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The Portable MBA in Entrepreneurship
John Wiley & Sons
ISBN: 0-471-27154-3
Chapter One
THE ENTREPRENEURIAL PROCESS William D. Bygrave
This is the entrepreneurial age. It is estimated that as many as 460 million persons worldwide were either actively involved in trying to start a new venture or were owner-managers of a new business in 2002. More than a thousand new businesses are born every hour of every working day in the United States. Entrepreneurs are driving a revolution that is transforming and renewing economies worldwide. Entrepreneurship is the essence of free enterprise because the birth of new businesses gives a market economy its vitality. New and emerging businesses create a very large proportion of innovative products and services that transform the way we work and live, such as personal computers, software, the Internet, biotechnology drugs, and overnight package deliveries. They generate most of the new jobs. For example, from 1990 to 1994, small, growing firms with 100 or fewer workers generated 7 to 8 million new jobs in the U.S. economy, whereas firms with more than 100 workers destroyed 3.6 million jobs. In 1998 to 1999, the last period for which data are available, small business accounted for two-thirds of the 2.6 million net new jobs.
There has never been a better time to practice the art and science of entrepreneurship. But what is entrepreneurship? Early this century, Joseph Schumpeter, the Moravian-born economist writing in Vienna, gave us the modern definition of an entrepreneuras the person who destroys the existing economic order by introducing new products and services, by creating new forms of organization, or by exploiting new raw materials. According to Schumpeter, that person is most likely to accomplish this destruction by founding a new business but may also do it within an existing one.
Very few new businesses have the potential to initiate a Schumpeterian "gale" of creation-destruction as Apple computer did in the computer industry. The vast majority of new businesses enter existing markets. In The Portable MBA in Entrepreneurship, we take a broader definition of entrepreneurship than Schumpeter's. Our definition encompasses everyone who starts a new business. Our entrepreneur is the person who perceives an opportunity and creates an organization to pursue it. And the entrepreneurial process involves all the functions, activities, and actions associated with perceiving opportunities and creating organizations to pursue them. Our entrepreneur's new business may, in a few rare instances, be the revolutionary sort that rearranges the global economic order as Wal-Mart, FedEx, and Microsoft have done, and Amazon.com, eBay, and Expedia.com are now doing. But it is much more likely to be of the incremental kind that enters an existing market.
Is the birth of a new enterprise just happenstance and its subsequent success or demise a haphazard process? Or can the art and science of entrepreneurship be taught? Clearly, professors and their students believe that it can be taught and learned because entrepreneurship is the fastest growing new field of study in American higher education. A study by the Kauffman Foundation in 2002 found that 61% of U.S. colleges and universities have at least one course in entrepreneurship. It is possible to study entrepreneurship in certificate, associates, bachelors, masters, and PhD programs.
That transformation in higher education-itself a wonderful example of entrepreneurial change-has come about because a whole body of knowledge about entrepreneurship has developed during the past two decades or so. The process of creating a new business is well understood. Yes, entrepreneurship can be taught. However, we cannot guarantee to produce a Bill Gates or a Donna Karan, any more than a physics professor can guarantee to produce an Albert Einstein or a tennis coach a Serena Williams. But give us students with the aptitude to start a business, and we will make them better entrepreneurs.
CRITICAL FACTORS FOR STARTING A NEW ENTERPRISE
We begin by examining the entrepreneurial process-the personal, sociological, and environmental factors that give birth to a new enterprise (Exhibit 1.1). A person gets an idea for a new business either through a deliberate search or a chance encounter. Whether or not he decides to pursue that idea depends on factors such as his alternative career prospects, family, friends, role models, the state of the economy, and the availability of resources.
There is almost always a triggering event that gives birth to a new organization. Perhaps the entrepreneur has no better career prospects. For example, Melanie Stevens was a high school dropout who, after a number of minor jobs, had run out of career options. She decided that making canvas bags in her own tiny business was better than earning low wages working for someone else. Within a few years, she had built a chain of retail stores throughout Canada. Sometimes the person has been passed over for a promotion, or even laid off or fired. Howard Rose had been laid off four times as a result of mergers and consolidations in the pharmaceutical industry, and he had had enough of big business. So he started his own drug packaging business, Waverly Pharmaceutical. Tim Waterstone founded Waterstone's bookstores after he was fired by W. H. Smith. Ann Gloag quit her nursing job and used her bus driver father's $40,000 severance pay to set up a bus company, Stagecoach, with her brother. They exploited legislation deregulating the U.K. bus industry.
For other people, entrepreneurship is a deliberate career choice. Sandra Kurtzig was a software engineer with General Electric who wanted to start a family and work at home. She started ASK Computer Systems Inc., which became a $400 million-a-year business.
Where do would-be entrepreneurs get their ideas? More often than not it is through their present line of employment or experience. A 2002 study of the Inc. 500-comprising America's [500] fastest growing companies-found that 57% of the founders got the idea for their new venture in the industry they worked in and a further 23% in an industry related to the one in which they were employed. Hence, 80% of all new high-potential businesses are founded in industries that are the same as, or closely related to, the one in which the entrepreneur has previous experience. That is not surprising because it is in their present employment that they get most of their viable business ideas. Some habitual entrepreneurs do it over and over again in the same industry. Joey Crugnale, himself an Inc. 500 Hall of Famer and an Inc. 500 Entrepreneur of the Year, became a partner in Steve's Ice Cream when he was in his early twenties. He eventually took over Steve's Ice Cream, and created both a national franchise of some 26 units and a new food niche, gourmet ice creams. In 1982, Crugnale started Bertucci's where gourmet pizza was cooked in wood-fired brick oven and built it into a nationwide chain of 90 restaurants. Then he founded Naked Restaurants as an incubator to launch his innovative dining concepts. The first one, the Naked Fish, opened in 1999 and brought his wood-fired grill approach to a new niche: fresh fish and meats with a touch of Cubanismo. The second restaurant, Red Sauce, opened in 2002, serves moderately priced authentic Italian food somewhat along the lines of Bertucci's.
Others do it over and over again in related industries. In 1981, James Clark, then a Stanford University computer science professor, founded Silicon Graphics, a computer manufacturer with 1996 sales of $3 billion. In April 1994, he teamed up with Marc Andreessen to found Netscape Communications. Within 12 months, its browser software, Navigator, dominated the Internet's World Wide Web. When Netscape went public in August 1995, Clark became the first Internet billionaire. Then in June 1996, Clark launched another company, Healthscape, to enable doctors, insurers, and patients to exchange data and do business over the Internet with software incorporating Netscape's Navigator.
Much rarer is the serial entrepreneur such as Wayne Huizenga, who ventures into unrelated industries: first in garbage disposal with Waste Management, next in entertainment with Blockbuster video, then in automobile sales with AutoNation. Along the way he was the original owner of the Florida Marlins baseball team, which won the World Series in 1997.
What are the factors that influence someone to embark on an entrepreneurial career? As with most human behavior, entrepreneurial traits are shaped by personal attributes and environment.
Personal Attributes
Two decades ago, at the start of the entrepreneurial 1980s, there was a spate of magazine and newspaper articles that were titled "Do you have the right stuff to be an entrepreneur?" or words to that effect. The articles described the most important characteristics of entrepreneurs and, more often than not, included a self-evaluation exercise to enable readers to determine if they had the right stuff. Those articles were based on flimsy behavioral research into the differences between entrepreneurs and nonentrepreneurs. The basis for those exercises was the belief, first developed by David McClelland in his book The Achieving Society, that entrepreneurs had a higher need for achievement than nonentrepreneurs, and that they were moderate risk takers. One engineer almost abandoned his entrepreneurial ambitions after completing one of those exercises. He asked his professor at the start of an MBA entrepreneurship course if he should take the class because he had scored very low on an entrepreneurship test in a magazine. He took the course, however, and wrote an award-winning plan for a business that was a success from the very beginning.
Today, after more research, we know that there is no neat set of behavioral attributes that allow us to separate entrepreneurs from nonentrepreneurs. It turns out that a person who rises to the top of any occupation, whether it be an entrepreneur or an administrator, is an achiever. Granted, any would-be entrepreneur must have a need to achieve, but so must anyone else with ambitions to be successful.
It does appear that entrepreneurs have a higher locus of control than nonentrepreneurs, which means that they have a higher desire to be in control of their own fate. This has been confirmed by many surveys which have found that entrepreneurs say that independence is their main reason for starting their businesses.
By and large, we no longer use psychological terms when talking about entrepreneurs. Instead we use everyday words to describe the characteristics found in most entrepreneurs (see Exhibit 1.2).
Environmental Factors
Perhaps as important as personal attributes are the external influences on a would-be entrepreneur. It's no accident that some parts of the world are more entrepreneurial than others. The most famous region of high-tech entrepreneurship is Silicon Valley. Because everyone in Silicon Valley knows someone who has made it big as an entrepreneur, role models abound. This situation produces what Stanford University sociologist Everett Rogers called "Silicon Valley fever." It seems as if everyone in the valley catches that bug sooner or later and wants to start a business. To facilitate the process, there are venture capitalists who understand how to select and nurture high-tech entrepreneurs, bankers who specialize in lending to them, lawyers who understand the importance of intellectual property and how to protect it, landlords who are experienced in renting real estate to fledgling companies, suppliers who are willing to sell goods on credit to companies with no credit history, and even politicians who are supportive.
Role models are very important because knowing successful entrepreneurs makes the act of becoming one yourself seem much more credible.
Would-be entrepreneurs come into contact with role models primarily in the home and at work. If you have a close relative who is an entrepreneur, it is more likely that you will have a desire to become an entrepreneur yourself, especially if that relative is your mother or father. At Babson College, more than half of the undergraduates studying entrepreneurship come from families that own businesses. But you don't have to be from a business-owning family to become an entrepreneur. Bill Gates, for example, was following the family tradition of becoming a lawyer when he dropped out of Harvard and founded Microsoft. He was in the fledgling microcomputer industry, which was being built by entrepreneurs, so he had plenty of role models among his friends and acquaintances. The United States has an abundance of high-tech entrepreneurs who are household names. One of them, Ross Perot, was so well known that he became the presidential candidate preferred by one in five American voters in 1992.
Some universities are hotbeds of entrepreneurship. For example, Massachusetts Institute of Technology has produced numerous entrepreneurs among its faculty and alums. Companies with an MIT connection transformed the Massachusetts economy from one based on decaying shoe and textile industries into one based on high technology. According to a 1997 study by the Bank of Boston, 125,000 jobs in Massachusetts were MIT-related. Nationwide in 1996, 733,000 people working in more than 8,500 plants and offices held jobs that originated with companies founded by MIT graduates. The 4,000 or so firms that MIT graduates founded accounted for at least 1.1 million jobs worldwide and generated $232 billion in revenues. If MIT-related companies were a nation, it would be the 24th largest economy in the world. The neighborhood of East Cambridge adjacent to MIT has been called "The Most Entrepreneurial Place on Earth" by Inc. magazine. According to Inc., roughly 10% of Massachusetts software companies and approximately 20% of the state's 280 biotechnology companies are headquartered in that square mile.
It is not only in high-tech that we see role models. Consider these examples:
It has been estimated that half of all the convenience stores in New York city are owned by Koreans.
It was the visibility of successful role models that spread catfish farming in the Mississippi delta as a more profitable alternative to cotton.
The Pacific Northwest has more microbreweries than any other region of the United States.
In the vicinity of the town of Wells, Maine, there are half-a-dozen secondhand bookstores.
African Americans make up 12% of the U.S. population, but owned only 4% of the nation's businesses in 1997. One of the major reasons for a relative lack of entrepreneurship among African Americans is the scarcity of African-American entrepreneurs, especially store owners, to provide role models. A similar problem exists among Native Americans.
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