Entrepreneurship Lecture

Definition Entrepreneurship Gielnik

„ … the process of discovery, evaluation, and exploitation of opportunities; and the set of Individuals who …“

• anything we start from scratch

• high focus on the individual

characteristics Pre-Launch Phase

Discovering and Evaluating an Opportunity

• identification of business opportunity

• evaluation of business opportunity

• intention to proceed further

characteristics Launch Phase

Exploiting an Opportunity

• assembling resources

• choosing legal form

• protecting new products/servides

• developing initial marketing plans and strategy

characteristics Post-Launch-Phase

Exploiting an Opportunity

• managing the business

• conducting negotiations

• human resource management

Opportunities emerge from …

… a complex pattern of changing conditions in:

• technology

• economy

• politics

• society

• demography

→ specific juxtaposition or confluence which did not exist previously

Classification of opportunities by …

• Type

• Characteristic

• Mechanism

• Role

opportunity classification Type

Classified by origin

• Technological

• Regulatory

• Demographic

• Socio-Cultural

• Macroeconomic

• Political

• Natural-environmental

opportunity classification Characteristics

Influence actionability and market potiental

• Scope (the larger the more promising)

  • spatial

  • temporal

  • sectoral

  • socio-demographic

• Onset

  • predictability/suddenness

opportunity classification Mechanism

Specify the cause-effect relationship

• Combination

• Compression

• Conservation

• Enclosing

• Expansion

• Generation

• Legitimation

• Substitution

• Uncertainty Reduction

opportunity classification Role

Situate effects by venture creation stage

• Triggering

• Shaping

  • Offer

  • Venture

  • Process

• Outcome-enhancing

opportunity classification: mechanism Compression

Reduction in the amount of time required to perform an activity

opportunity classification: mechanism Conservation

Reduction in the amount of resources required to perform an activity

opportunity classification: mechanism (Resource) Expansion

Increase in the amount of resource that is accessible

opportunity classification: mechanism (Resource) Substitution

Replacement of one resource with another

opportunity classification: mechanism Combination

Coupling with external resources or artifacts to provide functionality

opportunity classification: mechanism Generation

Allowing the creation of new artifacts (devices, functionalities, business models)

opportunity classification: mechanism Uncertainty Reduction

Reduction in the perceived uncertainty of any business decision of buyers or sellers

opportunity classification: mechanism Legitimation

Increase in the legality or psychological/sociocultural acceptability of the venture or its offerings

opportunity classification: mechanism (Demand) Expansion

Increase in demand at a given price and given functionality

opportunity classification: mechanism (Demand) Substitution

Increase in demand that is due to making a focal venture‘s market offerings (perceived as) more needed/attractive (positive substitution) or to making competitive offerings perceived as less needed or attractive (negative substitution)

opportunity classification: mechanism Enclosing

Increase in a venture‘s ability to capture the loyalty of buyers and the value it creates

Importance of prior knowledge

individuals are not equally likely to recognize a given entrepreneurial opportunity

• specific prior knowledge guides the cognitive process of interpreting new information

• prior knowledge on markets, customers, and other products influences the individuals discovery of business opportunities

knowledge corridor

people’s prior knowledge determines whether or not and which business opportunity they will identify

experience in markets

• … may be helpful to identify a specific opportunity

• … may lead to being unreceptive for other opportunites

• … may lead to discarding new information, strongly relying in past experiences

entrepreneurs who identify a set of market opportunites prior to first entry…

… derive performance benefits by doing so

the positive relationship between the number of market opportunities identified prior to first entry ...

… and new firm performance is nonlinear and subject to decreasing marginal return

escaping the knowledge corridor

• entrepreneurial experience

• active information search and external knowledge sourcing breadth

• coachability

• creativity techniques

experienced entrepreneurs posses…

… a refined and complex (mental) schemata to identify and evaluate business opportunities

lack of entrepreneurial experience can be made up for, by …

… active information search

coachability

degree to which an entrepreneur seeks, carefully considers and integrates feedback

analogical reasoning

applying the knowledge from one domain as a kind of model to help in understanding or developing ideas in another domain

conceptual combination

mentally combining different, opposing, previously unrelated concepts

creativity techniques

• conceptual combination

• analogical reasoning

• morphological box

morphological box

breaking down the problem into its key dimensions

What is an opportunity?

end-state that can be actualized through action when the necessary conditions (are believed to) exist

behavioral patterns of innovative entrepreneurs

1. Questioning frequently, challenging the status quo

2. Observing the world around, everyday experiences to find new ideas

3. Experimenting with hypothesis-testing and an open mindset

4. Idea Networking, testing ideas with a netword of individuals, diverse in background and perspective

role of action in entrepreneurship

• catalyst for associational thinking/pattern recognition

• change the status quo

• less susceptible to status quo bias

associational thinking

• cognitive process of connecting concepts that appear to be unconnected

• make connenctions across seemingly unrelated questions, problems, disciplines, fields or ideas

translate entrepreneurship flow model: cognitive bias → discovery behaviors → cognitive process to generate novel ideas

bias against status quo → questioning, observing, experimenting, idea networking → associational thinking → opportunity recognition

characteristics personal initiative (PI)

• self-starting (starting from scratch)

• future-oriented (proactive)

• persistent (overcoming barriers)

firm performance is dependent on…

pre- and post-entry learning

action theory process model: antecedents and mediators

antecedents and outcomes of actions:

• cognition (human capital, knowledge, cognitive biases)

• motivation (self-efficiany, passion)

• emotion (positive/negative affect, fear of failure)

action sequence of the opportunity development process:

• goal setting → information seeking → action planning → execution/monitoring/feedback → goal setting

• function as mediators, as they transmit the antecedents

action theory process model performance outcomes in the prelaunch phase

• business ideas

• business opportunity identification

• innovations

action theory process model performance outcomes in the launch phase

• business oppportunity development

• innovation

• resources

• organization structure

action theory process model performance outcomes in the postlaunch phase

• business opportunity development

• innovations

• growth

• sales

• survival

criteria for opportunity evaluation feasibility analysis

1. product/service feasability: desirability and demand

2. industry/target market feasability: industry and target market attractiveness

3. organizational feasibility: management prowess and resource sufficiency

4. financial feasability: total start-up cash needed, financial performance of similar businesses, overall financial attractiveness of the proposed venture

criteria for opportunity evaluation First screen: strength of business idea (1)

score each with (-1), (0) or (+1)

1. extent to which the idea:

   • takes advantage of an environmental trend

   • solves a problem

   • addresses an unfilled gap in the marketplace

2. timeliness of entry to market

3. extent to which the idea “adds value” for its buyer or end user

4. extent to which the customer is satisfied by competing products that are already available

5. degree to which the idea requires customers to change their basic practices or behaviours

criteria for opportunity evaluation First screen: industry-related issues (2)

score each with (-1), (0) or (+1)

1. number of competitors

2. stage of industry life cycle

3. growth rate of industry

4. importantce of industry’s products and/or services to customers

5. industry operating margins

criteria for opportunity evaluation First screen: target market and customer-related issues (3)

score each with (-1), (0) or (+1)

1. identification of target marget for the proposed new venture

2. ability to create “barriers to entry” for potential competitors

3. purchaing power of customers

4. ease of making new customers aware of the new product or service

5. growth potential of target market

criteria for opportunity evaluation First screen: founder related issues (4)

score each with (-1), (0) or (+1)

1. founder’s experience in the industry

2. founder’s skills as they relate to the proposed new venture’s product or service

3. extent of the founder’s professional and social networks in the relevant industry

4. extent to which the proposed new venture meets the founder’s personal goals and aspirations

5. likelihood that a team can be put together to launch and grow the venture

criteria for opportunity evaluation First screen: financial issues (5)

1. initial capital investment

2. number of revenue drivers

3. time to break even

4. financial performance of similar businesses

5. ability to fund initial product/service development and/or inital start-up expenses from personal funds or via bootstrapping

criteria for opportunity evaluation First screen

1. strength of business idea

2. industry-related issues

3. target market and customer-related issues

4. founder-related issues

5. financial issues

strategic perspective

• trying to predict which idea/opportunity will be succesful

• uncertainty can lead to paralysis/inaction

state uncertainty

inability to predict how the environment changes

effect uncertainty

inability to predict how changes in the environment effect you

response uncertainty

lack of insight into response options given a changing environment and the inability to predict the consequences of a response choice

opportunity evaluation role of confidence

• subjective (biased) perceptions have a crucial impact on new business creation

• strongest covariate: individuals belief to have sufficient skills, knowledge and abilities to start a business

• negative correlation of entrepreneurial confidence and approximate survival chances of business

• entrepreneurs overestimate their own odds of success and underestimate the amount of risk

opportunity evaluation substantial overoptimism

nascent entrepreneurs’ overstimating the probability that their activity will result in an operating venture

• forecasting through plans and financial projections increases this

opportunity evaluation optimal level of confidence

~ 65%

opportunity evaluation optimal ratio of positive and negative feedback

80 (+) / 20 (-)

opportunity evaluation high variability in percieved self-efficacy…

enables the ideal calibration of confidence

Dunning-Kruger-effect

• cognitive bias: people with low skill or knowledge in a specific area tend to overstimate their competence

• meta-cognition: combination of lack of expertise to perform well and lack of ability to accurately evaluate personal performance

above-average-effect

cognitive bias: people overestimate their own qualities and abilities relative to others (believe they are better than the average person)

naive optimism

unwavering belief that good outcomes are likely, ignoring risks, evidence or complexities

necessary naivety

beneficial, often strategic form of innocence or idealism allowing individuals to undertake challenging tasks without being paralyzed by risks or failures

escalation of commitment

behavioral phenomenon: continuous investment of resources into a failing course of action

definition entrepreneurship Schüßler

entrepreneurship is about assembling/organization-creation:

planning, coordinating, resources, people, ideas, establishing routines, structures and systems through ongoing interactions that are socially embedded and context-specific

cycles of entrepreneurial activity

1. organization creation

   • enactment ↻ selection ⇒ emergence

2. establishing routines

   • selection ↻ retention ⇒ newness

3. changing routines

   • newness ↻ emergence ⇒ transformation

entrepreneurship as a verb

bringing an organization into being

variance view entrepreneurship

• focus on the differences between individual entrepreneurs and their outcomes

• assumes that entrepreneurs are either succesful or unsuccesful

• focus on traits, variables and variables between relationships

⇒ entrepreneurship as an act

process view entrepreneurship

• focus in the underlying processes that drive entrepreneurial outcomes (e.g. learning, adaption, innovation)

• recognizes that entrepreneurial outcomes and entrepreneurial individuals are shaped by a complex interplay of factors

• focus on sequences, events and feedback loops

⇒ entrepreneurship as a journey

valley of death

space between opportunity discovery and product development

• shift from invention to commercial innovation

  • organization variables (legal, supply chain, finance, …) begin to matter

• shift in roles

idea journey

1. idea generation

   • need: cognitive flexibility

2. idea elaboration (evaluating idea’s potential)

   • need: support

[valley of death]

3. idea championing (convincing investors)

   • need: influence and legitimacy

4. idea implementation (producing a tangible outcome)

   • need: shared vision and understanding

five phases of growth model (Greiner)

each phase involves growth and a crisis

1. creativity; leadership

2. direction; autonomy

3. delegation; control

4. coordination; red tape

5. collaboration; variable

maturity increases throughout the stages

IPO

Börsengang

life cycle entrepreneurial firm: ideal type model (Picken)

1. startup: define and validate business concept

2. transition: lay the foundation for a scalable business

3. scaling: add resources to profitably scale the enterprise

4. exit: harvest the venture through IPO, private sale, merger or acquisition

ideal type model: startup (1)

define and validate the business concept

• understand the market opportunity, the offering, the business model and go-to-market strategy

• organization: informal, loosely structured, founder-driven

ideal type model: transition (2)

lay the foundation for a scalable business

• get the product-market fit and organizational structures in place

• engage customers

• organization: develop new organization capabilities, build repeatable processes and lay foundation for growth

ideal type model: scaling (3)

add resources to profitably scale the enterprise

• leverage partnerships to grow the business within the framework of the validated business concept geographically/market segments

• organization: professionalized functions

ideal type model: exit (4)

harvest the venture through IPO, private sale, merger or acquisition

• realize returns for funders and investors through a succesful exit

eight transition challenges

1. setting a direction and maintaining focus

2. positioning products in an expanded market

3. maintaining customer/market responsiveness

4. building an organization and management team

5. developing effective processes and infrastructures

6. building financial capital

7. developing an appropriate culture

8. managing risks and vulnerabilities

growth ambitions: start-up

growth ambitions: yes

right business model: no

⇒ find a model

growth ambitions: scale-up

growth ambitions: yes

right business model: yes

⇒ scale the model

growth ambitions: shape-up

growth ambitions: no

right business model: no

⇒ reinvent the model

growth ambition: stand-up

deliberate strategic choice

growth ambitions: no

right business model: yes

⇒ secure the model

pathways of growth

affected by:

• management

• marketing

• money

rapid growth

incremental growth

episodic growth

plateau growth

difference between growing and scaling

growing: increasing revenue with incrementally increasing costs

scaling: adding significant numbers of clients/customers/users, increasing revenue without necessarily expanding costs

⇒ scaling as a high-growth strategy, significant in digital economies

blitzscaling

• measure when you need to grow really quickly

• rapidly building out a company to serve a large (usually global market) with the goal of becoming the first mover at scale

resources entrepreneurs seek from their environment

• cultural resources

• social resources

• material resources

cultural resources

• positive attitude towards entrepreneurship

• value of risk-taking

• success stories

• acceptance of failure

• …

social resources

dense networks that provide…

• risk capital

• workforce

• knowledge and expertise

• mentorship

material resources

• support organizations: universities, incubators, accelerators, …

• political-institutional infrastructure

  • physical infrastructure

characterists Schumpetarian entrepreneurial venture

before the start: opportunity orientation

moment of venture creation: high-tech innovation

early life of a new venture: high growth aspirations

characterists non-Schumpetarian entrepreneurial venture

before the start: necessity orientation

moment of venture creation: low-tech or tech imitation

early life of a new venture: permanently small

definition institutions (North)

• formal and informal “rules of the game”

• provide economic agents with incentives and constrints

• induce stable patterns of behaviour

formal institution

e.g. protection of private property, tax codes, social insurance systems, employment, protection legislation, competition policy, trade policies, capital market regulation, contract enforcement, law and order