fundamentals of entrepreneurial opportunity recognition lit review 070508
TRANSCRIPT
LITERATURE REVIEW
(i) Entrepreneurship: Origins and an historical overview
a) From Cantillon to Schumpeter and beyond
THE PURPOSE OF THIS SECTION IS TO END WITH A RIGOROUS
EXPLANATION OF ENTREPRENEURSHIP AS A SUB-PROCESS OF
ECONOMIC ACTIVITY AND A ROBUST DEFINITION OF THAT PROCESS
HIGHLIGHTING ITS FUNDAMENTAL CHARACTERISTICS.
And in the beginning they were called ‘Undertakers’ …
Given the unique and critical role of entrepreneurship in an economic
system characterized by the private ownership of capital, one would have
thought a vast body of research would exist for economists to draw on in
support of their predictions, not to mention the army of budding entrepreneurs
wanting to know more about entrepreneurship. Sadly, however, reference to
any elementary text on economics reveals little on the subject if it is
mentioned at all. Whilst anecdotal evidence dating back to the middle-ages
suggests that the origins of entrepreneurship can be traced to the role some
individuals played when appointed by the nobility to oversee and take
responsibility for the successful completion of large scale production projects
(Berthold, 1951), there is little subsequent theoretical support for the notion.
In formal economic theory the concept of ‘entrepreneur’ and
‘entrepreneurship’ are first acknowledged in the essays of Richard Cantillon
(1734). Cantillon described the entrepreneur as an agent who purchased the
means of production for combination into marketable products. The word
‘entrepreneur’ derives from the French verb ‘entreprendre’ meaning ‘to
undertake’ and was originally translated from the German verb ‘unternehmen’
of the same meaning. The original essays of Richard Cantillon (1755) refer to
this individual as an ‘undertaker’ acknowledging that such a person undertook
or managed large scale projects and acted as a ‘go-between’ in sizeable
transactions.
“The circulation and exchange of goods and merchandise as well as their
production are carried on in Europe by Undertakers, and at a risk. The farmer
is an undertaker who promises to pay to the landowner, for his farm or land, a
fixed sum of money (generally supposed to be equal in value to the third of
the produce) without assurance of the profit he will derive from this enterprise.
The undertaker or merchant who carries the products of the country to the city
cannot stay there to sell retail as they are consumed. No city family will
burden itself with the purchase all at once of the produce it may need, each
family being susceptible to increase or decrease in number and in
consumption or at least varying in the choice of produce it will consume.
For this reason many people set up in a city as merchants or undertakers, to
buy the country produce from those who bring it or to order it to be brought on
their account. These undertakers can never know how great will be the
demand in their city, nor how long their customers will buy of them since their
rivals will try all sorts of means to attract customers from them. All this causes
so much uncertainty among these undertakers that every day one sees some
of them become bankrupt.”
(Richard Cantillon ‘Essai sur la nature du commerce en general’ 1755,
Chapter 13, pg. 12).
Cantillon’s original insight acknowledges that discrepancies between supply
and demand exist and that such discrepancies create market opportunities for
someone to buy cheap goods and to sell them more profitably in that market.
It is this sort of arbitrage that brings competitive markets into equilibrium.
Displaying a willingness to engage with economic uncertainty and to assume
a degree of risk are two of the most important distinguishing characteristics of
the classic entrepreneur. According to Cantillon (1755), the entrepreneur was
not necessarily involved in manufacture nor did they essentially use personal
funds to invest in the enterprise, although many did. The entrepreneur was
any individual who was self-employed and not directly engaged for their labor
in some productive process. Cantillon therefore makes a clear distinction
between the capitalist and the entrepreneur in the economic process.
Cantillon also included beggars and thieves in his definition of entrepreneurs,
as they were not working for an employer and therefore faced economic
uncertainty. This could possibly be one reason why the notion of
entrepreneurship and the identity of entrepreneurs have been excluded from
pure discussion in economics for fear of a less than worthy image being
associated with the profession.
From Cantillon’s early description we can visualize many of the
characteristics and qualities later theorists would focus on in an attempt to
more accurately define what an entrepreneur was and how they engaged in
economic activity. In the first paragraph above, for example, the Farmer is
identified as a primary producer that accepts risk, a notable attribute of
entrepreneurs, without any assurance of making a profit. Cantillon
acknowledges the presence of simple supply chain issues and the presence
of a market by referring to merchants who transport their goods to cities for
sale. He also recognizes that certain merchants will ‘create new ventures’ for
the purpose of selling their goods, the presence of competitors in the market,
the ambiguities and uncertainty surrounding market conditions and the
ongoing problems associated with business sustainability.
Despite this early insight and acknowledgment of entrepreneurship and
entrepreneurs traditional neoclassic macroeconomic theory has failed to
develop the concept further. The disappearance of entrepreneurship from
economic debate has a long history. Adam Smith (1776) in the ‘Wealth of
Nations’ clearly separates the functions of the capitalist from those of the
manager, emphasizing the fact that the profits accumulated by the capitalist
excluded the ‘wages’ paid to management citing these as payment for the
labour of inspection and direction. Furthermore, Smith did not distinguish
between the capitalist as the provider of the enterprise’s stock and the
entrepreneur as the ultimate decision maker. Although the terms ‘projector’
and ‘undertaker’ can be found in Smith’s work the terms were used
synonymously to identify the business proprietor. The acknowledged status of
Adam Smith’s work and his subsequent failure to elaborate on the role of the
entrepreneurial function and distinguish it from the pure ownership of capital
ultimately filters through to ensuing standard practice for all classic English
economists. Baumol (1968, pg.66) notes that; “The theoretical firm is
entrepreneur-less; the Prince of Denmark has been expunged from the
discussion of Hamlet”.
In some respects the classic economist can be forgiven for this oversight. If
one considers that the most prevalent form of business ownership at the time
of the Industrial Revolution was small to medium size enterprise, commonly
family-owned, with capital provided by the owner, relatives and friends, it is
little wonder that economists failed to highlight the distinctive nature of the
entrepreneurial function. It would seem that early business structures have an
inherent entrepreneurial orientation that is embedded in the way they operate
and which cannot be separated from normal economic activity. Others,
however, perceive this as gross negligence particularly when this distinction
was clearly set out in Cantillon’s work and which was written some 20 years
prior to Adam Smith’s seminal text (Blaug 2000). Whilst formalized neoclassic
economic models do not explain the role of the entrepreneur and
entrepreneurial activity, it does not mean that the concepts have been
ignored. They have simply not been accorded the same importance in the
advancement of neoclassic economic theory. According to Baumol (1968,
pg.67)) “there is no room [in modern economic theory] for enterprise or
initiative”. John Stuart Mill (1848), another neoclassic economist, for example,
refers to the entrepreneur and considered entrepreneurship to be direction,
supervision, control, and risk taking, with risk being the main distinguishing
feature between the manager and the owner-manager.
Jean Baptiste Say (1803) writing after Adam Smith’s seminal text ‘Wealth of
Nations’, cannot bring himself to dwell on the role of entrepreneurs in
economic theory. Say refers to entrepreneurs as ‘adventurers’ and describes
them as, “the master-manufacturer in manufacture, the farmer in agriculture,
and the merchant in commerce; and generally in all three branches, the
person who takes upon himself the immediate responsibility, risk, and conduct
of a concern of industry, whether upon his own or a borrowed capital” (pg.
18). Say’s interpretation of the entrepreneur / adventurer furthermore
suggests they are not unique from any other capitalist agent in the economic
process; “The ownership of land, capital, and industry are sometimes united in
the same hands. A man who cultivates his own garden at his own expense, is
at once the possessor of land, capital, and industry, and exclusively enjoys,
the profit of proprietor, capitalist, and labourer. The knife-grinder's craft
requires no occupancy of land; he carries his stock in trade upon his
shoulders, and his skill and industry at his fingers' ends; being at the same
time adventurer, capitalist, and labourer”, (Say, 1830, pg. 19). The proprietor,
capitalist, craftsman, labourer and adventurer are one and the same person.
What does this mean for entrepreneurship as a discrete process? It supports
a view that there is no distinction between the business owner (capitalist) and
an entrepreneur. Say’s proprietor/craftsman inherently possesses all the
talents associated with entrepreneurship and is therefore equipped to identify,
assess and exploit entrepreneurial opportunities as they come along. Such an
interpretation relegates entrepreneurship to metaphoric use; i.e.,
entrepreneurial activities are performed ad hoc by anyone engaged in
economic processes.
Similarly, David Ricardo (1821) who borrowed heavily from Cantillon in
distinguishing between the provision of capital to business enterprise on the
one hand and the functions of superintendence, direction and control on the
other, largely ignores the role of entrepreneurship in the economic process.
Ricardo, like many other of the era, regarded production and the investment
of capital as an automatic process that did not involve risk and where
decisions were made against a fairly stable backdrop of certainty. Ricardo did
however recognise that the first capitalist agent to introduce some form of
innovative improvement such as a new machine or process, was likely to reap
some extra advantageous return initially but this did not single them out as
being any different from other capitalist agents (para. 5.29).
For Marxist economic theorists the economic process is also virtually
automatic once the question of where to source capital had been addressed.
The only problematic aspect of the production process for Marxists was the
labour process; the control and direction of the work force in such a way as to
maximise the intensity of human effort. For Marx himself, the fact that an
entrepreneur was prepared to accept an element of risk for economic gain
was of lesser importance than the purpose behind accepting the risk in the
first place (Marx, 1867; Sweezy, 1942). Marxist theorists perceived the
entrepreneur as an agent directly involved in the accumulation of capital (for
his/her own gain), a key element in their perspective of the economic process.
For Marxists, the entrepreneur is a pest, a drain on the economic system and
something to eradicate, an enemy to the collective process of capital
accumulation by the masses. The entrepreneur is a Capitalist agent, an
opposite to the collectivist ideologies of the Marxists on the economic
spectrum, seeking only to accumulate wealth at an individual level. The
Marxist school does not therefore dwell on any qualities of entrepreneurship
other than to identify it as a process working independently and for its own
selfish gain. Like the English neoclassic economists of the day Marx did not
consider whether the residual income left over after paying interest on
borrowed capital and management wages corresponded to any particular
economic function such as buying raw materials at certain prices and selling
outputs at uncertain prices, resulting in possible losses or profits. Marx
assumes then that decision making under uncertain conditions entails no risk
or, if it does, then there are readily available capitalists (necessary ‘evils’)
willing to take on such risk. Marx is consequently perpetuating what Adam
Smith and David Ricardo have posited by conflating the functions of the
capitalist and the entrepreneur.
At roughly the same time, John Stuart Mill (1848) was busy popularizing the
term ‘entrepreneur’ amongst English economists but he was simply
perpetuating the Adam Smith and David Ricardo view that the entrepreneur
was a multifaceted capitalist . A shift of focus away from the internal
mechanisms of the organization ultimately eliminated further discussion of the
role of the capitalist and the entrepreneur. The general equilibrium theory of
Leon Walras heralded a new era of neoclassic economics which seems to
have ultimately spelt the demise of any further discussion regarding
entrepreneurship. Walras refers to the notion of ‘productive agents’ in a
competitive economy who are rewarded on the basis of their marginal
product, i.e., the increment of output that is contributed by the marginal unit of
that agent. So, when one productive agent hires others to produce a particular
output, this hiring agent is forced, through wage and market competition, to
pay the marginal product of all the agents he employs. Whatever is left after
all productive agents have been paid represents the reward or marginal
product of the hiring agent for his services. This encourages productive
agents to become hiring agents thereby eliminating the residual positive
marginal product. If on the other hand the hiring agent incurs a negative
marginal product after paying all the agents, in other words a loss, then the
hiring agent ceases to be a residual income recipient and reverts to renting
his services to others at the value of his marginal product. In the final analysis
Walras claimed that the residual outcome would tend to become zero. When
‘perfect competition’ had done its work and when long and short term
equilibrium had been reached, labor would have received its wages, capital
would have received its interest but profit would have been eliminated, along
with the entrepreneur who Walras claimed neither ‘benefited’ or ‘lost’ (Hebert
& Link, 1982).
Unfortunately, economic theory founded on an equilibrium model is
predicated on the assumption of perfect information and efficient markets.
Macroeconomics has been taught and practiced this way for over 100 years
but the assumptions it has been based on are manifestly untenable in a real-
world setting. Whilst these assumptions have led to a degree of
understanding and progress in empirical research, their dogmatic retention
has become a barrier to future economic progress because they fail to
recognize variations in individual decision making processes. According to the
classic economic model uncertainty does not exist. It therefore eliminates the
existence of the entrepreneur who, by definition, assumes the risk for
decisions made under conditions of uncertainty. General economic
equilibrium theory provides a static conceptualization of economic competition
with no room for change or entrepreneurial adaptation. Indeed, innovation, a
hallmark of Schumpeter’s economic theory (1934), was far removed from any
discussion on economic growth in neoclassic economics.
It is perhaps prudent to pause at this time and summarise the status of
entrepreneurship and the role entrepreneurs play in economic theory. From
Cantillon’s discovery of the entrepreneur and his acknowledgment that
entrepreneurship is a separate process of economic activity involving the key
characteristics of risk and uncertainty, there has been a concerted drive by
subsequent economic theorists to subvert any reference to the phenomenon.
Equilibrium theory has systematically dismantled any suggestion of a rogue
creative process that, by its very nature, is complex, disruptive and which
causes imbalances in the standard economic framework. The argument that
organizations of the time were much smaller, sourced capital from wealthy
family and friends, and may have had entrepreneurial flair embedded within
them has merit. Equilibrium theory has continued to focus on the growth of the
modern organization and the dynamics of a growing economy. However, rigid
adherence to a notion that ultimately economic exchanges tend toward ‘zero’
and perfect balance, is to suffer from what Barker (1984) refers to as
‘paradigm paralysis’; we ignore that which does not fit within our paradigm
(Kuhn, 1952).
Western European theories of early entrepreneurship focus primarily on the
contributions of two economists, Johann von Thunen, a German economist
and Joseph Schumpeter, an Austrian born economist. Both have used
Cantillon’s work on the entrepreneur’s acceptance of risk as their point of
departure, a feature which is strongly represented in their respective works on
entrepreneurship.
Von Thunen in particular concentrated on economic activity that resulted in
‘entrepreneurial profit’ as opposed to profit from capital only. This required a
more advanced model of risk and decision making under uncertain conditions
that suggested entrepreneurs were not people who simply received a fixed
contractual income similar to that of an employee but rather they operated as
freelance agents generating income on the basis of their innovative capability
(Von Thunen, 1850). Specifically, von Thunen defines the gains made by
entrepreneurs as being that which is left over from gross profits of a business
operation after paying the interest on invested capital, management wages
and the insurance premium against calculable risk of losses. Thus, the profit
generated purely by capital (through interest) was seen to be different from
the profit generated by following an innovative, and by his definition,
entrepreneurial process, which was the return for incurring risks that no
insurance company would cover because they were unpredictable. The
investor would therefore generate a return or profit from the capital invested in
the project, usually predetermined and contractually stated, whilst the
entrepreneur would generate a profit on top of this through his ingenuity
(talent) and willingness to accept those risks that could not be covered. Von
Thunen’s entrepreneur appears to have played a stabilizing role in the
economic process, in other words, by accepting risk the challenge for the
entrepreneur would be to manipulate the economic situation, using his
specific talents and expertise, from a situation of uncertainty to one of
certainty thereby minimizing not only the investor’s but the entrepreneur’s own
exposure to risk, in order to profit. Through Von Thunen’s work we begin to
see a return to an acknowledgement of the entrepreneur’s role in the
economic process.
Buried in the depths of American economics literature was another theorist,
Frank Knight, (????) who focused extensively on Thunen’s original factors of
‘risk’ and ‘uncertainty’. His contribution emphasized that entrepreneurship as
a process was not noted for it’s accuracy in ‘probable forecasting’, i.e. using
historical events, past performance and calculable formulae to predict
conditions for the future, but rather it’s focus on ‘uncertain forecasting’ where
probability formulae and past performance do not apply. The distinguishing
feature of this perspective from that of Von Thunen is that Knight’s
entrepreneur takes risks where there is a high degree of uncertainty, whilst
Von Thunen’s manages risk and the uncertainties have to some extent either
been marginalized or are not significant enough to have any direct impact on
the entrepreneurial process. These two perspectives are later echoed by both
Schumpeter and Kirzner. Schumpeter’s entrepreneur breaks the equilibrium
cycle by taking risk through the introduction of disruptive innovations, whilst
Kirzner’s entrepreneur returns the economic cycle to equilibrium by managing
risk.
There is, however, another interpretation to be offered here which clarifies
the distinction between Von Thunen and Knight. Von Thunen’s entrepreneur
can perform multiple roles including managing and administering but he
remains in essence a creator or innovator. According to Von Thunen, an
entrepreneur confronted by significant ‘uncertainty’ would be more inclined to
manage the risks associated with the venture based on historical events and
formulae that have proven to have had a certain reliability in outcome.
However, this runs contrary to the essence of his entrepreneur who is
supposed to be creative and seek out unique solutions. Knight, on the other
hand, does not impose managerial or administrative constraints on his notion
of the entrepreneur. He retains the fundamental quality of creativity but allows
the entrepreneur to develop unique solutions to uncertain events by taking
risks and thereby creates a more proactive and dynamic image of the
entrepreneur.
In many respects, Knight’s view of the entrepreneur is more that of a
strategic thinker and has a broader conceptualization of situational factors that
could have an impact on the enterprise whilst Von Thunen is more inwardly
and organizationally focused on minimizing the impact of situational factors
through management. The Board of Directors in an organization, for example,
is expected to deal with strategic issues, a high degree of uncertainty and an
increasingly complex world of business. Using this analogy one would expect
Knight’s entrepreneur to fit in with the Board of Directors, i.e., a body that is
more strategically focused and Von Thunen’s entrepreneur with the senior
executive structure of the organization, a level that is more operationally /
managerially focused. This point will be addressed again later in this chapter,
however, it is relevant to mention here that entrepreneurs demonstrate the
same degree of creativity that strategists do and one cannot help but wonder
whether entrepreneurship and being entrepreneurial is not simply another
form of strategic management and possessing the capacity for strategic
thinking one would find in larger, modern organizational structures. The
evolution of the modern corporate organization from its smaller industrial
revolution beginnings seems to support the neoclassic economist’s view that
entrepreneurship is simply an aberration to equilibrium theory. Indeed, it is
perhaps this view of the entrepreneur that has led to the development of an
Institutionalism perspective of Entrepreneurship and a recent swing to the
notion of ‘Corporate Venturing’.
Weber (1905-6), seeing the entrepreneur as the ultimate source of formal
authority in an organization, analyzed the presumed relationship between the
"Spirit of Capitalism" and the "Protestant Work Ethic." According to his thesis,
the success of the entrepreneur could be traced to cultural values such as
asceticism, deferred gratification, frugality, and thrift; fundamental elements of
a Protestant culture (but not exclusive to it). Culture was the explanatory
variable that predisposed some people towards being drawn into
entrepreneurial activity while other people tended to refrain from new venture
creation. This explains why Protestants in France, for example, were more
often perceived as entrepreneurs. Thus, the Weberian approach argues that
entrepreneurial behavior is culturally influenced by values and beliefs.
Weber (1905-6) also elaborated on how religion, the caste system, and the
family framework affected the emergence of entrepreneurship in India. He
noted that the ‘Jains’ (an ascetic religious sect) became a trading sect for
purely ritualistic reasons, because only in ‘trading’ could one practice
‘ahimsa’, the absolute prohibition of the killing of living things. In much the
same way, Gadgil (1959) showed that Muslims, Christians, and Jews were
the chief traders of Kerala, in South India, and Jenkins (1984) showed that
Protestants in Northern Ireland used ethnicity in the territory of economic
transactions in order to dominate the country. From a Weberian perspective
then, the entrepreneur is not attracted to entrepreneurship because of its risk;
the individual is attracted to entrepreneurial activity because it is compatible
with the cultural values to which the individual was previously conditioned.
The turning point for a substantial return to debate on the role of
entrepreneurship and entrepreneurs is best represented through the work of
Joseph Schumpeter (1911). The concept of innovation is central to
Schumpeter’s theory of entrepreneurship. Schumpeter places
entrepreneurship and its connection with dynamic uncertainty at the centre of
economic enquiry. In developing this argument Schumpeter constructed a
model of an economy where any form of technological change was absent.
He posited that such an economy would eventually settle down to become a
repetitive and perfectly routine process where there was no uncertainty about
the future (a state of perfect equilibrium – the neoclassic economy). He further
contended that such an economy would be devoid of profit and that even
interest rates would trend toward zero. However, as has been previously
argued a static conceptualization of equilibrium theory denies the possibility
for change and economic growth. Dynamic change and technological
innovations are central to Schumpeter’s argument; these caused tensions to
develop in economic balance but also introduced new methodologies,
products, services, sources of supply and new forms of organization.
Schumpeter defines innovation as the implementation of new combinations in
a commercial sphere. The origin of these innovations is the entrepreneur; the
source of all dynamic change in an economy (Schumpeter, 1942).
The evolution of capitalism according to Schumpeter is a process of
‘creative destruction’. “The opening up of new markets, foreign or domestic,
and the organizational development from the craft shop and factory to such
concerns as U.S. Steel illustrate the same process of industrial mutation - if I
may use that biological term - that incessantly revolutionizes the economic
structure from within, incessantly destroying the old one, incessantly creating
a new one. This process of Creative Destruction is the essential fact about
capitalism;
It is what capitalism consists in and what every capitalist concern has got to
live in” (Schumpeter, 1934, pg. 83). The entrepreneur is an active and
creative member of this economic process of ‘industrial mutation’
(entrepreneurship) who does not passively adapt to re-equilibrating
circumstances but continues to push ahead. Schumpeter recognizes that the
entrepreneur is a crucial element of the creative destruction process but is
distinct from the person supplying the capital. Besides being an innovator of
dis-equilibrating technology the entrepreneur can also function as a manager
but Schumpeter acknowledges this is not their true essence. Thus the
innovative (entrepreneurial) businessman ultimately loses this characteristic
as they build their business and settles into running it along similar forms of
other established business. The consequence of this is that the population of
entrepreneurs in a capitalist economy is constantly changing and the process
of entrepreneurship becomes less identifiable because it is mixed in with other
kinds of business activity.
Following World War II, economic recovery was of paramount importance
and mainstream economic philosophy split into two diametrically opposed
ideologies, namely, the Planned Economy which was based on the writings of
Karl Marx and Engels and the Free Market economy, a continuation of the
neoclassic theories formulated by Adam Smith and John Stuart Mills. As
previously mentioned entrepreneurship and entrepreneurs do not feature in
Marxist economics other than in a negative context and I will therefore not
elaborate on this in further discussion. In the Free Market framework,
however, entrepreneurship continued to flourish as a field of theoretical
enquiry through two main schools; the Austrian school comprising the writings
of Ludwig von Mises and Friedrich Hayek; and the Chicago school based
mainly on the contributions of Milton Friedman and Israel Kirzner.
For von Mises (1949) it was the entrepreneur who determined the course of
production in a society’s economic organization. In doing so the entrepreneur
is subjected totally to the demands made by the consumer. If they fail to
produce what the consumer wants in the cheapest and best possible way,
they will lose their potential for profit and be eliminated from their competitive
position. If they succeed, however, consumers will continue make their
purchases and the entrepreneur will ultimately gain in profit. Von Mises makes
the point that entrepreneurs are different from other people because if all
people were able to correctly predict the future state of any given market then
entrepreneurs would neither earn any profit nor suffer any loss. Successful
entrepreneurs are therefore those who can predict future prices more
accurately than anyone else and bring the means of production together
cheaply. The challenge for the entrepreneur is to select new technological
methods of production that provide consumers with those products and
services that are urgently needed, in the cheapest possible way. More
specifically, von Mises recognises that the key to entrepreneurial profit was
the decision making capacity of the entrepreneur. Von Mises recognised that
it was ‘mental acts’ in the mind of the entrepreneur from which profit ultimately
originated. ‘Profit is a product of the mind, of success in anticipating the future
state of the market. It is a spiritual and intellectual phenomenon’ (pg. 97).
Unfortunately the Austrian theory of entrepreneurship reduces the process to
simple arbitrage and eliminates many of the critical questions that have been
posed about the phenomenon.
Shapero (1984) concluded that culture was an explanatory variable for
entrepreneurial activity or the lack of it. He also noted that some cultures
value entrepreneurship more than do others. "Some cultures that value
entrepreneurship are the: Ibos in Africa, Gujeratis, Jains, and Parsis in India,
the Chinese in Southeast Asia, Antioquerios in Colombia, Jews, Lebanese,
the people from Pyongan in North Korea, and Mennonites and Mormons in
the United States (p. 26)." I will return to the point of culture and values in
further discussion below.
Numerous empirical studies report some cultures as being more
represented than others in the small business sector. Among them, Lasry
(1982) noted the percentage of entrepreneurs among Sephardi immigrants in
Montreal as being significantly higher (38 percent) than among immigrants in
general.
Some cultures, in contrast, do not value entrepreneurial behavior. Becker
(1956) suggested that some societies, because of their non-entrepreneurial
culture, would rather welcome outsiders to perform entrepreneurial functions.
In effect, some groups with entrepreneurial values do become the
predominant entrepreneurs of host societies. Sayigh (1952), for instance,
found Christians and Jews to be the most prominent group of entrepreneurs in
Lebanon. Also, Kong, Soon, and Hwa (1991) showed how Singaporean
Chinese are active entrepreneurs in Malaysia.
Entrepreneurship as an economic process
In the context of modern economic theory, Entrepreneurship, being a sub-
class of economic activity, can lead to two possible outcomes. The first deals
with the introduction to the market of new products / services that meet
defined needs or expectations and that create wealth. The second possible
outcome focuses primarily on the creation of new enterprise that could
ultimately meet defined market needs or expectations through the creation of
innovative products or services. Whilst there has been considerable debate
surrounding what Entrepreneurship is there is also a substantial body of
knowledge telling us what entrepreneurship comprises. For example;
It is a purposeful activity to initiate, maintain and aggrandize a profit
oriented business (Cole, 1949)
It is the creation of new enterprise (Low & Macmillan, 1988)
It is the creation of new organizations (Gartner, 1988)
It is the process of creating something different with value by devoting the
necessary time and effort; assuming the accompanying financial,
psychological and social risks; and receiving the resulting rewards of
monetary and personal satisfaction (Hisrisch & Peters, 1989)
It is the process by which individuals – either on their own or inside
organizations – pursue opportunities without regard to the resources they
currently control (Stevenson & Jarillo, 1990)
Entrepreneurship is ‘new entry’ (Lumpkin & Dess, 1996)
It is taking advantage of opportunity by novel combinations of resources in
ways that which have an impact on the market (Wiklund, 1998)
A common thread running through all of the above explanations, some
more explicitly stated than others, is that entrepreneurship is a process, i.e., a
purposeful and deliberate course of action that occurs in an economic context
which produces an outcome that creates wealth for the agent engaged in it
(Kirzner, 1983).
Fig.1. Entrepreneurship as a class of economic activity.
The entrepreneur is an integral part of the entrepreneurial process, so
much so that any study of entrepreneurship that does not include the
entrepreneur would render the findings meaningless Carland, Hoy & Carland
(1988). Similarly, Shaver and Scott (1991) state “Economic circumstances are
important, marketing is important, finance is important, even public agency
assistance is important. But none of these will, alone, create a new venture.
For that we need a person, in whose mind all of the possibilities come
together, who believes that innovation is possible, and who has the motivation
to persist until the job is done. Person, process and choice: for these we need
a truly psychological perspective on new venture creation.” (pg. 39).
Entrepreneurship
Process: Opportunity identification, assessment and
exploitation
Entrepreneurs
Opportunities
The notion that entrepreneurship is a process means that it can be
managed and broken down into defined phases. If this is the case then not
only can it be managed but it can also be analyzed and researched.
Somebody must perceive an opportunity (opportunity recognition), assess its
feasibility and desirability (opportunity assessment) and make the decision to
pursue it (opportunity exploitation). The following broad discussion examines
the three phases of this process in greater depth.
Opportunity recognition
In order to initiate the process of entrepreneurship an opportunity must exist,
be discovered or created. The discovery or creation of an opportunity requires
different skill sets from the entrepreneur. If we accept the premise that an
opportunities objectively pre-exist, it is highly probable that some form of
‘triggering event’ in the environment has enabled it (Morris, 1998). Opportunity
recognition thus becomes tied to circumstance and the opportunistic abilities
of the entrepreneur. Skills such as constant environmental scanning and
strategic thinking are therefore important to the individual. It is the task of the
entrepreneur to ‘discover’ them. According to Shane (2003), access to
information through life experience and social networks as well as broad
cognitive skills are necessary for opportunity recognition. On the other hand,
creation theory suggests that opportunities are constructed by entrepreneurs
themselves. Opportunity recognition is therefore an intensely personal
experience, generating potential ideas that cannot be substantiated by
prevalent conditions in the environment. The entrepreneur’s tolerance for
ambiguity, uncertainty and risk are consequently tested in the decision making
process.
Opportunity assessment
The decision to pursue an opportunity in the face of inadequate or non-
existent supporting data is one that confronts all entrepreneurs. However, a
fundamental principal to assessing the viability of an opportunity is that the
entrepreneur must believe that the resulting gain will be more than what they
are sacrificing (Venkataraman, 1997). Several factors must be considered
during the assessment process such as, opportunity cost, and perceived
resulting income. Those personal attributes associated with the assessment
process include a combination of personal experience, education, age, social
networks, industry experience and cognitive abilities (Shane, 2003).
Opportunity exploitation
Once the opportunity has run the gamut of analysis a decision to exploit or not
to exploit must be made. Many of the personal attributes associated with
opportunity assessment influence the entrepreneur’s decision at this point:
The better educated the entrepreneur the greater the expected return from
the opportunity (Le, 1999; Casson, 1995; Clouse 1990; Storey, 1994b;
Reynolds, 1997)
Career experience reduces the uncertainty surrounding the expected
return from exploiting the opportunity (Shane & Khurana, 2001)
The greater the general business experience of the entrepreneur the
greater the likelihood of opportunity exploitation (Romanelli &
Schoonhoven, 2001; Klepper & Sleeper, 2001)
Entrepreneurs with a broader range of functional experience (marketing,
finance, operations and product development) are more likely to exploit
opportunities (Klepper & Sleeper, 2001).
Knowledge of the industry or market entrepreneurs will be entering has a
significant impact on the decision to exploit opportunities (Praag & Pohem,
1995; Aldrich, 2000).
Start-up experience is another factor influencing opportunity exploitation.
(Jovanovic, 1982; Herbert & link, 1988)
The focus of this study will be on opportunity recognition and the cognitive
content of the opportunity identification process. In particular the focus is on
those beliefs and values which influence the entrepreneur’s ability to either
recognize (discover) or create viable opportunities. Before we can do this
however we need to carefully examine what constitutes an entrepreneur.
What does this have to do with opportunity recognition? The answer to this
is perhaps less explicit in the context of the above quote. What can be
inferred however is that the ‘undertaker’ would have had to identify the need
for goods in the cities, identify a source that could provide sufficient quantity of
product, organize the resources necessary to bring those products to the
cities, estimate the presence of sufficient demand for those products and
assess the risks associated with not only the day-to-day operational
requirements of selling goods but also the establishment of an enterprise that
could viably supply products over a sustainable period of time. In other words,
opportunity recognition gives rise to a series of assessments and calculations
warranting the exploitation of an opportunity.
Jean Baptist Say (1816), Knight (1921), and Oxenfeldt (1943) also
recognized the centrality of risk in the entrepreneurial undertakings of the
traditional self-employed. There is no reference to Schumpeterian innovation
(Schumpeter 1911, 1934, 1949) or technology in this school of thought.
b) Entrepreneurs: Differing schools of thought.
Much of the confusion in defining entrepreneurs stems from an exclusive
focus on narrow disciplinary perspectives. Despite having vanished form
discussion in economic theory for a substantial period, the entrepreneur has
been identified as a distinctly different category of capitalist agent who follows
a rather eclectic methodology to conducting commercial activity. Attempts
have been made to define Entrepreneurs along psychological, socio-
economic, demographic and metaphorical strata but in all cases theorists
have thus far failed to assemble a convincing and comprehensive set of
characteristics for entrepreneurs that set them apart from other business
people.
The ‘Great Person’ concept of entrepreneurs is predicated on the belief
that certain individuals are endowed with traits or qualities that at birth. This
intuitive ‘sixth sense’ and inherent instinct is what differentiates the
entrepreneur from other mortals. Examples of such individuals reflect their
status and charismatic leadership within society and include people such as
Henry Ford, Lee Iaococca, Donald Trump and Enzo Ferrari to name a few
(Garfield, 1986; Hughes, 1986; Silver, 1985). One key quality of the ‘Great
Person’ is their intuition which fuels their persistence and energy in typically
the start-up phase of a business. The defining characteristic however, is an
exceptional belief in him / herself and their ability to succeed. Although not
empirically tested at that time, later work done by Bandura (1994) in
social learning theory giving rise to the concept of ‘self-efficacy’ and
‘entrepreneurial role identity’ developed by Jelinek & Litterer, (1995).
Krueger & Hamilton (1996) lend weight to the argument that at a
cognitive level an appreciation of identifying oneself as entrepreneurial
holds merit.
The psychological characteristics school focuses on personality factors and
these are said to be the distinguishing features of entrepreneurs (Coulton &
Udell, 1976; McClelland, 1965; McClelland 1968). Three key personality
characteristics have been identified in the literature; (i) a personal value base
reflecting honesty, obligation, responsibility and ethical behavior (Lachman,
1980), (ii) risk-taking propensity (Mill, 1984) and (iii) the need for achievement
(McClelland, 1961). The view that entrepreneurs have a proportionately
higher need for achievement and success than their managerial counterparts,
has been consistently addressed in the literature to the point where it has
become the norm. Similarly, risk-taking propensity has been a feature of
entrepreneurs since their discovery by Cantillon (1735). Personally held
values such as honesty, ethical behavior and responsibility, have not been
empirically substantiated but do have relevance to this study because they
involve the deeper cognitive structures that are to be explored. Whilst there is
considerable support for these features there has been less agreement
amongst theorists regarding an entrepreneur’s defining characteristics.
The classic school of entrepreneurship attempts to make a distinction
between entrepreneurs and managers. A fundamental difference between the
two is the notion of ‘innovation’ Innovation, creativity and discovery are the
key factors underpinning the classical body of theory and research into
entrepreneurship (Schumpeter, 1934). Furthermore, theorists have
emphasized the subjective and individualistic nature of the process of
innovation. Those that innovate are often motivated to satisfy some personal
need or desire and therefore exclude the interests of society and
organizations. Steven Jobs and Apple Computers are often referred to in the
classic entrepreneurial tradition as an example innovation giving rise to a level
of energy and creativity rarely seen by other industries at the time. Questions
do arise however, when one considers that innovation is difficult to sustain
over long periods and what impact the entrepreneur, in this case Steven Jobs,
would have on the organization in the longer term. Could the same drive for
creativity and innovation displayed by the founder eventually undermine the
ongoing efficiency of the organization and its management?
The management interpretation of entrepreneurship is based primarily on
the theories of management developed in the early 1900’s. The focus of these
was on the major management functions of planning, organizing, directing
(leading) and controlling. An entrepreneur is thus defined as “a person who
organizes or manages a business undertaking, assuming the risk for the sake
of profit” (Webster’s, 1966). Mill (1984) furthermore noted that in addition to
risk-taking, entrepreneurial functions included management functions such as
supervision, control and providing direction for the business. Early
interpretations of entrepreneurs from this perspective seem to concentrate on
the development of strategies for new ventures, business planning and growth
(Good, 1989; Kao, 1989). Later interpretations appear to dilute, if not totally
eliminate, the crucial role creativity and innovation play in the process of
entrepreneurship. In doing so, an interpretation arises that, like management,
entrepreneurs and entrepreneurship can be taught (Bird, 1988) and it
consequently becomes possible to reduce the number of business failures
providing a more stable economic environment. The criticism against this
premise lies in the fact that entrepreneurs are first and foremost creative and
innovative individuals and that in order to achieve a measure of economic
growth and health entrepreneurs are needed to create new ideas, ventures
and innovative products and services.
A less mainstream interpretation of entrepreneurs is actually a combination
of the ‘Great Person’ and ‘Management’ perspectives aptly referred to as the
‘Leadership’ perspective. Entrepreneurial leadership goes beyond the
normally attributed characteristics and interpersonal styles. According to Kao
(1989) the function of the entrepreneurial leader is to motivate change,
reinforce shared values, set goals and create opportunities. The leadership
school describes the entrepreneur as a ‘social architect‘ (Bennis & Nanus,
1985), or the ‘expert’ in promoting and protecting the shared value base
(Peters & Waterman, 1982). In this context it appears the entrepreneur is little
more than a figurehead acting in a custodial capacity that perpetuates the
organization’s existence. Stephen Tindall of the Warehouse could be seen as
a current example of such an entity. Having been entrepreneurial in the start-
up of the Warehouse Tindall’s behavior would have had to adapt to changing
circumstances to the point where today he is the figurehead of a large and
impressive corporate entity adopting a managerial style of leadership.
Finally, the intrapreneurial perspective assumes that innovation can be
achieved within an existing organization by encouraging people to be creative
and work within semi-autonomous units. The problem with this assumption is
that it does not take account of the creative individual who, through sheer
frustration with internal mechanisms designed to control and manage not only
staff but innovations as well, ultimately leaves the organization and starts their
own venture (Knight, 1988). The notion of Intrapreneurship has not been well
developed and has consequently slipped into obscurity as a meaningful
description of the entrepreneur. However, with the dynamic evolution of the
managerial role in organizations, attention has returned to the notion of
‘Corporate Entrepreneurship’ or ‘Corporate Venturing’ where creativity and
innovation are attracting greater recognition. Organizations such as 3M, Sony,
Merck Sharp and Dhome, who have a long history of successful continuous
improvement and innovation, are test beds for the ongoing development of
theory in this area.
A current view of Entrepreneurs
The lack of substantive empirical data has led to a relatively weak
conceptual framework on which to base generalized definitions of
entrepreneurs. More recently, however, research and applications of the ideas
and concepts from cognitive science have contributed significantly to a series
of successful studies underpinning not only the nature of entrepreneurs but
also the manner in which opportunities are recognized, assessed and
exploited (Kreuger, 1993, 2007; Kreuger & Brazeal, 1994; Kreuger & Dickson,
1994; Mitchell, Busenitz, Bird, Gaglio, McMullen, Morse & Smith, 2007).
Past theories of entrepreneurship, for example, view the contribution of
entrepreneurs to be almost exclusively focused on the creation of new
enterprise (Low & Macillan, 1988; Rumelt, 1987; Schumpeter, 1934). This
outcome based description of entrepreneurial activity, whilst useful in
explaining some of the broader generalized issues of the role entrepreneurs
play in new venture creation, does not adequately explain the finer, micro
level issues such as ‘how and why’ entrepreneurs would engage in this
process (Baumol, 1993; Bull and Willard, 1993).
More recently, two distinctly different approaches appear to have
been used in the literature to define entrepreneurs. The first
approach is to define what an entrepreneur is and then observe
them (Alverez, 2005). This method presupposes that
entrepreneurship and entrepreneurs are one and the same (the
terms being used interchangeably) and therefore the two cannot be
analyzed independently of one another, i.e., the entrepreneur is
entrepreneurship and vice versa. Based on behavioral observations,
entrepreneurship would consequently be defined inductively in
terms of what these individuals do. However, of all the possible
activities that an entrepreneur can engage in, how would we be able
to discern which of those activities are associated with
entrepreneurship and which, are simply normal business routine?
Treating entrepreneurs and entrepreneurship as one and the same
also ignores the subtle differences in tactics, analysis and decision
making from one entrepreneurial process to another.
The second approach is to propose an a priori definition of
entrepreneurship and its related behaviors, and define
entrepreneurs as those who engage in entrepreneurial activity
based on an ex post assessment of their behavior (Shaver, 1995). The
main criticism of this approach is that the results of an ex post
evaluation of entrepreneurial behavior is at best a speculative stab
in the dark. Firstly, the entrepreneur is often at a loss to completely
and accurately explain what they did and how they did it without
embellishing the process and secondly, there are factors beyond the
direct control of the entrepreneur which can best be described as
fortuitous circumstance, i.e., being at the right place at the right
time which may have a significant impact on the outcome.
There is however, a third approach i.e.; that entrepreneurship
can be defined independently of the actors engaged in the process.
Bygrave & Hofer (1991) propose that the focus of research into
entrepreneurship change from a concentration on the
characteristics of the entrepreneur to the features of the
entrepreneurial process. By focusing on the process, entrepreneurs
can be identified by their engagement with the process, not by a
unique set of characteristics. The focus on the entrepreneurial
process supports an a priori definition of entrepreneurs. This makes
sense in that we achieve little by assigning labels to people who
have yet to demonstrate their competence when engaging in
entrepreneurial activities and even less when asking so-called
entrepreneurs to recount their actions. The downside of this
approach though is that it introduces a characterization of the
entrepreneur as being a question of degree, i.e., there will be those
who ‘lightly dabble’ in aspects of entrepreneurial process
sometimes and there will be those who climb in ‘boots and all’
constantly - what objective criteria do we then have to make the
distinction between who is and who isn’t an entrepreneur? Efforts to
isolate common physiological or psychological characteristics to all
entrepreneurs have generally met with failure due to the weak conceptual
framework and ex post research results which continue to be challenged.
Theorists have been, and will necessarily continue to be, unable to agree on a
fundamental set of personality traits that categorically define the entrepreneur
(Brockhaus & Horowitz, 1986; Sexton & Bowman-Upton, 1991).
Entrepreneurs don’t really exist, or do they?
If we were to refer to the previous discussion concerning some of the
historical perspectives on what constituted an entrepreneur there is the
position posited by Schumpeter (1934) that entrepreneurs who start new
ventures ultimately evolve to the ranks of management. Is the entrepreneur
then simply a trainee manager, an inventor or innovator who will eventually
succumb to corporate life? Or is there truly a tribe of ‘opportunists’ who will
continue to push the boundaries of innovation and more importantly can they
be identified?
The former question can be addressed by reference to research in
strategic management which has attempted to cross the divide between long
term corporate sustainability and how the performance of a new venture is
influenced by the entrepreneur. The notion that the large corporate entity
evolved from humble beginnings as a new venture is well entrenched in
economic literature (Mill, 1984; Schumpeter, 1934). Could we therefore claim
that strategic thinking at the corporate level is merely the evolution of
entrepreneurial thinking at the new venture level? The dynamics of the two
processes do not differ markedly; both require a measure of creativity in
generating solutions to changing environments, both require consideration of
past and future events, a degree of abstraction compared to current concrete
subjects and the focus on innovative responses to multiple issues at one time.
Indeed, in this context, one could argue that ‘entrepreneurship’ and
‘entrepreneurs’ do not really exist - there are no fundamental differences
between strategic thinking and entrepreneurial thinking. Consequently, new
venture creation, innovation and creativity can occur at a corporate level and it
is merely an extension of an individual’s ability to think strategically within a
corporate environment. Thinking in this way ultimately results in spin-off
businesses and ideas for new ventures (Herron, 1990; Kunkel, 1991;
McDougall, 1987; Sandberg, 1986, Shane & Venkataraman, 2000).
There is some support for this perspective when one considers the degree
of creative thinking that applies at both a strategic and entrepreneurial level
regardless of whether a corporate is plotting the way forward in a competitive
environment or an individual is launching a new venture. However, Herron
(1990) demonstrated that individual entrepreneurial skill and skill propensity
were related to new venture performance thereby negating the attempts of
many other researchers bent on linking new venture performance with the
collective attributes one encounters in a corporate setting (Cooper, Willard &
Woo, 1986; MacMillan & Day, 1987; Sandberg, 1986). What is the difference
between individual entrepreneurial skills and other generally accepted
business skills? What is skill propensity? Why are entrepreneurs more adept
at demonstrating these skills on their own than in a corporate setting? What is
the foundation of this skill development? Is skill application, knowledge
acquisition and self-efficacy tied to deeper cognitive structures?)
Entrepreneurship, it is argued, is largely an independent activity that does
not simply arise from dramatic events in the environment. Whilst such events
can be seen as triggers that provide impetus for entrepreneurship they are not
solely sufficient cause for the process to be initiated (Morris 1998).
Entrepreneurs may observe that conditions, timing, resourcing and many
other factors are not conducive to opportunity exploitation at that time and
therefore delay the entrepreneurial process until circumstances become more
favourable. The process of entrepreneurship requires engagement from
perceptive individuals who can identify, assess and pursue opportunities. A
comprehensive theory based on multi-disciplinary views of entrepreneurship
is thus compromised because of a failure to link the environment and the
individual engaged in the entrepreneurial act into one cohesive and
continuous process.
(ii) Entrepreneurial opportunities and resources
‘Small opportunities are often the beginning of great enterprises.’
DemosthenesGreek orator & politician in Athens (384 BC - 322 BC)
(a) The nature of entrepreneurial opportunities
Before the entrepreneurial process can be initiated it seems self-evident that
an opportunity must exist. The definition of an entrepreneurial opportunity that
will be used here is – “… a situation in which a person can create a new
means-ends framework for recombining resources that the entrepreneur
believes will yield a profit.” (Shane, 2003, pg.18). The main distinguishing
feature of an entrepreneurial opportunity over any other business opportunity
is the perquisite creation of new means-ends frameworks (and which focus
primarily on Schumpeterian type opportunities) rather than seeking
improvements (as with Kirznerian type opportunities) within an existing
paradigm (Shane, 2003). A new means-ends framework refers to the process
of thinking about what the entrepreneur perceives and believes about the
value of resources. Shane (2003) argues that because the process of
opportunity discovery, i.e., constructing new means–ends frameworks
(thinking), is cognitive it cannot be a collective act. This somewhat negates
the position of several other theorists (Timmons, 2002; Timmons & Spinelli,
2004; Ryan, Ray & Hiduke, 2003) that the identification of opportunities is a
team effort. The logic of this is clear; only one person can come up with the
original idea, at best the contributions of the rest of the team refine the original
concept into a practical and implementable business innovation.
Shane (2003) furthermore posits the view that entrepreneurial opportunities
pre-exist objectively in the environment and that only certain individuals will
recognize them over others. Shane argues: “The formulation of conjecture is
influenced by the possession of information or beliefs that lead a person to
think a certain way about a means-end framework. Because both beliefs and
information are unevenly distributed across people, not everyone will
recognize a given entrepreneurial opportunity.” [emphasis added] (Shane,
2003, pg.45). (the reference to beliefs is highly relevant to this study and
needs to be returned to later) So, the distinguishing features that identify
entrepreneurs from non-entrepreneurs from Shane’s point of view are access
to information and their beliefs.
The question arises however as to whether entrepreneurial opportunities
exist independently of whether or not the entrepreneur recognizes them; an
objectivist perspective? (Kirzner, 1973; Shane & Venkataramen, 2000; Shane,
2003) Or, are entrepreneurial opportunities created by entrepreneurs
themselves; a subjectivist perspective? (Venkataraman, 2003; Schumpeter,
1934; Loasby, 2002; Langlois & Cosgel, 1993; Casson, 1982). The objectivist
perspective is based primarily on three key assumptions:
Opportunities originate from the attributes of the industries within which the
entrepreneur operates. Thus, if the entrepreneur has specific specialist
knowledge, skill and experience related to a particular industry, they are in
a better position to identify opportunities when industry characteristics
change and allow the entrepreneur to capitalize on them.
Entrepreneurs are different from other business agents. Entrepreneurs are
said to be more ‘alert’ (Kirzner, 1973) than their counterparts in the same
industry which makes them more perceptive to changes when they occur
and they have a proactive attitude enabling them to take swift action.
(more recent research from Kirzner develops a stronger link between
‘mental alertness and perception – develop the alertness argument,
mental agility and awareness - show a link to entrepreneurial perception)
Unfortunately, given the emphasis on perceiving opportunities and
cognitive reasoning in the entrepreneurial process it is curious that the
theory of mental alertness does not adequately explain how entrepreneurs
break the cycle of traditional thinking within an industry or develop useful,
innovative alternatives.
The third assumption upon which this perspective is based deals with risk.
Based on an analysis of the above two assumptions there is a logical
conclusion that identifying opportunities will invariably lead to the presence
of some degree of risk. The dynamic nature of conditions within an
industry structure will assume that information, factors and resources are
imperfectly distributed and may be costly to acquire (Alverez, 2005).It is
therefore the ‘alert’ entrepreneur who is able to gain access to this
information at a lower cost than his counterparts that will succeed in
generating a profitable outcome (Shane, 2003).
The core of this view is that entrepreneurship can be explained by
considering the special abilities of individuals with specialist knowledge and
skill within an industry gaining access to information about opportunities that
already exist before any other person and converting them into something of
value. The speed at which the entrepreneur assesses and exploits this
information will then determine their advantage in the market place and their
ability to secure a profit. This view also suggests that entrepreneurs are
somewhat forced to seize on opportunities within the limits of a particular
industry. The entrepreneur’s bank of knowledge, skill and experience is
confined to one industry and possibly even a specific element of it.
The creation theory on the other hand focuses primarily on the entrepreneur
and new ventures. Similarly it is based on three major assumptions:
Entrepreneurial opportunities are created through a process of decisions
to exploit a particular idea. In other words they do not exist independently
of the actors but are created by them. Creation theory argues that under
conditions of uncertainty the changing attributes of an industry render the
outcomes unknowable and difficult to predict. It is therefore not risk but
uncertainty that influences the decision-making framework. Under these
circumstances opportunities are created through a process of
hypothesizing, testing and revision until the hypothesized opportunity
roughly approximates with what turns out to be an objective opportunity
(Alverez, 2005).
Unlike the objectivist theory seeking differences in people, creation theory
suggests there are differences in decision-making under conditions of
uncertainty. The entrepreneur is therefore someone with the confidence
and courage to coordinate resources and assess probable outcomes.
Creation theory makes no reference to individual ability or characteristics
other than to suggest they have a heightened ability in exploiting potential
opportunities.
Entrepreneurs accept uncertainty and not risk as part of the process of
opportunity creation and exploitation. A decision is risky when two
conditions are met:
i. All possible outcomes of the decision are known at the time the
decision is made, and
ii. The probability of each of those outcomes is known at the time the
decision is made.
Uncertainty in decision making on the other hand regards all possible
outcomes of a decision and the probability of their occurrence as
unknowable, ex ante. The decision maker is therefore ignorant of possible
future outcomes. An example would be the numerous books on personal
success and wealth purporting to have discovered the formula for infinite
wealth. Interviews of their authors consistently reveal the absence of
specific measures, tasks or activities they followed on the road to fame or
fortune.
In summary, creation theory suggests the actions needed to be taken to
exploit opportunities are not knowable a priori and must be hypothesized and
tested over a period of time by exploiting imperfections in the process. One
insight the theory provides is that meaningful, value-creating and wealth-
providing innovation is a time consuming process and not as one would
believe an ‘overnight sensation’. It is this hypothesizing and testing that
influences and trains the entrepreneur to the extent that the final outcome of
the opportunity reveals its uniqueness. In the process, the entrepreneur
acquires certain skills, knowledge and expertise which may prove useful in the
future. A danger in this for the entrepreneur is to become dogmatic and
focused on one particular process that has worked in the past and is
subsequently applied to all future opportunities without question. Such a state
would essentially remove the inherent innovative and creative qualities of
entrepreneurship from the agent rendering them static and inflexible in the
face of new opportunities.
Which theoretical position is better suited to opportunity recognition? On the
face of it the two appear to be diametrically opposed to one another and yet
the nature of their respective assumptions is not that dissimilar that they
cannot be perceived in some respects as being complementary. Is it possible,
for example that an entrepreneurial opportunity can be both discovered and
created? They are perhaps a combination of both. A market need that gives
rise to an entrepreneurial opportunity can be ‘discovered’, if conditions are
suitable. The ‘creative’ solution to that market need can also be an
entrepreneurial opportunity if it is sufficiently innovative and unique. In the
context of this study the process of entrepreneurship does not focus on
whether opportunities exist objectively from the observer or whether they are
created by them – both possibilities are comfortably accommodated. It is also
not a case of whether we are dealing with risk or uncertainty in the decision
making process. Risk and uncertainty are both factors that are taken into
consideration during opportunity assessment and measured against the
dimension of feasibility. Opportunity recognition on the other hand inherently
focuses on the dimension desirability.
(b) Origins of entrepreneurial opportunities
If we accept a focus on the qualities associated with Schumpeterian type
opportunities as does Shane (2003), then the following characteristics
distinguish entrepreneurial opportunities from normal business opportunities:
Dis-equilibrating – entrepreneurial opportunities cause imbalance and
destabilize existing processes. They are ‘frame-breaking’ technologies that
cause paradigmatic shifts.
New information - there is no information concerning the feasibility,
desirability or viability of the entrepreneurial opportunity. Equally, existing
decision making frameworks are inadequate for solving complex problems
associated with the new opportunity.
Innovative – entrepreneurial opportunities are unique and have
considerable commercial potential.
Rare – truly entrepreneurial opportunities are quite rare which can be a
function of two possible perspectives. First, conditions are not presently
conducive to opportunity exploitation and resources / technology may not
currently exist to enable the opportunity. Second, there are insufficient
entrepreneurs in the environment to engage with the opportunity, i.e.,
entrepreneurial capacity is depleted (Allen, 2004).
Involve creativity – a critical precursor to innovation, entrepreneurial
opportunities require a great deal of creative effort to come to fruition.
There is some empirical evidence that the source of entrepreneurial
opportunities emanate from three main domains (Bhide, 2000). A common
feature running through all three domains is the presence of change, a
characteristic of reinforced by Schumpeter’s early theory of ‘Creative
destruction’ explained above. Hence, when change occurs in either,
technology, politics and regulations, or society and demographics, the three
primary sources of entrepreneurial opportunity, conditions become more
favorable for entrepreneurship.
Technological change – the speed and pervasiveness of change in the
technology arena is obvious. Technology change is an important source for
entrepreneurial opportunity because it has the capacity to change the
economic landscape rapidly and in innovative ways (Shane, 2003). Empirical
evidence gathered by Blau (1987) points to significant increases in the rate of
self-employment in the United States as a result of technological advances.
The number of technology start-ups is prolific throughout the world. For
example, changes in technology have created entire new markets (traditional
retail versus online shopping) and the growth of cross border purchasing. New
Zealand’s ‘Trademe’ is a good example of radical transformational change
within the auctioning industry giving rise to several new start-ups such as
‘Ferrit’ and ‘Smile City’. Technology has furthermore enabled the introduction
of social networking sites such as ‘Facebook’, ‘Bebo’ and ‘Youtube’ which in
turn have had a significant impact on how individuals socialize.
Social and Demographic change – There can be little doubt that we are
living at a time of great mobility and in an increasingly uncertain era. Changes
in the socio-demographic structure are important because they produce new
information concerning the way in which people and communities distribute
resources and create potential for scale economies (Shane, 2003). The recent
shift in rural communities from sheep to dairy farming in New Zealand is one
example of demographic shifts for economic sustainability and long term
viability. There is a trend toward greater urbanization as evidenced by the
demand for more affordable housing which opens entrepreneurial
opportunities to address this significant need with low cost alternatives. The
significant influx of international students mainly from China to New Zealand
during 2003/2004 created major entrepreneurial opportunities in the form of
language schools and private tertiary educational institutions. The current
substantial drop off in student numbers has had a noteworthy impact on this
industry as a number of private education facilities have subsequently gone
out of business. Changes in attitude toward social networking, brought about
largely by the developments of technology, are beginning to influence both
tradition and culture throughout the world.
Political and regulatory changes – Central and local government policy
changes create opportunities through the re-allocation and re-distribution of
funding and resources to different parts of society. For example, skill
shortages in the employment market cause a shift in focus toward
encouraging young mothers to re-engage with the workforce. Incentives, such
as subsidized child care, gratuitous payments for services and education
assistance programs are put in place to facilitate such strategies. The recent
deregulation of the telecommunications industry and the ‘unbundling of the
local loop’, previously the property of Telecom, suddenly opens up the
competitive landscape and allows entrepreneurs to take advantage of
technology and regulatory change in ways that result in a more competitive
and innovative market.
(iii) The Entrepreneur and opportunity recognition
a) Emerging theories of entrepreneurial cognition
An entrepreneurial opportunity does not just ‘happen’. The opportunity must
first start out as an idea, that idea is usually the product of the entrepreneur
either perceiving a unique blend of existing resources in such a way that they
lead to a viable innovation, i.e., ‘discovering’ the opportunity or as a result of
their own creative and evolving thought processes that take the concept from
a level of abstraction to a concrete form, i.e., ‘creating’ the opportunity. The
process of opportunity identification is therefore a cognitive exercise in
entrepreneurial thinking. In order to understand what promotes or inhibits
entrepreneurial activity we need to understand how entrepreneurial
opportunities are perceived and assembled. Identifying, assessing and
exploiting an entrepreneurial opportunity is an intentions-driven process
motivated by known critical antecedents (Krueger, 2007).
Since the discovery or creation of an entrepreneurial opportunity is a
cognitive process it is meaningless to talk about it in a collective context
(Venkataraman, 2003). It requires the agency of one individual, namely the
entrepreneur, to perceive the opportunity. Opportunity assessment and
exploitation could well be collective acts, as they perhaps should be. It would
take an entrepreneur significantly longer to exploit an opportunity they had
first perceived without the support and assistance of others.
Differences in opportunity recognition exist for a number of reasons. The
formulation of conjecture is influenced by the possession of information or
beliefs that lead a person to think a certain way about a means-ends
framework (Shane, 2000). Because beliefs differ from one individual to
another and information is unevenly distributed across the population not
everyone will recognize a potential opportunity. Generally speaking,
opportunity recognition by some differs from others for two main reasons; first,
some individuals have better access to information about the possibilities of
an entrepreneurial opportunity. Second, some people are simply better than
others at processing even the same information because they have superior
cognitive capability (Shane, 2003). Superior access to information comes
about as a result of a number of factors such as; job experience, searching
capability, social networks and the individuals ‘absorptive capacity’, the ability
to process and categorize that information efficiently and effectively (Cohen &
Levinthal, 1990). McGrath and MacMillan (2000) suggest that entrepreneurs
with prior start-up experience have developed an "entrepreneurial mind set"
that drives them to seek and pursue entrepreneurial opportunities with
enormous discipline, and hence, can be expected to pursue only the very best
opportunities. Prior experience consequently confers an ability to recognize
the value of new information, to learn, and to apply it to new commercial ends
(Cohen & Levinthal, 1990). Experienced entrepreneurs are therefore more
likely to search information within a specific industry based on their past
experiences and knowledge of processes and information sources that have
worked well in the past (Cyert & March, 1963; Fiet, Piskounov, & Gustafsson,
2000; Shane, 2003), while nascent entrepreneurs with little or no prior
experience may have fewer guidelines to follow in discerning information that
would be relevant to the identification of an entrepreneurial opportunity
(Cooper, Folta, & Woo, 1995). The amount of prior experience seems in this
respect to be highly associated with an entrepreneur's effectiveness in
recognizing and acting on entrepreneurial opportunities.
Cognitive differences enable some people to process information differently
from others and allow them to ‘see’ new patterns based on the information
they have received. Kirzner (1997) refers to this as the individual’s capacity
for ‘alertness to opportunity’. Other identified cognitive differences refer to
‘intelligence’ (Knight, 1921) supported indirectly by research conducted by
Busenitz (1996) who found that entrepreneurs were more likely than
managers in organizations to generate ideas for new businesses. ‘Perceptive
ability’ is another difference supported by Hills & Schrader (1998) showing
that members of the Entrepreneurship Hall of Fame were significantly more
likely to report opportunity identification as a natural attribute they possessed
over their business counterparts. ‘Creativity’ Shane (2003) describes as a
critical component of the new means-ends framework formulation.
Imagination and creativity are needed to generate and define novel solutions
to open-ended problems (Harper, 1996; Sarasvathy, 2001). Other theorists
have posited that entrepreneurs have a higher degree of ingenuity or
creativity that the rest of the population (Schumpeter, 1934; Wu, 1989).
Finally, ‘Risk-taking’ or rather the attitude toward risk is a cognitive difference
between entrepreneurs and non-entrepreneurs. Research conducted by
Sarasvathy, et al (1998) suggests that entrepreneurs identified fewer risks
than their bank colleagues in a simulated computer game on
entrepreneurship. One explanation given for this is that entrepreneurs
possessed with higher levels of self-efficacy perceive opportunities whereas
others identify risk (Shane 2003).
In summary, entrepreneurial opportunity identification is the sole domain of
an individual, teams and organizations go on to provide support and expertise
in opportunity assessment and exploitation. Opportunity identification is also
largely a cognitive affair involving perception, a considerable degree of
entrepreneurial thinking, the development of attitudes and beliefs that support
the entrepreneur’s sense of self-efficacy and a large measure of creativity and
imagination to bring the opportunity into reality.
The focus of this study is on the intangible infrastructure. Individuals need to
perceive a prospective new course of action, believe that it is a credible and
desirable opportunity, and creatively engage their minds to exploit it.
Thinking 'entrepreneurially': the need for cognition-based models
The centrality of perceptions in opportunity identification argues for taking a
cognitive approach to develop insights into the nature of opportunity
identification and how to nurture it. In particular, social psychology offers the
construct of intentions as a consistently useful device to integrate past
findings from a theory-driven, empirically robust vantage (Ajzen, 1987; Tubbs
& Ekeberg, 1991). From a research perspective, intentions models have
proven consistently forceful both in explanatory power and in predictive
validity (Ajzen, 1987; Tubbs & Ekeberg, 1991). From an entrepreneurial
standpoint, the conceptual framework offers a prudent mechanism for
examining the process of opportunity identification.
Entrepreneurship research sorely needs a framework solidly grounded in
well established theory (MacMillan & Katz, 1992; Jelinek & Litterer, 1994).
Intentions-based models provide a comprehensive theory-driven conceptual
framework. We need models that reflect how individuals actually make
decisions and take action; these models include scripts and schemata (Lord &
Maher, 1990). Intentions models perform this role.
A tangible infrastructure can be constructed to support the assessment and
exploitation of existing opportunities. However, what about future
opportunities? Regardless of whether the opportunity is discovered or created
there is a need for cognitive construction. “Opportunities are thus very much
in the eye of the beholder” (Krueger, 2007). This tells us that perceptions and
other cognitive phenomena are critical. What sort of cognitive infrastructure
enables an entrepreneur’s orientation toward seeing opportunities and acting
on them? This is the 'heart of entrepreneurship' - an orientation toward seeing
(and acting on) opportunities regardless of whether resources exist or not
(Stevenson & Jarillo, 1990). In a rapidly changing world, economies need to
continually identify new opportunities if they are to continue to grow and
survive (Hamel & Prahalad, 1989, 1994; Mintzberg, 1994) This is what Covin
and Slevin describe as an "entrepreneurial orientation" (1991; Lumpkin &
Dess, 1996). Entrepreneurs need to focus strategically on the identification of
viable new opportunities.
The relevance of ‘deep beliefs’ in opportunity recognition
Developing new competencies to identify and exploit entrepreneurial
opportunities is a critical antecedent to profiting from innovation (McGrath,
Tsai, Venkataraman, & MacMillan, 1996). However, what is necessary for an
entrepreneur to learn in order to identify new opportunities? Even if an
individual possesses the prior information or experience necessary to identity
or create an opportunity, he or she could still fail in actually doing so because
of his or her inability to perceive potential new means-ends relationships or be
subjected to unpredictable circumstances over which they have no control.
The cognitive properties of an individual, i.e., the ability to combine existing
concepts and information into new ideas, therefore play a central role in the
process of entrepreneurial learning (Busenitz & Barney, 1997; Kaish & Gilad,
1991). An increased effectiveness in opportunity recognition consequently
means that the entrepreneur has learned more relevant information necessary
to identify entrepreneurial opportunities, and in so doing may well have
developed his or her cognitive faculties sufficiently to appreciate the
desirability and feasibility of the opportunity. (Shane & Venkataraman, 2000).
Prior experience in this context gives rise to further creativity, permitting the
sorts of associations and linkages that may never have been previously
considered. This argument also fits theories that argue that the level of prior
experience is a key factor for the ability to evaluate and utilize outside
knowledge and exploit new market opportunities (Cohen & Levinthal, 1990;
Gatewood, Shaver, & Gartner, 1995; Shane, 2003; Zahra & George, 2002).
Senge focuses on what he labels simply "mental models", individually
internalized cognitive schemata that guide much of our daily activity. We all
need multiple schemata to adapt to an ever changing environment. In turn,
this requires that we learn multiple mental models and, that we learn how to
learn new schemata (Senge, 1992).
Intentions are fundamental to schemas (mental models). Intentionality is
deeply ingrained in how we process information into action. Any deliberate
behavior is intentional by definition, thus the individual pursuit of an
opportunity is inherently intentional. It is therefore useful to understand that
intentions depend on a handful of critical antecedents. Personal and
situational influences affect intent only by affecting these critical antecedents.
For example, role models can help promote entrepreneurial activity, but only if
they influence perceptions of desirability or, more likely, perceptions of
feasibility.
Consider the notion of "entrepreneurial orientation" (Covin & Slevin, 1991).
We have an increasing understanding of what comprises the dimensions of
entrepreneurial orientation (Lumpkin & Dess, 1996), but we know relatively
little about its antecedents. For example, the outward behavioral expression of
an ‘entrepreneurial orientation’ is plain to see – the individual is enthusiastic,
energetic, seeking information or solutions, questioning, inquisitive, positive –
in short ‘driven’. What we don’t know, however are the intangible beliefs,
values and attitudes that drive that behavior.
Studying these deep beliefs is relevant and important because they play
such a crucial role in how we perceive opportunities, how we assess
desirability and how we determine feasibility. And yet for most entrepreneurs
it is these deep beliefs they are most unaware of. This is perhaps the key
reason behind the criticisms leveled at ex post research on entrepreneurial
success. How can the entrepreneur provide sound rational explanations or
data on the reasons for their successful opportunity identification if they are
unaware of the attitudes and beliefs that caused opportunity recognition in the
first place? Such a proposition renders an examination of the process of
entrepreneurship futile. If, however, we can discover the antecedents of
opportunity recognition that lead to successful entrepreneurial outcomes then
we will have provided another strut to the framework of a theory on
entrepreneurship.
In summary the pathway of argument where this study is focused is as
follows (Krueger, 2007):
Behind entrepreneurial opportunity identification lie entrepreneurial
perceptions;
Behind entrepreneurial perceptions lie entrepreneurial intentions;
Behind entrepreneurial intentions lie entrepreneurial attitudes;
Behind entrepreneurial attitudes lie deep beliefs and values.
Perceiving entrepreneurial opportunities – underlying principles
The actions of men are the best interpreters of their thoughts.
-- John Locke
The first principle that applies to all entrepreneurs is that opportunities are
not collectively perceived – only individuals can perceive an opportunity. As I
have argued previously, collective effort by other team members is useful and
even perhaps necessary in the context of assessing and successfully
exploiting the opportunity, but the idea must first be perceived by an
individual.
Second, as human beings we have a natural tendency to simplify the world
around us by categorizing situations. From a strategic perspective we would
naturally scan the environment and categorize perceived events into
opportunities or threats (Hill, Jones, Galvin & Haider, 2007). More importantly
though, is an understanding at an individual cognitive level of what drives this
categorization process. Jackson and Dutton (1988) for example, showed that
acting on an opportunity depends closely on perceptions that the situation is
positive and that it is controllable. In contrast perceptions of threat depend on
perceptions that the situation is negative and uncontrollable.
Third, perceiving opportunity reflects an intentional process. Mental models
of what we intend reflect why we intend to perform an action. Dutton and
Jackson's antecedents of opportunity perceptions largely correspond with the
known antecedents of intentions. In short, intentions are driven by perceptions
of feasibility (e.g., controllability) and by perceptions of desirability (e.g.,
positiveness). Fishbein and Ajzen (1975) have developed a theoretically
sound and empirically robust framework (Theory of Planned Behavior) for
understanding intentions that appears applicable to most planned behaviors,
whether the action is narrowly or broadly defined or whether it is proximal or
distal. A number of other disciplines have also discovered this isomorphic
trend (Ajzen, 1987) which suggests that the framework is at the heart of
human decision making.
Fourth, there is some understanding of the mental models that
entrepreneurs share, the scripts and schema that differentiate entrepreneurs
from other business people (Bird, 1988; Mitchell & Chesteen, 1995). It
therefore seems probable that we have cognitive access to both an
'opportunity' schema and a 'threat' schema. Which schema is activated first
(or activated more strongly) depends on critical stimuli from the environment.
It is also known that humans process negative situations differently from
positive situations: we differ in how we value information; we may even use
different parts of our brain. Yet, one individual facing the same environmental
cues may see a threat while another sees an opportunity.
Fifth, a review of the literature on entrepreneurship finds strong arguments
for intentionality (Bird, 1988; Katz & Gartner, 1988). Existing applications of
intentions based models or self-efficacy (Bandura, 1977) show consistent
support (Krueger & Brazeal, 1994). For example, Shapero's model of the
'entrepreneurial event' (1982) is similar to the Ajzen-Fishbein framework
(Krueger, 1993; Krueger, Reilly, & Carsrud, 2000). Shapero argued that the
decision to undertake entrepreneurial activity required a pre-existing belief
that the activity is both desirable and feasible, coupled with some personal
inclination to act on opportunities and some sort of triggering event.
Sixth, at the heart of these scripts and schemas are critical attitudes that
form a common framework of intentionality. For example, we know that
attitudes of competence strongly influence our perceptions of whether a
situation is controllable. An attitude of self-efficacy is a substantial antecedent
of perceived opportunity (Krueger & Dickson, 1994). If we see ourselves as
competent we are more likely to see a course of action as feasible, thus we
are more likely to see an opportunity. However, how are these attitudes
formed? What deeper seated schema are there that support attitudes such as
self-efficacy?
Entrepreneurial perceptions
Identification of a viable economic opportunity is an important initial step in
the entrepreneurial process. In fact, an entrepreneurs’ decision to act often
stems from their belief that they have identified an opportunity no one else
has yet recognized and can therefore capitalize on this by being ‘first to
market’.
Theorists have long held that cognitive factors such as perception and
interpretation play a significant role in opportunity identification (Forbes,
1999). Kirzner (1979), for example states that entrepreneurial activity is
undertaken by individuals with high levels of ‘alertness’ to opportunity and
Knight (1921), discussed the process of entrepreneurship as being engaged
by individuals with different ‘conceptions’ of risk and opportunity. Perception is
a process which involves the recognition and interpretation of stimuli from the
environment which register on our senses (Rookes & Wilson, 2000).
To explore how humans see the world around them in greater depth
requires reference to the psychological theory of perception. Some
psychologists feel that perception is direct (Gibson, 1950; 1986) and all the
information needed to interpret what is being presented is contained in the
sensory picture. Others believe that the brain uses past experience and other
influences to construct a version of reality (Gregory, 1990; 1996). Theorists,
such as Neisser, (1976) have attempted to reconcile these opposing views,
and yet others have taken an ‘artificial intelligence’ approach using knowledge
about computer programs to help explain perceptual processes, for example,
Marr's computational theory (Marr, 1976).
First, it seems clear that perception plays a role. When an entrepreneur
identifies an opportunity (and let us assume for the moment that the
opportunity does in fact exist), this implies that there is ‘‘something’’ out there
to notice—some kind of stimulus or stimulus configuration that can be noticed
or perceived. Much basic research on perception has focused on this task,
which is known as object or pattern recognition: identification of a complex
array of stimuli which, together, allow perceivers to recognize an object or a
complex pattern of objects or events (e.g., Matlin, 2002). If it is assumed that
opportunities must, at some level, actually exist as discernible patterns or
configurations of observable stimuli (something that potential entrepreneurs
can actually observe), then the findings of basic research on object
recognition may be relevant to understanding this process. In other words,
such research may provide insights into the nature of the stimulus
configurations that are identified as opportunities—in other words, into the
essential nature of opportunities from the point of view of the entrepreneur.
This is a very basic question that, to date, has been largely ignored.
It is important to note that this approach is opposite to one suggesting that all
opportunities are unique and that no underlying similarities exist between
them. The presence of highly successful repeat entrepreneurs raises doubts
about this interpretation. Such persons often recognize opportunities that, at
first glance, seem entirely unrelated to one another. This suggests that at
some basic level, diverse and seemingly unrelated opportunities do indeed
share recognizable components. Again, however, this question, which seems
crucial to the task of understanding the essential nature of opportunities and
the processes through which they are recognized, has not yet been
addressed in empirical research.
Putting this issue aside for the moment, it seems useful to consider the basic
findings of research on object or pattern recognition. Such work suggests that
human beings accomplish this task through a number of interrelated
processes. Considering these may shed light on the processes that play a
role in opportunity recognition. One such process is described by feature-
analysis models (e.g., Larsen and Bundesen, 1996). These models suggest
that objects or complex patterns of events are identified in terms of their
distinctive features. These distinctive features are stored in memory, and new
stimuli that individuals encounter are compared with these features for
purposes of identification. Consider, for instance, letters of the alphabet. Here,
distinctive features include vertical lines, diagonal lines, and curved
components. We can distinguish between the letter R and the letter K
because only the former has a curved component. Evidence for the accuracy
of feature-analysis models is compelling. For example, neuroscience research
suggests that within the visual cortex, different groups of neurons respond
primarily to horizontal, vertical, and diagonal lines (Hubel and Wiesel, 1979).
What might be the distinctive features for opportunities? Newness might be
one; nascent entrepreneurs (or experienced ones, too), may compare new
ideas with an existing concept of ‘‘newness’’ stored in memory in order to
determine whether a new stimulus configuration should be identified as an
opportunity. Similarly, practicality may constitute another distinctive feature.
Only ideas that exhibit this feature are identified as being bona fide
opportunities. A third distinctive feature might be novelty or uniqueness—only
ideas for new products or services, which do not currently exist, are identified
as being opportunities. These suggestions are, of course, largely speculative.
But if recognition of opportunities proceeds, even in part, through feature
analysis, then it should, in principle, be possible to identify the distinctive
features used by entrepreneurs to determine whether a new idea is, or is not,
an opportunity. While feature-analysis models of object or pattern recognition
are useful, they suffer from one major drawback: they are primarily applicable
to identifying relatively simple objects or patterns. In contrast, prototype
models of object or pattern recognition apply to more complex objects or
patterns and so may be more relevant to the process of opportunity
recognition.
Such models suggest that through experience, we construct prototypes; each
representing a set or category of objects (or patterns). In a sense, such
prototypes comprise our basic ideas of what a specific object or pattern is like
—its essential nature. For instance, most persons possess a prototype for
‘‘house.’’ This mental abstraction is broad enough so that everything from a
huge mansion to a simple cottage can be recognized as a house, while other
objects that do not match this prototype well (e.g., tents, skyscrapers, and
shopping malls) are excluded. Prototypes seem to be based on, and to
represent, the mode or most frequently experienced combination of attributes
associated with an object or pattern (e.g., Solso, 1999).
Thus, for example, the prototype of ‘‘house’’ would probably include such
attributes as windows, doors, rooms in which to sleep, eat, and wash, a roof
or other protection from rain, and so on. Applying prototype models to
opportunity recognition, it may be the case that entrepreneurs compare ideas
for new products or services with their existing prototype for ‘‘opportunity’’—a
mental abstraction they have acquired through experience. Such a prototype
might encompass a combination of attributes such as newness, novelty,
practicality, the ease with which it can be described to venture capitalists, the
likelihood of competitors, appeal to a specific, identifiable market, and so on.
According to such models, opportunity recognition would involve comparison
of ideas for new products or services with existing prototypes of opportunity;
the closer the match, the more likely would entrepreneurs be to conclude that
an idea for a new product or service does indeed constitute an opportunity
worth pursuing.
Other theoretical models of object or pattern recognition exist (e.g., the
recognition-bycomponents models; Biederman, 1995), but feature-analysis
models and prototype models are among the ones that are most widely
accepted. Together, such models call attention to the fact to date, that
researchers in the field of entrepreneurship have largely ignored the following
basic questions: (1) What patterns of discernible stimuli are recognized by
entrepreneurs as constituting opportunities? In other words, what is an
opportunity, from a perceptual point of view? And (2) What cognitive
processes play a role in this task? Answers to these questions may prove
invaluable to the field of entrepreneurship in its efforts to address the
question: ‘‘Why do some persons but not others identify opportunities?’’
The variety of theory on perception can be categorised into two main
approaches. Top-down and bottom-up approaches have been applied to
virtually every aspect of cognition including perception. The terms are used to
refer to the different methods of interpreting sensory data and they come from
the information processing approach to the study of areas like memory,
attention, perception, etc. This method constructs a model of the mind that is
similar to the flow charts used by computer programs, and it views the human
brain as a machine which manipulates information through a series of
processing stages.
Bottom-up processing theories – Information which is acquired from sensory
inputs is transformed and combined until we have formed a perception. The
information is transmitted upwards from the bottom, most basic levels (the
senses) to the higher, more cognitive levels. This kind of processing is also
called 'data-driven processing' because the information, i.e., the data received
by the senses determines (drives) perception. For example, when we observe
an object (e.g. a table) the visual system extracts all the simple, low-level
features like vertical and horizontal lines. These elementary features are then
combined into more complex, complete shapes like legs and a top. These
features are integrated at a higher cognitive level and ultimately these
integrated shapes are recognized as a table. How does this approach apply to
entrepreneurial opportunity recognition? Sensory stimuli are received by the
entrepreneur from the environment regarding the resources (e.g., finance, raw
materials, systems, processes, expertise, etc.) needed to assemble an
innovation (e.g. a new product / service or venture). Higher cognitive faculties
integrate the information from various sources into a cognitive picture of the
opportunity which is both desirable and feasible.
Top-down processing theories – these are the reverse of bottom-up
processing theories and are used to describe the higher, more cognitive
influences on perception. They are based on the notion that information from
the senses is insufficient to explain how we interpret information. We also
need to use our stored knowledge about the world in order to interpret
sensory input. This stored information works downwards from the higher
cognitive levels and influences the way in which we interpret sensory input.
This kind of processing is also called 'concept-driven processing' because
prior knowledge (stored mental schema) comes from the top to determine
(drive) interpretation of sensory input at the bottom. In a sense this is the
individual proactively scanning the environment ‘looking’ for combinations of
stimuli that are familiar and which require an appropriate behavioural
response. In the context of entrepreneurial opportunity recognition, top-down
processing means that the entrepreneur uses his/her prior experience and
knowledge to evaluate sensory stimuli against pre-determined criteria (mental
schema) assessing desirability and feasibility. The entrepreneur can therefore
be discerning regarding the recognized opportunity and set up cognitive
criteria based on previous experience and industry knowledge against which
to assess sensory data for ‘personal fit’ and viability. This explains to some
degree why entrepreneurs sometimes hesitate or fail to initiate the
entrepreneurial process. Environmental conditions / stimuli, as perceived by
the entrepreneur may not be suitable, when measured against these higher
cognitive criteria, for invoking the process, i.e. ‘something is missing’ that, if
present, would significantly alter the entrepreneur’s intention to act.
All theorists, generally acknowledge that there has to be some matching
process between sensory information and stored mental representation in
order for final identification to take place (Rookes &Willson, 2000). The
entrepreneur can only know whether an opportunity is feasible if it can be
matched with criteria stored in memory. The difference between the two sets
of theoretical approaches is that sensory-driven theorists posit that the
matching process itself operates in a bottom-up direction until a
corresponding match is found. This is like the entrepreneur saying, “I’m
receiving information from the environment that suggests an opportunity might
exist. I will continue to search for further information until such time as the
information matches directly my cognitive criteria for an entrepreneurial
opportunity”. Cognitive-driven theorists, on the other hand, assume that stored
experience and knowledge is required throughout the matching process. From
this perspective the entrepreneur says, “I know what an entrepreneurial
opportunity looks like and have set out the criteria against which I will evaluate
the information I receive from the environment. Until I find the information I
need, no determination can be made regarding this opportunity”.
The question is whether the entrepreneur recognizes an opportunity solely
from a bottom-up analysis of individual features like raw materials and
systems, differentiating it from other opportunities in terms of innovative
content, or whether his/her knowledge and experience with opportunities in
terms of factors, such as industry conditions and market drivers, helps him or
her in a top-down direction to create the opportunity. In practice, like the
debate whether entrepreneurial opportunities are created or discovered, there
is often an overlap between bottom-up and top-down processing. It therefore
seems plausible that entrepreneurs use both top-down and bottom-up
processing in identifying opportunities. Whether one approach is used more
than the other would seem to depend on the cognitive processing capacity or
style of the individual doing the perceiving and the environmental conditions
(Market and industry) at the time.
Neisser’s theory of ‘analysis-by-synthesis (1976) is an attempt to reconcile
the advantages and disadvantages of both the above approaches into one
cohesive model. It combines the process of perception based on prior
knowledge or schemas with the extraction of sensory cues from the
environment. The perceptual process is therefore seen as a continuous active
interaction between top-down and bottom-up processing.
Figure: Neisser's model of perception (1976)
A broad criticism of the theory is that it is too vague and does not show how
cognitive schemas interact with incoming data from the senses. It also does
not show at what point perception actually occurs. It describes what we do but
not how or why we do it. The question of ‘how’ is perhaps covered by the
notion of ‘entrepreneurial thinking’. Like strategic thinking (also known as
‘three bubble thinking’), data is cognitively evaluated against four key
dimensions as illustrated below. Data is compared with ‘concrete’ events in
the present and elevated to a level of abstraction to explore further
possibilities. Data is also evaluated against what has occurred in the past and
extrapolated into the future to understand possible implications. Finally, the
data is taken together in its totality and assessed against the entrepreneur’s
criteria for desirability and feasibility.
Sensory cues from the
environment
Analysis of sensory
cues(bottom-up)
Search for expected sensory
features(top down)
Perceptual Model
(Schema)
Figure: Evaluating opportunities using Entrepreneurial Thinking
Why we do it could be explained by the entrepreneur’s ‘attitude’, ‘intentions’
based theory and the personal goals of desirability and feasibility’.
Entrepreneurial intentions
Despite having all the data available to perceive the possibility of an
entrepreneurial opportunity, entrepreneurs may still not ‘see’ it. In the absence
of an intention to act, entrepreneurial behavior is unlikely. Intentions indicate
that the entrepreneur has mentally processed a range of events, factors,
contingencies, weighed alternatives and has ‘made up his or her mind’ on a
particular course of action. If there had been no intent to engage the cognitive
faculties it is unlikely an opportunity would be identified. Logically, intent
therefore precedes action. Bringing a commercially viable innovation to
fruition requires significant planning. Knowing, as entrepreneurs do, what it
will take to introduce an innovation into the market not only reflects their intent
to do so but also that they will follow a planned series of steps in order to
accomplish this intent. ‘Intent’ is therefore a critical antecedent of planned
behavior. Action (both mental and physical) requires effort; if we are to try, we
must first intend to try. At a deeper level, these mental models reflect why we
intend a given action. If we can better understand the cognitive impulses that
ABSTRACT
CONCRETE
PAST FUTURE
motivate why an entrepreneur behaves in a certain way, we can better
understand what it is they are trying to accomplish.
Ajzen (1987) argues persuasively that intentions-based models capture how
individuals actually think. Even routine behaviors are anchored by intentions;
the intentionality is simply more deeply placed. Ajzen and Fishbein’s model of
reasoned action and planned behavior illustrated below shows how the
intentions framework serves as a conduit to channel our interpretations of
events into action. This implies that intentions are constructed, even where
they appear to arise spontaneously.
This latest version of the framework suggests that the intent behind a
particular behavior depends on certain fundamental underlying attitudes.
These specific attitudes reflect the entrepreneur’s attributions about a
potential course of action. Entrepreneurs need to perceive the course of
action as (a) within their sphere of competence and control (thus feasible), (b)
personally desirable, and (c) consonant with social norms (Ajzen, 1991).
Barriers to any of these critical antecedents will represent a substantive
inhibition to an entrepreneur’s intent to seek and act on opportunities. In other
words, if we inhibit the intent, we inhibit the action.
Figure: Ajzen & Fishbein (2000) Model of reasoned action and planned
behavior
The above model argues that the perceptions of desirability and feasibility
explain (and predict) intentions significantly. Intentions are driven by
perceptions that outcomes from the behavior are not only personally desirable
but also that they are socially desirable. The entrepreneur’s Intentions toward
an innovation are therefore best predicted by three critical perceptions: that
the innovative activity (e.g., a new product, service or venture) is (a) perceived
as personally desirable, (b) perceived as supported by social norms including
that a market for the innovation exists, and (c) it is perceived as feasible.
BACKGROUNDFACTORS
INDIVIDUAL
PersonalityMood
EmotionIntelligence
ValuesStereotypes
GeneralAttitude
Experience
SOCIAL
EducationAge
GenderIncomeReligion
RaceEthnicityCulture
DATA
KnowledgeMedia
Intervention
BehaviouralBeliefs
Attitude Toward
Behaviour
BehaviourIntentionSubjective Norm
Normative Beliefs
Control Beliefs
Perceived Behavioural
Control
Actual Behavioural
Control
Exogenous factors such as individual, social and informational differences
as well as situational circumstances operate indirectly on intentions (and thus
behavior) by changing the above antecedents, not by directly affecting
intentions. That is, a change in objective circumstances would thus change
intentions if and only if the change altered the entrepreneur’s attitude toward
the opportunity. A change in legislation, for example, may not only restrict
opportunity exploitation but also alter the entrepreneur’s attitude toward
proceeding if it becomes undesirable. Path analyses using meta-analysis
clearly supports the causal linkage from attitudes to intentions to behavior
(Kim & Hunter, 1993). Research also suggests that certain exogenous
variables can serve to facilitate or 'precipitate' the realization of intentions into
behavior (Shapero, 1982; Krueger & Brazeal, 1994; Stopford & Baden-Fuller,
1994). Moreover, formal intentions models have already been applied
successfully to entrepreneurial behavior (e.g., Davidsson, 1991; Krueger &
Brazeal, 1994; Reitan, 1997).
Entrepreneurial attitudes
Based on the Ajzen-Fishbein model the entrepreneur’s personal attitude
depends on how they see the consequences of exploiting the entrepreneurial
opportunity: the likelihood of success as well as the magnitude of that
success; negative outcomes as well as positive, and the expected
intrinsic/extrinsic rewards. “An attitude is a predisposition to action, a state of
readiness to act in a particular way” (pg 213). Attitudes are generalized states
of the individual, which lead to or result in a wide variety of particular ways of
behaving (MacDonald & Morgan, 1959).
Perceptions of Desirability: Personal and Social - A personal attitude of
desirability is supported by a number of expectations which are necessary for
entrepreneurial behavior. According to the model, attitudes can not only be
learned but also influenced in order to increase the likelihood of
entrepreneurial behavior. For example, if positive outcomes are emphasized,
and the negatives are minimized one would expect the entrepreneur to pursue
the opportunity more pro-actively. The same applies to manipulating the
expected rewards should the idea succeed. Learning more about the
opportunity and gaining experience in the industry where the opportunity is
introduced enhance the entrepreneur’s portfolio of possible options and
reinforce its perceived desirability.
However, a strong personal attitude of desirability is not sufficient to predict
the intended behavior. Compliance with the normative beliefs of those around
the entrepreneur adds to the attitude of perceived desirability. Normative
beliefs reflect the culture within which the entrepreneur finds themselves. A
particularly supportive environment with good intergroup relationships which
are encouraging will influence the individual’s capacity for innovation (Scott &
Bruce, 1994).
Perceptions of Feasibility: Self-Efficacy - Bandura and his associates
developed and elaborated on a social-cognitive model of human agency
(Bandura, 1986, 1995) which is particularly relevant to entrepreneurs. This
model argues that taking action requires consideration of not just outcome
expectancies (i.e., desirability) but also perceived self-efficacy (i.e., feasibility).
Bandura defines self-efficacy as an individual's perceived ability to execute
some target behavior. Thus, it reflects the perception of a personal capability
to do a particular job or set of tasks. Increases in self-efficacy lead to
increased initiative and persistence and thus subsequent performance; low
self-efficacy reduces effort and thus performance (Eden, 1992).
Increasing self-efficacy requires more than just teaching competencies;
developing mastery in the skill sets relevant to entrepreneurship requires
nascent entrepreneurs to fully internalize the competency through application
and experience. Psychological and emotional support from the entrepreneur’s
supporters and peers reinforces perceptions of increased self-efficacy.
Developmental experiences provide opportunities to experience mastery at
those competencies (McCall, 1992; Senge, 1992). Exposure to diverse life
and work experiences broadens the entrepreneur’s range of what they
perceive as feasible.
Exogenous Factors - As the model suggests, most exogenous factors
influence intentions (and behavior) through influencing one or more critical
attitude. The various literatures on innovation and entrepreneurship offer
numerous examples of exogenous factors logically related to innovative or
entrepreneurial activity, though often with disappointing results. If effects are
actually indirect, then applying this framework may strengthen the findings.
For example, the presence of role models may increase entrepreneurial
behavior only if the role models actually change a key attitude such as self-
efficacy (Krueger & Brazeal, 1994).
Precipitating Factors
Exogenous factors may also influence the intention-behavior relationship by
precipitating, or facilitating the realization of intentions (Shapero, 1982; Ajzen,
1987; Stopford-Fuller & Baden, 1994). One such factor may be perceptions of
resource availability (Triandis, 1967). Another might be a personal propensity
to act on opportunities (Shapero, 1982). Tangible barriers may serve to
prevent an intention from coming to fruition, but the subtleness of cognitive
barriers can present even greater obstacles. While Shapero notes that purely
subjective conditions can precipitate action, such as facing a fortieth birthday,
it appears that the typical precipitating event reflects some sort of
displacement, a disruption of the entrepreneur’s inertia such as divorce or
being offered a big contract away from the immediate support structure. Yet,
how the entrepreneur reacts to displacement depends on his/her perceptions
of the impact of that event. Shapero argues that the entrepreneur’s reaction
also depends on the believable options that he/she perceives. Precipitating
factors are not well understood, so research in this area is very likely to shed
some new light.
(c) Deep cognitive structures in Entrepreneurs
Entrepreneur’s Values
The essence of this study focuses on the role personally held core values
play in entrepreneurial opportunity recognition. Limited extant research in this
area has explored cross-cultural values differences in entrepreneurial start-up
ventures (Morris & Schindehutte, 2005). The role values have played in
entrepreneurial activity is often predicated on Western values such as
‘individualism’, ‘competitiveness’, ‘material gain’ and ‘ strong work ethic’
(Herbert & Link, 1998; Cauthorn, 1989; Schumpeter, 1950). Researchers
have furthermore demonstrated relationships between entrepreneurial activity
and culturally based values such as individualism, achievement,
independence and masculinity (Berger, 1991; Lipset, 2000).
However, a number of questions still remain unanswered such as, whether
personally held values influence entrepreneurial behavior? Is there a core set
of values that all entrepreneurs subscribe to? And, do values have an impact
on the process of opportunity recognition; if so, what is the nature of that
impact?
What is a value? The term was first defined by Kluckhohn (1951) in an
anthropological context as “… a conception, explicit or implicit, distinctive of
an individual or characteristic of a group, of the desirable which influences the
selection from available modes, means and ends of actions.” (cited in
Hofstede, 2001, pg. 5). A clearer definition is provided by Rokeach (1972);
“To say that a person ‘has a value’ is to say that he has an enduring belief
that a specific mode of conduct or end-state of existence is personally and
socially preferable to alternative modes of conduct or end-states of existence”
(pg. 159 – 160). Values are feelings, cognitive non-rational principles that we
intuitively believe in to the extent that they guide how we perceive the world
around us and subsequently how we behave, alone and in concert with
others.
Hofstede (2001) refers to values as ‘feelings with arrows to them’ (pg. 6).
This means there is a certain qualitative dimensionality to values that enables
them to be expressed on a continuum, such as, ‘good vs. bad’ and all the
perceptions between those two extremes. Values have both intensity and
direction. In other words, how strongly we believe in a particular value
indicates its intensity. Because values function along a continuum it is
therefore possible for one person to hold strong views regarding their
interpretation of a type of behavior whilst someone else may hold a more
moderate view of the same behavior. Direction is indicated by outcome. For
example ‘being successful’ may be extremely relevant (intensity) to an
entrepreneur and he/she may consider ‘more success’ as good and less as
bad (direction). This means that values can be measured – intensity can be
measured from ‘irrelevant’ to ‘highly intense’ whilst direction can be measured
against desirability, i.e. ‘highly desired vs. unimportant’. Research problem -
Positivistic fallacy – the distinction between what people actually desire vs.
what they think they should desire. Measurement should therefore focus on
what entrepreneurs actually desire.
Another question that requires closer examination is which values are
relevant to entrepreneurial behavior? Bales & Couch (1969) produced an
inventory of approximately 900 values from a variety of different
questionnaires and eventually distilled into four clusters, namely, authority,
self restraint, equality and individuality. The Schwartz Value Survey
(Schwartz, 1992; Schwartz & Bilsky, 1990) cited 56 commonly held values
clustered around 10 universal sub-dimensions (power, achievement,
hedonism, stimulation, self-direction, universalism, benevolence, tradition,
conformity and security) and three higher order dimension (Individualism /
Collectivism; openness to change / conservation; and self-enhancement / self-
transcendence). This research also illustrates the extent to which the above
dimensions apply across all cultures, albeit in varying degrees. We also know
that entrepreneurial activity takes place in all societies under widely varying
circumstances and within equally differing cultures. Further, some cultures are
known to value entrepreneurial activity more than others and this is reflected
in the differing economic trends (Dana, 1997; Shapero, 1984). There is some
evidence that entrepreneurship flourishes where values such as achievement,
wealth generation, personal gain, acceptance of change and economic
advancement are prevalent (McClelland, 1965).
Mitchell et al. (2000) proposed that emerging cognitive theories of
entrepreneurship explain why entrepreneurs in different cultures do not think
differently in several significant respects and suggest the prevalence of a
global culture of entrepreneurship. They and others suggest that cognitions
vary systemically by entrepreneurial involvement rather than by culture
(McGrath et al. 1992; McGrath, MacMillan, and Scheinberg 1992). A case in
point, is Holt (1997) who found that the emphasis on individualism and
acceptance of uncertainty did not differ significantly between Chinese and
U.S. entrepreneurs. He concluded that the prospect of creating private
enterprise either fosters these values or attracts those that have values
comparable to entrepreneurs elsewhere; i.e., there is a universality to
entrepreneurial values.
Kilby (1993) noted that values are instrumental in advancing the constructive
understanding of human behavior and consequent change. Thus, it would
seem that personal values should have important implications not only for the
decision to pursue entrepreneurship but also in the way in which the
entrepreneur recognizes an opportunity (Bryan 1999; Bird 1989; Gasse 1977).
Values reflect the entrepreneur's conscious view of him/herself (Feather
1990). Moreover, the conscious view (or belief) that a person has about him/
herself directly shapes movement toward action, or one's motives (McClelland
1965).
The findings of the Morris and Schindhutte study (2005) first and foremost
indicate that entrepreneurship is a ‘values-driven’ activity. The value
orientation of the entrepreneur is a key antecedent to developing the
appropriate attitude toward recognizing entrepreneurial opportunities. The
researchers also seem to conclude that entrepreneurial attitudes are not as
deeply embedded in ethnic cultures as they are often portrayed, but that they
can rapidly adapt to changing economic and political circumstances without
undermining or altering the value base. So, whilst the entrepreneur’s
background culture matters, it is less of an antecedent to entrepreneurial
opportunity recognition and is instead a complex and dynamically interacting
factor. The findings also lend support to the conclusion that the pursuit of
entrepreneurial activity itself gives rise to certain shared values with other
entrepreneurs. Universal values such as independence, success,
achievement, and ambition, which have been traditionally associated with
entrepreneurship (Hebert and Link, 1988; Cauthorn 1989; Schumpeter 1950),
were consistently reinforced across ethnic groups in the study. A closer
examination of these universal values is necessary to determine what role
they may play in opportunity identification.
The exploration of personal values is an important first step because most of
our decisions are based on them. A personally accepted and positive value is
one that produces behaviour that is beneficial both to the practitioner and to
those on whom it is practiced. The reverse is also true in that a value that is
negatively perceived by the individual may produce detrimental behaviour,
which could be damaging to those around them. It is quite self-evident then
that individuals will naturally move towards those values that they have a
positive affiliation with and try to move away from those they perceive as
damaging to their progress. Values are deep cognitive states that are based
on life experiences. So, for example, people will generally gravitate toward
values such as ‘success’, ‘happiness’, ‘security’, ‘adventure’, and so on.
Equally, they will move away from or try to avoid values such as
‘embarrassment’, ‘rejection’, ‘humiliation’, ‘anger’, ‘frustration’ or ‘resentment’.
There is a further distinction that needs mentioning in values. The four so
called ‘universal values deemed to be present in all entrepreneurs are
classified as ‘ends values’. ‘Means values’ on the other hand, are simply
vehicles or tools used to achieve ‘ends values’. For example, if an
entrepreneur claimed that one of their values was ‘money’ then this would be
classed as a ‘means value’. The entrepreneur clearly doesn’t behave the way
they do simply to gather up piles of paper with the Queen’s face on them!
Money is a ‘means’ to an ‘end’, i.e., the vehicle for a deeper seated value or
‘end value’, such as ‘success’. The key to understanding how an entrepreneur
recognizes opportunities then is to explore both ‘means’ and ‘ends values’ i.e.,
what value they are striving to experience and the tools they use in the
process.
Another concept closely associated with values is a belief. A belief is a
feeling of certainty about the meaning of something. Beliefs underpin values
and set out the conditions, rightly or wrongly, by which an entrepreneur can
experience whether they are ‘living’ (i.e., behaviourally expressing) their
values or not. So, for example, if one of an entrepreneur’s values is ‘success’
then the belief that underpins that value could be “If I have a million dollars in
the bank then I will be successful”. Beliefs are often constructed in this ‘if …
then’ format. Basically, the entrepreneur’s beliefs tell their sub-conscious
when it will be okay to feel ‘success’. It is important in this context to
acknowledge that beliefs can support or limit the achievement of what the
entrepreneur values.
What is the relevance of this to opportunity recognition? Just this, it is very
easy for an individual to set themselves up for failure from the outset if they do
not understand what it is they value most in pursuing opportunities and how
deeply they believe they are equipped to get there. What the entrepreneur
values in life and their beliefs, shape the decisions they make in business and
ultimately their long term success.
For example, assume that an entrepreneur’s top value in business is to be
successful, an ‘end value’, and that in order for that entrepreneur to feel that
successful, they need to be publicly acknowledged as being able to accurately
spot entrepreneurial opportunities frequently – they are acknowledged by their
peers and followers as creative, innovative, an absolute fund of new ideas -
the belief or condition component. Remember of course, that entrepreneurs
also have values that they will do anything to avoid or move away from. For
this scenario, let’s assume that our entrepreneur’s top avoidance value is
‘rejection’ and one of the beliefs that underpins this negative value is that
when they are no longer consulted about new ventures, products or services
or they are excluded from meetings discussing innovative ideas.
Our entrepreneur has been invited to participate in a product development
session with other influential business people and noted leaders in the
industry. Whilst our erudite entrepreneur is addressing the forum four of the
dozen people in the meeting get up and leave the room. Two of them are very
influential people that the entrepreneur has been trying to develop relations
with. The question is how is our entrepreneur likely to feel about that meeting
afterwards? Are they more likely to feel rejected or successful? Now, those
individuals may have left for very good reason, to catch a flight or due to
illness, their reasons do not matter – what matters is the cognitive
interpretation and meaning our entrepreneur attaches to their actions. It is
those ‘feelings’ at the end of the day which will enable an entrepreneur to
clearly identify whether an opportunity exists or not.
Following Hofstede’s (2001) claim that ‘values are feelings with arrows’ (pg.
6) and that they can be measured across two dimensions, namely, intensity
and direction it should be possible to explore in greater depth the impact
these universal values have in coming to a decision regarding the
identification of an entrepreneurial opportunity. As with all personally held
values, however, there are ‘rules’ that determine whether or not an individual
will behaviorally display what they value most. A cautionary factor to be
considered in any measurement of these values will be to ensure participants
to this study have a common understanding of each definition.
Independence – A dictionary definition of this value is ‘freedom from
dependence on or control by another person, organization, or state’
(Encarte UK dictionary). In the context of the entrepreneur identifying
opportunities it would mean freedom from influence or direction from
others in the identification of an opportunity. In other words, the individual
relies solely on their own perception of the possibilities and whether an
opportunity exists or not, they are not manipulated or influenced in any
way by others. The intensity of the feeling can be measured from ‘weak’ to
‘strong’. The direction of the value would range from ‘dependence’ to
‘independence’. One would expect the behavioral expression of this value
to identify an individual who is singularly focused on the pursuit or
development of an opportunity with little or no input from others.
Success – Success is a relative concept; it means different things to
different people. What may seem to constitute an enormous success to
one person may appear to be somewhat ordinary to another. As a
universally held value though, the measurement dimensions of intensity
and direction may not be reliable or valid. Following the individual’s
definition of what constitutes success, a more reliable approach would
seem to be an exploration of the underpinning rules (beliefs) that support
the pursuit of success. The behavioral expression of success is more
directly observable if there is a deeper understanding of the
limiting/supporting rules an individual has regarding their feeling success
and how these influence decisions regarding opportunities.
Achievement – the widely held belief that entrepreneurs have a distinctly
higher need for achievement was originally posited by McClelland (1965).
However, on its own and isolated from other variables this value is
insufficient as a sole predictor of an individual’s ability to recognize an
opportunity. Measuring the intensity of the need for achievement may yield
some interesting results however it would need to be done in the context
of other personally held values. Like success a closer examination of the
underlying beliefs that support a need for achievement would be more
appropriate than measuring intensity and direction. Such an examination
should also reveal the behavioral expressions of a high need for
achievement and support the cognitive drivers to uncover opportunities.
Ambition – "Great ambition is the passion of a great character.
Those endowed with it may perform very good or very bad acts.
All depends on the principals which direct them." Napoleon
Bonaparte Ambition combines a number of different concepts but those
most congruent with how we perceive entrepreneurs include motivation,
drive and aspiration. To have ambition means to be driven or motivated to
achieve a goal or aspiration. Ambition underpins the values expressed
above; without ambition the drive to be independent, achieve goals and
experience success become unattainable. In terms of measurement,
intensity is a relevant dimension because ambition can be ‘strong’ or
‘weak’. Direction also becomes relevant because ambition must be
directed toward something; a goal, objective or target. If there is no goal or
objective there can be no ambition to achieve. The behavioral expression
of ambition can be observed through the entrepreneur’s focus,
commitment to purpose, physical drive and determination to achieve.
Could these be the catalysts Shapero refers to which crystallize beliefs and
attitudes into a salient intention? A strong and supportive orientation in these
four value dimensions seems to underpin a personal propensity to act on
perceived entrepreneurial opportunities. The question then becomes to what
role universally recognized and personally held values play in entrepreneurial
opportunity identification?
What catalyst/s serve to crystallize beliefs and attitudes into a salient
intention? Shapero suggested the existence of some sort of personal
propensity to act. However, does this propensity help attitudes coalesce
into intentions or facilitate the realization of intentions?
Qualitative tests. This model merits a formal qualitative test. One
specific approach proposed is action research to identify whether
universal values do indeed influence opportunity perceptions (and thus
behavior). What dimensions of cognitive infrastructure influence which
dimensions of entrepreneurial orientation?
Conclusion
Perhaps the most critical antecedent of entrepreneurial action is the
categorization of strategic issues into opportunities and threats. As with
intentions, opportunities are constructed, not found (Mintzberg, 1994; Dutton
& Jackson, 1987; Dutton, 1993). An economy seeking to promote
entrepreneurial activity must establish conditions where entrepreneurs can
perceive the prospect of seeking new opportunities (and the uncertainties
associated with them), not threats.
Understanding what promotes and inhibits entrepreneurial activity requires
an understanding of how intentions toward a prospective course of action are
constructed. Mental schema of what we intend reflect why we intend an
action. Intentions-based models capture how individuals formulate these
mental schema. Based on well-developed theory and robust empirical
evidence about intentions, we can construct a social psychological model of
how entrepreneurial opportunities are identified, assessed and exploited.
Perceptions of desirability and perceptions of feasibility (both personal and
social) are critical to the construction of intentions toward important behaviors.
An individual’s personally held value and belief structure (cognitive
infrastructure) should enhance, not impede, these critical perceptions.
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