“The most valuable thing you can make is a mistake – you can’t learn anything from being perfect.”
In this document we will be discussing the role of entrepreneurship theories in understanding what it means to be an entrepreneur. We will discover how these theories apply to real life entrepreneurs and how it can effect decision making in a business environment.
Entrepreneurship theories are significantly important for three main reasons; firstly, they help to understand the process underlying entrepreneurship. Second they aim to determine whether it is possible to increase the entrepreneurial population. And lastly, to determine whether an increase in the number of new enterprises being formed could be achieved through selective education and policy measures.
To begin, we must ask ourselves, ‘how do we define an entrepreneur?’ and ‘why should I study entrepreneurship?’ Regarding the latter, entrepreneurship allows us to identify the qualities required of an entrepreneur. ‘What makes an entrepreneur?’, ‘Are people born entrepreneurs or do they learn the skills required?’ By identifying the qualities required we can better understand how ordinary people can achieve extra-ordinary success. Entrepreneurship helps estimate the appropriate contribution of an entrepreneur with regards to teamwork. It is also important in the appreciation and development of training and education when mistakes are costly and it is of interest to avoid learning by doing. This is of particular importance when dealing with intrapreneurship.
There are many different aspects to be considered, such that there is no single definition. Taking the ‘multi-disciplinary approach’ we can split the issues into five concerns; Economics, Psychology, Sociology, Management and Intrapreneurship.
Economic theory and Entrepreneurship
The perspective of the observer determines the definition of an entrepreneur. There are three main types of economists that we will go into in brief detail. The first is the ‘Classical economists’ which where primarily concerned with the economy with little interest in the individual. Second, the ‘Neo-classical’ focused on maintaining equilibrium for management and decision making. And finally, the Non-economists who maintained that the entrepreneur was the key figure in economic development.
The classical tradition was primarily concerned with risk taking, profit, motivation, management and the ability to solve problems adequately. The two most prominent theorists in the classical tradition would be Richard Cantillon and Jean-Baptiste Say.
Richard Cantillon, acknowledged by many to be the first great economic theorist, was an Irishman with a Spanish name who lived in France where he made his fortune under John Low’s schemes. He believed the entrepreneur to be a pivotal figure in the economy, a person with the required risk taking skills needed to succeed and as an individual capable of reacting to profit opportunities balancing supply and demand. His theory referred to any form of self-employment an act of entrepreneurship and as an individual capable of reacting to profit opportunities balancing supply and demand.
Jean-Baptiste Say was born in Lyons to a wealthy family of textile merchants. In 1787 Say gained a position at an insurance company in Paris upon completing his 2 year apprentice to an English merchant. Later in life he served as a French volunteer in the military campaign to expel the allied armies from France. It was during this period he began writing his theories. He believed the entrepreneur must be able to organise the factors of production and carry them out. He distinguished between the profit of the entrepreneur and the profits of capital and stressed the needs for administrative and management skills.
In this tradition entrepreneurship is regarded as one of the economic factors of production with four considerations, land, labour, capital and enterprise. It drew comparisons between a capitalist and an entrepreneur, suggesting the two are in fact interconnected, and focused on equilibrium results vs. adjustments process. Its main flaw hid in the fact that it could not explain origins of new demand. Alfred Marshall, a Neo-Classical writer stressed the importance of the entrepreneur. He believed management be separate to entrepreneur adding a leadership aspect to tasks.
In this tradition the entrepreneur was the key to economic development; theorist Joseph A. Schumpeter pioneered this tradition. A former product of the Austrian schools he argued those daring spirits, entrepreneurs created technical and financial innovations in the face of competition. He proposed the idea of 5 sources of innovation.
1 Developing new products and services.
2 Developing new methods of production
3 Identifying new markets
4 Discovering new sources of supply
5 Developing new organisational form
He believed the entrepreneur played the key role in generating economic development, by acting to cause rather than react to change. And that entrepreneurship is a form of creative destruction, in the sense that an entrepreneur creates a niche environment by challenging established companies and eliminating existing market structures, creating a chaotic marketplace.
For my case study, in the related field, I am going to compare and contrast two “fathers of computers” and evaluate economic traditions they could be applied to.
Adam Osborne vs. Charles Babbage.
These two men are both known as fathers of computers, one for pioneering calculating machines, which would later become the computer. The other is the pioneer of mass production of portable computers.
Both men excelled in a very similar field but through very different means and under very different terms. To be fair it could be argued that Charles Babbage was not an entrepreneur but an inventor, a purely from a profit oriental perspective his products were not commercial. But he possesses many of the skills and attributes befitting an entrepreneur.
Born in London in 1791 to a London banker, Babbage found himself as his own algebraic instructor, of which he was very passionate, and well read in the continental mathematics of his day. Clearly showing his sense of innovation and motivation, from an early age, he entered trinity college Cambridge in 1811 and found himself beyond the capabilities of his tutors. He co-founded the analytical society to promote continental mathematics, reforming the mathematics structure taught at the university.
Where he differs from more well established entrepreneurs lies in his marketing skills, or lack of. As a professional mathematician and calculating machinery enthusiast, it was this enthusiasm that led him to fame. He invented the difference engine in 1821 to compile mathematical tables, upon completion he had already moved on to a better machine which could perform not just one task but any type of calculation. It was named the analytic engine and had some of the characteristics of today’s computers.
“Errors using inadequate data are much less than those using no data at all”.
Due to technological insufficiencies it was unfeasible to construct in production. The British government suspended funding and after an agonizing waiting period ended the project. In this sense he failed to abide to any particular economic tradition, although he did possess many common traits. He proved himself a risk taker with an abundance of motivation, management skills and an ability to resolve problems. But as he failed to balance supply and demand, while reacting to profit opportunities, he falls short of being a classical tradition success story. Nor does he apply to the neoclassical. But in every sense he applies to then non economic tradition, solely concerned with the development through the entrepreneur.
Adam Osborne on the other hand was very much money orientation. Born to British parents in Thailand, the American entrepreneur trained as a chemical engineer, made a successful move in the nineteen seventies into publishing computer in books and then in 1981 at the west coast computer fare, in the same year that IBM launched the PC, he introduced the Osborne1, a 12Kg ‘luggable’ computer, the first ever portable computer.
He made significant profit selling $6 million in 1981 and $68 million the following year, at his peak shipping 10,000 units per month with 3 million units on backorder.
The ground breaking machine came with full keyboard, 5in. diagonal, monochrome built in monitor and floppy drives, nearly all the components of modern portable computers. It was fitted with: C. PM, a forerunner of DOS, and applications like ‘word star word processing’ it was even designed to fit under aircraft seats. He clearly showed he had a definite target market in mind, as the Osborne1 was aimed towards the businessman, a man with the finances to afford such a luxury.
In 1982 at a personal computer world show in London he announced his ‘executive machine’ with superior features which in effect killed the original machines sales. Perhaps in being too hasty to develop his idea, he failed to make a greater profit on the original before launching the executive. But the over hyped new model failed to appear in any quantity before the company went bankrupt. It is taught that management errors were to blame.
“Money coming in says I’ve made the right marketing decisions”.
However, following the collapse of Osborne computers, Osborne wrote a best selling memoir of the experience, “Hyper growth: The rise and fall of the Osborne Computer Co.”. Again showboating his innovation and drive.
“Anyone who chooses to judge me only by the nine months of that period when I wasn’t an officer of no corporation [sic] and running no company has got to be a victim of their own delusions”.
Following that, he went into publishing, founding the “Paperback Software International ltd. a company that specialized in inexpensive computer software. He argued that if telephone companies applied the same logic to their pricing as software companies a phone would cost $600. One of their products was an inexpensive clone of the lotus 1-2-3, which led to legal action in which lotus sued and as a result of the lawsuits; consumer confidence waned for the Paperback Software. Revenues dropped by 80 percent by 1989 preventing expansion. In the nineteen nineties, the case went to court and the court ruled the Paperback Software product, by copying of the lotus 1-2-3’s look and menu interface, violated the lotus’s copyright.
Although both men diverged in their behaviour, they shared a risk taking quality and although it may have seemed to be reckless, both men thrived on adversity, creating a profit out of a hindrance. And despite both men having possessed many required skills from an early age, both thrived on learning from their mistakes, in a constant attempt to better themselves in the true spirit of entrepreneurship.
“This is the ultimate con game – I’m having fun and people pay me to do it”.
Psychology theory and Entrepreneurship
To look at how personality traits can influence an entrepreneur’s life we are going to look at Roman Abramovich. In the short period since the collapse of communism in the U.S.S.R., Abramovich has amassed an estimated personal fortune of $13.3 billion and become governor of a large province in Eastern Russia.
Abramovich was born in Saratov, Russia in 1966. Orphaned at an early age, he was raised by his uncle in Ukhta, a bleak oil industry town outside the Artic Circle. His education was interrupted as he was drafted into the Red Army. At that time the Soviet army had a whole hierarchy set up in it, the Muscovites and Jews were especially hated.
Despite being Jewish, Abramovich was able to establish good relations with officers within the squad. It was in the army that he developed the ability to overcome privations and to depend only on himself. It is these skills of self preservation that have become prevalent in his career as an entrepreneur.
After being discharged from the army, he set up a business that made and sold dolls. His big break came with the privatization gold rush that came with perestroika. Abramovich was one of the first in Russia to discover that oil could be sold without extracting it. Instead he found that it could be sold by getting an export license and selling at world prices whilst purchasing it at domestic prices. This quickly allowed him to set up the company Sibneft with Boris Berezovsky. The vast profit he made turned him into one of the youngest oligarchs (Jewish oil baron).
Unlike his contemporaries like Berezovsky and Mikhail Khordorkhovsky, Abramovichs sense of self preservation, that had been nurtured in the army, allowing him to continue to conduct business under a changing political climate. Whilst his contemporaries are in exile and prison respectfully, Abramovich sold his 72% share of Sibneft to the Russian government. In that time he has gathered enough political sway to become governor of the region of Chukotka, where he enjoys a tax haven.
There are two key factors in the personality traits of Roman Abramovich that have allowed him to succeed in such a dynamic environment. First being the ability to react and adapt to huge changes to his environment such as being orphaned at a young age and conscription into the army. This trait seems to be in his nature as he has never had real parental figures in his life. The other is instinct of survival at all costs which appears to have been drummed into him in the Red Army. These key elements of his personality have enabled Abramovich to become one of the most powerful men in Russia today.
Sociology Theory and Entrepreneurship
The school of sociology believes that entrepreneurial behaviour of an individual depends on his interaction with the enviroment that he has been exposed to. Entrepreneurs can also completely understood in terms of their ability to adapt to the enviroment and their networking skills.
To look at how the sociological factors can influence an entrepreneurs life we are going to look at Ingvar Kamprad. He is the founder of IKEA, which currently has 186 stores in 31 countries around the world and has made its owner the richest man in the world with an estimated personal fortune of $32 billion.
Kamprad grew up on a small farm in Agunnaryd, Sweden. He began his career at an early age selling matches. When he was 17 he was given money by his father for doing well in school and with this money he started IKEA. He began a mail order system where he would deliver the goods himself in a milk van around Smaland. It is from this rocky, windswept area that Kamprad obtained the make do attitude that is reflected in his own self improving ethos: “You can do so much in ten minutes time. Ten minutes, once gone, are gone for good. Divide your life into ten minute units and sacrifice as few of them as possible on meaningless activity.”
This instinct to maximise the use of resources that come from being brought up on a farm in 1930’s Sweden are still reflected in IKEA today. During the 1990’s the company is said to have marketed a line of picture frames made entirely out of rubber offcuts from a Volvo factory.
Kamprads strong family background is present even in the names IKEA. The first two letters of which are his own initials and then proceeded by Elmtaryd (the name of his fathers farm) and Agunnaryd (the parish he grew up in).
Management Theory and Entrepreneurship
The management school takes the view of an entrepreneur as embracing the skills required to operate a business during the rapid expansion and growth phase rather than the skills for starting a business. This school is based on four principles Management, Finance, Operations and Marketing.
Google founders Larry Page and Sergey Bergin are of this ethos. They were not terribly fond of each other when they first met as Stanford University graduate students in computer science in 1995. They argued about every topic they discussed. Their strong opinions and divergent viewpoints would eventually find common ground in a unique approach to solving one of computer technologies biggest challenges: retrieving relevant information from a massive set of data.
By January of 1996, Larry and Sergey had begun collaboration on a search engine called BackRub, named for its unique ability to analyse the “back links” pointing to a given website. Larry took on the task of creating a new kind of server environment that used low-end PCs instead of big expensive machines.
A year later, their unique approach to link analysis was earning “BackRub” a growing reputation among those who had seen it. Larry and Sergey continued working to perfect their technology through the first half of 1998.
Following a path that would become a key tenet of the Google way, they bought a terabyte of disks at bargain prices and built their own computer housings in Larry’s dorm room, which became Google’s first data centre. Meanwhile Sergey set up a business office, and the two began calling on potential partners who might want to license a search technology better than any then available and presently, perhaps the best in the world. They wrote up a business plan, put their Ph.D. plans on hold, and went looking for an angel investor eventually raising 1 million. Over the years, Google have managed to earn financial trust from several mainstream companies. Today their biggest income is advertising rights.
The sheer size of Google shows the scale of their excellent managerial achievements. Their expanded web index contains more than 6 billion items including 4.28 billion web pages plus 880 million images, 845 million Usenet messages and a growing collection of book-related information pages. There are over a 100 million search queries every day and it is available in over 26 different languages. They have maintained their high standards by continuing to train their employees in an innovative way.
The launch of Google Labs enabled Google engineers to present their pet ideas proudly to an adventurous audience. Users could get acquainted with prototypes that were underdeveloped, while developers received feedback that helped them groom their projects for success.
By 1999, they had moved to Googleplex, its current headquarters in California. Their offices reside in all four continents. Presently, there is nearly 5000 employees worldwide.
To maximize the flexibility of the work space, large rubber exercise balls were adapted as highly mobile office chairs in an open environment free of cubicle walls. Lava lamps and dogs were a unique feature of their offices. The wellbeing of their staff was important to them, proven when they hired a company chef, bringing with him an eclectic repertoire of health-conscious recipes. Sections of the parking lot were roped off for twice-weekly roller hockey games. Larry and Sergey led weekly TGIF meetings in the open space between the desks. The informal atmosphere encouraged a good working environment with an accelerated exchange of ideas. Google employees made many noticeable improvements to the search engine itself and additional enhancements.
They are persistent with their young and fresh approach in all areas of their marketing strategies. Annually, Google continue to add new products and features to their web engine which include adwords, google toolbar and deskbar, discussion boards, catalogue shopping, email, digital photography, maps, games, website development, wireless technology, entertainment guides and the unusual zeitgeist which charts our shifting obsessions every year. .
Both founders are frequently rewarded with numerous awards and this feeds their hunger of personal accomplishment.
Mr. Pinchot coined the word “Intrapreneurship”. It involves the creation of independent business units designed to create, market and expand innovative services, technologies, or methods in the organisation. Some individuals are given the freedom to act in an entrepreneurial way without having to take on ownership responsibility.
For decades, forward-thinking corporations relied on internal entrepreneurial efforts to alter an organization’s status quo, harness the energies of talented renegades, and give sponsorship to promising businesses that were unrelated to the company. The trouble is that few companies were able to get it right. The biggest impediment was the nagging fact that even the most profitable corporations couldn’t hope to compete with the riches available to employees who left to found – and eventually take public – their own company.
Under Mr. Pinchot’s proposals for Research and Development departments, a researcher wishing to plunge intrapreneurially into some project would initially have to risk something of value to himself; such as 10% of the costs of a project, up to 20% of his salary for the duration of a project and two years thereafter. A committee within the company would then contract to “buy” the completed research in an intrapreneurial scheme for both cash bonuses and intra-capital. If a company makes £lm on a project, the intrapreneur’s share might be £100,000, of which only £10,000 might come in cash and £90,000 might come in intra-capital which the intrapreneur can invest on the corporation’s behalf in future Research and Development projects of his own choice. If he is successful again, his reward will be another cash bonus, probably larger the second time plus more intra-capital.
This system, says Mr. Pinchot, motivates creative staff to think practically and frees their individual initiative. It minimizes politics and maximizes performance as a criterion for advancement. It rapidly puts a portion of the company’s Research and Development budget in the hands of proven winners. It gives any good research employee a strong reason to stay with the company, since leaving would mean giving up control of his accumulated intra-capital.
Scratch a major innovation and you’ll find an intrapreneur. Don Estridge hid out in Boca Raton, Florida, far from his bosses at I.B.M. headquarters, to spearhead the creation of the personal computer. Steve Jobs and a group of 20 Apple Computer engineers created the Macintosh computer without “adult supervision,” mainly to compete with Apple’s mainstay, the Apple II – not to mention Mr. Jobs’s nemesis, Apple CEO John Scully. Intel’s gigantic microprocessor business got its start when Ted Hoff and a couple of engineers decided they didn’t want to do just another custom chip for a Japanese calculator maker. And then there’s James Gosling, Patrick Naughton, and the rest of the Sun Microsystems crew that holed up in a shuttered Digital Equipment research lab in Palo Alto, California, played Nintendo and created Java.
“Look back at any great business or invention at just about any big company and you can find that intrapreneurs created it”. Gifford Pinchot.
Considerable effort has also gone into trying to understand the psychological and sociological wellsprings of entrepreneurship. These studies have noted some common characteristics among entrepreneurs with respect to need for achievement, perceived locus of control, orientation toward intuitive rather than sensate thinking, and risk-taking propensity. In addition, many have commented upon the common, but not universal, thread of childhood deprivation, minority group membership and early adolescent economic experiences as typifying the entrepreneur.
There are similarly many questions about what the psychological and social traits of entrepreneurs are. The same traits shared by two individuals can often lead to vast different results: successful and unsuccessful entrepreneurs can share the characteristics commonly identified. As well, the studies of the life paths of entrepreneurs often show decreasing ‘entrepreneurship’ following success, which tends to disprove the centrality of character or personality traits as a sufficient basis for defining entrepreneurship.
Creativity is often not a prerequisite for entrepreneurship either. Many successful entrepreneurs have been good at copying others and they qualify as innovators and creators only by stretching the definition beyond elastic limits.
Micro Computer Beginnings by Dave Mathews
Jones Telecommunications & Multimedia Encyclopedia