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Explain why the activities of entrepreneurs are so important to the economies of their countries, and why entrepreneurship is an increasingly popular career choice. 3. Describe the process perspective of entrepreneurship, and list the major phases of this process. 4. Explain why entrepreneurship can be viewed as arising out of the intersection of enterprising people and opportunities. 5. Understand why this text will both describe what entrepreneurs actually do and what, perhaps, they should do! 6. Describe several issues and questions about entrepreneurship that is currently receiving greater attention in the field (e.g., university-based technology transfer). 7. Explain why certain sources of knowledge about entrepreneurship are more reliable and useful than others. 8. Describe the nature of three basic means for obtaining knowledge about entrepreneurship-systematic observation, the case method and experimentation-and the role of theory in the field of entrepreneurship. One of us has been an entrepreneur (Baron) and the other has worked closely with them for many years (Shane), so we know that many people seem to believe that entrepreneurs have extraordinary powers-abilities that are almost magical in nature, this belief, in turn reflects the widely held view that entrepreneurs are unusual people. Think about it for a moment. When we say the word "entrepreneur," what names come to mind?' Bill Gates? Michael Dell? Julie Aigner-Clark (founder of "Baby Einstein")? Jeff Bezos (founder of Amazon.corn)? Probably because the fame of these entrepreneurs has spread" around, the globe. But in fact" entrepreneurship, as we'll describe it in this book, is definitely not restricted to this kind of awe-inspiring success in one of a handful of industries. On the contrary, the entrepreneurial .spirit can be observed in much smaller companies and in an almost endless array of contexts. For instance, consider Lorrain~ Santoli. Growing tired of trying to find a facial tissue while driving, she came up with a new idea-a cup that holds and' dispenses tissues' one at a time and that can fit in the cup' holders found in almost every vehicle (see Figure 1.1). The company she founded to develop this idea- TissueKups Inc.-is now humming along with sales in, the millions. High tech? No. "Sexy"? No. Effective and appealing to many potential customers? Something new that did not exist before? Yes! Or; for another example, consider Victoria Maimer who, like many millions of people in the United States and other countries, wanted to .drink more liquids because doing so is good for personal health. Moreover, like many people, she wanted her beverages to have a flavor she liked. One solution is to carry around heavy bottles containing preferred drinks. But Ms. Maimer didn't like doing that, so she and her friend Paul Staunton came up with another idea: why not produce flavorings in small containers that people can easily carry with them and add to any beverage to get the taste they like? The company they started to produce this and similar productsFlavor2Go-is now riding a wave of sharply rising sales. Figure 1.1 From Small Inventions, Profitable Companies Sometimes Grow New products don't have to be dramatic to succeed. The TissueKup, created by Lorraine Santoli, is a good illustration of this fact. The device, which fits into the cup holders found in almost all vehicles, is useful to many drivers, and has found a large and ready market. Why do we start with these examples of what might be termed non-earthshaking products? Because they illustrate several key points about entrepreneurship that we will make throughout this text. First, these entrepreneurs and their companies indicate that entrepreneurship is definitely a process-a chain of events and activities that takes place over time-sometimes, considerable periods of time. It begins with an idea for something new-often, a new product or service. But the idea is only the start. Unless the process continues After that, we consider the question of how we know what we currently know about entrepreneurship-in other words, how the information presented in this book was obtained. We think this point is important because, in general, it is dangerous to accept any information as accurate without knowing something about its source and how it was obtained. Finally, we provide you with an overview of the contents of this book and a description of its special features. Now, to begin at the beginning, we offer a definition of entrepreneurship so that the idea is converted into reality (actually brought to market through a new business venture, licensing to existing companies, etc.), it is not entrepreneurship. Rather, it is just an exercise in creativity or idea generation.
that currently.. and who is often praised by her friends who tell her how delicious these are. some relating to individuals (i. market conditions). customers. we'll comment briefly on current trends in the field of entrepreneurship-topics and questions that are receiving growing attention because they are increasingly recognized as playing an important role in the entrepreneurial process. we provide you with an overview of the contents of this book and a description of its special features. We'll be discussing-and refuting-these and other false ideas throughout this book. Having clarified these important points. First. and so on). in general.g. new markets.. we emphasize yet another key theme: At the heart of the entrepreneurial process lies the intersection of opportunities generated by changing economic. then. thus producing a wide range of effects] By implication. this process is affected by many different factors. as a field of business. we should note that a definition offered by Shane and Venkataraman has received increasing acceptance. to begin at the beginning. Although it helps to clarify many important questions. Now.e. working in a particular industry or sector (e. group. a field of study in business. After that. This theme will be examined in more detail in Chapter 2. seeks to understand how opportunities to create something new e. we offer a definition of entrepreneurship Define entrepreneurship as a field of business The Field of Entrepreneurship: Its Nature and Roots LEARNING OBJECTIVE 1 Definitions are always tricky. how the information presented in this book was obtained. It is not surprising. We think this point is important because. which focuses on the cognitive foundations of entrepreneurship (e. As part of this discussion.g. which focuses on the . the heart of the process involves bringing something newsomething that is not now being produced or exploited by others-to the marketplace. some to their relations with other people (e. Next. we now turn to several tasks that we want to accomplish in this initial chapter. and the activities involved in actually exploiting or developing this opportunity. where ideas for new products or services originate and how individuals actually perceive or recognize opportunities).emergence of opportunities. On the contrary. and Chapter 3. We believe that this definition is a clear and useful one. perhaps the most central of these is: "Just what makes someone an entrepreneur?" To see how the definition offered by Shane and Venkataraman helps significantly in this respect. so stay tuned for more about this point because our goal is to present an accurate picture of what entrepreneurship really is. societal) play an important role in every phase of the entrepreneurial process.. the task is even more complex. and social conditions. who then use various means to exploit or develop them. Finally. there is no single agreed-upon definition of entrepreneurship either as a field of study in business or as an activity in which people engage. and for a field as new as entrepreneurship. later. we simply want to break the mind-set with which many people enter their first course in entrepreneurship an approach reflecting several major myths about entrepreneurship (e. venture capitalists).. We'll have more to say about this. as well as enterprising people capable of recognizing and actively exploiting them.. it can't occur without large amounts of capital.g.. For each. or coming up with a dramatic new product. these examples underscore the fact that being an entrepreneur does not necessarily involve starting a particular kind of company. and some to society as a whole (e. as we note in a later section of this chapter. Having said that. the heart of entrepreneurship. here. new production processes or raw materials. starts a company to make and sell them. new ways of organizing existing technologies) arise and are discovered or created by specific individuals. 2 . must tap a really "hot" market. it also involves being able to run a new business successfully after it comes into existence. as an activity carried out by specific individuals. Broadly paraphrased. entrepreneurs). we'll offer a framework for understanding entrepreneurship as a process one that unfolds over time.g. As we'll soon see.Second. this definition suggests that entrepreneurship.. In addition. it must be based on new technology. as we'll see over and over again. ask yourself the following question: "Is this person an entrepreneur?" A woman who enjoys making appetizers for parties in her home. consider the following individuals. high-tech). we consider the question of how we know what we currently know about entrepreneurship-in other words.g. we present a definition of entrepreneurship as an activity. it is dangerous to accept any information as accurate without knowing something about its source and how it was obtained. A major theme of this book will be that all three kinds of factors (individual. Third. government regulations. and does indeed capture the essential nature of entrepreneurship. the process does not end with the launching of a new venture. new products or services. their definition suggests the following: Entrepreneurship. involves the key actions we mentioned earlier (identifying an opportunity that is potentially valuable in the sense that it can be exploited in practical business terms and yield sustainable profits). rather than a repetition of what many people think it is. and a way of life. technological.g. partners.
Why? Recall our definition: Entrepreneurship involves recognizing an opportunity to create something new. We suggest.' They note that in essence. entrepreneurship requires creating or recognizing a commercial application for something new. you might be tempted to conclude that only the last two are really entrepreneurs-only they brought something new to market. A man who has often forgotten the numbers needed to open combination locks comes up with a new idea: why not build a lock that uses letters instead of numbers? He enters the idea (which he previously patented) in a contest for new inventions. Similarly. As shown in Figure 1. but no. enough. entrepreneurship involves two 3 . Even though his research does add appreciably to human knowledge. or generating a new idea is not. however. Newness Is Not Enough! As shown here. then. In sum. to use a new raw material. the fact that he makes no effort to apply his discoveries to the development of new products. In contrast. According to this definition. he has no interest in identifying practical uses of his discoveries and does not attempt to do so. suggests that he not an entrepreneur. Giaever used his scientific knowledge to develop a new productone that can help physicians identify cancer cells not by looking at them through a microscope (what they typically do). and both took active steps to exploit these ideas in ways that generate economic gains. A retired army officer purchases obsolete amphibious vehicles from the government and uses them to start a company that specializes in tours of remote wilderness areas. that all of these individuals with the exception of the university scientist are entrepreneurs. alternatively. In essence. qualifies as entrepreneurship. The new commercial application can take many different forms. or to develop a new means of production. or service. one of us (Baron) is privileged to teach. many inventions never result in actual products for the simple reason that they offer no commercial benefits (or. the fact that he has attempted to bring this new product to market makes him an entrepreneur as well as a world-class scientist. A Recent Extension and Clarification The definition offered by Shane and Venkataraman appears to be a useful one and has gained widespread acceptance in the field of entrepreneurship. and so they cannot really serve as the basis for a profitable new business. we agree with Shane and Venkataraman and with other theorists'' that entrepreneurship emerges out of the intersection of what might be termed inspiration and activation-recognizing opportunities for something new that people will want to own or use. for instance. no one can think of a marketable use for them). Which of these individuals are entrepreneurs? At first glance. to mention just a few possibilities. it can involve recognizing an opportunity to develop a new market. Ivar Giaever. and his product-which he patented-may well soon become a commercial as well as a scientific device. we should note that it has recently been extended and clarified by McMullen and Shepherd. product. in itself. but in terms of the electrical activity of the cells. In fact. It does not have to be a new product or service. the university scientist is not an entrepreneur according to our definition. he is not an entrepreneur. The retired Army officer and the inventor are also entrepreneurs: Both identified opportunities for new products or services. with a Nobel-prize winning physicist.A university scientist engaged in basic research on the biochemistry of life. scientists often can be entrepreneurs. and taking vigorous steps to convert these opportunities into viable. services. two well-known researchers. makes important discoveries that advance the frontiers of his field. the downsized executive is using an existing "raw material “old tires-in a new way. This activity. markets. too. on the contrary. profitable businesses. Certainly.200 stores. Whether it does or not. The retailer that runs the contest signs a contract with him to sell this new kind of lock at all of its 1. or means of production. Prof. a middle-aged· man discovers a special way of processing old tires to make edging for gardens (borders that keep different kinds of plants separate). however. but simply inventing a new technology. the fact that a product is new is not sufficient to assure that it will be developed and brought to market. the appetizer baking woman is acting as an entrepreneur because she recognized a new Market-one that will pay a premium price for appetizers that taste truly homemade In fact. and wins.2. this is just what Nancy Mueller did when she started Nancy's Quiche-s-a company she recently sold for several hundred million dollars. We doubt. However. he is playing a valuable role in society. After being "downsized" from his management level job. For instance. Professor Giaever found that cancer cells and normal cells differ in this respect. that the product shown here will ever really exist outside the cartoonists' imagination. from time to time.
governmental. Now that we have offered a working definition of entrepreneurship. we will turn to another key task: suggesting a framework for understanding it as a process. technological. 4 . In essence. they often face formidable barriers or obstacles.key phases or activities. and knowledge in entrepreneurial action. because not all organizations are as committed to innovation as General Electric. and social factors. successful entrepreneurs perceive meaningful patterns that point to potentially profitable business opportunities. these more recent suggestions truly enrich our basic understanding of the process of entrepreneurship and how it unfolds. on the contrary. but it also helps to highlight the importance of individual motivation. skills. In the first. Entrepreneurship: A Process Perspective Learning objective 3 Describe the process perspective of entrepreneurship. including large. In the second phase. The company they founded. and on how entrepreneurs create specific kinds of firms because these new businesses are the "tool" through which entrepreneurs convert their ideas and skills into means of exploiting various opportunities. Although our focus will be firmly on entrepreneurs throughout this book we do want to note that individuals can act entrepreneurially in several different contexts. why. this framework is fully consistent with the definition offered earlier. we should note. A Note on Intrapreneurship Before turning to other topics. existing companies. so it is something all organizations should seek. highlighted its importance. The view that entrepreneurship is a process rather than a single event is certainly not new or unique to this text. and list the major phases of this process. it holds more 51. suggested by Sarasvathy proposes that we should focus not so much on who. company. but inside an existing company rather than through the route of founding a new venture. and the additional point-a very important one that recognizing an opportunity can be quite distinct from actually doing something about it. Although we can't say for certain that this policy increased innovation at GE. briefly. the company obtained more patents during recent decades than any other U. . so it is important that we present it clearly and that you understand fully what it implies. in fact. and provide concrete rewards for innovation? For instance. In other words. Other additions to the framework have been offered as well. at first glance. that recognizing opportunities for creating or developing something new can occur within existing organizations as well as outside them. can develop. but rather on the barriers that prevent some persons from becoming entrepreneurs. One of the most interesting. "Connecting the Dots" To Recognize New Business Opportunities Opportunities for new ventures often emerge out of changes in a wide range of economic.However. individuals (potential entrepreneurs) use their existing knowledge and personal strategies for obtaining knowledge. many successful companies are deeply concerned with encouraging innovations and take active steps to provide an environment in which it can flourish. and briefly described its roots in related disciplines. innovation is truly essential for gaining and sustaining competitive advantage. to recognize that some opportunity exists-an opportunity that someone." In fact. General Electric offers employees who come up with innovative Ideas a share of the profits resulting from them. This was certainly true for Bill and Cheryl Brown who recognized the fact that millions of people in the United States who are getting married for the second or third time might need the help of a wedding service specifically focused on their needs. The Second Time Around." These companies work to develop a corporate culture that is receptive to new ideas rather than one that routinely rejects them. there is a growing consensus in the field that viewing entrepreneurship as a process which unfolds over time and which moves through distinct but closely interrelated phases is both useful and accurate. and how specific persons identify particular opportunities. they evaluate this opportunity to determine whether they have the knowledge and skills needed to actually develop it. total! Individuals who act like entrepreneurs inside a company are often described as being intrapreneurs-people who create something new. Even though these trends and changes may seem.000 in. has been highly successful. to be unrelated.S. not necessarily they. This will be a guiding theme for the remainder of this book. they try to determine whether the opportunity is one they can pursue by taking such actions as founding a new venture. Unfortunately. IS Further. When added to the definition proposed by Shane and Venkataraman.
development of the opportunity is consistent with existing legal and moral standards. human resources (partners. Deciding to start a business is one thing. initial employees). he combined component ideas that already existed and had been generated by other people (e. Rather. and would. a company that helps people getting married for the second (or third or fourth) time plan their weddings. First. Opportunities have the potential to generate economic value (i. new ways of organizing existing technologies. As Shane. We will examine the emergence of opportunities and the cognitive roots of entrepreneurship. economic. Once the required resources are assembled. no matter how good. actually doing so is quite another. its competitors— existing wedding services-focus entirely on young people getting married for the first tune.." Ideas do not emerge out of a void. establishing the roles of the top management team. these trends and events might seem to be unrelated. Locke. social. on the contrary. It is at this stage. a striking pattern emerges: Millions of people in the United States who need help planning their second or third wedding.) that has emerged from a complex pattern of changing conditions-changes in knowledge. and social factors.e. new production processes. When entrepreneurs notice links or connections between these changes (i. What are new are the combination and the recognition of links or connections between the various elements of which the ideas are composed.. therefore. they often have greater financial resources. Sadly. understanding entrepreneurs' motives is crucial to comprehending the entire process. they almost always consist of a novel combination of elements that already exist. opportunities. and the company provides a clear illustration of how diverse events and trends can combine to produce a new and potentially profitable business opportunity. there really is nothing "entirely new under the sun.. Deciding to Proceed and Assembling the Essential Resources: Having an idea for a new product or service or recognizing an opportunity is only. basic research on the nature of sound. that entrepreneurs typically prepare a formal business plan-a detailed description of how they plan to develop their new venture. consider Bill and Cheryl Brown." so to speak. Another and seemingly unrelated trend is that older people in many societies seem increasingly willing to "indulge" themselves-they do not want to miss out on experiences simply because they are in their forties or fifties instead of their twenties and thirties. To take a striking example from history. political. when they notice patterns in these changes). The company experienced tremendous growth because.e. "die on the vine. however. or ideas for new products and services. and demographic conditions. the first step in the process. not be blocked or constrained by these standards).. and unless it is completed successfully. etc. competitors. :Launching a New Venture. ideas for new ventures may quickly follow. developing the new product or service. At first glance. but when considered together. who recently started The Second Time Around. new raw materials. Doing so involves a wide range of actions and decisions: choosing the legal form of the new venture. At that point. technology.g. etc. of course. new markets. Bill and Cheryl Brown noticed. The idea for Second Time Around was suggested by this emergent pattern. no matter how attractive. we want to emphasize just one point: in a sense. and financial resources. Second. the number of people getting married who have been married before has increased dramatically. Similar argument holds for recognizing opportunities. and so on. The opportunities themselves often emerge from changes in economic. technological. So. in their view. electric batteries. but for the moment. and Collins suggest. environmental and legal issues). governmental. because these individuals tend to be older than people marrying for the first time. profit) and are viewed as desirable in the society in which they occur (i. many new entrepreneurs do not 5 .there is general agreement that the key phases in this process are as follows: Recognition of an Opportunity: The entrepreneurial process often begins when one or more individuals recognize an opportunity-the potential to create something new (new products or services. that several recent trends converge to suggest the need for a company like theirs. and especially when seeking financial backing. and would-be entrepreneurs quickly discover that they must assemble a wide array of required resources: basic information (about markets. the entrepreneurial process occurs because specific individuals make this decision and act upon it. an initial decision to proceed-to do something active about the idea or opportunity-is required..) in a new way and invented a product that revolutionized human communication. For instance. Inc. Gathering these resources is one of the most crucial phases of the entrepreneurial process. the new venture can actually be launched. in essence.e. Alexander Graham Bell did not invent the telephone out of sheer creative genius.
and so on. entrepreneurs must. going concern represents major progress. the Impact of many factors on entrepreneurs' behavior and Success does indeed change over the Course of new venture creation. How can both findings be true? One possibility is that whether entrepreneurs are more or less risk-prone than other people depends on which phase of the entrepreneurial process we are considering. in many cases. Attention to the tasks entrepreneurs perform.fully grasp the complexities of starting a new venture. be relatively willing to accept risk: If they were not. years of sacrifice and commitment. motivate. building effective relationships among founders of the new venture). and talents. effort. founders choose an exit strategy that allows them to harvest the rewards they have earned through their time. consider the question of whether entrepreneurs are more "risk prone" than other people-a question that has received a great deal of attention in recent years. and management issues relating to growth (e. Building Success and Managing Growth: Although moving from an idea to an actual. For example. gives us a good handle on identifying the skills. they may shift toward becoming much less accepting of risk. In fact. Second. and characteristics they need to function effectively in this role. 6 . in fact. too. and retain high-quality employees. An overview of the major phases of new venture creation is shown in Figure 1. a smaller proportion fully recognizes the importance of two key factors in the process: developing effective strategies for encouraging and managing growth. such as managers. and as we will note in later chapters. However. early on. One additional comment: We do not mean to imply here that entrepreneurship can be readily divided into neat and easily distinguished phases. meet payrolls. First. they would never give up secure jobs to start new ventures. entrepreneurs' behavior-and the role of risk in their decisions and strategies-may change considerably over the entrepreneurial process. and that the effects or importance of specific factors may well change over the course of new venture creation. an active decision to proceed. Harvesting the Rewards: In this final phase. Figure 1. Finally. knowledge. it helps avoid a static view of entrepreneurship -one that sees it as a specific act (launching of a new venture) that occurs and is then complete.7 Entrepreneurship as a Process: Some Key Phases The entrepreneurial process unfolds over time and moves through a number of different phases.7. it is just the start of another key phase in the entrepreneurial process: running the new venture and building it into a growing. Many entrepreneurs recognize that this phase requires additional financial resources. of course. In essence. being able to attract. almost by definition. with idea generation or opportunity recognition occurring first. next. viewing entrepreneurship as a process suggests very strongly that different factors may affect it at different points in time. have been avoided. a process perspective is useful. Recent findings suggest that as this logic suggests.g. But later on. So from this angle. Events and outcomes during each phase are affected by many individual-level. profitable business.. the process is far too complex for that to be true. and manage limited resources. How well entrepreneurs perform these activities is often more central to their success than their personal characteristics or background-although. Some research findings suggest that entrepreneurs are indeed "riskier" than other people. too. in turn. viewing entrepreneurship as an ongoing process draws attention to the key activities entrepreneurs must perform as they proceed with their efforts to convert ideas for new products or services into success ful businesses. Such a view ignores the fact that entrepreneurs face an ever-changing array of tasks and challenges. group-level. while other findings from equally careful research point to the opposite conclusion-that entrepreneurs are less willing to take risks than other groups. and that they often think and feel differently about these tasks and challenges as they change and unfold. once they have launched a new venture and must pay bills. this can burden them with problems that could. We believe that viewing entrepreneurship in this manner offers several benefits. But the activities just described do tend to unfold over time in an orderly sequence. For instance. Individual entrepreneurs must choose carefully among the many ways of reaping the benefits of successful entrepreneurship so as to maximize the benefits they gain from. in our experience. these are important. and societal-level factors.
group-level. as we'll explain in a later section. and societal-level variables) in our efforts to understand entrepreneurship: Why do some individuals. are actually related to a suggestion you may well find even more provocative-the idea that genetic or biological factors. consider the question of opportunity recognition. The kinds of ideas people generate reflect the times in which they live. Certainly. some individuals have higher energy. the current state of technological knowledge. in part. or even figures in the mass media-often suggest the basis of an idea for a new product or service. or primarily on the economic. a genetic component is a factor in how individuals' brains react to high levels of risk. while others dislike it. associates. Results indicated that those who had previously chosen to become entrepreneurs had higher levels of this male hormone! Further evidence suggested that this difference stemmed from a greater tendency toward risk on the part of the entrepreneurs. to be closely related to entrepreneurship. Among these studies. it is well established that genetic factors play a role in the development of specific skills or abilities. surprising as they may be.)? As you can guess from our earlier comments on the macro/micro issue. The Possible Role of Genetic and Other Biological Factors: The "Micro" Perspective Carried to the Limit The findings we just described. in part. Direct evidence for the role of individual-level factors in choosing to become an entrepreneur is provided by many studies. all three levels of analysis (individual. Similarly. considerable disagreement existed in the field of entrepreneurship over the following question: In studying the entrepreneurial process should we focus primarily on the entrepreneur (e. all three categories of variables play a role. motives. lead individuals to pursue different kinds of careers and to seek employment in different 7 . government policy. we view this question as largely irrelevant. talents. We believe that at every stage of the entrepreneurial process. those high on these dimensions-and especially self-efficacyare probably more likely to choose the entrepreneurial role.e. therefore.g. etc. have been found to be related to entrepreneurship: Entrepreneurs show greater persistence than most people in overcoming~ obstacles and in engaging in the same activity for long periods of time. are more willing to accept risk. These skills and abilities. one of the most unusual compared the levels of testosterone shown by male MBA students who had previously started new ventures and those who had not. But nothing that has to do with people-not even basic aspects of cognition occurs in a social vacuum. or genetic factors). group. but not others.7. may play a role in entrepreneurship! How can this be? The authors who propose this idea note that genetic factors have been found to play a role in several tendencies and predispositions that have been found. at least early in the process. These factors. recent findings indicate that entrepreneurs who have a mentor-an older and more experienced person with whom they work and who influences their career tend to recognize more opportunities than entrepreneurs who do not enjoy the benefits of having a mentor. this crucial process occurs in the minds of specific individuals and must. technological. and have greater self confidence (selfefficacy) and greater tolerance for stress than others. With respect to individual factors. abilities. reflects differences in how their brains function. Further. they have genetically inherited tendencies to respond positively or negatively to risk. reflect the impact of individual-level variables such as the existing knowledge structures and the unique life histories of these individuals. individual-level (i. other people with whom the entrepreneur has contact-friends.LEVELS OF ANALYSIS: MICRO VERSUS MACRO REVISITED Until recently. Third. some people find such conditions more pleasant or acceptable than others because. For instance. and societal context in which the entrepreneur operates (economic and market conditions. in turn.. traits-and perhaps. in turn. Here's another example of the importance of considering both micro and macro factors (individual-level. too. even biological. which. and many other aspects of the societies. genetic factors play a role in how people react to overcoming obstacles or to engaging in the same activities for a long period of time.. too. In short. societal) are relevant and must be considered in order to understand idea generation fully. this person's skills. and societal-level (macro) variables all play a role (please refer again to Figure 1.) For instance. micro) variables. choose to become entrepreneurs? Again. For instance. group or interpersonal-level variables. Some enjoy it.
Please don't misunderstand: There is no suggestion here that genetic factors directly lead individuals to become entrepreneurs. For instance. Because these areas offer greater opportunity for engaging in entrepreneurship than other fields or industries. and societal-level factors influence every action and every decision taken by entrepreneurs during all phases of the entrepreneurial process. through this indirect route. For instance. or preferences. Group-Level and Societal-Level Factors Turning to group-level factors. Figure 1. the likelihood that such individuals will become entrepreneurs is enhanced. are more likely to choose this role than individuals from other backgrounds or who live in other countries.. Just a few short years later. at least in part. a company whose sole mission was that of helping former-and highly talented-Enron employees to become entrepreneurs. This intriguing possibility is just now becoming the focus of careful research. Individuals who come from certain social and economic backgrounds.8). by genetic factors. So. it seems possible that individuals who receive encouragement from friends or family members and those who have been exposed to entrepreneurs in their own lives are more likely to proceed than ones who do not receive encouragement and have not been exposed to models of entrepreneurs. Genes have been found to strongly influence several characteristics personal dispositions that have also been shown to increases the likelihood that people will become entrepreneurs. skills.e. They succeeded to an amazing degree: Within just three months. then. people with high mathematical or quantitative abilities may choose to work in technical or scientific fields. Societal-level factors. Although this approach adds complexity to our discussions of 8 . members of the local business community feared that a large number of highly talented people would leave the Houston area. or who live in countries where government policies are favorable to starting new ventures. the main point should be clear: Individual-level. 2001). Stay tuned: The findings promise to be both interesting and surprising. they had helped 25 senior Enron employees to found new ventures. are important. genetic factors can influence entrepreneurship. several of these companies became profitable and were adding good jobs to the Houston-area economy. they organized Resource Alliance Group. we will employ all three levels of analysis throughout this text. group-level (i. it has been proposed that genetic factors may play a role in entrepreneurship. To keep them around.8 Are Entrepreneurs "Born"? The Possible Role of Genetic Factors in Entrepreneurship Recently. when Enron. So clearly. Taking note of this fact. but by now. social) factors such as help and encouragement from others can play a key role in the entrepreneurial process. One mechanism through which genetics may exert such effects is indirect in nature. We could continue because several other factors found to play a role in entrepreneurship -are ones that are determined. a huge energy company based in Houston imploded as a result of a series of accounting scandals (October.industries. Rather. We could continue with other exa mples. too. which in turn lead them to be more or less attracted to the kind of activities entrepreneurs perform and the kinds of environments in which they operate (see Figure 1. the basic idea is that genetic and biological factors predispose individuals to develop certain characteristics. In essence. some individuals may be predisposed to become entrepreneurs by their own genetic nature. group-level.
and useful picture of what we know about the process of entrepreneurship and how. They occur in industries that are faster growing or ones in which customer needs are easier to identify or satisfy. and had just sold his company to Lucent Technologies for almost one billion dollars.) During his acceptance speech. it has to be there in the first place-something must have changed so as to generate the opportunity. then we. But after that. should be obvious: At the very heart of entrepreneurship is a nexus (connection) between opportunities and people (see Figure 1. Mr. we carefully examine the specific characteristics that make some opportunities more promising than others. (Mr. This is an important point: Opportunities vary greatly in their potential value. as Mr. Chatter pointed out. you have to recognize it and be able to tell that it is a good one-something you can turn into a successful business. as authors. If those are not the ultimate goals of any text.to-potential benefits sufficiently favorable to justify efforts to exploit them. however. In other words. Chatter was receiving the "Entrepreneur of the Year" award given annually by Prof. it will also offer a more complete. technological. only for some opportunities is the ratio of risk. at a banquet held in his honor. it can be made to run more smoothly for entrepreneurs. perhaps. with the result that only some are worth pursuing...many topics. In just a few sentences. As you have probably observed yourself. one of us (Robert Baron) had the honor of introducing a highly successful entrepreneur. highly motivated individuals recognizes them and the fact that they are worth pursuing. this theme suggests that it is the intersection of valuable opportunities and enterprising individuals that is the essence of entrepreneurship. some business opportunities are superior to others. We view these remarks as highly insightful. But to recognize it. and social conditions. It is this connection or intersection that starts the process-and sometimes changes the world! Figure 1.. some opportunities are easier to protect against competition. mind-bending work. Chatter made the following remarks: Success comes from many sources. if you are not willing to put in the hours and give up lots of other things in your life. Opportunities. but nothing happens with respect to these opportunities until one or more energetic. you have to recognize an opportunity. Baron's university. Several years ago. Further. Yes. After that. The key point we wish to make here. Chatter captured another key theme in entrepreneurship-and this book.. researchers. Luck definitely plays a role. accurate. Briefly stated.9 Entrepreneurship: What Sometimes Happens When Enterprising Individuals Meet New Opportunities? What is the essential nature of entrepreneurship? Shane (2003) suggests that it occurs when individuals willing to assume some risk recognize new business opportunities-and decide to act on them. have no idea as to what they should be! ENTERPREWNEURSHIP: THE INTERSECTION OF VALUABLE OPPORTUNITIES AND ENTERPRISING INDIVIDUALS Learning objective 4 Explain why entrepreneurship can be viewed as arising out of the intersection of enterprising people and opportunities. you have to be in the right place at the right time and know the right people who can help you. 9 .9). Mukesh Chatter. and entrepreneurs. are generated by changing economic. Mr. it's largely a matter of hard. you won't succeed-you won't make it happen.
and to what extent. raises an important question: How do we know which information is the most accurate and useful? As any visit to a local bookstore will suggest. why some means of developing opportunities are better than others (at least in some contexts). reflection combines them. through various branches of management on the other. on the contrary. To provide you with a sense of the breadth this work. we will discuss many aspects of entrepreneurship-how opportunities arise. and partly because it is still quite new. What are these methods. We'll now highlight just a few of the topics that many researchers would view as "on the cutting edge"-topics related to important aspects of the entrepreneurial process that have recently become the focus of increased attention and study. As a field of study in business.). many potential sources of information about entrepreneurship exist. and can they really be applied to the study of entrepreneurship? The methods themselves are quite complex and well beyond the scope of this brief discussion. we will describe them briefly here. Partly because it draws on several different existing disciplines (strategy. Observation collects facts. As we discuss each of these issues. and since much of the information presented in this text has been gathered through these methods. In the remaining chapters of this book. in a sense. why some entrepreneurs are successful while others fail. deciding for yourself whether. it is literally overflowing with interesting issues and questions. they should do! There can be no doubt that entrepreneurs encounter change on a daily basis when starting and running their new ventures. entrepreneurship reflects this basic reality. reflection. we will present the most accurate and up-to-date information available. meeting new and emerging customer needs. organizational behavior. 10 . bringing new products and services to market. Our goal is certainly not that of turning you into an entrepreneurship researcher. In fact. in turn. cognitive science. perhaps. alleged "facts" about it are really accurate. with no shortage of self-proclaimed experts on this topic. but their essential nature was stated concisely by the French philosopher Diderot (1753) more than 250 years ago: There are three principal means of acquiring knowledge: observation. This goal. etc. and experimentation. Since this is the case.The Cutting Edge: Emerging Issues and Questions Learning objective 5 Understand why this text will both describe what entrepreneurs actually do and what. change is what entrepreneurship is all about: creating something' new-profitable new ventures-where none existed before. So how have we chosen the information to include in this book? The answer is straightforward: We have selected information that has been gathered in accordance with a set of rules or methods for acquiring reliable knowledge-methods that prove extremely helpful in many fields ranging from the physical sciences on one hand. it is simply to provide you with a basic understanding of these methods so that you can become a more informed consumer of knowledge about entrepreneurship. SOURCES OF KNOWLEDGE ABOUT ENTREPRENEURSHIP: HOW WE KNOW WHAT WE KNOW LEARNING OBJECTIVE 7 Explain why certain sources of knowledge about entrepreneurship are more reliable and useful than others. how some people recognize them. experimentation verifies the result of that combination That these methods can be used to study entrepreneurship is strongly suggested by the fact that they are currently being employed in a large volume of entrepreneurship research. and so on.
and then proceeding to test these predictions by collecting relevant data. the development of secure means for making purchases online. Positive numbers indicate that as one increase. Correlations can range from -1. the researcher would predict a positive correlation between breadth of work experience and number of opportunities recognized.00. the better they will be at recognizing opportunities." The patterns entrepreneurs detect then point to opportunities for new ventures. do you recall our discussion of Expedia.OBSERVATION. she might predict that the more varied individuals' work experience.00 to + 1. the other decreases. and other factors so as to form a recognizable pattern. suppose that a researcher is interested in increasing our knowledge of opportunity recognition-the process through which entrepreneurs identify opportunities for profitable new businesses. Why? Because broad experience helps individuals perceive connections between seemingly independent events or trends. Negative numbers indicate that as one variable increases. changes. REFLECTION AND EXPERIMENTATION: ALTERNATIVE ROUTES TO KNOWLEDGE LEARNING OBJECTIVE 8 Describe the nature of three basic means for obtaining knowledge about entrepreneurship systematic observation. The basic idea is straightforward: We observe certain aspects of the world systematically. where changes in one are accompanied by changes in the other. Then. For instance. For example. the more opportunities they will recognize or the greater the number of companies they will start. For instance. Imagine that this researcher has reason to believe that opportunity recognition involves noticing or recognizing patternsconnections between seemingly unrelated events. The researcher might then predict that these two variables will be correlated. This basic processperceiving connection between various events and trends-may play a role in the identification of many opportunities. deregulation of the airline industry-which produced huge variations in ticket prices. How would a researcher study this basic idea? One way to do so would involve deriving from this reasoning one or more hypotheses. the researcher might reason that if recognizing patterns plays a key role in opportunity recognition. In other words. then the broader or more varied the work experience individuals have. we'll start with systematic observation. keeping careful records of what we notice. and experimentation-and the role of theory in the field of entrepreneurship. or trends.com? In that discussion we pointed out that the idea for this new business involved connecting several independent events and trends-the growing number of individuals with personal computers. 11 . the researcher might then obtain information on two variables-aspects of the world that can take different values. shifts in government policies. One variable would be the breadth of work experience individuals have had (from very narrow to very broad) and the other would be the number of opportunities they have recognized (perhaps. To test this idea. as yet untested predictions or explanations for a set of facts. So in this case. so does the other. the case method. recognizing opportunities involves "connecting the dots" between such factors as advances in technology. Specifically. we use this information as a basis for reaching conclusions about the topics we wish to studyand understand. Because it is the method most frequently used to study entrepreneurship. changes in markets. the number of companies they have started or the number of patents they have received this variable could potentially be measured in several different ways).
and perhaps the one most frequently used. add much to our understanding of entrepreneurship. The reasoning behind it is impeccable: If we change one variable while holding everything else constant. In essence. Another involves what Diderot described as reflection. a researcher observes the people or companies of interest and makes no attempt to change them in any way. Can this 12 . Experimentation: Knowledge Through Intervention When it is conducted carefully. a detailed case study of Carlson's activities offers support for the hypothesis that opportunity recognition does indeed involve perception of complex patterns. Findings obtained through the case method are often highly valuable and can offer useful insights into how complex processes occur. permanent copies. Note that this approach involves active interventions by the researcher. there is simply no substitute for careful research if we really want to understand how the entrepreneurial process unfolds and what factors influence it. Further. the individual credited with inventing the modern copy machine and laser printers (see Figure 1. they provide a different kind of knowledge than systematic observation or another method we will now describe—experimentation. we can conclude that changes in the first cause changes in the second. nearly as informative as the findings of careful research. In entrepreneurship research. was Chester Carlson able to come up with one that worked well? Careful study of his background and life suggest some intriguing possibilities. using the case method also suggests that often those individuals who possess the "cognitive equipment" needed to perceive such patterns are the ones who then become highly successful entrepreneurs. Why. First. he may have enhanced his own ability to perceive ways of connecting several processes into a means of making dry. especially in business and educational settings. once he decided to try to solve this problem. which involves gathering large amounts of data about one organization or specific individuals. During the 1940s and 1950s. As an example. In fact. By focusing on these processes. in our view.e. All the "educated guesses" offered by self-proclaimed "experts" on entrepreneurship are not. But since they often rely on somewhat informal means and on the judgment and intuition of researchers. At the time he invented (or rather. and often does. the researcher merely observes the variables of interest without attempting to change them. does not in any sense prove that this is so. many products for making copies had been invented. and in accordance with certain basic rules. We should hasten to add that the case method. The Case Method Systematic observation is an important method of research in entrepreneurship. As a result.11). search) to technologies and processes he understood well.. How could this method be used to investigate opportunity recognition? One possibility is to gather detailed information on famous entrepreneurs.Research conducted in this manner can. adapted) the basic process used in copy machines (and in laser printers). and then using this information to reach conclusions about what factors influenced important outcomes such as economic success. in systematic observation. permanent copiesan invention with far-reaching effects? Detailed study of his life and activities through the case method offers some intriguing possibilities and in this way. experimentation involves systematically changing one variable in order to see whether such changes affect one or more other variables. breadth of experience is positively related to opportunity recognition. Moreover. and these changes affect another variable. but none seemed to work very well. to determine whether they recognized important opportunities by "connecting the dots" between various events and trends. actual research on this topic suggests that in fact. Similarly. this approach is the basis for the case method. (By the way. the need for better means of making copies.11 Chester Carlson: A Case Study in Entrepreneurship Why was Chester Carlson able to come up with a practical and cost-effective technology for making dry. then. consider Chester Carlson. experimentation is a powerful tool. was clear. in the case method. but it is certainly not the only one. in contrast. by itself. Figure 1. he held both a law degree and a technical degree. In other words. sheds important new light on the basic. nature of opportunity recognition. he restricted his efforts (i. he understood both the strong need for improved means of making copies as well as several of the technical processes that might be used to meet this need.
ever-changing world in which 13 . For instance.method actually be used to study entrepreneurship? In many instances. Then. education. For instance. age. would not receive such training.12 Experimentation in Entrepreneurship Research: an Example In the study illustrated here. consider. the possibility that recognizing opportunities involves "connecting the dots" between seemingly unrelated events or trends so that meaningful patterns emerge and point to ideas for new products or services. one group of participants was given training in recognizing patterns while the other was not. but about which the participants in the study do not know. the group given training was more successful in recognizing these opportunities. work experience). one group of individuals could be given training in recognizing patterns-that is. For instance.. not very readily. these materials could be based on new ventures that actually developed in the past. they would be trained in techniques that help in searching for and noticing patterns in complex events or trends. then the individuals given training in pattern recognition would be more successful at this task than those not given such training (see Figure 1. We realize that this scenario may seem very far removed from the chaotic. or change amount of capital available in economic markets.g. For example. When both groups then read materials containing potential opportunities for new ventures. both groups would be asked to read materials carefully designed to contain information that can be combined into patterns pointing to new business opportunities. Another group. again. because researchers simply cannot change many variables that are of interest to them.12). they cannot alter government policies or demographic trends. If recognizing patterns does indeed play a role in identifying opportunities. carefully matched to the first in as many respects as possible (e. But in some contexts-especially in research relating to the behavior of individual entrepreneurs-it is possible to use experimentation. Figure 1. This suggestion could be studied by experimentation. This research suggests that recognizing patterns in complex trends and changes may indeed play an important role in opportunity recognition.
especially. psychology. In sum. Instead.entrepreneurs normally operate. For instance. In the experiment we just described. can be used to establish the direction of causality in systematic observation. Because of practical constraints (e. there are several different methods for gathering useful—and accurate—information about various aspects of entrepreneurship. this evidence would be stronger and more conclusive than that obtained by other methods. such as pay incentives for family members. THEORY: ANSWERING THE QUESTIONS “WHY” AND “HOW” We need to mention one more aspect of the quest for knowledge about entrepreneurship before concluding: the role of theory in this endeavor. When changing one variable in an experiment produces changes in another. On the other hand. and is greatly superior to the kind of informal.. there is a growing body of theory developed specifically to help explain various aspects of the entrepreneurial process. experimentation. we don't want merely to be able to state that some people are better at recognizing opportunities than others or to report the percent of people who are highly skilled at this task: We want to be able to explain why they are better and how they go about recognizing these opportunities. it makes sense to conclude that the experience produced (caused) opportunity recognition. it provides strong evidence that the first variable caused changes in the second. efforts have recently been made to apply prospect theory. experimentation is not often used in the study of entrepreneurship. it is not surprising to learn that it has few well-developed theories of its own. one theory designed to explain why some family-owned businesses are more successful than others. Up to this point in time.. for instance. a well-developed theory of decision making. The term theory has a special meaning in the realm of science. It refers to efforts to go beyond merely describing various phenomena to the point at which we can explain them—understanding why and how they happen or take place as they do. For instance. perhaps. or the case method. called Granger causality. and the extent to which family members know the share of the business they will inherit. the more opportunities they later recognize. theories are frameworks for explaining various events or processes. This concept. researchers employ a wide range of statistical techniques to help determine causality on the basis of other methods such as systematic observation. reliable) foundations than information gathered through the use of systematic observation. So. but it is our strong conviction that all are very useful. Rather. with respect to opportunity recognition. In other words. However. Don't misunderstand: We do not mean to imply that the people writing such books are ill-intentioned or totally lacking in useful insights about the entrepreneurial process. in fact. the purpose of experimentation is not to simulate or reproduce these conditions. Given the fact that the field of entrepreneurship has been in existence for only a relatively short period of time.e. such as economics. In sum. it is to gain insights into the nature of complex processes such as opportunity recognition insights that cannot readily be gained through the case method or systematic observation. Although these sources may sometimes provide important insights. differences in the performance of the two groups (one with training in pattern recognition and the other: without such training) would point clearly to the potential role of connecting the dots" in opportunity recognition. Experimentation offers one additional important advantage: It is useful for establishing causality. For instance. "shoot from the hip" approach taken in many popular books on entrepreneurship.g. Because work experience precedes recognizing opportunities. Something that occurs later in time cannot reasonably be the cause of something that occurred earlier.g. suppose that research findings indicate that the more varied individuals' work experience. entrepreneurship has largely borrowed theories from other fields. Offering family members pay 14 . it is difficult to vary the factors of merest systematically). it has sometimes been criticized for lacking such frameworks. we only wish to note that the information they communicate is based almost entirely on their own experience and other informal sources. Moreover. their belief that the firm will or will not be sold. and cognitive science. to several important issues relating to entrepreneurship (e.. they rest on less certain (i. As we noted earlier. the question of how entrepreneurs perceive risk) to answering the question above. one such theory might involve the ability to perceive meaningful patterns in diverse trends and events. ones that other people miss. we want to know just what it is about certain people that allow them to be so good at recognizing opportunities. calls attention to the joint effects of several factors. None are perfect. rather. The opposite-that—discovering opportunities produces varied work experience—makes little or no sense. One approach is to determine whether one variable or change Occurs before another.
As you can see. the theory is modified and further tests are conducted. If results are consistent with the theory. doing so contributes to the company's success is not yet clear. 5. that's why we introduce this concept here. known as hypotheses. but whether. as the preceding example suggests. confidence in its accuracy is increased. These predictions. Even if initial predictions are confirmed. affected) by expectations about ownership of the business. In other words. year-end cash bonuses) is quite common. thus allowing greater latitude for the impact of economic factors such as pay incentives. The theory. are then tested by actual research. If results agree with predictions. Ultimately.13 The Role of Theory in Entrepreneurship Research Theories both organize existing knowledge and make predictions about how various events or processes will occur. further tests of the theory are generally required.. confidence in the theory is increased.g. the process goes something like the following: 1. So. Why? Perhaps because when they believe the firm will be sold. Even if it is accepted as accurate. 15 . We will encounter many instances in this book when one variable moderates the effects of another. which consists of basic concepts and statements about how these concepts are related. and to what extent. helps to organize existing information and makes predictions about observable events.13 for a summary of these steps. how are theories derived in the first place? Briefly. For instance. the theory remains open to further refinement as improved methods of research are developed and additional evidence relevant to the theory's predictions is obtained. the theory might predict the conditions under which individuals recognize or do not recognize opportunities.incentives (e.) Figure 1. The theory just mentioned suggests that pay incentives for family members will enhance firm performance when these persons believe the business will be sold but will not enhance performance when they believe the company will remain in the family. If they are not. 2. theories are extremely useful because they help explain why certain events or processes occur as they do. On the basis of existing evidence or observations. 4. their feelings of commitment toward the family business are reduced. Once theories are formulated. why pay incentives improve the performance of family businesses under some circumstances but not under others. If results disagree with such predictions. In this case. the effects of pay incentives are strong when family members expect the business to remain with the family. a theory reflecting the evidence is proposed. In situations like this. For instance. (Please see Figure 1. hypotheses derived logically from them are tested through careful research. the effects of pay incentives are moderated (changed. 3. however. we say that the effects of one variable are moderated by another variable. the theory is either accepted as accurate or rejected as inaccurate. the theory may be modified or ultimately rejected as false. but are weak when they expect that the business will be sold.
in turn. "There is nothing as practical as a good theory. individuals who choose to become entrepreneurs are: (1) more likely than others to be susceptible to several kinds of cognitive errors or biases (e. confidence in it is increased: there would be a stronger basis for accepting the theory's premise that entrepreneurs do indeed think differently from other people. Why should the field of entrepreneurship. the researcher may lose objectivity. developing good theories is more than an exercise in basic science: It is an important step toward attaining valuable. be interested in theory? Because. we will understand this process in ways that enhance our ability to assist entrepreneurs in their efforts to start new ventures. etc. if we have good and well verified theories about entrepreneurship." By this statement he meant that having a good theory-a clear understanding of why or how a process occurs as it does-is very useful from the point of view of intervening in it in beneficial ways. 16 . of course. actual or would-be entrepreneurs could be compared with people who have no interest in starting new ventures in terms of their susceptibility to cognitive errors and their tendency to think about various situations in terms of losses. Two final points: First. as one social scientist remarked many years ago. confidence in it is reduced.. research should never be undertaken to prove or verify a theory. which is eminently practical in orientation. If a researcher sets out to prove her or his pet theory. causes them to be more accepting of risk. if results are not consistent with predictions derived from the theory. Specifically. For instance.Perhaps another concrete example will help clarify the importance of theory. any results obtained under these conditions are on shaky ground. If results are consistent with predictions derived from the theory.) (2) more likely than others to think about situations in terms of the gains they will give up if they do not launch a new venture. an entrepreneurship researcher formulates the following theory: Individuals who choose to become entrepreneurs think differently. Suppose that on the basis of careful observations and existing findings. so designing research to test these hypotheses is quite feasible. it is performed to gather evidence relating to the theory. Clearly. These predictions are then formulated as specific hypotheses and tested in actual research. And that. On the other hand. In other words. in various ways. and either unconsciously (or even consciously) design her or his research so that it tips the balance in favor of the theory. they are more likely to be overly optimistic and to suffer from the illusion of control-they overestimate their ability to control the outcomes they experience. theories are never proven in any ultimate sense. from people who do not choose this role . Measures of all these variables already exist and have been used in previous studies. they are always open to testing and are accepted with more or less confidence depending on the weight of available evidence relating to them.g. In short. Rather. which. the researcher commits a serious violation of the methods that should be followed to gather accurate information about any topic. practical results. Second. would be a very positive ou tcome. Why? Because in this case.
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