Module 1: The Entrepreneurial Mindset

At the end of the lesson, the learners will be able to:

1. Identify the different types of entrepreneurs

2. Describe the entrepreneurial process
3. Describe the typical characteristics of Filipino entrepreneurs

Introduction

Some people make a big deal out of the fact that there are many successful
businesses founded by entrepreneurs who do not have a college degree. Often
cited are Apple founder Steve Jobs, Microsoft founder Bill Gates, Facebook co-
founder Mark Zuckerberg, and Uber co-founder Travis Kalanick. In the Philippines,
we have Philippine Airlines and Asia Brewery owner Lucio Tan, National Bookstore
owner Socorro Ramos, Zest-O Corporation President Alfredo Yao, and Mang
Inasal founder Edgar Sia II. Some of these individuals actually went to college, but
decided to drop out after spotting a business opportunity. The other came from
poor families, and could not afford a college education, but succeeded in growing
their businesses nevertheless.

However, we must not lose sight of the fact that other equally successful
businesses were founded by individuals who earned their college degrees.
Examples are Jollibee founder Tony Tan Caktiong, Lamoiyan Corporation founder
Cecilio Pedrom and ECHOstore co-founder Pacita Juan. Clearly, educational
background, while important, is not a defining element for entrepreneurial
success. There are other factors that come into play.

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In this chapter, we identify the different types of entrepreneurs. We also describe
the various stages that entrepreneurs undergo in implementing their business
plans, which usually start as mental constructs or intentions. In this light, we
identify the factors that influence entrepreneurial intentions. After this, we
discuss how entrepreneurs formulate their decisions, based on three types of
mental processes. Finally, we examine the role of cognitive adaptability in
managing risks brought about by an uncertain and dynamic business
environment.

Lesson 1: What is an Entrepreneur?

The term “entrepreneur” comes from the French word entreprendre which means
to undertake. It is a reference to individuals who have initiated the establishment
of a business enterprise. In his classic work The Theory of Economic Development,
Joseph Schumpeter emphasized the role of entrepreneurs in the process of
economic transformation. Through their business ventures, entrepreneurs
introduce to the market, innovations in the form of new products, new processes,
new markets, and new organizations.

The entrepreneurs described by Schumpeter, however, are individuals who have

generated substantial value and profits from innovations in a very short period of
time. These individuals are also willing to absorb huge risks of using enormous
amounts of capital in their business ventures (Quickmba.com). We call these
people megaentrepreneurs. Because of the speed by which they create a big
amount of ‘value-added,’ these entrepreneurs were cited by Schumpeter as
having contributed much to the economic progress of the developed countries in
the West. In addition, the enormous profits they have gained have attracted
competitors and imitators, and brought dynamism to the industries they operate
in and ultimately prosperity to the entire economy.

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However, another type of entrepreneur can be found in developing countries.
Although they also initiate business enterprises, the ‘value-added’ and profits
they make are limited. Some introduce innovations in the form of changes in their
production and distribution processes, but their contributions are minimal and
attract few competitors and imitators. Because they are short in funds and
inadequate in skills, they cannot undertake projects that involve huge capital,
sophisticated technology, and extensive risks. We call them microentrepreneurs.
Unlike megaentrepreneurs, they engage in micro and small businesses as an
alternative to formal employment. Although they are not crucial in bringing rapid
economic prosperity to a country, they nevertheless contribute to inclusive
growth.

While there are distinct differences between megaentrepreneurs and

microentrepreneurs, they have something in common. They both start businesses
from opportunities facing them. Given this, Peter Drucker (1985) in his book
Innovation and Entrepreneurship, emphasized the “discipline” in the process of
starting and managing a business. Even if contributions of entrepreneurship can
vary (i.e., being an agent of rapid economic progress or being an avenue for
inclusive growth), what is important is the system entrepreneurs follow to
achieve their goals. In seizing opportunities and converting them into business
ventures, there are several steps to follow.

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Entrepreneurial Process

Although Drucker acknowledged how personal traits and elements of the external
environment could influence the outcomes of an enterprise, what he emphasized
is the importance of how theses personal traits and external factors are managed
to achieve the goals of the enterprise. Thus, it is important to formulate a
strategy, which should include an articulation of a plan and how this is going to be
implemented. This entrepreneurial discipline is often referred to as the
entrepreneurial process, which involves several stages from the awareness of an
opportunity to the realization of a business idea. The steps include the following:
(a) discovery, (b) development of concept, (c) organizing resources, (d)
implementation, and (e) reaping the returns.

Discovery refers to the recognition of a business idea of the detection of

opportunities that could make money for the entrepreneur. Megaentrepreneurs
draw their ideas from current interventions and other technological
developments that can bring about huge profits for them. For example, the
developers of a social network like Facebook used the developments in
information and communication technology (ICT) to connect people across the
globe instantly. Similarly, those who introduced smart phones saw the market
value of combining the capabilities of a telephone, camera, television, computer,
and the other applications of electronic gadgets. On the other hand,
microentrepreneurs typically get their business ideas from the limitations of
existing products where markets are easy to enter. For example, the popularity of
lechon baboy amoung Filipinos encourages other local entrepreneurs to introduce
lechon manok in the market.

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The business idea is then transformed into a business concept. The development
of a business concept gives more details on how the general business idea can be
realized. It suggests the preparation of a business plan, which must spell out the
various activities that must be done from production to the distribution of the
product or service. The business plan must also describe how the enterprise is
going to be organized and managed, and how the business is going to be
financed, among others.

Organizing resources, on the other hand, describes the process of identifying,

sourcing, and financing human, nonhuman, and other resources needed for the
conduct of business. Megaentrepreneurs usually require highly educated
technologically savvy, and creative employees, who are sourced from the best
universities and training institutions nationally or globally. Since they are engaged
in sophisticated business activities that entail huge capital, they source their funds
from the capital market or from venture capitalists. In contrast,
microentrepreneurs draw their resources, including labor, from what is available
in their locality. This may include family members, neighbors, and other workers,
who might not necessarily have the desired skills. Aside from being readily
available, these resources are relatively inexpensive. Funds for their business
operations are usually sourced from family savings, loans from informal lenders,
and remittances of relatives working abroad.

Implementation is the process of carrying out the business plan. It covers a

number of activities, including the management of human, physical,
technological, and financial resources of the business. Implementation also
includes mechanisms for confronting actual and potentials as well as for
responding to competitors and the bargaining powers of suppliers and buyers can
define the competitive edge of a business enterprise. In addition, major changes
in the local economy and the global market present both opportunities for growth
and threat to the survival a business in an industry.

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Finally, reaping the returns pertains to strategies relates to the expansion of the
business firm. It also covers mechanisms for addressing conditions in the business
environment that may affect the future of the firm. Entrepreneurial ventures,
after all, are very dynamic. They usually start as small ventures and eventually
transform over time n term of the quantity and quality of products they produce
as well as the resources they require in the production process. As these small
enterprises change, their governance structures and financing mechanisms may
also change.

CHARACTERISTICS OF AN ENTREPRENEUR

While the entrepreneurial process is important in the success of business

ventures, many entrepreneurship scholars have argued and presented evidence
that entrepreneurial traits are likewise important in the performance of a
business venture. In this section, we present the effects of these personality
characteristics on entrepreneurial performance based on two criteria. Their first
pertains to how personal traits connect with the way entrepreneurs create ‘value-
added’ and the second involves the link between these personal qualities and the
formation of entrepreneurial intentions.

Entrepreneurial Traits and Creation of Value-added

The characteristics of an entrepreneur will vary depending on whether they are in

the developed countries pursuing Schumperterian entrepreneurship or in
developing countries operating small enterprises. The level of education,
employment status, wealth, and risk appetite of entrepreneurs differ depending
on the amount of value added or profit created by their enterprises. As discussed
previously, there are differences between megaentrepreneurs and
microentrepreneurs.

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Level of education. Studies have shown the entrepreneurs need some formal
edication to be able to seize the opportunities presented by interventions,
motivation, and other techonological developments. This may be true for
megaentrepreneurs since they need some degree of technological know-how to
understand the commercial potentials of modern inventions and innovations. In
developed countries, like the United States, some of the more successful
entrepreneurs are engineers who are able to recognize business opportunities
being offered by the latest developments in ICT. Many of these billionaires
amassed their wealth from ICT innovations. Business ventures that came about
from modern technological innovations are usually initiated by educated
megaentrepreneurs.

On the other hand, since entrepreneurship in developing countries is more often

being used as an alternative to formal employment, many microentrepreneurs
usually have limited educational qualifications. In addition, engaging in small
enterprises does not require high level of schooling. These small enterprises use
simple technology, and do not require technical sophistication from workers. For
example, one does not need a college degree or a high school diploma to
introduce binalot na adobong manok to be sold in “Jolyjeeps” in Makati.

Thus, the degree of human resource qualification will depend on the type of
business ventures that are being established by entrepreneurs. For
microentrepreneurs, which are meant for employment and economic survival,
formal schooling is probably not required. For bigger and more sophisticated
businesses, however, more education and training is required from the
entrepreneur. Although, we know that some successful entrepreneurs like Bill
Gates and Steve Jobs are college dropouts, they nevertheless have formal
schooling and have sophisticated ICT technical know-how.

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Employment status. Individuals who become entrepreneurs in developed
countries are usually former employees of companies in the formal sector. The
choice of pursuing entrepreneurship can be viewed as a step in the
entrepreneur’s professional development. These entrepreneurs usually get their
business ideas and concept from the operations of the companies they formerly
worked for. Know the ins and outs of a company’s operations, including the flaws
and weaknesses, they become aware of business opportunities. This is the reason
why many fresh college graduates seek employment first in established
companies before starting their own business. Once they discover business
opportunities, they convert their business ideas into business ventures. In
addition, experience in business is important to the success of megaentrpreneurs,
who are also exposed to various management practices.

On the other hand, microentrepreneurs are usualy drawn from the pool of
unemployed or underemployed. They see their small business ventures as an
option for making a living. In fact, many microentrepreneurs in developing
countries are involved in several activities at the same time. For example,
someone who is manning the store is also doing the carpentry or doing repairs of
consumer durable. These entrepreneurs have to do this because the ‘value-
added’ created in these micro and small enterprises are very limited. Thus, to
augment their income, they engage in other income-generating enterprises.

Entrepreneur’s wealth. The wealth of the entrepreneur is also an important

factor. Usually megaentrepreneurs source their funds from their own wealth and
from their families. Some generate capital for their business from the wealth they
have accumulated from their past employment. They can also borrow money
from their wealthy parents. Since they have existing wealth at their disposal, they
can use some of these assets as collaterals in securing credit from banks. This is
not the case for microentrepreneurs, who have very limited funds. Many of them
are too poor to have substantial savings to finance a big business venture. In
addition, because of their limited human and nonhuman resources they cannot
avail of credit from financial institutions.

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Risk appetite. Risk is also an important factor in undertaking any business venture.
Risks are associated with uncertainties in business operation. These uncertainties
can threaten the survival and stability of a business enterprise. Usually,
entrepreneurs are risk-takers. Otherwise they will not engage in business and will
just be comfortable with the certainties of being formally employed.

Conceviably, megaentrepreneurs are more willing to take risks compared to

microentrepreneurs. Their educational qualifications, as well as their work
experience, give them and edge in preparing for, and managing, these risks. In
addition, their wealth can provide some security to absorb losses in case the
business does not do too well. Because of these insurances that serve as potential
shields for risks, megaentrepreneurs can pursue business ventures that are riskier
but that can generate higher returns.

On the other hand, microentrepreneurs take risks by default if they want to

survive and escape the consequences of unemployment. But their appetite for
risk is not a much. Since microentrepreneurs have limited wealth and have
difficulties in getting credit, they have weak defenses against the impact of
uncertainties. As a result, they engage in venture that are relatively safe but with
limited returns.

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Lesson 2: Entrepreneurial Traits and Entrepreneurial Intentions

At the end of the lesson, the learners will be able to:

1. Explain the factors that influence individuals to pursue entrepreneurial

outcomes
2. Explain how entrepreneurs think and how they make decisions
3. Explain the role of risk and failure in the entrepreneurial process

Every individual who sets up a business venture started out by intending to do so.
Thus, we examine entrepreneurial intentions, which are planned actions
formulated in the mind of individuals which are geared towards the objective of
establishing a business venture from potential business opportunities. The
question is “how are these intentions formulated?” Based on studies, there are
two broad set of factors that may influence the formation of entrepreneurial
intentions: internal and external factors.

Internal factors include mainly the qualities of individuals such as demographics,

personal traits, psychological characteristics, individual skills, prior knowledge,
and social ties.

Demographics refer to gender, marital status, age, and employment status of

individuals who are likely to form entrepreneurial intentions. For example,
entrepreneurial activities generally increase with age, but decrease beyond a
certain age level. Also, married individuals are more likely to entertain
entrepreneurial intentions than single individuals.

For personal traits, there are theoretical bases for the contributions of self-
confidence, determination, and enthusiasm and other positive human qualities in
influencing entrepreneurial intentions. However, studies have shown that these
personal traits are weak predictors of entrepreneurial intentions.

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Psychological traits include a host of qualities, including need for achievement,
risk appetite, acceptance for vagueness, self-efficacy, and goal setting. There are
also theoretical bases for these psychological traits in influencing entrepreneurial
intentions, but only for appetite for risk and self-efficacy or belief in one’s
strength have been empirically verified.

As discussed earlier, knowledge and skills learned from prior employment are
valuable in setting up a business. Thus, vocational know-how, supervisory and
managerial skills acquired from work experience can also predict entrepreneurial
intentions and behavior.

Since a business enterprise is a socioeconomic institution, its operation will

require the entrepreneur to deal with a lot of people. Thus, having social ties
might be an important consideration for setting up a business or not. There social
connections are also important in building networks that can complement the
productivity of human and nonhuman resources of business. Aside from
influencing entrepreneurial intentions, these dimensions of social capital can also
contribute to enhancing entrepreneurial performance.

Besides the effects of the previously mentioned internal factors in the formation
of intention, external factors are also significant determinants. Among the
external factors are environmental support and environmental influence.

For environmental support, many studies have affirmed the positive effects of
government, financial institutions, and training institutions in setting up
businesses. An individual will be inclined to pursue entrepreneurship if support
from various government agencies are forthcoming.

For example, the availability of credit provided by financial institutions can

encourage individuals to pursue business. Potential entrepreneurs might also be
motivated to pursue their intent if technically adept workers and other human
resources produced by schools and other training institutions are readily
available.

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Environmental influence, on the other hand, includes regulatory structure,
patents, protection of property rights, and competitive environment. Government
regulations are important particularly in promoting public interest like addressing
information asymmetry (labeling and proper disclosure), limiting negative
externalities (taxing business enterprises polluting the environment), and others.
However, overregulation and heavy taxation from the government can discourage
potential entrepreneurs. In addition, protection of intellectual property rights,
respect for contracts, promotion of rule of law, and presence of an even playing
field can create a positive competitive environment, which can also influence
entrepreneurial intentions.

Characteristics of Filipino Entrepreneurs

Following the discussion on entrepreneurial traits identified in many studies

across the globe, this section will enumerate the key characteristics of Filipino
entrepreneurs. We will draw these features from the 2014 Entrepreneurship
Report of the Philippines. The report is part of the Global Entrepreneurship
Monitor (GEM), which covers the intentions, perceptions, activities, and
aspirations of entrepreneurs all over the globe.

Like other entrepreneurs in developing countries, a number of Filipinos go into

entrepreneurship because they see it as an opportunity for income creation and
employment. Likewise, they get into business enterprises because of their
apparent capabilities to undertake entrepreneurial activities, the prestige
associated with entrepreneurship, and the positive exposure given by various
forms of media to successful entrepreneurs. However, this attitude is tempered
by a fear of business failure.

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It is interesting to note that there are more females than males that are engaged
in the early-stage entrepreneurial activities in the Philippines. However, in the
more advanced stages of entrepreneurial activity, the gender proportion of
entrepreneurs and managers become more even. This implies that males tend to
be more resilient in staying in business, as females withdraw at the intermediate
stage.

In terms of age, entrepreneurship in the country attracts more young individuals.

Given the extent of youth unemployment in the country, entrepreneurship
becomes a viable employment option for the young. This result is consistent with
the conclusion of entrepreneurship in other developing countries.

In terms of educational attainment, almost half of entrepreneurs in the early-

stage development have secondary schools. However, entrepreneurs that own
firms at the mature stage of entrepreneurship have higher levels of education.
This is aligned with empirical results in other countries showing that mature firms
and those that create higher ‘value-added’ have more educated managers and
entrepreneurs.

Majority of those engaged in early-stage entrepreneurial activities in the

Philippines are in consumer services including retail, food, personal beauty care,
appliance and electronic repair, cleaning services, and laundry services. According
to the report, many of these establishments are operated within the households,
implying a limited scale of operation. A number of Filipino entrepreneurs are also
engaged in manufacturing, extractive enterprises, and business services. Business
services include advertising, architecture, consultancy, microfinance, and others.

As mentioned earlier Filipino entrepreneurs are fearful business failure. This is

legitimate concern since a number of enterprises close down at various stages in
the life of an enterprise. The report has enumerated a number of reasons for
business failure including unprofitable business, personal reasons (e.g., illnesses,
death in the family, maternal responsibilities), financing problems, and shift to
formal employment.

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Entrepreneurial Decision-Making

In previous sections, we discussed how some individuals are more inclined to set
up businesses. But entrepreneurship is not only confined with the forming of
intentions and crafting of business plans. The core entrepreneurship is aimed at
the actualization of intentions and is directed toward the implementation of
business plans. As intentions are translated into actions and as plans
implemented, the entrepreneur has to make decisions. These decisions are
influenced and produced by mental processes referred to as thinking.

In this section, we will discuss various types of thinking that influence

entrepreneurial decision-making. The types of mental processes that we will
cover include critical thinking, creative thinking, and strategic thinking.

Critical thinking refers to the systematic and rational way of providing an answer
to a question. It is systematic since it follows steps in responding to an inquiry.
Just like a scientific inquiry, an answer to a question is preceded by an
understanding of the problem, providing possible answers, and reflecting on the
validity of these tentative answers. It is rational because it adheres to the rules of
logic in connecting the relations of variables and in making conclusions.

Aside from providing an answer, critical thinking also explains what is going on. In
businesses, critical thinking is useful in explaining how a firm can survive and
remain stable Many tool in business analysis make use of analytical thinking. For
example, SWOT (strengths, weaknesses, opportunities, threats) analysis may be
used to show how businesses can use their strengths to take advantage of
opportunities, how they can improve on their weaknesses, and how they can
guard themselves against threats. Similarly, an analysis of Porter’s competitive
forces uses critical thinking in determining the impacts of various forms of
competition brought about by bargaining power of buyers, suppliers, existing
competitors, potential rivals, and new products. In the same light, environmental
scanning is another systematic analysis of effect various environments on the
viability of a firm.

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Creative thinking, on the other hand, refers to thought processes that bring about
discovery of new ideas. Unlike critical thinking, it does not follow as systematic or
analytical process since it looks at things from different perspectives. Sometimes,
creative ideas start from a dream, an insight, or from mere observation. The
intent of creative thinking is not to provide an answer but to ask questions that
can lead to discovery and change. Since creative thinking stresses growth, it
encourages discontinuity rather than stability. Thus, it is useful in developing new
products and new systems in business operations.

The Blue Ocean Strategy by W. Chan Kim and Renee Maubourgne, for example,
provides examples of enterprises that use creative thinking. They cited companies
that utilized creative mechanisms to eliminate competition by differentiating their
products and by substantially reducing costs. For example, new products can arise
from a creative complementation of products and services (e.g., Cirque de Soleil,
which combined circus and opera). Similarly new products and services can
surface from differentiating a buyer from a user or by looking for functional and
emotional appeal among buyers.

Strategic thinking involves thought processes that assess current situation that
can be useful in the formulation of plans for the future. It is similar to critical
thinking since it uses an orderly and logical system in its assessment. But it also
resembles creative thinking since in its growth and future orientation. Porter’s
five forces of competition, trend analysis, and scenario building, for example, are
utilized to provide an intelligent forecast of future events that can assist the
entrepreneur in formulating strategic plan that can enhance the growth of an
enterprise.

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RISKS, COGNITIVE ADAPTABILITY, AND ENTREPRENEURIAL DECISIONS

In the process of implementing a business plan, an entrepreneur will be faced

with numerous situation, challenges, and opportunities that will require flexibility
in decision-making. One of these challenges is managing risks.

Risks can be described as uncertain situation and developments that can increase
the probability of loss or business failure. Since these hazards can originate from a
variety of sources, business risks can be generally categorized into those
emanating from internal and external factors. Internal risks pertain to dangers
coming from the management of resources of a business enterprise that may
imperil its operations. For example, liquidity and financial risks borrowing at high
interest rate or excessive credit exposure), failure to hire the best talents
(compensation package is unattractive), damage to reputation (roaches in coffee
or worms in food served in restaurants), and failure to innovate (using the
business models of twentieth century vintage) can be considered as internal risks.

On the other hand external risks are threats coming from various environments
outside the business firm. These can endanger the operations and profitability of
a firm. Some examples of external risks are a lethargic economy (slowdown in
economic growth), increases competition (introduction of a better products or
substitute goods), commodity price risks (decline in the price of exportable
goods), regulatory risks (environmental requirements to address climate change),
business interruptions (natural calamities, power outages), and political risks
(wars and civil disturbances).

The process of identifying, assessing, and responding to these risks is called risk
management. For internal risks, the company may adopt controls on the use of
physical and financial resources to ensure efficient resource utilization. It can also
install mechanisms to maintain the quality of its products and services. It can
prepare a long-term plan on human resource development pertaining to
recruitment and retaining best talents. It can also devote resources for research
and development that can support the innovation projects of the company.

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For external risks the company can hold periodic reviews of their strategic plans in
preparation for the impacts of global and national socioeconomic and political
developments on the company. It can also prepare for contingency plans in case
of emergencies, natural calamities, and other events that can interrupt the
business operations.

Entrepreneurs must respond to these various risks. In this light, they need to
develop what we call cognitive adaptability. Cognitive adaptability refers to the
ability of individuals to be involved in the process of producing several ways of
decision-making based on the identification and management of changes in their
environment. It requires qualities of flexibility, dynamism and self-control on the
part of the entrepreneur.

Although we discuss cognitive adaptability in the context of managing risks, it

should not only be confined to risk management. It can be applied by an
entrepreneur to various decision-making processes in all aspects of business
operations. Cognitive adaptability demands that an entrepreneur be flexible and
open to various decision processes. With this flexibility, entrepreneur can shift
from using critical thinking to creative thinking (or from strategic thinking to
short-term thinking) in making decisions, depending on the objective being
pursued. In solving problems, critical thinking may be helpful. If the concern is the
development of a new product or service to respond to potential rivals, creative
thinking may be effective. If the entrepreneur is mapping the future of the
company, strategic thinking will be needed.

Beside flexibility in shifting to various processes of thinking, cognitive adaptability

requires that an entrepreneur to be dynamic. The dynamism of an entrepreneur
is needed in the light of the variety of changes, situations, problems, and issues
that he has to confront. This implies that there is no uniform response to these
developments. A dynamic entrepreneur should be aware of what is going on
outside his company and should be receptive in providing appropriate responses
to the changes in the environment. Dynamism may require him to combine
various processes of thinking for the needed decision-making.

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Cognitive adaptability also expects that and entrepreneur should have self-control
in making decisions. Although decisions should be made to respond to the
changes in the environment, these should not be made in undue haste. The
decision of an entrepreneur should be formulated after careful analysis, deep
reflection, or even intuitive thought.

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