory, or demographic changes.(Drucker 1985)
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Opportunities: Entrepreneurial activities
• Expected demand is large– (Schmookler, 1966; Schumpeter, 1934)
• Industry profit margins are high – (Dunne, Roberts, & Samuelson, 1988),
• The technology life cycle is young– (Utterback, 1994),
• The cost of capital is low – (Shane, 1996)
• The density of competition in a particular opportunity space is neither too low nor too high
– (Hannan & Freeman, 1984)
• Population-level learning from other entrants is available
– (Aldrich &Wiedenmeyer, 1993)
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Create or discover opportunities?What came first?Idea :Decision to start a business:Simultaneous: (Handbook of entrepreneurial dynamics Gartner et al 2004)
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37% 42%21%
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Different opportunities
• Opportunity recognition involves matching known products with existing demand. The entrepreneur connects dispersed knowledge regarding products and demand to exploit a previously unrecognized market opportunity.
• Opportunity discovery starts either from a known supply and proceeds in search of an unknown demand, or from a known demand that motivates search for an unknown supply. Once the missing side of the transaction is discovered, the market opportunity can be exploited.
• Opportunity creation neither the supply nor demand exists prior to entrepreneurial action; instead, the entrepreneur participates in creating both.
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Readings
• DISCOVERY AND CREATION: ALTERNATIVE THEORIES OF ENTREPRENEURIAL ACTION
– SHARON A. ALVAREZ and JAY B. BARNEY– Strategic Entrepreneurship Journal Strat. Entrepreneurship J., 1:
11–26 (2007)
• Opportunity Recognition as Pattern Recognition: How Entrepreneurs “Connect the Dots” to Identify New Business Opportunities
– Robert A. Baron– Academy of Management Perspectives, February 2006
• Causation and effectuation: Toward a Theoretical shift from economic inevitability to Entrepreneurial contingency
– S Sarasvathy– Academy of Management Review, 26:2 , 2001
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“I was seldom able to see an opportunity until it had ceased to be one.” Mark Twain
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