Subject Entrepreneurship

Segment Frameworks
Topic What is Entrepreneurship?

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Table of Contents
1. Overview
2. Definition of Entrepreneurship
3. Role of Creation and Innovation in Entrepreneurship
4. Economic Organisation and Entrepreneurship
5. Risk, Uncertainty and Entrepreneurship
6. The New Entrepreneur
7. Self-Assessment
8. Summary

1. Overview
You have learned about some of the latest developments in the area of
entrepreneurial activity and the key traits that drive entrepreneurship.
In this topic, you will define entrepreneurship as a construct. You will then explore in
detail the three criteria that determine the presence of entrepreneurship. We will
conclude the topic by examining the differences between today's entrepreneur and
the old-style entrepreneur.
Objectives: What is Entrepreneurship?
Upon completion of this topic, you should be able to:
 describe the key elements under which entrepreneurship exists
 identify the importance of each element and how it influences
entrepreneurship
 recognise how the notion of entrepreneurs has changed over the past few
years

2. Definition of Entrepreneurship
Over the past few years, educators, researchers and policy makers have deliberated
a great deal on the subject of entrepreneurship. This is primarily because new
ventures play a considerable role in economic growth. Moreover, a number of people
choose entrepreneurship because it seems to offer greater economic and
psychological rewards.
However, despite all the discussion and attention paid to the subject of
entrepreneurship, a fundamental question remains unanswered: What is
entrepreneurship? Many definitions of entrepreneurship can be found in the literature
describing economic and business evolution over the centuries.
Entrepreneurship can be defined as "the creation of an innovative economic
organisation or network of organisations for the purpose of gain or growth, under
conditions of risk and uncertainty".

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Subject Entrepreneurship
Segment Frameworks
Topic What is Entrepreneurship?

Each of the major concepts embedded within this definition tell us something very
important about entrepreneurship. Let us explore each concept in greater detail.

3. Role of Creation and Innovation in Entrepreneurship

The definition of entrepreneurship emphasises the creation of a new organisation.

The creation of a new enterprise is the hallmark of entrepreneurship. If a new
enterprise is not created, then there is no entrepreneurship.
What is involved in the creation of a new enterprise? The following elements are
significant for the creation of a new enterprise:
 A product or a service
 A market
 A mechanism for bringing the product and market together, such as
distribution system or technology
 Management of the elements mentioned above
In the beginning of this century, the concept of innovation was added to the
definition of entrepreneurship. This innovation could be process innovation, market
innovation or even product innovation. Large organisations can be hot-houses of
intrapreneurship if they are creating new businesses. This would mean that they are
generating new product and service ideas and business models and then operating
these as independent, or almost independent profit centres. A large organisation that
simply does line extensions or incremental product and service upgrades may be
acting in an innovative and flexible manner, but this is not usually considered
intrapreneurship.
Click the presentation below to learn about the four distinct types of corporate
innovation and change to consider.

Types of Corporate Innovation

There are four distinct types of corporate innovation and change to consider.
Radical vs. Incremental
Radical innovation moves the corporation away from its core businesses and takes
the established firm into new technologies, geographies and ways of operating.
Incremental innovation builds on existing business models, products and services.

Product Innovation vs. Process Innovation

Product innovation creates new outputs for the business to sell and distribute.
Process innovation changes the manner in which the corporation does things. For
example, adopting a new technology, modifying manufacturing methods, creating a
new administrative structure, etc.

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Subject Entrepreneurship
Segment Frameworks
Topic What is Entrepreneurship?

Competence Enhancing vs. Competence Destroying

Competence enhancing innovation enables a company to do what it does better. It
improves the existing skill base.
Competence destroying innovation makes the organisation do things differently. Old
skills are no longer needed, and new skills, techniques and routines are developed.

Component or Modular vs. Architectural

A component innovation changes a small part of a larger system. It is a relatively
small change and self contained within an existing system.
An architectural innovation changes the entire system. It moves the company to
another design altogether and, as such, it is more radical than a modular change.

Reading: History of Innovation at 3M

3M is known as one of the most innovative and entrepreneurial companies in the
world. The company is currently celebrating a century of innovation.
Visit the 3M Worldwide website and review history of innovation and
entrepreneurship at 3M in the About 3M section. Read the story of the first 100 years
of 3M accomplishments and view the timeline that shows the innovation and
development of completely new product categories.
Can you see that perseverance, ingenuity and creativity have made 3M's first 100
years a century of success? These winning factors have made 3M a name
synonymous with innovation.

4. Economic Organisation and Entrepreneurship

The definition of entrepreneurship requires the creation of an economic organisation.

We have all been part of and participated in economic organisations throughout our
lives.
What exactly is an economic organisation?
A day-care facility can be an economic organisation. A retail shop is an economic
organisation as are wholesalers, construction firms, service providers and financial
institutions. A division marketing a new product or service within a larger
organisation is also an economic organisation. However, a government agency
making rules and policies, even if these rules are about business and economics, is
not an economic organisation. This is because the principle purpose of an economic
organisation is the production or allocation of a scarce resource. The price
mechanism is almost always the core of how this allocation is made.
There are many types of economic organisations, and therefore entrepreneurship can
be found in all sorts of places. These include independent businesses, businesses
within other organisations and not-for-profit organisations that use price to allocate
their services or products. Good examples of this category are the Girl Scouts of the
USA that sell cookies or Planned Parenthood Federation of America, where you pay a

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Subject Entrepreneurship
Segment Frameworks
Topic What is Entrepreneurship?

small price for free healthcare. All of these organisations have economic gain and
growth as their objectives.
A relatively new phenomenon in entrepreneurship is the creation of the virtual
organisation. A virtual organisation is a network of independent organisations
fulfilling core functions as if they were operating within the framework of a single
company. For example, imagine that you are starting a company to manufacture and
distribute canoes, but your primary expertise is in designing the boats. You could
then raise the money and recruit the top managers to do everything in-house.
Alternatively, you could contract with a manufacturer, a distributor, a marketing
organisation for promotion, an accounting firm and a legal firm. None of these other
organisations are within your absolute control, yet each will perform as if they were
because of their contracts and incentives. This is the concept of a virtual
organisation. The advantage of virtual organisations is that everyone does what they
are best at. On the other hand, the disadvantages are extra communication and
control costs, in addition to the fact that each organisation carries its own overhead.
Read the following article to know how Paul Farrow created a virtual corporation with
Walden Paddlers.
Welles, E.O., “ Virtual Realities”, Inc. 15 no. 8 (August 1993): 50-57

5. Risk, Uncertainty and Entrepreneurship

Finally, the conditions of risk and uncertainty are important for entrepreneurship to
exist. Entrepreneurship is often described as the process of bearing the risk of
buying at certain prices and selling at uncertain prices. The conditions of risk and
uncertainty exist in markets and help define them. Without risk and uncertainty, we
would have a paradox that would destroy the market and the business.
What do we mean by risk?
Risk in the definition of entrepreneurship is the same concept used in finance, which
is the variability of outcomes. Without risk, all the outcomes are invariable. The
same revenues, the same costs and the same profits occur, no matter what. If the
profits are positive, they will remain positive, regardless of the situation. In this
event, all people interested in starting a firm will enter this business and all make
money indefinitely. This is, of course, an impossible situation. New entrants will
eventually have higher costs or be forced to lower prices. If these happen, profits
diminish for potentially all firms, and therefore not everyone can make infinite
profits.
Successful entrepreneurs manage risk even though they can never eliminate it.
Generally, the key is to reduce the variability and increase the expected value or the
average outcome. You can think of variability as the variance or standard deviation
in statistical terms. You will learn more about how entrepreneurs manage risk in the
future segments.
What do we mean by uncertainty?
Without uncertainty, the future would be perfectly predictable and known to all.
Businesses that would make money in this knowable future would be duplicated by

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Subject Entrepreneurship
Segment Frameworks
Topic What is Entrepreneurship?

everyone and they would still make money! If you can know the future, you would
be better off as a punter at the horse races than as a founder of a business.
A future that is certain and predictable is again an impossible situation. Of course,
any particular entrepreneur with a better than average set of predictions for how the
future may turn out, may prosper. In fact, as you will learn in the later segments,
entrepreneurs with a better sense of how things might turn out in the future can use
this as a source of competitive advantage.

6. The New Entrepreneur

You have read that entrepreneurship involves the creation of an economic

organisation, commonly associated with economic gain and growth. Moreover,
entrepreneurs usually are considered to bear risk while pursuing opportunities, and
are often associated with creative and innovative actions.
You learned about some key traits that drive entrepreneurship. Let us examine how
these traits have changed over the years.
In the past, an entrepreneur was analogous to a business version of the American
cowboy. This sort of an entrepreneur steered his business without training and
assistance from experts. However, these days there is more of a professional feel to
entrepreneurs and entrepreneurial teams. They rely more upon their brains and their
guts. In addition, they use newer methods and technology to analyse the business
environment. The table given below highlights how the ideas about entrepreneurs
and entrepreneurship have changed over the past 20 years.
Evolution of Entrepreneurs

Entrepreneurs Then Entrepreneurs Now

Small-business founder True entrepreneur

Boss Leader

Lone Ranger Networker

Secretive Open

Self-reliant Inquisitive

Seat of the pants Business plan

Snap decisions Consensus

Male ownership Mixed ownership

In 1980, women owned only one- In 1993, women owned one-third of all sole
quarter of all sole proprietorships. proprietorships.

Idea Execution

In 1982, 80% of the CEOs of the Inc. In 1992, 80% of the CEOs of the Inc. 500

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Subject Entrepreneurship
Segment Frameworks
Topic What is Entrepreneurship?

500 companies believed their companies said that the ideas for their
companies' success was based on companies were ordinary, and that they
novel, unique or proprietary ideas. owed their success to superior execution.

Knows the trade Knows the Business

Eastern, one of the first airlines in the Federal Express, an overnight delivery
United States, was founded by pilot service utilising airplanes, was developed
Eddie Rickenbaker. from a business plan written by Fred Smith
while he was studying for his MBA at Yale.

Automation Innovation

Technology lets business automate the Technology lets people do things never
work people had always done. done before.

7. Self-Assessment
Now, try the self-assessment questions to test your understanding of the topic. Click
the following link to open the Self-Assessment in a new window.
Self-Assessment
Q1. Risk and uncertainty are the required elements for entrepreneurship to exist
because:
1. anything that can go wrong will go wrong.
2. entrepreneurship is risky business.
3. entrepreneurs thrive on uncertainty.
4. otherwise everyone will know all the business outcomes in advance.
Q2. Which one of the following is a likely characteristic of the modern entrepreneur
of today?
1. Secretive
2. Self-reliant
3. A consensus builder
4. A big risk taker
5. The Lone Ranger

8. Summary
This topic covered the following points:
 Any definition of entrepreneurship requires the elements of:
o Creativity and innovation
o Economic organisation
o Risk and uncertainty
 Entrepreneurs can manage risk and reduce uncertainty, but these conditions
cannot be eliminated completely. However, they may find this skill a source of
competitive advantage.
 The modern entrepreneur takes much more of a professional approach than
the cowboy entrepreneur of a generation ago.
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