Nelson Mandela University Effectual Entrepreneurship PDF

STUDY UNIT 2 I CHAPTER 2 Effectual Entrepreneurship & Entrepreneurial Opportunity SU 2 CH 2 Lecturer: Miss Nokuthula Jantjies Change the world mandela.ac.za  General Objective...

STUDY UNIT 2 I CHAPTER 2 Effectual Entrepreneurship & Entrepreneurial Opportunity SU 2 CH 2 Lecturer: Miss Nokuthula Jantjies Change the world mandela.ac.za  General Objective The overall outcome of this chapter study unit is to understand what informs entrepreneurial thinking- effectuation, know how to recognise entrepreneurial opportunities, what they are and how to implement them. Change the world mandela.ac.za  Learning Outcomes AFTER STUDYING THIS CHAPTER, STUDENTS SHOULD BE ABLE TO DO THE FOLLOWING: 1. Distinguish between a managerial mindset 2. Differentiate between causal thinking versus an entrepreneurial mindset and entrepreneurial thinking 3. Determine what is effectual 4. Describe Sarasvathy’s principles of entrepreneurship and why it is important effectuation 5. Differentiate between an idea and an 6. Understand how to identify gaps in the opportunity market 7. How to conduct a feasibility study 8. Use evaluation criteria to choose the best opportunity Change the world mandela.ac.za  Learning Outcome 1 Managerial vs entrepreneurial mindset (Not in textbook) Change the world mandela.ac.za  Introduction h According to Sarasvathy (2001) business/ management science students are often taught causal and predictive reasoning- that is there is a predetermined problem or idea which has to be worked toward, given a set of means (resources)- in every function of business (think of the different business functions there are – Financial, HRM, Marketing, Purchasing & Logistics etc) h A more interesting form of causal or predictive reasoning is what is known as strategic thinking ( think of setting goals, mission, vision etc) h However, effectual reasoning does not begin with a specific goal in mind, it begins with a given set of means and goals to emerge (possibly) overtime, from varied imagination and diverse aspirations of those involved. Change the world mandela.ac.za  Learning Outcome 2 Causal reasoning vs effectual reasoning Change the world mandela.ac.za  Effectual Thinking h Effectual thinkers are like the early ‘colonial explorers’ setting out on expeditions into unknown lands or early inventors – working in laboratories -who sometimes stumbled on solutions h The same person can use both causal and effectual reasoning at different times depending on what the circumstances call for h Successful entrepreneurs are capable of both and do use both modes well h But they prefer effectual reasoning over causal reasoning in the early stages of a new venture creation h Causal thinking may or may not use creativity. Effectual thinking is inherently creative. Change the world mandela.ac.za  Effectual Thinking h Causal reasoning vs Creative causal reasoning Figure 1a Figure 1b Change the world mandela.ac.za  Effectual Reasoning As Entrepreneurial Thinking h Entrepreneurial thinking as effectual reasoning Figure 1c Change the world mandela.ac.za  Learning Outcome 3 Effectual entrepreneurship and its importance Change the world mandela.ac.za  Effectual Entrepreneurship h All entrepreneurs begin with three categories of means: 1. Who they are – their traits, tastes and abilities 2. What they know – their education, training, expertise, and experience; and 3. Whom they know – their social and professional networks. h Using these means, the entrepreneurs begin to imagine and implement possible effects that can be created with them h Through their actions, the effectual entrepreneurs’ set of means and consequently the set of possible effects change and get reconfigured through the process. Eventually, the emerging effects come together into clearly achievable and desirable outcomes Change the world mandela.ac.za  Effectual Entrepreneurship h Let us look at an example- imagine Miss Vera Wang is a registered dietician, and who recently graduated from Capsicum Culinary School in 2021. She would now like to start her own Japanese cuisine restaurant. h Causal thinking vs Effectual thinking process- What do you think h Note- I am not saying one is better than the other- just that each has its merits and the entrepreneurs- prefer the entrepreneurial effectual thinking h Why is Effectual thinking important? h Often little time is allocated to self-understanding and reflection. h Who am I? What are my capabilities? h Knowing and doing the above is the foundation of entrepreneurial activity. Change the world mandela.ac.za  Effectual Entrepreneurship Identification of the right opportunities Self Higher Why does this all understanding commitment matter? & reflection Improved chance of success Change the world mandela.ac.za  Learning Outcome 4 Describe Sarasvathy’s principles of effectuation Change the world mandela.ac.za  Saravathy’s Five Principles Of Effectuation h An Indian academic- Saras Saravathy developed the five principles of effectuation- the basis of Effectuation theory 1. Bird in hand: Making use of the resources at your disposal to develop solution- approaching and negotiating stakeholder relationships to commit to fulfilling certain tasks 2. Affordable loss: Commitment of the entrepreneur on the uncertainty of the tasks- considers the willingness to lose over only expecting a return. Be sure to invest what you are willing to risk losing 3. Lemonade: Expecting the unexpected- making plans for the unfavourable outcomes instead of avoiding them. These mishaps or surprises can be used to fuel new opportunities Change the world mandela.ac.za  Saravathy’s Five Principles Of Effectuation 4. Patchwork quilt principle: Developing new innovations with existing means, instead of using or finding new ways to achieve goals. So, here the entrepreneur considers collaborations with others to attract investment and new processing/ ways of doing 5. Pilot-in-the-plane: Relying on human or social capital as the main driver of entrepreneurial endeavours Change the world mandela.ac.za  Learning Outcome 5 Differentiate between an idea and an opportunity Change the world mandela.ac.za  Remember… h Entrepreneurship is a task that involves the active search for opportunities through fortuitous and intended discovery h Now the next step is to understand the what, where and how of the entrepreneurial opportunity process- what an opportunity is, where to find one and how to identify a feasible opportunity h Note the active search for opportunities will increase the chances of one discovering new opportunities- upon first identification they may not appear viable but when more “ironing out is done” the viability is found h Similarly, entrepreneurs will purse the most feasible idea- in the same way feasibility is ‘worked on’- h The opportunity is tweaked and ‘perfected’ to become feasible and viable Change the world mandela.ac.za  The Difference Between An Idea And An Opportunity h Opportunity identification starts with an idea. The idea is converted into an opportunity Defining an idea= An idea is the starting point for the entrepreneurship journey and typically a source of inspiration. An idea is the “light bulb going on”- an inkling, thought, impression or notion. It may or may not meet the criteria of an opportunity h Often businesses fail because there was no real opportunity to begin with h Before running with a business idea it is important to make sure it meets the criteria of being the right opportunity Change the world mandela.ac.za  The Difference Between An Idea And An Opportunity h Defining an opportunity= An opportunity is generally a set of circumstances that enables someone to do something e.g. having the chance to an internship immediately after graduation h The opportunity is dependent on external factors- the right environment h For a business start-up the business needs to discover a gap in the market and take advantage of that gap h What becomes important is the ability of the entrepreneur to take advantage of the entrepreneurial opportunity Change the world mandela.ac.za  The Difference Between An Idea And An Opportunity Entrepreneurial opportunity h Is defined as the gap in the market that entrepreneur has sought to bridge with a feasible idea- which has resulted in a new venture. This shows there is a relationship between the ability to identify and take advantage of an opportunity and the entrepreneurial opportunity- which must be repeatable (will the outcome be the same if the opportunity is implemented in different context? Or is it a sustainable idea) h The gap in the market could be many things from lack of information to market inefficiencies- Can you think of any examples of gaps fulfilled by current businesses? Let me start…. Therefore and entrepreneurial opp should h Be durable, timely and create value for the buyer Change the world mandela.ac.za  Learning Outcome 6 Understand how to identify gaps in the market Change the world mandela.ac.za  How to identify gaps in the market Approaches to generating ideas Sources of for generating ideas are: h Family and friends: Are a great source for support and ideas, as the entrepreneur may spend a lot of time with them h Reviewing existing products and services: This is achieved by conducting thorough research on existing products and services therefore gaps can be identified which can be transformed into entrepreneurial opportunities Change the world mandela.ac.za  How to identify gaps in the market h Cognitive exercise based on the individual’s level of creativity and preparedness to take risks h Is both an active and passive process Active process- Entrepreneur has a plan on how they will identify opportunities Passive process- Entrepreneur indirectly searches for opportunities through interacting with friends and family Change the world mandela.ac.za  How to identify gaps in the market Sources of opportunities h Customers: Are a source of delight. Entrepreneurs should approach and research customers on their experience with the product or service, so that feedback can be provided-the information is collected which will allow the entrepreneur to improve the service or product h Employees: Are also a source of delight (“and despair”). Employees provide a point of contact and act as a link between the entrepreneur and customers. The employees are seen as a collective source of ideas from which opportunities can be birthed. Employees are a great source of opportunities for the business Change the world mandela.ac.za  How to identify gaps in the market Sources of opportunities h Intermediaries: Can be used to improve the value of the product or service being provided to the target market. They have high level of knowledge of the materials, industry, competitors or even the customer for example. Information from intermediaries could be invaluable for improving or customizing offering h Competitors: A comparative analysis among competitors could reveal unexploited opportunities or the need for a new business model to revive a shrinking opportunity. So, once the environmental scanning is done and the idea more superior than the competitors, it is an opportunity h Consultants: The use of consulting firms as a source of ideas. The consulting firm may conduct research for the entrepreneur- they would have access to more resources and information, therefore can provide rich source of entrepreneurial opportunities Change the world mandela.ac.za  How to identify gaps in the market Sources of opportunities h Research, Development and Innovation: Creates a platform for the recognition of opportunities. RDI acts as source of opportunity as it entails the planned discovery process. Possibilities are created and tested, those that pass the test go through more evaluations. RDI exposes the entrepreneur to a source of opportunity as they can select from and screen the ideas h Informal settings: Places where people gather for social interactions or informal trading. These can be physical spaces ( car wash, sports arena, religious gatherings, pub, taverns or shisa nyama’s, hair salons etc) or virtual spaces (Twitter, Facebook groups, YouTube, Reddit or Quora etc) Change the world mandela.ac.za  Learning Outcome 7 Transform an idea into an opportunity (Drivers of opportunities) Change the world mandela.ac.za  Drivers Of Opportunities Push Factors h Are certain external factors that exert pressure and drive the entrepreneur into seeking greener pastures. Generally it is the pushing of prospective entrepreneurs into a new activity. ‘Push’- motivated entrepreneurs are described as individuals dissatisfied with their current situation and who could be driven into searching for entrepreneurial opportunities. Examples are: h Declining profits: The business where an individual is currently employed may be experiencing declining profits. Which then leads to fear of job loss or the dissatisfaction of the company’s overall performance. There could be a loss of customers, growing competitors, obsolete/ irrelevant product/ service, which ultimately leads to business failure if not corrected Change the world mandela.ac.za  Drivers Of Opportunities Push Factors h Need for growth: In the absence of growth the individual will not be satisfied, which will cause them to look for new opportunities. The need for company growth may spur the entrepreneur to seek entrepreneurial opportunities h Declining product: Every product has a declining stage (characterized by drop in sales). This either pushes the company to rejuvenate the product or removing it from the market. Therefore the entrepreneur is forced to actively search for new opportunities that will awaken the declining product or introduce a new product onto the market Change the world mandela.ac.za  Drivers Of Opportunities Pull Factors h Entrepreneurs have an intrinsic desire to create or explore opportunities. Pull factors are from within an individual h Self actualisation: (where do you know this from?). Entrepreneurs may wish to realise their true selves or reach their highest potential of what they can achieve in life. Therefore such desires can be reached when the entrepreneur finds their perfect entrepreneurial opportunity. As a result will only stop when that intrinsic desire has been satisfied h Ability to make own decisions: When employed or working for corporate individuals have to follow the rules and guidelines set by that institutions. They are unable to make their own decisions. Therefore this means that employees still desire a platform where they can demonstrate their own decision making. If this is left unsatisfied this will pull employees to seek opportunities where they can make their own decisions and take the responsibility as well Change the world mandela.ac.za  Drivers Of Opportunities Pull Factors h Independence: Independence is close to the preceding pull factors. So, any inhibiting activity will be seen as suppressive and diminishing an individuals freedom. On the other hand should the individuals desire to be independent remain unsatisfied- even with the absence of a suppressive force will compel the individual to obtain independence. This will drive the individual to search for opportunities that will provide independence Do you know of any entrepreneurs stories that were driven by these pull or push factors? Change the world mandela.ac.za  Learning Outcome 7 How to conduct a feasibility study Change the world mandela.ac.za  How To Conduct A Feasibility Study h A feasibility study is an assessment that focuses on the practicality of the opportunity by revealing strengths and weaknesses while determining whether it is profitable to pursue h The importance of a feasibility study: Each identified opportunity should be evaluated based on the value or innovativeness it carries. It is therefore important to ask whether an opportunity is worth pursuing or not Change the world mandela.ac.za  How To Conduct A Feasibility Study h Key benefits of conducting a feasibility study: 1. Improves the entrepreneurs focus 2. Identifies new possibilities (Which effectuation principle fits here?) 3. Provides valuable information for decision making 4. Narrows entrepreneurs alternatives 5. Identifies valid reasons to further evaluate opportunities 6. Improves the decision making process for the opportunity 7. Identifies reasons not to pursue the opportunity Change the world mandela.ac.za  How To Conduct A Feasibility Study Risk assessment h Pursuing an opportunity means dealing with uncertainty and complexity. Uncertainty brings risk but an entrepreneur can pursue a well calculated risk. Depending on the perceived risk the opportunity can either be pursued or discarded h The next sections describes areas in which uncertainty and complexity can be intensified, overshadowing the opportunity- 1. Customer analysis: There are important questions regarding customers that cannot be overlooked such a: Is the customer willing to pay this price? Is there a potential for growth of the customer base? Etc. The entrepreneur needs to analyse the existing demand that will be fulfilled by the opportunity. Risk arises when demand is unstable and shows no potential for growth Change the world mandela.ac.za  How To Conduct A Feasibility Study h Industry analysis: An analysis surrounding the industry of the entrepreneurial opportunity should be done to ascertain the further feasibility of the opportunity. The analysis includes analysing the role players that have an impact on the opportunity. Asking questions such as will role players accept this opportunity or will they increase the value of this opportunity. Asking these sort of questions to role players will further ascertain the feasibility and fit of the opportunity h The competitor analysis: The entrepreneur needs to assess the probability of competitors responding to the new product or service. Will the competitors copy this products or service before costs are recovered? Will the new product maintain competitive advantage? How will competition be fought? Are the type of questions that the entrepreneur asks Change the world mandela.ac.za  How To Conduct A Feasibility Study h Regulatory structure: A potentially successful opportunity could fail if the prospective entrepreneur does not ensure the product or service falls within the confines of the relevant governing bodies. There could be recognised body that controls certain aspects. E.g. Vera Wang wanting to start a Asian restaurant- would need to comply with relevant business registrations (CIPC), needs to comply hygiene standards etc. Therefore the recognised opportunity must fall within certain regulatory structures h Conducting a SWOT analysis: Assess the entrepreneurial opportunities- Strengths, Weakness, Opportunities & Threats Change the world mandela.ac.za  Learning Outcome 8 Use evaluation criteria to choose the best opportunity Change the world mandela.ac.za  Use The Evaluation Criteria To Choose The Best Opportunity Decision making h Is hard for an entrepreneur who has identified some opportunities but has limited information about those opportunities. To maximise the information of the entrepreneur, a viability assessment and opportunity evaluation should be conducted h Viability assessment: An entrepreneurial opportunity can be assessed for viability if there is enough information to decide on its innovativeness. The viableness can be assessed if there is already an existing product or service for an underserved market: it is a new application for an existing p/s, it is a minor change/ improvement for existing p/s, there is a significant improvement to an existing p/s, it is a combination of two or more existing p/s into one unique p/s and/ it is a brand new creation or innovation. Once viability is assessed next is to evaluate for the entrepreneurial opportunity for final decision making Change the world mandela.ac.za  Use The Evaluation Criteria To Choose The Best Opportunity Evaluation criteria h If accurate or detailed information is missing or lacking, the quality of the decision-making outcomes decreases. To remedy this seven evaluation categories need to be considered. 1. Market/industry attractiveness: Consider and understanding of the target market, consumer needs, sales, costs & profits 2. Environmental factors: Consider the internal environment ( FOPs, and own capabilities). Then consider the external environments ( Tech, Economical, Physical, Political, Socio- economic, International etc) 3. Economic and financial factors: What is the required capital, R &D costs, ROI, and fixed/ variable costs. Value > costs. Therefore sales, profits, asset usage and break-even points must be known beforehand. Change the world mandela.ac.za  Use The Evaluation Criteria To Choose The Best Opportunity 4. Product and service issues: A cost benefit analysis needs to be done to determine the sustainability of the opportunity. Factors to be assessed to determine sustainability are social, economic and environmental factors 5. Desirability: Th opportunity needs to be desirable but this depends on the entrepreneurs propensity to take risks, need for interdependence and expected income 6. Human capital: The labour used and costs attributed- skill, trainings, productivity impact. Evaluating human capital will inform the entrepreneur if they can afford the opportunity based on human capital needed 7. Feasibility: Looks at operational capabilities of the opportunity. The p/s needs to be tested in the target market to see if it will be received. Skills must be considered objectively this will determine how prepared the entrepreneur is Change the world mandela.ac.za  Read The Case Study On Pg 38-39 1. From reading the case study, what caused (pull and push factors) Ntsoaki to start her safety and security company? 2. Explain some of the qualities that helped Ntsoaki achieve her goals. Change the world mandela.ac.za  References Sarasvathy SD. 2001. What makes entrepreneurs entrepreneurial? Darden Case No. UVA-ENT-0065, Darden School of Business. Available at SSRN 909038. Change the world mandela.ac.za  END OF UNIT 2 Change the world mandela.ac.za