INTRODUCTION TO THE STUDY OF ENTREPRENEURSHIP

You may have come across the words entrepreneur and entrepreneurship. You may have also

used the words, read them being used or have heard them being used. You sure have a hazy idea

or probably a layman’s idea of what they mean. This may even be your first encounter with the

subject Entrepreneurship as a discipline of study. You should find this course enlivening and

enlightening as you dig deeper into the concept entrepreneurship. I hope you will find this course

interesting and stimulating. I also hope that you will gain a better understanding of

entrepreneurship as a discipline and as an area of management and economics. The purpose of

this introduction is to assist you to appreciate the importance of the phenomenon of

entrepreneurship to modern business trends.

Entrepreneurship is currently a topical issue among students of management and economics. The

function of the entrepreneur has become the hub for business creation and development. The

function of the entrepreneur is organizing new productive resources to expand supply. It is also

founded on small start-ups and is engineered by people who want to change the business world

and for these reasons entrepreneurship is getting more and more attention. There are more

resultant reasons why it is important to study entrepreneurship; not only does it play a major role

in business creation and development but for its complex, many-sidedness and innovative nature.

Entrepreneurship fosters economic growth, small new businesses are providing most of the new

jobs both in developed countries and in developing countries. New businesses that start up and

expand quickly tend to create the most jobs in the economy. It is important to study

entrepreneurship as it tends to address the world’s problems of unemployment and third world

problems of poverty.

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Another important reason for studying entrepreneurship is to gain an understanding of how

entrepreneurship addresses the fundamental problems of the economy. The most fundamental

problem of our economy is productivity. Productivity is the ability to raise the quantity and

quality of products and services with lesser costs, that is, less labour inputs and overheads.

Entrepreneurship plays the role of raising levels of productivity by improving production

techniques, which is the impetus of the entrepreneurial function.

To gain insights into the phenomenon of entrepreneurship there is need to understand the

symbiotic relationship between entrepreneurship and innovation and change. Entrepreneurs play

the role of promoting innovative creativity. Many large corporations that have refused

innovation, including new technologies, have forced out many of their employees to become

inventors and entrepreneurs. Entrepreneurs, thus, develop new technologies, new products and

services and new ways of doing business. One entrepreneurial innovation gives rise to many

others. Inventions have been created to increase production and further inventions developed

towards rapid increase in production. Many a firm have increased production through innovative

ways of doing things.

The market place is the deciding factor about the success of goods and services. The level of

competitiveness on the market for any good or service determines its success. Entrepreneurs “stir

up the waters” of competition in the market place. Small businesses and startups are created due

to opportunities that open up in the market which entrepreneurs grab and exploit. These startups

become “agents of change” in a market economy and they tend to upset the market by coming up

with striking innovations and take over market leadership. You can imagine what will happen if

you were running the only grocery shop in your neighbourhood and Shoprite moved in right next

door.

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The cornerstone of all study is theory. Investigations begin and end with theory and thus all

decisions taken in the course of the study are guided by relevant theory. Due to the importance

that entrepreneurs have given to society and the potential that they have to contribute to the

economy researchers try to analyse their personalities, skills and attitudes, as well as those

characteristics that forge their development. Research has centered on psychological factors that

underlie the entrepreneurial spirit and so it is important that these be studied and understood.

While entrepreneurship is such an important issue, there are barriers to venture creation. These

barriers need to be known. Most entrepreneurs fail because of lack of a viable concept and in

many cases due to lack of proper planning. The would-be entrepreneur needs to have a clear

focus of what she needs to accomplish and thus needs a business plan, which is, a formal

document that contains a statement of purpose, a description of the products or services to be

offered, a market analysis, financial projections and management procedures, designed to attain

the organisation’s goals. The study of entrepreneurship helps the student to gain insights into the

nature of the phenomenon and to understand

The aim of this course is to provide the intended MBA student with diverse ways of developing

an entrepreneurial mind towards organizational management. Entrepreneurship as an area of

study is increasingly being recognized as an important area of management study and practice.

The relevance of entrepreneurship as a study is not only confined to the context of new venture

creation or the management of small businesses but to the management of organizations of all

sizes, and in all sectors, that require people to respond in ways that could be characterized as

“entrepreneurial”. The course aims to provide an entrepreneurial foundation in business

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leadership and an appreciation of the role that businesses –large and small- play in the economy

and within society at large.

Course Description

This course helps students gain an understanding of the business entrepreneurial principles

necessary to start and operate a business. The students will develop an awareness of the

opportunities for small business ownership and develop the planning skills needed to open a new

successful business. Students will explore the traits and characteristics of successful

entrepreneurs. Students will gain an awareness of knowledge and strategies of business

management and the role of the entrepreneur in business venture creation and development. This

Entrepreneurship course is designed for students enrolled for MBA so that they have an interest

in developing the skills, attitudes, and knowledge necessary for successful entrepreneurship. As a

result the course interns to integrate relevant issues that culminate into the concept of

entrepreneurial spirit in business venture creation, business innovation and SMEs development.

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CHAPTER 1

The concept Entrepreneurship

Prescribed sources:

Objectives

When you have studied this chapter you should be able to:

 define the concepts “entrepreneur” and “entrepreneurship”.

 explain the traits of an entrepreneur.

 list and discuss the characteristics of an entrepreneur.

 describe and explain the meaning of “entrepreneurial spirit”.

Observe :

You may have come across the words entrepreneur and entrepreneurship in everyday talk. The

words are so frequently used that it is assumed that their meanings are clearly understood. The

concept that you may have developed is in some way true. You however need to prepare yourself

to understand the concepts more aptly and in a more diverse manner. You will need to acquaint

yourself with the different views and extents to which the concepts apply. You will probably

realize that your understanding of the words was very narrow and too generalized. As a student

of entrepreneurship you need to have a clear conception of the meanings and to develop a deeper

construction of the sense of entrepreneurship. You will also realize that there may not be a clear-

cut and easy, all-embracive definitions of the words.

History

It is important to note that the entrepreneur is the driving force in microeconomics. While the

study of Entrepreneurship would seem to be a recent thrust in modern economics it actually dates

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back to the work of Richard Cantillon and Adam Smith in the late 17th and early 18th centuries.

For many years the study of Entrepreneurship has been largely ignored theoretically up until the

late 19th and early 20th centuries and empirically until the last forty years with the dawn of

profound resurgence in business and economics.

In the 20th century, the development of the study of entrepreneurship owes much to the work of

economist Joseph Schumpeter in the 1940s and other Austrian economists such as Carl Menger,

Ludwig von Mises and Friedrich von Hayek. According to Schumpeter, an entrepreneur is a

unique person who is raring and able to transform a rare and novel idea or invention into a

successful business enterprise. Entrepreneurship entails what Schumpeter called "the gale of

creative destruction" to replace in whole or in part inferior innovations across markets and

industries, simultaneously creating new products including new business models. In this way,

creative destruction is largely responsible for the dynamism of industries and long-run economic

growth. An alternate, description posited by Israel Kirzner suggests that the majority of

innovations may be much more incremental improvements such as the replacement of paper with

plastic in the construction of a drinking straw.

For Schumpeter, entrepreneurship resulted in new industries but also in new combinations of

currently existing inputs. Schumpeter's explanation and example of this was the combination of a

steam engine and then current wagon making technologies to produce the horseless carriage. In

this case the innovation, the car, was transformational but did not require the development of a

new technology, merely the application of existing technologies in a novel manner. It did not

immediately replace the horse-drawn carriage especially in Africa, but in time, incremental

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improvements tend to reduce the cost and improve the technology which will ultimately lead to

the complete practical replacement of beast drawn vehicles in modern transportation.

Different scholars have described entrepreneurs as, among other things, baring risk. For

Schumpeter, the entrepreneur did not bare risk: the capitalist did. For Frank H. Knight (1921)

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 (ibid) 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 entrepreneur is observed as an actor associated with true uncertainty, particularly when it

involves bringing something really novel to the world, whose market never exists. For many

reasons the entrepreneur is widely regarded as an integral player in today’s business world. Both

the developed world and the developing world view the entrepreneur as the engine for job

creation, poverty alleviation and economic growth. Promotion of entrepreneurship has become

the song in many economies. Given entrepreneurship's potential to support economic growth, it

is the policy goal of many governments to develop a culture of entrepreneurial thinking. This can

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be done in a number of ways: by integrating entrepreneurship into education systems, legislating

to encourage risk-taking, and national campaigns. In Zimbabwe, for instance, efforts by

government have been significant as shall be discussed in the subsequent chapters.

Defining the concept “entrepreneur”.

Various definitions have been listed below for you to study. You are also expected to source

your own from any text books accessible to you.

 Hisrich and Peters (2001)

The entrepreneur is someone creating something new with value by devoting time and

effort assuming their risks and receiving their accompanying rewards of monetary and

personal satisfaction and independence.

 Schumpeter J.A. (1984) “Everyone is an entrepreneur only when he carries out new

combinations (innovations) and loses that character as soon as he has built up his

business”. He believed that entrepreneurs do not only satisfy their personal needs. He

identifies the following possessions:

o Dream and will to found a private kingdom in order to achieve social distinction.

o The will to conquer, to fight, to prove one superior to others, to succeed for the

sake of success itself and not the fruits of success.

o The joy of creation, of getting things done, to exercise energy, to change for the

joy of changing.

 J. B. Say (1821) says “Entrepreneurs play a co-coordinating role” the entrepreneur

estimates needs and above all the means to satisfy them. So the entrepreneur plays a

pivotal role in the production, distribution of essential services.”

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 So the entrepreneur requires a combination of qualities / attributes e.g. judgement,

perseverance and the knowledge of the world of business. He must possess the art of

superitence and administration. Say identifies areas where entrepreneurs can excel as

based on three agents of production.

a) Land and other agents that contribute to it; minerals, water, gases, soil etc

b) Capital in order to exploit the land

c) Human industry i.e. innovators, scientists inventors, developers, change agents,

discoverers etc.

The entrepreneur is the necessary component as he is the driving force, the implementer

who applies the invention and directs execution.

Say observed the key qualities of an entrepreneur as:

 Judgement

 Uncertainty

 Use of knowledge

 Perseverance

 Cantillion, R (1755)

He was the first person to use the term entrepreneur. He asserted that there were 3 stages

for any economy to function

1) Land Owners / Capitalists – he classified these as consumers of luxury(wealthy,

power, prestige)

2) Entrepreneurs – he called these arbitrages i.e. people who take a gamble

3) Hirelings – people who get things done i.e. wage workers (too happy to earn a wage)

or consumers of necessity.

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 He detects three characteristics of an entrepreneur:

o Opportunity detector – should be able to identify opportunity

o Moderate risk taker – should be able to take moderate risk

o Coordinator role.

A general definition of the word entrepreneur would be: Entrepreneurs are initiators who

detect opportunities, seize them and take moderate risk to combine the factors of

production to increase production and profitability.

These individuals are driven by desires to reach higher levels of performance.

Mclleland (1917) is well known for motivational theories. He states that the people are driven by

3 motivational factors:

i. Need for achievement (drive for success to do things better.)

ii. Need for power (desire to control / influence others).

iii. Need for affiliation (desire to maintain association / warm relations)

Defining the concept “entrepreneurship”.

Entrepreneurship is the act of being an entrepreneur. The word entrepreneur is a French word

which means "one who undertakes an endeavour". Entrepreneurs mobilise resources including

innovations, finance and business acumen with the aim to transform innovations into economic

goods. Entrepreneurship thus is a process that culminates into the formation of new organizations

or the transformation of existing organizations into new-look and revitalized firms in response to

an exploited opportunity. One of the most apparent forms of entrepreneurship is that of starting

new businesses. The concept entrepreneurship however is wider than just starting a new business

venture. The term includes entrepreneurial issues of business creativity, innovation and change.

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Entrepreneurial activities within a firm or large organization is referred to as intra-preneurship

and may include corporate venturing, when large corporations spin-off organizations.

 Mcllelland’s (1917) definition

Entrepreneurship is when a person exercises control over production that is not just for

personal consumption. According to this definition an executive in a steel producing unit in

the USSR is an entrepreneur

 Neiman et-al (2005)

Entrepreneurship is the emergence and growth of new businesses. It is also a process that

causes changes in the economic system though innovations of individuals who respond to

opportunities in the market place. In the process, entrepreneurs create value for themselves

and for society.

 Watson (2001)

“The distinction factors of entrepreneurs are most strongly innovation, then the opportunity

recognition and growth in business”

 O’Sullivan and Sheffrin (2001)

Entrepreneurship is when an ambitious leader combines the factors of production to create

and market new goods and services. The factors of production are land, labour and capital. If

land, labour and capital are the essential ingredients for creating all goods and services, the

entrepreneur is that one who pulls these resources together. They are the individuals who

take risks to develop original ideas, start business, create new industries and fuel economic

growth.

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There is need for you to understand what factors of production are so as to understand

how the entrepreneur as one of the factors, is the driving force and coordinator of the other

factors in creating wealth and profitability.

Land:

Economists use the term ‘land’ to refer to all natural resources used to produce goods and

services. Natural resources are material found in nature. They include fertile land and

products that are in or on the land such as minerals, water, forests, and gases.

Labour:

This is the effort that a person devotes to a task for which that person is paid. It includes the

medical aid provided by the doctor or the tightening of a screw or even an artist’s creation of

a painting or the repair of a television set.

Capital:

This is any human made resource that is used to produce other goods and services. There are

two categories of capital i.e. physical and human capital.

a) Human Capital – this is the knowledge and skills a worker gains through education and

experience

b) Physical Capital – these are human made objects used to create other goods and services.

These are also called capital goods. Physical capital includes buildings, machinery, tools

and any form of equipment that belong to an organization.

 Timmons (2004)

“Entrepreneurship is the process of creating or seizing opportunities or pursuing them

regardless of the resources currently held.”

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 “ Entrepreneurship is a way of thinking reasoning and acting that is opportunity

obsessed, holistic in approach and leadership balanced. Who can be an entrepreneur you

ask ? – anyone who wants to experience the deep dark of canyons of uncertainty and

ambiguity and one who wants to walk the breath-taking highlands of success.” /

The traits of an entrepreneur.

Traits are behavioural dispositions that characterize certain types of people. Those that depict

the character of an entrepreneur tell us what exactly makes a person a successful

entrepreneur.

 Traits e.g.

a) The ability to see a business opportunity where others do not.

b) They recognize an existing or potential demand for which there is no supply

c) They possess a willingness to take risks.

d) They possess an ability to learn from the mistakes that they make or errors

other people make.

e) They are obsessed by a strong vision.

f) They have a strong ability to create novel things.

g) They have an ability to fantasize and as a result they have an ability to see

beyond the ordinary.

h) They persevere and are dedicated to their vision as a result they are consistent

and determined to soldier on.

i) They have a strong ability to plan and re-plan.

Possession and willingness to exploit entrepreneurial traits is often referred to as

entrepreneurial spirit.

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It takes a certain type of personality to start up a business. Entrepreneurs who start up successful

businesses exhibit the following entrepreneurial personality traits:

a) They are strongly committed to their goals

b) They maintain flexibility as they face new challenges

c) They value achievement over money

d) They look toward the future rather than the past

e) They are upbeat and optimistic

f) They have high energy levels

g) They have desire to reach their full potentials

h) They believe in themselves

i) They are willing to take risks

j) They seek out responsibility i.e. they are accountability

The characteristics of an entrepreneur.

Themba et al define an entrepreneur as one who has the following characteristics:

- Initiative

- Self confidence

- Risk propensity

- Individuality

- Innovativeness (ability to change)

- Creativity and creativeness (creativity = ability to create; creativeness = propensity to

create).

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What makes an entrepreneur?

There are physiological and sociological factors that contribute to the personality of an

entrepreneur.

Psychological Factors

Entrepreneurs are complex and therefore their behavior cannot be easily determined.

Psychologists have ultimately identified 5 dimensions

a) Need achievement

b) Locus of control: things do not happen by chance but by ability, propensity). This the

idea that individuals and not luck or fate control their lives

c) Tolerance for risks: entrepreneurs are willing to take risks moderate risk.

Entrepreneurs who take moderate risk are bound to earn higher returns than those

who do not take risks

d) Tolerance for ambiguity: to some extent every manager needs this because many

decisions have to be made with incomplete or unclear information.

- Entrepreneurs face ambiguity since they will be doing some things for the first time

e) Type A behavior

This refers to the drive to get more done in less time even despite the objection of

others.

Sociological Factors

People are driven into entrepreneurship by circumstances in which they live. They can be driven

by:

i. Discrimination by gender, race.

ii. Frustration

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iii. Cultural issues

iv. Affiliation

v. Deprivation

vi. Social and economic statuses

The Importance of Entrepreneurship

Start-up

A start up is a business founded by individuals intending to change the environment of a

given industry by the introduction of either a new product or a new production process.

1. The basic concept of entrepreneurship is based on new ventures and the attention is on

creating newer smaller firms. The concept also includes organizing new productive

resources to expand supply. The idea also includes the supply of goods and services

rather than managing demand.

2. The benefits of entrepreneurship

Entrepreneurship has at least four social benefits:

 It fosters economic growth

 It increases productivity- lesser production costs vs more quality and quantity.

 It creates new technologies, products and services

 It changes and rejuvenates market complexion

Economic growth

- Employment creation

- Competition – better pricing-high production levels and high quality goods.

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 Productivity

This is the ability to produce more goods and services with lesser labour and other inputs.

Higher productivity is chiefly a matter of improving production techniques and this is an

entrepreneurial role.

New technologies and products

The relationship between entrepreneurship and change is the role that entrepreneurs play in

promoting innovative technologies, products and services. Sometimes one entrepreneurial

innovation gives rise to many others.

Market place change

 Entrepreneurs stir up the waters of competition in the market- place.

 Entrepreneurs change the levels and standards in the market – place.

Barriers to Entrepreneurship:

Entrepreneurship is faced with challenges that may be social, cultural, psychological or political.

These challenges become barriers to the development of entrepreneurship in developing

countries. Some issues have been listed for you below. Try and find other barriers of your own:

a) Religious problems – some religious beliefs reduce propensity to start a business Tombs,

DCK not operating on Saturday religious barrier.

b) Cultural problems – there are so many beliefs about evil associated with business people

c) Gender problems – this could also be culture based: strange beliefs and labeling of

business women is rife in developing societies.

d) Political factors e.g. colonialism. The colonial education produced worker mentality and

stifled independent thought. It was more prescriptive than creativity based.

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e) Social factors – people normally attribute business sources to gods and spirits. Sometimes

business people are given bad names.

f) Economic factors- the economy is the heart of every business. If the economy is not

strong or stable it is very difficult to start a business. For business to survive they need

markets and markets need money to turn interest into effective demand, so a bad

economy stifles entrepreneurship.

g) Legal factors – sometimes legal factors present restrictive laws ranging from those that

control people’s movement to those that control what they say or do. This affects people

in a number of ways because there is generally too much control of people’s actions

including interferences in business operations. There can be exorbitant taxes that stifle a

budding entrepreneur

h) Technological factors – in developing countries goods produced are inferior and local

producers are outcompeted. This is due to poor technological equipment or resources.

i) Infrastructural factors - most developing countries have poor infrastructure e.g. poor road

and communication infrastructure, poor transport networks, poor and lack of buildings:

poor telecoms and power distribution.

j) Illiteracy – illiteracy is prevalent in developing countries. Most people cannot do business

plans. People fail to focus and to strategically plan. Many people cannot access

information because of illiteracy; so illiteracy plays havoc on entrepreneurial

development

k) High risk aversion – many people try to avert high risk because once the venture fails

some people never rise again. There are many people who are afraid of failure.

l) Low self confidence – one needs high confidence in order to be successful.

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 m) Low independence – people who are low in independence fail to develop. Many people

are afraid to question those in authority and would rather keep quiet than challenge the

status quo.

The Paradoxes of Entrepreneurship

1. An opportunity with no or very little potential can be an enormously big opportunity.

2. In order to make money, you have first to lose money. Investors should not look for a

quick return. Good business takes long to realize profit. Investors do not take dividends

too soon.

3. In order to succeed one must first experience failure. It is normal for the 1st venture to fail

when you fail don’t give up.

4. Entrepreneurship requires considerable thought, preparation and planning yet it is

basically an unplannable event. ( based on uncertainty) We are living in a dynamic

environment with shifting goal posts making planning difficult. Planning without having

all the facts is difficult. You can’t however do business without planning. Your plan is

your compass. It will help you to see your focus.

5. In order for credibility and innovation to prosper, vigor and discipline must accompany

the process.

6. Entrepreneurship entails a bias towards action, a sense of urgency, also demands patience

and perseverance. Opportunity is like a wall crack, opportunity is like a window, one

should seize the opportunity while the window is still opening. When it is open everyone

will see the opportunity. One needs speed because opportunities are not in perpetuity.

7. The greater the organization’s orderliness, discipline and control, the lesser you will

control your ultimate destiny. Everything should be in its place but entrepreneurship is

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 about flexibility and nimbleness. (Finding your way through). You need to keep on

strategies and tactics; one has to apply on bended knees. Discipline and orderliness are an

impediment to entrepreneurship. “If I am in total control I know that I am too slow”,

Mario Andretti.

8. In order to realize long term equity value you have to forgo the temptation for short term

profitability. As business we need to invest in:

 New people

 New products

 New initiatives

 New services

 Support systems

9. An opportunity with no or very little potential can be an enormously big opportunity.

10. In order to make money, you have first to lose money. Investors should not look for a

quick return. Good business takes long to realize profit. Investors do not take dividends

too soon.

11. In order to succeed one must first experience failure. It is normal for the 1st venture to fail

when you fail don’t give up.

12. Entrepreneurship requires considerable thought, preparation and planning yet it is

basically an unplannable event. We are living in a dynamic environment with shifting

goal posts making planning difficult. Planning without having all the facts is difficult.

You can’t however do business without planning. Your plan is your compass. It will help

you to see your focus.

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13. In order for credibility and innovation to prosper, vigor and discipline must accompany

the process.

14. Entrepreneurship entails a bias towards action, a sense of urgency, also demands patience

and perseverance. Opportunity is like a wall crack, opportunity is like a window, one

should seize the opportunity while the window is still opening. When it is open everyone

will see the opportunity. One needs speed because opportunities are not in perpetuity.

15. The greater the organization’s orderliness, discipline and control, the lesser you will

control your ultimate destiny. Everything should be in its place but entrepreneurship is

about flexibility and nimbleness. (Finding your way through). You need to keep on

strategies and tactics; one has to apply on bended knees. Discipline and orderliness are an

impediment to entrepreneurship. “If I am in total control I know that I am too slow”,

Mario Andretti.

16. In order to realize long term equity value you have to forgo the temptation for short term

profitability. As business we need to invest in

TEST YOURSELF

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Question 1

Entrepreneurs are described as ambitious leaders who combine factors of production to create

new goods and services. What are the factors of production and how can entrepreneurs use

these to raise productivity?

There are 4 factors of production

1. Land-all resources

2. Labor-work

3. Capital-physical and human

4. Entrepreneur drives all other factors of production to produce goods and services.

Brings creativity, technology, new ideas, new goods and services, dreams, innovation.

Question 2

Read the following case study and attempt the questions at the end of the case.

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WHAT MAKES ENTREPRENEURS?

Entrepreneurs come in all shapes and sizes. Some have become very wealthy and well

known, such as Andrew Carnegie who built a successful steel company in the 1800s, and

Mary Kay Ash who founded Mary Kay Cosmetics. Most entrepreneurs, however, are

involved in smaller ventures, but all entrepreneurs have many things in common.

Entrepreneurs have the ability to see a business opportunity where others do not. In other

words, they recognize an existing or potential demand for which there is no supply. Most of

all, entrepreneurs possess a willingness to take risks and an ability to learn from the mistakes

that they make.

A classic story of entrepreneurial success is that of Charles Darrow. In 1933 Darrow found

himself out of work. To support his family he took whatever odd jobs he could find but he

had a brilliant business idea. He wanted to create a compelling board game in which people

could live the fantasy of acquiring land, houses and hotels which they could sell or rent to

fellow players. He named the real estate featured on the game after places in cities. He called

the game “Monopoly”.

Although many people told him he was wasting time, Darrow spent months developing

Monopoly. He then took his game to Parker Brothers, a leading board game company, which

rejected the game because it found 52 flaws in it. Undaunted, Darrow corrected every one of

the flaws. Then with the help of a friend who was a printer, he produced several Monopoly

sets which he tried to sell to local stores.

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 Finally after weeks of pounding the streets and pavements, a Philadelphia department store

agreed to buy 5 000 of the Monopoly sets. The store sold all of the games so quickly that

Parker Brothers reconsidered and agreed to produce the game. Within a year, more than

800,000 sets were sold, and soon Charles Darrow became a millionaire. Since that time,

some 100 million sets of monopoly have been sold worldwide.

Try and answer the following questions.

(a) What entrepreneurial traits did Darrow use to make Monopoly a success?

Determination, creativity, ability to learn from mistakes, perseverance, high levels of

energy, risk taking, believed in himself, intuition, achievement oriented, opportunity

detector, optimistic, locus of control, working in a state of uncertainty.

(b) Which of Mclleland’s motivational factors drove Darrow? Support your choice.

Achievement.

(c) For Darrow what were the draw-backs and benefits of being an entrepreneur?

Social status, looking after his family, economic growth improved.

(d) From your reading of the case, what shows that Darrow believed in himself?

Assignment 1: Individual

Interview: An interview with a local entrepreneur. Identify an “Entrepreneur” in your area. Find

out everything about them e.g. trials and tribulations of local entrepreneurs. Find out what they

need to grow and whether their expectations are entrepreneurial. Write a report evaluating

whether they are entrepreneurial or not.

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Assignment 2: Individual

(e) Entrepreneurs are described as ambitious leaders who combine the three factors of

production to create new goods and services. What are the factors of production and how

can Entrepreneurs use these to raise productivity in their organizations. Define factors of

production, productivity and entrepreneur 6-12 pages.

Chapter 2
ENTREPRENEURSHIP AND NEW VENTURE CREATION
Objectives
When you have studied this chapter you should be able to:

 Define what new venture creation is, what a business opportunity is, consider how

everyone has the potential to be entrepreneurial, and to explore the constituents of the

entrepreneurial process.

 Identify steps required to research the potential for an innovative idea for the development

of an existing enterprise, a new venture or an entrepreneurial opportunity.

 Examine the key resources required to exploit an innovative idea or opportunity to

develop an existing business or launch a new venture.

 Identify the key steps required for exploiting an innovative idea or opportunity to develop

an existing business, launch a new venture, or initiate a social enterprise.

 Identify types of businesses and articulate their advantages and disadvantages.

 Produce a business plan

2.1. Introduction

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Society is abound with rapid changes in technology, changes in political structures and alterations in

lifestyles which are constantly creating new products, new markets and many more opportunities for

socio-economic venturing and new venture creation than ever before. Even in established, or more-so in

seemingly successful businesses too, there is need to maintain the entrepreneurial effort that

characterizes early business creation. Even within society there is increasing and continuous pressure for

reform and change emanating from the continuously changing socio-cultural terrain, to address the

ways in which those communities do business. Entrepreneurship answers to each of these

constituencies, the new venture creator, those employed within more mature enterprises that need to

maintain their entrepreneurial drive and those change agents active in community development and

social change. It is important for you as a student to be effective in the increasingly competitive

employment market to understand the concept of new venture creation as a first step towards

developing entrepreneurial attitudes. This module seeks to build your awareness of entrepreneurship

and provide you with a framework for assessing the viability of any innovative project or new venture or

the development of an existing one. It aims to give you insights to the nature of business ventures, the

problems and issues associated with establishing and managing the development of a new or existing

venture and the need for a business plan for that venture. The issues covered in this chapter will give

you an opportunity to audit your own personal entrepreneurial potential.

Creating a new venture is a challenging task, one that requires specific domain knowledge as well as

general business and entrepreneurial skills. This course utilizes the knowledge and skills gained from the

MBA entrepreneurship course; it provides hands-on experience in the creation and development of a

growth-oriented new venture. Students in teams take a task approach to the preparation and

presentation of a professional business plan. In the process, the course focuses on developing skills

conducive to venture success including organizing, planning, integrating, and creativity.

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2.2. A Business Opportunity

Entrepreneurs have been described as initiators who detect opportunities, seize them and take

moderate risk to combine the factors of production to increase production and profitability. They

see a window of opportunity as it begins to open and seize the opportunity before other people

can see it.

A business opportunity (or bizopp) involves the opportunity for sale or lease of any product, service,

equipment, or anything marketable that will enable an entrepreneur to begin a business. Opportunities

can be realized in several ways. The most popular one is through opening a new organization (e.g.

starting a new business). Another approach is to promote innovation or introduce new products or

services or markets in existing firms. This approach is called corporate entrepreneurship or

entrepreneurship, and was made popular by author Gifford Pinchot in his book of the same name. A

recent approach involves creating charitable organizations (or portions of existing charities) which are

designed to be self-supporting in addition to doing their good works. This is usually called social

entrepreneurship or social venturing. Even a version of public sector entrepreneurship has come into

being in governments, with an increased focus on innovation and customer service.

A business opportunity consists of four integrated elements all of which are to be present within the

same timeframe (window of opportunity) and most often within the same domain or geographical

location, before it can be claimed as a business opportunity.

These four elements are:

 A need

 The means to fulfill the need

 A method to apply the means to fulfill the need and;

 A method to benefit

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With any one of the elements missing, a business opportunity may be developed, by finding the missing

element. The more unique the combination of the elements, the more unique the business opportunity

will be. The more control an institution (or individual) has over the elements, the better they are

positioned to exploit the opportunity and become a niche market leader.

Sources of Opportunities

Opportunities rarely come from the obvious because those can be observed by all. Most successful

opportunities come from innovation and creativity. Drucker observes the following as important sources

of innovative opportunity and observes that the entrepreneur is on the look-out for:

 ‘The unexpected’: an unexpected success, failure, or event.

 Incongruities: between things as they ought or are said to be – and how they actually are;

 Problems with an existing process for which no one has provided a solution;

 Changes in how an industry or market operates that takes everyone by surprise;

 Demographic (population) changes; and

 Changes in ‘perception, mood or meaning’.

2.3. Opportunity Identification, Idea Generation and Evaluation

When a need arises an opportunity can be detected and an idea arises to start a business venture. One

needs to be creative in order to come up with a unique idea that presents a unique business idea. The

creative Process Model best explains how an idea can be muted, prepared, developed and verified

before a viable venture can be undertaken.

The creative Process Model

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The idea may arise from an opportunity for the need to expand a business, a need to diversify, a

turnaround or a completely new venture.

Idea Germination –(synthesizing an idea)

This is whereby an idea comes to mind after an opportunity has been realized. One prepares the idea in

terms of its workability, visibility and possible successes.

Idea Preparation

At this stage the creator seeks information about the idea. He finds out through various means more

about the idea. He can make a research to collect viable information. The creator may do a situational

analysis of the external environment.

Idea Incubation

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This is the stage where the creator is most focused. All the necessary plans are in place. (Targets,

systems and processes are now clear). The idea is visible; it has shape and can be determined.

Idea Verification

At this stage, evaluation is taken to ensure that the idea is workable. What are the advantages? What

are the limitations? Is it feasible? What are the issues of risk? What are the sacrifices?

The difference between an Entrepreneur Venture and a small business

It should be noted early that while entrepreneurs start new businesses not all small businesses are

entrepreneurial or represent entrepreneurship. It should be noted that initially new ventures and small

businesses have a lot in common. There is need for both because both serve an economic function

although they play different economic functions. Both pursue and create new opportunities. They start

from the same setup and usually start up small. The sole proprietor who opens another take away shop

or restaurant does take a risk but is not necessarily entrepreneurial. All what the proprietor has done

has been done many times before. What the proprietor has done is to take advantage of the increase in

the popularity of takeaway foods in a specific area. The sole proprietor does not create any new

satisfaction or novel consumer demand and therefore cannot be seen as an entrepreneur although it is a

new venture.

To be entrepreneurial the venture has to have special characteristics over and above being small and

new. Entrepreneurs create something new, something different, they change visions and expectations,

they bring to the market new satisfactions through new products and services and establish new

consumer demands. Further an enterprise does not need to be small and new to be an entrepreneur.

McDonald’s for example was once a simple restaurant but has over the years created new customer

expectations and satisfaction by providing a differentiated product, new product processes and has

significant growth propensity. Overall, looking at the size of McDonald’s, it is the first of its kind in the

fast food industry to reach such a high level and are still expanding throughout the world.

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Small Businesses tend to stabilize after start up, they however do not have growth. They are usually

owner managed and their principal objective is furthering personal growth to ensure personal security.

Carland (2000) observes, “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 business are not necessarily interested in growth as a strategy. They see themselves as

successful when they are profitable. Autonomy and security are the only primary objectives of small

businesses.

What distinguish small business from entrepreneurship?

 Innovation
Entrepreneurial ventures thrive on innovation e.g. new products, new ways of producing,
offering a service, new marketing and distribution strategies, new organizational structuring and
new technological changes.

 Potential growth
An entrepreneurial venture has great potential for growth. It creates its own markets. While
small businesses are unique in their locality they thrive only due to geographical position.

 Strategic Objectives
Entrepreneurial ventures set strategic goals with regard to market targets, market share, and
market position. A small business does not consider these strategic goals they target sales and
profits. They do not bring about significant change in an economy, small business tend to
pursue established products.

2.4. Resources

Once one has verified the viability of the new venture or idea one needs to determine the resources one

needs for start up of the venture. It is a given fact that resources are critical for starting a business.

Without resources a business cannot function or even be started. The entrepreneur has to plan how to

have those resources in place. It becomes necessary to mobilize resources for starting a business. The

entrepreneur thus, needs to determine which resources would be necessary and where to source them.

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In a business one needs monetary and non monetary resources. It becomes paramount to identify which

resources would be critical, which are readily available? However people put more emphasis on

monetary rather than non monetary resources. One however does not need to buy as it were all the non

monetary resources. Non monetary resources play a stronger role in the establishment of a business.

The most important issue is to identify the financial needs for starting a business:

 How much cash?

 When should the cash be needed?

 Where to raise the cash?

Resources can be internal or external.

Chief among these are: people who include the management team, employees, lawyers, consultants,

investors, customers, financial resources and assets like plant and equipment.

You do not only need resources but the ability to use the resources. There are people who describe the

idea of business as a post office box to which people send money. Business is about using the minimum

possible at all stages to keep the business running. Investments into the business are a gradual process.

Trying to source all resources is risking the young business. Entrepreneur can use other people’s

resources to reduce risk.

How to use other people’s resources?

There are many ways of using other people’s resources and the following are examples of ways one can

exploit available sources of resources:

 money invested or loaned by friends

 loans from relatives

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  loans and investments from business associates

 look at other investors

 resources can also include people, check on people who can assist you at minimal or no cost.

 use of other people’s space, transport, facilities, etc.

 use of other people’s equipment, machinery, tools, plants, etc.

 using other people’s materials; loaned materials, advanced inputs, etc.

 using suppliers; negotiating with suppliers for short term debt, etc.

 pre-selling.

 using free books and pamphlets.

Resources and Networking

 It is important to network with friends, family, classmates and advisors. Stevenson and Sahlman

say that the relationships should have that human touch that enhances the relationship

between the entrepreneur and the advisors to the venture.

 Dubini P contributed to the body of knowledge on social assets and how they benefit the

bottom line of ventures:

o They say that the effective entrepreneurs are more likely than others to systematically

plan and monitor network activities.

o Effective entrepreneurs are able to chat their present network and discriminate

productive and symbolic ties.

o Effective entrepreneur are able to view effective networks as crucial aspects for

ensuring the success of their companies.

o Effective entrepreneurs are able to stabilize and maintain networks in order to increase

their effectiveness and efficiency.

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 o Effective entrepreneurs are more likely than others to undertake actions towards

increasing their networking density and diversity.

 They set time for purely random activities.

 Are able to check network density so as to avoid too many overlaps

 Multiply through extending reachability of their networks. The stimuli for better and faster

adaptation to change

2.5. Growing a new Business

2.5.1. Types of Business Ventures

When beginning a business, one must decide what type of business entity to establish. The form of

business determines which route to take and each follows unique business procedures and business

structures and operations. The most common forms of business are the sole proprietorships,

partnerships, corporations, and business franchises. It is important for you as a student of

Entrepreneurship to have an understanding of the nature or each of these forms of business.

2.5.1.1. Sole Proprietorships (SPs)

An SP is a business owned and managed by a single individual. That person earns all of the firm’s profits

and is also responsible for all of the firm’s debts. This type of firm is by far the most popular in

organization in the whole world. It is alleged that about 75% of all business organizations in USA are SPs

but these are always small – in the USA they generate only 6% of all USA sales.

Advantages of Sole Proprietorship

 Many of the advantages are to the owner and SPs are simple to establish. The following are the

advantages:

 Ease of start up

 This is the main advantage of SPs, with just a small amount of startup cash anyone can start up a

business venture.

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  To start up a new business any SP must meet a small number of government requirements

which can vary from time to time / country to country. The following are the minimum

requirements:

 Authorization: SPs must obtain a business license sometimes they are asked to obtain a health

certificate.

 A site permit: if not operating out of the home, an SP must obtain a certificate of Occupancy to

use another building for business.

 A name: if not using his or her own name as the name of business. An SP must register a

business name.

 This paperwork often takes only a few days to complete. The only difficult part of starting a new

business may be just coming up with a good business idea.

 A few regulations

 A sole proprietorship is the least regulated form of business organization.

 Business is subject to some regulation, especially industry specific regulations e.g. health codes,

regulations for dangerous chemicals, zoning laws (cities and towns designate separate areas for

residential use and for business.

Sometimes these regulations prohibit SPs from operating from their homes. Otherwise these small

businesses face few legal requirements.

Sole receiver of profits

 One major advantage of SPs is that the owner keeps all profits after paying taxes. The potential

for profits motivates many people to start their own businesses. If the business succeeds the

owner does not have to share the achievements with anyone else.

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Full Control

 Another advantage of SPs is that they can run their business as they wish. This means they can

respond quickly to changes in the market place. Such a degree of freedom appeals to

entrepreneurs. Fast, flexible decision making allows SPs to take full advantage of sudden

opportunities.

 Easy to discontinue

 If SPs decide to stop operations and do something else for a living, they can do so easily.

However they have to pay their debts and other obligations like taxes but they do not have to

meet legal obligations. This advantage allows them to switch over to new opportunities without

restrictions.

Disadvantages of Sole Proprietorships

 As with everything else, there are tradeoffs with SPs. The independence of SPs comes with a

high degree of responsibility;

 Unlimited personal liability

 The biggest disadvantage of SPs is their liability as they have the legal bound obligation to pay

debts. SPs are fully and personally responsible for all their business debts i.e. if the business

fails, the SP may have to sell his personal property to up his debts.

 Limited access to resources

 Many small business owners use all their available savings and personal resources to start up

their businesses. This makes it difficult or impossible for them to expand quickly. They need

physical capital and human capital to start up a business. Further, an SP may lack the necessary

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 skills to run a business successfully. All individuals have strengths and weaknesses and so some

aspects of the business may suffer due to these weaknesses and limited skills and abilities.

 Lack of permanency

 An SP has a limited life span. If the owner dies or closes shop due to retirement, ill health,

reduction in interest etc, the business may cease to exist.

 SPs have trouble finding and keeping good employees, they cannot offer the security and

advancement opportunities for employees. Lack of fringe benefits reduces the sense of

permanence in employees. SPs offer little in the way of fringe benefits such as paid vacation,

retirement pay, health insurance, funeral allowances etc, Normally SPs employ those who

cannot find jobs anywhere else.

2.5.1.2. Partnerships

This is a business organization owned by two or more people who agree on a specific division of

responsibilities and profits. There are three categories of partnerships:

 General Partnerships

 Limited Partnership

 Limited liability Partnership

General Partnerships share equally both responsibilities and liability

Limited Partnerships are where one partner is required to be a general partner i.e. only one partner has

unlimited personal liability for the firm’s actions, the other partners only contribute money to the

organization and do not actively manage the business.

Limited liability Partnerships also called LLP functions like a general partnership except that all partners

are limited from personal liability in certain situations e.g. another partner’s mistakes.

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Advantages of Partnerships

 Ease of start up. Partnerships are also easy to start up as they are subject to few regulations (the

law does not require a written partnership agreement)

 Shared decision making and specialization. The more the partners the wider the sphere of

consultation and the more the ideas to choose from.

 Larger pool of capital is available as each partner’s assets and recourses can be exploited to the

organisation’s advantage.

 Taxation – Partnerships are not subject to any special taxes.

Disadvantages

 Unlimited liability.

 A potential for conflict is present as conflicting ideas are likely to brew.

2.5.1.3. Corporations

A corporation is a legal organisation or entity, owned by individual stockholders each of whom holds

limited liability for the company’s debts. Stockholders own shares also called stock representing their

degree of ownership in the corporation. Each one of the stockholders is a part owner of the firm. Unlike

sole proprietorships, corporations have an identity beyond that of the owner. They are a legal entity

with a legal identity separate from its shareholders. Large chain supermarkets, large retail chains, large

machinery manufacturers and insurance companies are good examples of corporations. There are two

major types of corporations. These are closely held companies also called privately held corporations

and the publicly held corporations. In the former stock is issued to a few people mostly family members

who do not always sell their stock but pass it on within the family. In the latter there are many

stockholders who can buy and sell shares on the open markets called Stock Exchange. The corporation’s

owners elect a board of directors who make all major decisions of the corporation. The board appoints

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corporate officers who run the firm and oversee production. These in turn hire managers and employees

who work in the various departments of the corporation.

Advantages of corporations

The advantages of incorporation are:

 Entrepreneurs gain the advantage of limited liability.

 Transferable ownership. Stockholders can transfer ownership by selling stock to other people.

 Stability and longevity. Corporations can live long. They can do business indefinitely.

 Strength in attracting capital. Corporations can raise money by borrowing it through selling

bonds.

Disadvantages of Corporations.

Corporations have their own disadvantages:

 Corporate charters can be difficult, expensive and time consuming for start up.

 There is loss of control by the owners of the firm.

 There are many legal regulations and legal requirements.

 Double taxation. Corporations pay taxes on their income and also pay taxes on the dividends

paid to the stockholders. This double taxation usually keeps firms from incorporating.

Corporations sometimes merge or combine with other corporations. Mergers can either be horizontal

(merging with one or more firms competing in the same market with the same good or service) or

vertical mergers (merging with one or more firms involved in different stages of producing the same

good or service). When a corporation buys companies that produce completely different or unrelated

goods or services, these combinations are called conglomerates. These have more than three businesses

that make unrelated products.

2.5.1.4. Business Franchises

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A business franchise is a semi-autonomous business that pays fees to an original firm for the right to sell

their established product or service in a given area. The franchiser is the parent firm which will have

developed the products or services and the business systems. The parent company then works together

with the franchise owners to produce the good or service and to sell the product.

The advantages of franchises.

The following are advantages of franchises:

 Standardised processes. Quality is assured as production processes are regularized and quality

controlled.

 Franchise owners are assisted in:

o Training and support. Management and employee training is done by the parent firm.

o Financial assistance is at times given for start up capital.

o Parent firms may pass on bulk material buying advantages to franchise owners.

o Advertising may be done centrally.

Disadvantages of Franchises.

The following may be disadvantageous to entrepreneurial development:

 Too prescriptive and strict operating standards.

 Limited product line.

 High fees and royalties.

 Purchasing restrictions.

2.6. A Business plan

A Business plan is a formal document that proffers a statement of a set of business goals, the

reasons why they are believed attainable, and the plan for reaching those goals. The document

also contains background information about the organization or team attempting to reach those

40
goals. A business plan having changes in perception and branding as its primary goals is called a

marketing plan

The Requirements of a Business Plan

 when to do it

 how to do it

 what to do

 where

 why do it

Once you have an idea for a business, you know what you want to produce or sell your target market, how

you are going to earn from your venture, you then definitely need a business plan. A lot of people dread the

idea of coming up with a business plan. Some think that it is a waste of time while others believe that the

documents are complicated and unnecessary. There are people who see the business plan as making things

more difficult for starting a business.

On the contrary, business plans are important as they help you see your business. The plan concretizes your

perception of your business. You ‘see’ your ‘customer base’ and your ‘profit potential’ in more factual terms.

The business plan forces you to contemplate every aspect of your business more critically in advance so that

as you develop the business you are not faced with unnecessary surprises that may cost you your business.

More importantly, business plans are necessary tools for making other people interested in your business.

Once you make a good business plan, other people will realize that you are serious about your plans and that

you are not merely dreaming wildly. A business plan also shows that you are a professional and that you have

a clear understanding of what it takes to start and manage a business venture. This also becomes important if

you are seeking outside funding for starting your business. For you to be able to get a good loan or investors

you need to proffer a good and convincing business plan.

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While you definitely need a good business plan, it does not need to be complicated at all. Your plan needs to

be factual and to cover at least the seven main areas and the good news is that you do not need to write

lengths of narrations. The seven areas are:

 Executive Summary

Although this is technically the first part of the business plan, it should be written last. This part

should summarise the entire aspects of the business plan. It should, however, be comprehensive as

many readers may not bother to read the entire document. When you finally construct the business

summary you need to note all the highlights of the contents of each part of the document. It is

important to note issues that stand out to the reader in each of the aspects covered and to ensure that

these are included in the executive summary.

 Company Overview

This aspect describes your vision, mission goals and objectives. In this section the reader should get

the gist of the guiding force behind your business. The aspect should forster in the reader what you

want to do and how you want to get there. The vision should be expressed as a statement of what you

wish to be. The mission statement should in less or about 50 words or so answer the questions:

o What am I producing/selling?

o Whom am I producing it for/selling it to?

o Why am I producing/selling it?

Goals specify what your company wants to achieve and objectives should clarify how you wish to

get there.

 Business Environment

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 This aspect requires that you do some researches because it demands information about the external

environment in which the business is going to be run. The information required includes, that from

the industry in which you are going to perform, the market, and the competition. You would need to

take an honest look at the field you are going to enter and pay close attention at its structure, trends,

and the attendant barriers to entry.

 Company Description

This aspect spells the detail about your business. You will need to describe in detail the following

issues:

o Who will you serve?

o What resources will you use?

o Who are going to be your managers and what skills do they have?

o What type of employees are you looking for?

o What organizational structure are you going to use?

o What type of distribution method are you going to utilize?

You will also need to make your Unique Position Statement: This is a statement that sets you apart

from your competitors. It is expressed as a one sentence statement.

 Action Plan

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 This part of the business plan presents the operations plan. It outlines the steps you are going to take

to make your plan work. These should be presented in line with the goals and objectives that were

outlined in the company overview.

 Marketing Plan

You would need to find out about your competitors and to show how you are going to differentiate

yourself from them. You will also need to identify your potential customers and how you are going

to meet their needs. The part of a business plan about having changes in perception and branding

as its primary goals is called a marketing plan. It outlines the distribution strategies to be

employed.

 Financial Plan

This financial section takes more thought and planning as it requires you to make some assumptions

about your business revenue expectations. Realistic estimates should be made on potential revenues.

You may use different structures as long as the issues covered are included. An example of a structure of a

business plan for a start up venture is given below:

Typical structure for a business plan for a start up venture:

 Cover page and table of contents

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 Executive summary

 Business description

 Business environment analysis

o Industry background

o Competitive analysis

o Market analysis

 Marketing plan

 Operations plan

 Management summary

 Financial plan

 Attachments and milestones

TEST YOURSELF

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Question 1

With reference to Mclleland’s motivational factors determine the driving force for these
individuals:

Name Driving Factor

Michael Jackson Affiliation Yes/ No
Tiger Woods Power
Mother Theresa Affiliation
Bill Gates Achievement
Princess Diana Power
Henry Ford Affiliation
Will Smith Affiliation
Michael Schumacher Achievement
Adolph Hitler Power
Jimmy Hendrix Power
Bishop Desmond Tutu Power

Question 2

Read the following case study and attempt the tasks that are asked.

FROM OUT OF A DORM ROOM INTO CYBERSPACE

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Michael Dell, born 1965 sees the trend towards high speed internet access as a boost to personal

computer sales. In 1984, Dell took US$ 100 and an idea, and began to build a computer business.

Defying the odds against the success of a new business, Dell built what is now the second largest

computer manufacturer in the world. In the process, he made millionaires out of investors who

had faith in a young person and his ideas.

This visionary and successful entrepreneur continues to fuel his success today. He has not only

adapted to change but has revolutionarised the way products are marketed and sold. Dell has

been called the Henry Ford of the computer industry. As a teenager in the early 1980s, dell saw a

future in personal computers (PCs). During his freshman year at the university of Texas he sold

PCs from his dorm room. Business was so good that the following year he quit school and with

$1000 in capital, started a company.

When Dell started his company, PC manufacturers were all selling standard models through

retail stores. Dell’s vision was to sell his computers directly to customers. This approach allowed

him to customize each computer to the customer’s needs and specifications. It also enabled Dell

to sell PCs for less than his competitors did because there were no retailers marking up his prices

to make a profit for their stores.

Dell’s direct-marketing model had cost advantages as well. By custom-building each computer,

he did not have to maintain warehouses full of unsold goods. The company took each order by

phone or fax and shipped the finished computer within two weeks. Not only did Dell’s customers

47
receive exactly what they ordered, but they got it at a lower price as well. Within fifteen years,

Dell Computer Corporation was a $19, 9 billion business.

As the internet grew in the early 1990s, Dell saw new opportunities- “e-commerce … was pretty

much restricted to ordering T-shirts on line,” Dell says. “But it … struck me that if you could

order a T-Shirt on line; you could order anything- including computers.” Today the Dell website

allows visitors to create a computer system, calculate its price, place an order, pay and even

arrange financing on line. Dell’s ideas have shaped much in e-commerce.

Answer the following questions.

(a) Tim Drake, one of the gurus in the study of entrepreneurship says, “For someone in the

middle of a period of hell, do not despair, we can lift our view from the pit to the mountain,

always rebrand yourself as businesses do.”

“Always have a plan or fall back position, no matter how comfortable you are on the job.

You need exit route, when you are a loser no one wants to be associated with you.” What

decisions did Dell make that resulted in innovations?

(b) List five characteristics of an entrepreneur you can observe from the case study above.

(c) What innovative opportunities did Dell exploit in his entrepreneurial venture?

(d) List five customer advantages that Dell created that led to his organisation’s success.

Question 3

Write at least two definitions of an entrepreneur that best describe Dell as an entrepreneur.

Try and give examples from the case that support the definitions that you have chosen.

Group Work Activities

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  Explain how Entrepreneurship has developed and influenced economic development and

productivity the world over.

 Discus how Entrepreneurship has altered the direction of national economies.

 How is innovation important as a key dimension of entrepreneurship?

 Describe the main factors that lead to the success for new ventures

 Find out the key resources required to exploit an innovative idea or opportunity to

develop an existing business, launch a new venture, or initiate a social enterprise

 Find out the key steps required for exploiting an innovative idea or opportunity to

develop an existing business, launch a new venture, or initiate a social enterprise

Presentation – 15 minutes

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Chapter 3
CREATIVITY, INNOVATION AND ENTREPRENEURSHIP

Objectives

When you have studied this chapter you should be able to:

 define the concepts “creativity” and “innovation”.

 distinguish between creativity and innovation

 explain the importance of creativity and innovation to entrepreneurship.

 Show the symbiotic relationship between innovation and entrepreneurship.

 describe guidelines for identifying innovative opportunity.

The Concept Creativity

Creativity is a much value possession in individuals but just like intelligence it is a problematic

concept to define. It is also problematic to identify determinants of creativity and for that matter

to explain why some people are creative while others may not. It is however easier to identify

characteristics of creativity. Some characteristics are as follows:

 Creative people are characterised by a degree of independence.

 They expose independence in both thinking and actions.

 They have interest in success and are generally inventive and individualistic.

 They possess a sense of humour not all commonly found in less creative persons.

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  They have a propensity for novelty and complexity and by and large see beyond what

others can see and tend to appreciate what other people cannot.

 Creative persons are all characterized by their ability to apply abstract principles to the

solution of problems.

 They are naturally curious and inquisitive and tend to give uncommon or unusual

responses which are evidence of high levels of imagination.

 Ellis Paul Torrance (1974) holds that a high degree of intelligence appears to be a

necessary but not sufficient condition for high creativity. This means that, in a general

sample, there will be a positive correlation between creativity and intelligence, but this

correlation will not be found if only a sample of the most highly intelligent people is

assessed.

Defining Creativity

Generally Creativity has been defined as a mental process that gives prominence to the

conscious or unconscious discovery of novel ideas or new associations built on already existing

ideas. Guilford (1967) states that the psychological point of view places creative thought as a

product of divergent thought. Guilford performed important work in the field of creativity,

drawing a distinction between convergent and divergent production (commonly renamed

convergent and divergent thinking). Convergent thinking involves aiming for a single, correct

solution to a problem, whereas divergent thinking involves creative generation of multiple

answers to a set problem. Divergent thinking is sometimes used as a synonym for creativity in

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psychology. Other researchers have occasionally used the terms flexible thinking or fluid

intelligence, which are roughly similar to (but not synonymous with) creativity.

Creativity is considered to have both originality and appropriateness. Because of the complexity

of the concept and the resultant diversity in which it manifests, creativity is not easy to define nor

can it have a single and specific definition. Its occurrence has been attributed to:

 Complex cognitive processes.

 Divine intervention.

 Chance, accident and serendipity.

 Intelligence and genius or even mental illness.

While popularly associated with art and literature, it is also an essential part of innovation and

invention and is important in business and economics. Today creative people have been

associated with entrepreneurial development. Entrepreneurs are said to be highly creative

individuals who come up with innovative ideas that have spun new business developments and

inventions.

Distinguishing between creativity and innovation

For the purpose of this chapter it is useful to explicitly distinguish between creativity and

innovation in entrepreneurship.

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Creativity is typically used to refer to the act of producing new ideas, approaches or actions,

while innovation is the process through which entrepreneurs both generate and apply these

creative ideas in developing entrepreneurial ventures and activities. In entrepreneurship

In the context of an organization, therefore, the term innovation is often used to refer to the entire

process by which an organization generates creative new ideas and converts them into novel,

useful and viable commercial products, services, and business practices, while the term creativity

is reserved to apply specifically to the generation of novel ideas by individuals or groups, as a

necessary step within the innovation process. Amabile and Shermaine Montefalco et al. (1996)

suggest that while innovation "begins with creative ideas ...creativity by individuals and teams is

a starting point for innovation; the first is a necessary but not sufficient condition for the second."

Although the two words are novel, they go hand in hand. In order to be innovative, entrepreneurs

have to be creative to stay competitive.

"Creativity is the ability to illustrate what is outside the box from within the box."The Ride

Thus creativity in entrepreneurship relates to the concept of making or creating something new

and heather to unimagined. It then leads to the creation and development new products and new

processes. In the process the birth of new products heralds the death of existing products. Lume

and Beings (1998) say, through our imagination of what it will be and how to achieve it, we

move beyond the boundaries that we have previously set ourselves. Creativity therefore has a

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novelty and also relevancy in terms of changing what we do and what we believe about our

potential which is yet to be realized.

We then can safely say that creativity is that which involves the unexpected, the new and the

surprising.

Sources of creativity

1. Divine inspiration

Creativity is seen as a result of high order thinking.

2. Serendipity

- Creativity is seen as a product of fortuitous confidence of thoughts and events. Most

products are a product of accidental discoveries.

3. Contrived luck

Creativity is seen as the natural outcome of a systematic approach to generate conditions

conducive to creativity. It involves a mindset that deliberately explores existing

conditions or scans opportunities.

The more you go looking for it the greater your chances.

4. Determinism

Creativity is forced via tenacious determination to solve a particular problem. The

desired outcome is seen to determine the creative ideas that enable it to happen for the

first time.

5. Learning Processes

High levels of creativity are associated with particular processes that characterize the way

we behave and think.

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 Nedhermann says creativity involves looking beyond the obvious and is a necessary

condition for invention and innovation.

Graham Wallas, in his work Art of Thought, published in 1926, presented one of the first models

of the creative process. In the Wallas stage model, creative insights and illuminations may be

explained by a process consisting of 5 stages:

(i) preparation (preparatory work on a problem that focuses the individual's mind on the

problem and explores the problem's dimensions),

(ii) incubation (where the problem is internalized into the unconscious mind and nothing

appears externally to be happening),

(iii) intimation (the creative person gets a 'feeling' that a solution is on its way),

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 (iv) illumination or insight (where the creative idea bursts forth from its preconscious

processing into conscious awareness); and

(v) verification (where the idea is consciously verified, elaborated, and then applied).

Even in solving problems and finding solutions creativity is called for. Models have been

developed to establish solutions through creative means. The Creative Problem Solving Model

is a case in point.

Creativity Problem Solving Model

Wallas considered creativity to be a legacy of the evolutionary process, which allowed humans

to quickly adapt to rapidly changing environments. Daniel Pink, in his 2005 book A Whole New

Mind, argues that we are entering a new age where creativity is becoming increasingly important.

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LaFalce (2001) contends that entrepreneurs are economic visionaries whose efforts are

consistently helping fuel our nations’ economic growth. They are the pied pipers of tomorrow’s

corporations, the leaders who pioneer new products and jobs and create exports. These creative

men and women need to know that they are crucial to the economic vitality of our economies.

Entrepreneurial ventures thrive on innovation e.g. new products, new ways of producing,

offering a new service, new marketing and distribution strategies, new organizational structuring

and new technological changes.

Task: Discus the problem solving model in relation to your organization.

The Concept Innovation.

Many organizations are established due to some level of innovation, whether the initial idea is

new to the world or rather a mundane efficiency improvement. To ensure survival and to

maintain growth an organization must combine necessary issues and continue to exploit new

opportunities. Only a few organizations are able to remain the same for a long time. The reason

is that organizations must continue to adapt to new and ever changing external business

environment and market situations.

For an organization to survive it must:

 Strive to do things differently.

 Do things better every time.

 Differentiate their offer from those of the competitors.

 Improve to attract loyalty and support of stakeholders.

 Must have speed in identifying opportunities.

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  Be effective in exploiting the opportunities for example-: technology develops,

legislation changes, community interests and values evolve, market dynamics change as

customers change, demands and expectations alter, new companies come into the market,

existing companies become more aggressive and opportunities constantly change or

emerge.

We should realize therefore that innovation is inevitable. It will always manifest in different

situations:

 It can be driven by technological advancement.

 It can be as a result of the market pull.

 It can be a response to the changing demand of the customer.

 It can be the basis for changing competition levels within the market.

 It is also about changing new processes and new ways of doing things.

 It is broader than just technological advancement. It is a process of creating,

experimenting, or transforming the business model.

According to Drucker (1985) in his book Innovation and Entrepreneurship, innovation is “…

whatever changes the wealth-producing potential of already existing resources”.  He agrees with

the Frenchman J B Say in 1800 who wrote “The entrepreneur shifts economic resources out of an

area of lower and into an area of higher productivity and greater yield.”

Management, or how things can be done better, is best appreciated as a ‘social technology’, as

much as a discipline like engineering or medicine. Drucker notes that the huge success of

McDonald’s was in large part due to better management of a service that had previously been run

by Mom and Pop owners. Everything - the product, the time it took to make it, the way it was

made, the way it was sold and served - was refined and standardized beyond belief. This was not

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‘high tech’, Drucker observes - it was doing things in a different, better way, and in the process

creating new value. 

It is important to note that the best innovations can be alarmingly simple, and often have little to

do with ‘technology’ or ‘inventions’. For example, there was nothing technically remarkable

about creating a metal container that could be easily offloaded from a truck onto a ship, but the

advent of container shipping as a standardized system of moving things around the globe was an

innovation that quadrupled world trade. You can also note such small things as the window latch

which can be found on every window the world over.

Drucker suggests that science and technology are actually the least promising of all the sources

of innovation, generally taking the most time to realize any benefits, and costing the most. In

reality, anything that takes advantage of an unexpected change in society or a market is actually

quicker, easier or more likely to result in success.

Good innovations are very focused, Drucker observes, not trying to do many things, but just one

thing extremely well. They are not too clever, and can be used by simpletons. They attract the

comment, ‘Why wasn’t this done before?’ Drucker writes, “[Anyone] who asks the question,

What does the customer really buy? Will win the race. In fact, it is not even a race since nobody

else is running.” People do not buy products, but what the product does for them. The purpose of

innovation is to provide satisfaction where before there was none.

 The entrepreneur is on the lookout for:

 ‘The unexpected’: an unexpected success, failure, or event.

 Incongruities: between things as they ought or are said to be – and how they actually are;

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  Problems with an existing process for which no one has provided a solution;

 Changes in how an industry or market operates that takes everyone by surprise;

 Demographic (population) changes; and

 Changes in ‘perception, mood or meaning’.

Innovation and Entrepreneurship

Innovation is underpinned in what Schumpeter (1934) referred to as ‘Creative Destruction”. He

identified 5 critical sources of creative destruction:

1. Introduction of a new good/ improvement in the quality of existing goods.

2. Introduction of a new method of production

3. The opening of new market or exploit market in a new territory or new supply zone.

4. The conquest of new source of supply of raw materials or manufactured goods.

5. The creation of a new type of industrial organization.

Schumpeter talks about quantum leaps versus incremental innovation

- Innovation is the process by which the opportunities that have been identified through

individual and organizational creativity are exploited.

- Innovation and entrepreneurship must therefore co-exist for individuals and organizations

to be considered to be enterprising.

- Innovation is an essential component of entrepreneurship by creating business activity,

generating growth and ensuring survival for an existing business.

Categories of innovation

- Product innovation-colour, scent

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 - Process innovation –the manner in which the product is produced, eg KFC

- Position innovation-maintain the position

- Paradigm innovation eg multiskilling.

Entrepreneurs are economic visionaries whose efforts are consistently helping fuel our
nations’ economic growth. They are the pied pipers of tomorrow’s corporations, the
leaders who pioneer new products and jobs and create exports. These creative men and
women need to know that they are crucial to the economic vitality of our economies.

Success in the innovation Process

1. Innovation needs to be regarded and managed as a process rather than a single event or
series of events
2. The outcome of the process can be improved by good management
3. Success routines can be learned over time through the experience of repeating the
process.
4. Effective integration of the contributions to the process is an essential ingredient.

Innovation and Technology

Technology defined

Technology as innovation can be categorized in three broad terms:

 Revolutionary or discontinuous

An innovation that creates a new market by allowing customers to solve a problem in a

radically new way. e.g. The replacement of the horse drawn cart with the motor-car.

 Evolutionary

An innovation that improves a product in an existing market in ways that customers are

expecting. e.g. the increasing software in computer performances.

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  Disruptive

An innovation that creates a new (and unexpected) market by applying a different set of

values. Internet facility has disrupted letter postal services.

Disruptive technology and disruptive innovation are terms used to describe innovations that

improve a product or service in ways that the market does not expect, typically by lowering price

or designing for a different set of consumers, improving quality and quantity thereby improving

productivity. Entrepreneurs should be alert for such technological innovations in order to

maintain competitive advantages. In contrast to disruptive innovation, a sustaining innovation

does not have an effect on existing markets. Sustaining innovations may be either discontinuous

(i.e. "revolutionary") or continuous (i.e. "evolutionary"). Revolutionary innovations are not

always disruptive. Although the automobile was a revolutionary innovation, it is not a disruptive

innovation, because early automobiles were expensive luxury items that did not disrupt the

market for horse-drawn vehicles. The market remained intact until the debut of the lower priced

Ford .
The Vicious Circle of Technological Evolution

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  This is the process used to produce a good or a service. Improvements in technology

allow an economy to produce more output from the same or a smaller quality of inputs or

resources.

 Technological progress allows an economy to operate more efficiently and productively

increasing GDP and giving businesses a competitive advantage in the world

 The world history is full of innovations that improved productivity – from the light bulb

to weaving looms, to computers, tractors to combine harvesters and other machines that

have allowed us to generate more goods in a shorter amount of time with fewer raw

materials.

 Inventions are the engine of the free enterprise system. They help us build “ more, better,

faster” thus giving consumers more economic choice

How has technology affected productivity?

 higher productivity

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  higher production efficiency

 higher speed and quantity.

 better quality of products and services

 better pricing due to lower production costs.

 increased market

 better and improved distribution of products.

 improved national GDP

 improved living standards

 better customer satisfaction

 improved customer expectations

 business expansion

 skills development

 better performance of products

Customer Benefits of Technological Advancement

a) TANGIBLE BENEFITS

 improved products

 quality products

 variety of products

 improved delivery

 improved services

b) INTANGIBLE BENEFITS

 satisfaction (enjoyment of purchase)

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  better design

 efficient customer services

 better experience

 better access

Organisational Benefits

- better market positioning

- increased profits

- improved efficiency

- efficient production

- efficient deployment of resources

- improved human capital

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Elgar, 2003, ISBN 1843769964

2. ^ Reynolds, Paul D. "Entrepreneurship in the United States", Springer, 2007, ISBN 978-0-387-
45667-6

3. ^ Angel Investing, Mark Van Osnabrugge and Robert J. Robinson

4. ^ Schumpeter, Joseph A. "Capitalism, Socialism and Democracy", 1942

5. ^ Knight, Francis A. "Risk, Uncertainty and Profit"

6. ^ "Searching for the invisible man". The Economist (The Economist Newspaper Limited): pp. 67.
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Retrieved 2008-03-05.

7. ^ Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction

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of Graduate Textbooks" (December 2004). [1]

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