The
nature and theories of entrepreneurship
1.1 What
is entrepreneurship?
Entrepreneurship is the practice of starting new organizations or revitalizing mature organizations, particularly new businesses generally in response to identified
opportunities. Entrepreneurship is often a difficult undertaking, as a vast
majority of new businesses fail. Entrepreneurial activities are substantially
different depending on the type of organization that is being started.
Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur
only part-time) to major undertakings creating many job opportunities.
According
to Schumpeter(1934) the
essence of entrepreneurship lies in the perception and exploitation of new
opportunities. It always has to do with bringing about a different use of national
resources in that the withdrawal from their traditional employ and subject them
to new combinations.
According to Hisrich and
Peters, (1995), entrepreneurship is the process of creating something
different with value by devoting the necessary time and efforts, assuming
the accompanying financial,. Psychic, and social risks, and receiving
rewards of monetary and personal satisfaction and independence.
1.2 Nature and
characteristics of entrepreneurship
Taking key concepts from a number of definitions,
including the ones above, one can identify some important aspects of
entrepreneurship and the entrepreneur
·
Identifying
an opportunity: This
means that there must be a real business opportunity.
·
Innovation
and creativity: Something new and different is required.
·
Getting resources:
Capital labour and operating equipment must be found.
·
Creating
and growing a venture: This refers to
the starting of a new business venture or the conversion of an existing
business.
·
Taking
risk: This means that there will be personal
and financial risk involved for the person who embarks on the entrepreneurial
process.
·
Being
rewarded: Reward is an essential element of the
free market system. It can be in the form of profit or an increase in the value
of the business.
·
Managing
the business: This means that
there must be planning, organisation, leadership and control of all the
functions in the business venture.
1.3 History of
Entrepreneurship
The understanding of entrepreneurship owes much to the
work of economist, behavioural scientists, management scientists and in later
years to entrepreneurs themselves as indicated in the table below.
|
Period
|
Topics
|
Authors and
researchers
|
|
What entrepreneurs do (1700 – 1950)
|
From an economic perspective
|
Cantillon, Say, Schumpeter
|
|
What entrepreneurs are (1960 – 1980)
|
From a behavioural perspective
|
Weber, Mclelland
|
|
What entrepreneurs do (1700 – 1950)
|
From management science perspective (finance, marketing
operations, human resources)
|
Drucker, Mintzberg
|
|
What support is needed by entrepreneurs (1985 -)
|
From a social perspective including economists and
sociologists
|
Gatner, Welsh
|
|
What entrepreneurial activities are and competencies
are required to perform them do (1990-)
|
From an entrepreneurial perspective
|
Timmons, Vasper
|
Adopted from Gideon et
al (2003)
In Schumpeter (1950), an entrepreneur is a person who is
willing and able to convert a new idea or invention into a successful innovation. Despite Schumpeter's early
20th-century contributions, the traditional microeconomic theory of economics has had little room for entrepreneurs
in its theoretical frameworks (instead assuming that resources would find each
other through a price system). If we perceive two kinds of entrepreneurs namely
business organizers and innovators, then economists perceived entrepreneurship
in terms of business organization and not innovation.
For Frank H. Knight
(1967) and Peter Drucker (1970)
entrepreneurship is about taking risk. The behavior of the
entrepreneur reflects a kind of person willing to put his or her career and
financial security on the line and take risks in the name of an idea, spending
much time as well as capital on an
uncertain venture.
Knight classified three types of uncertainty.
·
Risk, which is measurable statistically (such as the
probability of drawing a red colour ball from a jar containing 5 red balls and
5 white balls).
·
Ambiguity, which is hard to measure statistically (such
as the probability of drawing a red ball from a jar containing 5 red balls but
with an unknown number of white balls).
·
True Uncertainty or Knightian Uncertainty, which is
impossible to estimate or predict statistically (such as the probability of
drawing a red ball from a jar whose number of red balls is unknown as well as
the number of other coloured balls).
The acts of entrepreneurship are often associated with
true uncertainty, particularly when it involves bringing something really novel
to the world, whose market never exists. Before Internet, nobody knew the market for Internet
related businesses such as Amazon, Google, YouTube, Yahoo
etc. Only after the Internet emerged did people begin to see opportunities and
market in that technology. However, even if a market already exists, let's say
the market for cola drinks (which has been created by Coca Cola), there is no guarantee that a market
exists for a particular new player in the cola category. The question is:
whether a market exists and if it exists for you.
1.3 The
Entrepreneur
Some myths abut
Entrepreneurs
Myth
No.1 -Entrepreneurs are born, not made
Reality: The making of
an entrepreneur occurs by accumulating the relevant skills, know-how,
experiences, and contracts over a period of years and includes large doses of
self-development.
Myth
No. 2 – Anyone can start a business
Reality: The easiest part is starting up. What is hardest is surviving sustaining, and
building a venture so its founders can realize a harvest.
Myth
No. 3 – Entrepreneurs want the whole show to themselves
Reality: solo
entrepreneurs make a living, but it is extremely difficult to grow
higher-potential venture by working single-handedly. Higher-potential entrepreneurs build a team,
and organization, and a company.
Myth
No. 4 – Entrepreneurs are their own bosses and completely independent.
Reality: Entrepreneurs have to serve many masters and
constituencies, including partners, investors, customers, suppliers, creditors,
employees, and families. Entrepreneurs
can, however, make free choices of whether, when, and to what they respond.
Myth
No. 5 – Entrepreneurs experience a great deal of stress and pay a high price.
Reality: No doubt about
it; being an entrepreneurs is stressful and demanding.
But there is no evidence
that it is any more stressful than numerous other highly demanding professional
roles, and entrepreneurs find their jobs very satisfying.
Myth
No. 6 – Entrepreneurs should be young and energetic.
Reality: These qualities
may help, but age is no barrier. The
average age of entrepreneurs starting high potential businesses is in the
mid-30s, and many start businesses in their 60s.
Myth
No. 7 – If an entrepreneur has enough start – up capital, he or she can’t miss.
Reality: The opposite is often true. Too much money often creates euphoria, lack
of discipline and impulsive spending, leading to serious problems.
Myth No. 8
If an entrepreneur is talented, success will happen in a year or two.
Reality: An old maximum among
venture capitalist says that the lemon ripens in two and a half years, but the
pearls take seven or eight. Rarely is
the new business established solidly in less than three or fur years.
Entrepreneurs have many
of the same character traits as leaders. Entrepreneurs are often contrasted with
managers and administrators who are said to be more methodical and less prone
to risk-taking. Such person-centric models of entrepreneurship have shown to be
of questionable validity, not least as many real-life entrepreneurs operate in
teams rather than as single individuals. Still, a vast but now clearly dated
literature studying the entrepreneurial personality found that certain traits
seem to be associated with entrepreneurs:
1.
David McClelland
(1961) described the entrepreneur as primarily motivated by an overwhelming
need for achievement and strong urge to build.
2.
Collins and Moore (1970) studied 150 entrepreneurs and
concluded that they are tough, pragmatic people driven by needs of independence
and achievement. They seldom are willing to submit to authority.
3.
Bird (1992) sees entrepreneurs as mercurial, that is,
prone to insights, brainstorms, deceptions, ingeniousness and resourcefulness.
they are cunning, opportunistic, creative, and unsentimental.
4.
Cooper, Woo, & Dunkelberg (1988) argue that
entrepreneurs exhibit extreme optimism in their decision-making processes. In a
study of 2004 entrepreneurs they report that 81% indicate their personal odds
of success as greater than 70% and a remarkable 33% seeing odds of success of
10 out of 10.
5.
Busenitz and Barney (1997) claim entrepreneurs are prone
to overconfidence and over generalisations.
6.
Cole (1959) found there are four types of entrepreneur:
the innovator, the calculating inventor, the over-optimistic promoter, and the
organization builder. These types are not related to the personality but to the
type of opportunity the entrepreneur faces.
Characteristics of an entrepreneur
·
The entrepreneur has an enthusiastic vision, the driving
force of an enterprise.
·
The entrepreneur's vision is usually supported by an
interlocked collection of specific ideas not available to the marketplace.
·
The overall blueprint to realize the vision is clear
however details may be incomplete, flexible, and evolving.
·
The entrepreneur promotes the vision with enthusiastic
passion.
·
With persistence and determination, the entrepreneur
develops strategies to change the vision into reality.
·
The entrepreneur takes the initial responsibility to cause
a vision to become a success.
·
Entrepreneurs take prudent risks. They assess costs,
market/customer needs and persuade others to join and help.
·
An entrepreneur is usually a positive thinker and a
decision maker.
1.4
Alternative
categorization of entrepreneurs
Entrepreneurs
can be found at different levels of entrepreneurial sophistication based on the
nature of their entrepreneurial activities. These levels are discussed below.
Basic survivalists
No
economic independence, little involvement with other entrepreneurs within their
social network (individualism).
Entrepreneurial
activities: Isolated from markets, unaware of their own potential,
illiterate, few income-generating
activities. A practical example could be a person standing on a street corner
holding a sign stating that. he will wash cars in exchange for Tshs 1000.
Pre entrepreneurs
Follow
the group initiative (collectivism
Entrepreneurial
activities:
Welfare-oriented
approach, not expected to be self-sustaining. Training needed in
entrepreneurship competency. A practical example could be a person selling
crafts next to the road with ten other pre entrepreneurs selling exactly the
same product at exactly the same price.
Subsistence
entrepreneurs
Self-employed, independent income generation, temporary
market stall or stand.
Entrepreneurial activities:
Inexperienced in business management and still needs
general support and training in technical and management skills. Street vendors
are an example of this level.
Micro-entrepreneurs
Zero to nine employees,
operating license from local authority, fixed workshop.
Entrepreneurial
activities:, .
Difficult
in getting loans from banks. Assistance projects focus on credit rather than
training and technical assistance. A practical example is an entrepreneur who
runs a home-based business such as a hair dressing salon.
Small-scale
entrepreneurs
Ten to 49
employees.
Entrepreneurial
activities:
Qualifies for a loan from a bank. Well educated and
has adequate collateral to apply for a loan. An example could be an
entrepreneur who operates a small accounting or law firm.
Small
businesses
It is important to
distinguish between entrepreneurial ventures and small businesses. Both are
critical to the performance of the economy but serve different economic
functions. Both pursue and create new opportunities differently, they fulfil
the ambitions of their founders and managers in different ways, and they
present different challenges to economic policy makers. Both need entrepreneurial
action for start-up, but the small business venture will tend to stabilise at a
certain stage and only grow with inflation. Small business owners are
individuals who establish and manage their businesses for the principal purpose
of furthering personal goals and ensuring security. The activities of
artisan/craftsman, administration/manager and security/family are indicated as
characteristics of small business ownership.
Therefore, a small
business is any business that is independently owned and operated, but is not
dominant in its field and does not engage in any new marketing or innovative
practices. Owners of small businesses are not necessarily interested in growth
as an objective. Themselves are considered successful when are profitable.
Autonomy and security are primary objectives of some owners businesses. They
consider themselves successful even if they earn a smaller income than they
would have as employees. Quite often business only supports a certain lifestyle
of the owner.
Entrepreneurial
ventures
Entrepreneurial
ventures are businesses where the principal objectives are profitability and growth.
Three characteristics distinguish entrepreneurial venture from the small
business.
·
Innovation:
Entrepreneurial ventures thrive on innovation, be it a technological, service
delivery or product Small business is usually only involved in delivering an established
product or service.
·
Potential
for growth: Due to its innovation approach, an entrepreneurial
venture has a great deal more potential for growth than small business. It is
in a position to create its own market. The small business operates in an established
industry and is unique only in terms of its locality.
·
Strategic
objectives: The Entrepreneurial venture will usually set itself
strategic objectives in relation to: Market targets, Market development, Market
share and Market position
The small business
rarely cares about these aspects. Its objectives seldom go beyond survival,
sales and profit targets. Entrepreneurial ventures are the ones that create
employment. Although small business and entrepreneurial ventures both need Entrepreneurial
action during start ups, the small business will tend to stabilise at a certain
stage and only grow with inflation.
1.6 Entrepreneurship, management and
leadership
All entrepreneurs
are not good leaders or managers, but leadership and management skills are
critical success factors. All managers and leaders are not necessarily entrepreneurs
or entrepreneurially oriented, as one can witness from the fact that many firms
go into decline or failure and that many political and social leaders have no
entrepreneurial inclination at all.
The
entrepreneurial process ends in the last phase of the entrepreneurial process
where the business is started and the entrepreneur has to start managing it.
There are important differences between the entrepreneurial and managerial
functions, as well as the expertise and competence with regard to each.
Entrepreneurial
functions include innovative thinking and the identification of opportunities,
planning and establishment and/or growth of the business, and application of
resources.
After establishing
the business, the entrepreneur has to start managing it. Management of the
business involves the managerial functions of planning, organising, leading
and control. The entrepreneur also has to manage the various business
functions, such as finance, marketing, production, purchasing, administration,
human resources and public relations.
There are major
differences between these important roles to be played by the entrepreneur,
and not all entrepreneurs are equipped to perform all the roles of establishing
and managing the business. They often have the natural ability to identify
opportunities and establish the business, but need some training, employees or
the assistance of specialists to manage the business successfully.
Again not all
entrepreneurs are good leaders though it is essential that they posses
leadership qualities.
Every successful
entrepreneur brings about benefits not only for himself/ herself but for the
municipality, region or country as a whole. The benefits that can be derived
from entrepreneurial activities are as follows:
- Enormous
personal financial gain
- Self-employment,
offering more job satisfaction and flexibility of the work force
- Employment
for others, often in better jobs
- Development
of more industries, especially in rural areas or regions disadvantaged by
economic changes, for example due to globalization effects
- Encouragement
of the processing of local materials into finished goods for domestic
consumption as well as for export
- Income
generation and increased economic growth
- Healthy
competition thus encourages higher quality products
- More goods
and services available
- Development
of new markets
- Promotion
of the use of modern technology in small-scale manufacturing to enhance
higher productivity
- Encouragement
of more researches/ studies and development of modern machines and
equipment for domestic consumption
- Development
of entrepreneurial qualities and attitudes among potential entrepreneurs
to bring about significant changes in the rural areas
- Freedom
from the dependency on the jobs offered by others
- The
ability to have great accomplishments
- Reduction
of the informal economy
- Emigration
of talent may be stopped by a better domestic entrepreneurship climate
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