Chapter 1: Entrepreneurship - PDF

Chapter I: Entrepreneurship Structure of the Chapter: 1.0 Objectives 1.1 Introduction 1.2 What is Entrepreneurship? 1.3 Nature and Characteristics of Entrepreneurship 1.4 Career paths of Entrepreneurs 1.5 Factors Affecting Entrepren...

Chapter I: Entrepreneurship Structure of the Chapter: 1.0 Objectives 1.1 Introduction 1.2 What is Entrepreneurship? 1.3 Nature and Characteristics of Entrepreneurship 1.4 Career paths of Entrepreneurs 1.5 Factors Affecting Entrepreneurship 1.6 The Future of Entrepreneurship 1.7 Self-Assessment Questions 1.0 Objectives After Completing this Chapter, you will be able to : ✓ Understand the key concepts, underlying principles, and core competencies of the subject. ✓ Describe how innovation is important in entrepreneurship. ✓ Identify different job opportunities for entrepreneurship as a career. ✓ Explain the important recognition factors in opportunity recognition. 1.1 Introduction Some people make a big deal out of the fact that there are many successful business founded by entrepreneurs who do not have a college degree. Often cited are Apple founder Steve Jobs, Microsoft founder Bill Gates, Facebook co-founder Mark Zuckerberg, and Uber co-founder Travis Kalanick. In the Philippines, we have Philippine Airlines and Asia Brewery owner Lucio Tan, National Bookstore owner Socorro Ramos, Zest-O Corporation President Alfredo Yao, and Mang Inasal founder Edgar Sia II. Some of these individuals actually went to college, but decided to drop out after spotting a business opportunity. The others came from poor families, and could not afford a college education, but succeeded in growing their business nevertheless. However, we must not lose sight of the fact that the other equally successful businesses were founded by individuals who earned their college degrees. Examples are Jolibee founder Tony Tan Ciaktong, Lamoiyan Corporation founder Cecilio Pedro, and ECHOstore co-founder Patricia Juan.  Clearly, educational background while important, is not the defining element for entrepreneurial success. There are other factors that come into play. In this chapter, we identify the different types of entrepreneurs. We also describe the various stages that entrepreneurs undergo in implementing their business plans, which usually start as mental constructs or intentions. In this light, we identify the factors that influence entrepreneurial intentions. After this, we discuss how entrepreneurs formulate their decisions based on three types of mental processes. Finally, we examine the role of cognitive adaptability in managing risks brought about by an uncertain and dynamic business environment. 1.2 What is Entrepreneurship? Defining entrepreneurship might seem simple, but it isn’t! There are about as many definitions of entrepreneurship. Everyone seems to have his or her own views about what it is and in the same way the have defined it. Let’s look at some of the various ways in which entrepreneurship has been defined. “Entrepreneurship is the propensity of mind to take calculated risks with confidence to achieve a predetermined business or industrial objective. In substance, it is the risk taking ability of the individual, broadly coupled with correct decision-making.” In another view “Entrepreneurship refers to an action process of entrepreneur towards establishing an enterprise. It is a creative and innovative process and adapting response to environment. This concept can be seen in Figure 1.1 Entrepreneur Entrepreneurship Enterprise Creation Individual/ Person An Action Process Object Figure 1.1 Concept of Entrepreneurship Entrepreneurship has long been described by researchers and wruters with terms as new, innovative, flexible, dynamic, creative, and risk-taking. Many authors have said that identifying and pursuing opportunities are an important part of entrepreneurship. According to Frank Knight, “It involves a specialized group or persons who bear ‘risks’ and meet the uncertainty”. According to Franklin Lindsay, “Entrepreneurship is defined as anticipating the future requirements of society and successfully meeting these needs with new, creative and imaginative combinations of resources”. According to Howard W. Johnson, “Entrepreneurship is a composite of three basic elements- invention, innovation and adaptation”. According to H. Cole, “Entrepreneurship is the purposeful activities of an individual or a group of associated individuals undertaken to initiate, maintain and aggrandize profit by production or distribution of economic goods and services”. This definition states that entrepreneurship is goal- oriented process involving production or distribution of products and goods. It may be undertaken by person or by group of persons. According to John Kao, “Entrepreneurship is the attempts to create values recognition of business opportunity, the management of risk-taking appropriate to the opportunity and through the communicative and, management skills to mobilize human financial and material resources necessarily to bring a project to fruition.” This definition recognizes that entrepreneurship involves the fusion of capital technology and human talent to complete a project successfully and with reasonable degree of risk. According to Peter Drucker, “Entrepreneurship is neither a science nor an art. It is a practice. It has a knowledge base. Knowledge in entrepreneurship is a means to an end. Indeed what constitutes knowledge in practice is largely defined by the ends; that is, by the practice. Risk & uncertainty Creativity The Action Process of Leadership oriented Entrepreneur Decision Making Innovative Defining Enterprise Growth Creation Entrepreneurship Figure 1.2 Common Themes in Definition Accepting Invention Profit or Not-for- Creating Value Challenges Profit 1.3 Nature and Characteristics of Entrepreneurship 1. Economic Activity Entrepreneurship is primarily an economic activity because it involves the creation and operation of an enterprise. It is basically concerned with the production and distribution of goods and services and optimally utilizes the resource towards productive use. 2. Entrepreneurship Involves Innovation Entrepreneurship involves changing, revolutionizing , transforming, and introducing new approaches. Entrepreneurship is a n innovative fuction as it involves doing things in a new and better way. Innovation may take several forms, such as a new product, a new source of raw materials a new market, a new method of -production, not yet applied in a particular branch or, manufacturing etc. 3. Goal-oriented Activity The entrepreneur who creates and operates enterprises seeks to earn profits through satisfaction of needs of consumers; hence, entrepreneurship is a goal- oriented activity. Entrepreneurship emphasizes results, achievements and target achieved. 4. Value Creation We can see value created when, through entrepreneurship, resources are transformed into outputs such as products or services. During this transformation process, value is created because the entrepreneur is fashioning something worthwhile and useful. 5. Enterprise Creation In order to pursue the perceived opportunities for innovation and to create value, there must be organized efforts and actions. Someone must take the initiative to do something-take action to get the entrepreneurial venture up and running. 6. A function of Risk Bearing Risk is an inherent and inseparable element of entrepreneurship.An entrepreneur works under uncertainties and he assumes the uncertainty of future. 7. Entrepreneurship Implies Growth Entrepreneurship is about growing a business and pursuing opportunities as they rise. It’s not about standing still or being content to stay in one market or with one product. 8. Managerial Skill and Leadership Function. An entrepreneur must have the ability to lead and manage. He provides direction, create work culture, and build teamwork and cohesiveness among employees. 9. Recognition that it is a process The characteristics commonly found in entrepreneurship is the recognition that it is process, a set of ongoing decisions and actions. Entrepreneurship is not a one-time phenomenon; it occurs overtime. It involves a series of decisions and actions from initial start- up to managing the entrepreneurial venture. 10. Gap-Filling Function The Gap between human needs and the available products and services filled by entrepreneurship. An entrepreneur determines the needs of people and combines resources to produce goods and services of requirements. 11. Dynamic Process Entrepreneur thrives on changes in the environment, which bring useful opportunities for business. An entrepreneur deals proactively with changing markets- and environment. He looks at the changes as the source of market advantages, not as a problem. Uncertainties are market opportunities for him. 12. Uniqueness Through entrepreneurship unique products are created and unique approaches are tried. Entrepreneurship isn’t merely imitating what others have done. It’s doing something new, something untested and untried- something unique. 13. Organizing Function It is the ability to bring together productive resources of society. Entrepreneur coordinates and control the efforts of all the persons engaged in his enterprises. He harnesses land, labor, capital and other resources for the benefits of mankind. Therefore, an entrepreneur is called as an organization builder. 14. Knowledge- based Practice Peter Drucker writes, “Entrepreneurship is neither a science nor an art. It is practice. It has knowledge base. He uses his experiences for high achievements.  15. Another Characteristic of entrepreneurship is a recognition that entrepreneurship can take place in both profit and non- profit environments. Although we tend to assume that entrepreneurial activity is geared at making a profit, entrepreneurship also occurs In social service agencies, in community arts organizations, or in other types of not for profit settings 1.4 Career Opportunity of Entrepreneurs/ Opportunity Pathways Entrepreneurs start new businesses and take on the risk and rewards of being an owner. This is the ultimate career in capitalism - putting your idea to work in a competitive economy. Some new ventures generate enormous wealth for the entrepreneur. However, the job of entrepreneur is not for everyone. You need to be hard-working, smart, creative, willing to take risks and good with people. You need to have heart, have motivation and have drive. One of the best things about pursuing a career as an entrepreneur is the wide- open possibilities. There is room in many economies throughout the globe for entrepreneurship - such as India, Brazil, Dubai, the U.S. or Kenya. There are many industries where wealth creation is possible be it the Internet and IT, personal services, media, engineering or small local business (e.g., dry cleaning, electronics repair, restaurants). But there is a downside of entrepreneurship too. Your life may lack stability and structure. Your ability to take time off may be highly limited. And you may become stressed as you manage cash flow on the one hand and expansion on the other. Three out of five new businesses in the U.S. fail within 18 months of getting started. It's important to be savvy and understand what is and is not realistic. The web is chock-full of come-ons promising to make you rich. Avoid promotions that require you to pay up front to learn some secret to wealth. Understand that the market is more or less efficient - which means that if a bunch of people know a sure way to be a millionaire then the opportunity has probably already been competed away. On the other hand, look for inefficiencies in markets. Places where a better idea, a little ingenuity or some aggressive marketing could really make a difference. Think about problems that people would pay to have a solution to. It helps to know finance. It's a must to really know your product area well. What do consumers want? What differentiates you from the competition? How do you market this product? A formal business plan is not essential, but is normally a great help in thinking through the case for a new business. You'll be investing more in it than anyone else, so treat yourself like a smart, skeptical investor who needs to be convinced that the math adds up for the business you propose starting. Entrepreneurs have many personalities. A number never finished college. Some are fiery revolutionaries. Some are gentle souls with a good idea. Some are driven but difficult. Some have grown up in the most difficult circumstances imaginable emerging with enormous determination to strive for greatness. Others are pleasant, personable and compassionate renegades. Generally, there will be a life event, key motivator or a source of inspiration that causes a person to strike out on their own rather than work inside a larger company. Sometimes it is cubicle fatigue or, worse, getting fired. Other times it is an "aha moment" where an insight or innovation into how an industry or business could be done differently arises. Sometimes it's a bad boss. The possibilities in entrepreneurship are endless. The rewards can be high. And the risks are undoubtedly high too. But, if you have drive, creativity and the desire to be your own boss, this may very well be the career for you. Opportunity Recognition Process Before we proceed with the process of recognizing opportunities for entrepreneurial ventures, we need to define the concept of opportunity. According to Cambridge Dictionary, an opportunity is “a situation or occasion that makes it possible to do something that you want to do.” there are three elements in this simple definition. First, you want to do something. In this case you want to establish your own business enterprise. Second, there are conditions for the realization of the objective. Third, you must make decisions or take action on these conditions to realize your objective. From business perspective, an opportunity is, “an exploitable set of circumstances with uncertain outcome requiring a commitment of resources and involving exposure to risk” (www.businessdictionary.com).This definition not only fulfills the three elements discussed above, but also provides specific features of a business opportunity. It should be pointed out that an opportunity will not automatically lead to a realization of your objective. An opportunity can only be considered as a possibility of realizing your objective since there are elements of uncertainties in its realization. Thus, the entrepreneur must take action to achieve his objectives. This decision will require resources including time from the individual and his acceptance of the risks because of uncertainties. Opportunity recognition often entails phases that potential entrepreneurs take before introducing a product or service to the market. The five stages of opportunity recognition, according to Hills, Shrader, & Lumpkin (n.d) are summarized as follows:  Precondition A preparatory stage, during which the individuals assesses his knowledge of the market. His prior knowledge of the market is extensively shaped by his educational background. Aside from formal training, personal experiences including travel, and previous employment can also provide the individual with valuable information on the market that he wants to enter. Conception This is the gestation phase, during which entrepreneurial intentions and ideas are generated, using logic, creative thinking, or both. For example, connecting ideas on the various ways of preparing bread can lead to a creative idea. Visioning This third stage provides the individual a hunch that can serve as an opportunity for business. This comes about as ideas become clearer and how the logic of connections leads the individual to an new idea. Assessment This stage involves the evaluation on whether the idea can be realized or not. Aside from the resources needed and technology to be used, the paramount question to the individual is whether the idea can really be actualized. Realization The last phase suggests the production of a prototype. This is the stage when the mental construct or idea is now felt in its tangible or physical form. Factors in Opportunity Recognition A framework on recognizing opportunities crafted by Hisrich, peters, and Shepherd (), provided some of the key factors in opportunity recognition. According to them a successful recognition of business opportunities is influenced by three major factors: (a) market awareness, (b) entrepreneurial readiness, and (c) connections. a. Market Awareness - refers to the personal exposure to market and its components including customers and suppliers. Information on the market and its components including customers and suppliers. Information on the market, in turn, can be acquired from formal training.  b. Entrepreneurial Readiness- refers to a variety of features of an individual to start a business venture. It covers all types of resources that the individual possesses including financial, physical and human resource. Entrepreneurial readiness not only has a direct impact on opportunity recognition but it also has a direct impact on opportunity recognition but it also has an indirect effect as it interacts with previous knowledge on the market. c. Connection- Business opportunity recognition is heightened when the individual has a diversity of networks. Families and friends as well as business associates can bring about opportunities that we can pursue. Opportunity Pathways Once the opportunity has been identified, the individual can subject it to an assessment as described above, proceed with its implementation, or put the business idea on hold. If the decision is to proceed, the individual has two options to follow or pathways in transforming the opportunity into a business venture. These two opportunity pathways are called the rational approach and the intuitive approach. The rational approach is called the traditional approach. It uses systematic procedures in proceeding with the implementation of a business opportunity. Many Filipino entrepreneurs who use this approach may start with questions on what is possible (Ano and pwede?), then make an assessment to identify the best alternative ( Ano ang pinakamainam?) From the answers to these questions, he can conclue by trying it (Masubukan nga). In the rational approach, the traditional pathways employs a routine in the entrepreneurial process. It starts with the generation of entrepreneurial intent, visualization of an idea, recognition of an opportunity, assessment of opportunity, and finally seizing the opportunity. The Traditional Approach is usually applicable for business ideas that require substantial initial investments or those that are undertaken by what we refer as Schumpeterian entrepreneurs. There is a need to utilize systematic process (from the planning stage to the implementation phase) in these types of commercial enterprise because a business failure can mean a wast of huge resources. Since this approach is rational and systematic it implies that entrepreneurship can be learned. These are steps to be followed that eventually will lead to the introduction of the product and service in the market. The alternative pathway is called the intuitive approach. It starts with the recognition of an opportunity and proceeds directly to the grabbing of the opportunity after sensing that it can be done.  Rather than using a systematic process, this alternative approach relies primarily on the intuition of the individual, which is informed by his prior knowledge and previous work and life experiences. The individual has an immediate hunch or feel that an opportunity has prospects ( mukhang pwede); he then decides to try it (masubukan nga) without going through a detailed assessment phase. Another entrepreneur may spot an opportunity from the need for the product (kung kailangan ko, kailangan din ito ng iba); he then decides to try it ( masubukan nga). For business ideas that do not require substantial initial investments or those undertaken by microentrepreneurs, the intuitive approach may be appropriate. Athough pursuing an opportunity pathway using the intuitive approach can be risky, microentrepreneurs can absorb the risks since their investment is not that substantial. In addition, microentrepreneurs can apply cognitive adaptability in their decisions if something unexpected emerges. Because of the use of limited resources, micro entreprenerus can be more flexible in their decisions in adjusting to current realities and environments. 1.5 Factors Affecting Entrepreneurship The entrepreneurial activity at any time is dependent upon a complex and varying combination of economic, social, political, psychological and other factors. These factors may have been both positive and negative influence on the emergence of entrepreneurship. The Following factors contribute to the success of entrepreneurship: 1. Economic Factor 2. Socio-economic factor 3. Personal Factor 4. Political 5. Impact of Value Ethical System 6. Increasing Demand for Variety 7. Work Environment 8. Career Transitions 9. Entrepreneurial Education 1.6 The Future of Entrepreneurship As evidenced by the many different definitions, the term entrepreneurship varies of meaning from different conceptual perspectives. However, in spite of the differences, there are some common aspects; risk taking, creativity, innovation, independence, and rewards. These common themes will continue to be driving force behind the notion of entrepreneurship in the future. One thing is clear: The future of entrepreneurship appears to be bright. We are living in the age of the entrepreneur, with entrepreneurship endorsed by educational institutions government units, society, and corporations. Entrepreneurial education has never been so important in terms of courses and academic research. Society’s support of entrepreneurship will also continue. This support is critical in providing both motivation and public support. Never before have entrepreneurs been so revered by the general public. Entrepreneurial endeavors are considered honorable and even, in many causes, prestigious pursuits. A major factor in the development of this societal approval is the media. The media has played, and will continue to play, a powerful and constructive role by reporting on the general entrepreneurial spirit and highlighting specific success cases of the spirit in operation.