MBA Notes: Entrepreneurship

Key Topics:
- Entrepreneur vs intrapreneur
- Social entrepreneurs
- Creative destruction, the spur
- Why we need entrepreneurs
- Money for business plans

Entrepreneurship is the newest discipline in the business school armoury and in many schools the subject is still not taught. In some it is a topic within economics, which is considered appropriate as J B Say, a French economist in circa 1800, first coined the term entrepreneur, using it to describe 'Someone who shifts resources out of an area of lower and into an area of higher productivity and greater yield'. The most common practice is to reduce the subject to a basic 'start your own business' project culminating in a business plan presentation, with a handful of MBAs going the whole hog and launching a venture.
There is rather more to the subject than just starting a business, though that in itself is a worthy outcome. Governments are fixated with entrepreneurship, secondary schools are teaching it, 1 in 15 people in work runs a business and over half the world work for and report directly to an entrepreneur.


Why entrepreneurship matters
You might be surprised at the number of people and organizations that appear keen to give entrepreneurs a helping hand. Dragons' Den panellists, bankers and government ministers all seem eager to lend a helping hand. None of these would-be helpers is particularly altruistic. The primary reasons why entrepreneurs are essential are as follows.

Job creation
Governments need a constant injection of new businesses as they create most of the new jobs in any economy; a fact uncovered by David Birch, a researcher at MIT (Massachusetts Institute of Technology) back in 1979 (The Job Generation Process, MIT), and corroborated by dozens of other studies since then. Also, of course, you will pay tax on your profits and become an unpaid tax collector for VAT or Sales Tax on behalf of government agencies.

Innovation
New businesses are also the main source of innovations, with around 60 per cent of all commercially viable inventions being born in new businesses. By way of illustration one US study (Analysis of Small Business Innovation in Green Technologies) published in October 2011 concluded that 'of the 1,279 US firms that were granted 15 or more US patents in the five-year period 2005–2009, some 42 percent are small firms with 500 or fewer employees'. The study went on to conclude: 'When we compare the small innovative firms in the database with their larger counterparts, we find that small firms outperform large firms on average in every case. Patents of small firms are cited 79 per cent more by recent patents than is typical for patents of the same age and patent classification, while patents of large innovative firms are cited just slightly above average. We also found that the small firms in the study outperformed large firms in patent generality, originality, and patent growth' (www.sba.gov/sites/default/files/rs389tot.pdf).
 

Creative destruction and the innovative spur
Creative destruction is a term attributed to Joseph Schumpeter. Born in 1883, he became the youngest professor in the Austrian empire at 26 and finance minister at 36, only to be dismissed after presiding over a period of hyperinflation. A brief spell as president of a small Viennese bank was followed, after its failure, by a return to academia, first in Bonn and then in 1932 at Harvard. He is remembered for two books in particular: Theory of Economic Development (1911), where he first outlined his thoughts on entrepreneurship, and Capitalism, Socialism, and Democracy (1942), where he detailed how the entrepreneurial process worked and why it mattered.

His view was that the fundamental impulse that sets and keeps the capitalist engine in motion comes from 'the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates'. He pointed out that entrepreneurs innovate and develop new products, services or ways of doing business, and in the process destroy those organizations that can't adapt or have been effectively made redundant.

According to the US Department of Commerce statistics new small businesses produce 13 times more patents per employee than large established firms.

Schumpeter believed that capitalism has to create short-term losers alongside its short- and long-term winners in order for the economy to grow and prosper: 'Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist… propulsion. The atmosphere of industrial revolutions… is the only one in which capitalism can survive.' He went rather further than this by arguing that the more countries tried to mitigate the possibilities of business failing, the worse their economic performance would be. Picking up the pieces through social insurance is fine; propping up failing businesses or declining business sectors is not.

Who makes a good entrepreneur?
There are absolutely no reliable characteristics that predispose people to become entrepreneurs. Despite diligent research, Durham University's General Enterprise Tendency (GET) Test, with 12 questions measuring need for achievement, 12 to assess internal locus of control, 12 to determine creativity, 12 to gauge calculated risk taking and 6 to measure need for autonomy, has failed to gain recognition.

Peter Drucker, the international business guru, probably got it right with this description: 'Some are eccentrics, others painfully correct conformists; some are fat and some are lean; some are worriers, some relaxed; some drink quite heavily, others are total abstainers; some are men of great charm and warmth, some have no more personality than a frozen mackerel.'

Entrepreneurs do have one distinguishing characteristic in common, however. They put independence and doing their own thing above everything, including getting rich. That doesn't mean they don't want to succeed; it's just that success is not all about money. Research carried out by Simfonec, a science research centre based at Cass Business School (www.cass.city.ac.uk), found that 20 per cent of entrepreneurs in their sample (250 entrepreneurs and 250 managers) were dyslexic, whereas managers reflected the UK national dyslexia incidence level of 4 per cent. While it is perhaps comforting to know that dyslexia, or even not completing schooling or university because of it, is no bar to entrepreneurship; it is not something you can do much about.

Age matters
Research by the Global Entrepreneurship Monitor (www.gemconsortium.org) and the UK Office for National Statistics (www.statistics.gov.uk) reveals a number of interesting facts about small business starters. First, people aged between 25 and 34 are more likely than those in other age groups to be planning to start a business. In the UK one in ten of this age group fits this description. Surprisingly the over 54s are slightly more likely (3.7 per cent) than the under 24s (3.3 per cent) to be entrepreneurially inclined.

Woman power
Entrepreneurial activity rates for developed countries indicate that men are around twice as likely to be entrepreneurially active as women. But that average conceals some wide differences. In the United States women are almost as likely as men to be business starters, while in Japan barely a seventh of businesses have women at the helm. Women in Europe currently own less than a third of small businesses, but women start about 35 per cent of new businesses in the UK. Businesses started by women tend to be concentrated in the labour-intensive retail industries, where management skills are particularly valuable.

No need for education?
A popular myth states that undereducated self-made men dominate the field of entrepreneurship. Furniture company IKEA was founded by Ingvar Kampra when he was just 17, having cut his teeth on selling matches to his nearby neighbours at the age of 5. If Sir Richard Branson (Virgin) dropped out of full-time education at 16, and Lord Sugar (Amstrad), Sir Philip Green (BHS and Arcadia) and Bill Gates can give higher education a miss, education can't be that vital.
Research however, shows that the more educated the population, the more entrepreneurship takes place. Educated individuals are more likely to identify gaps in the market or understand new technologies. After all Stelios Haji-Iannou, founder of easyJet has six degrees to his name, albeit four are honorary. Tony Wheeler, who together with his wife Maureen founded Lonely Planet Publications, has degrees from Warwick University and the London Business School. Jeff Bezos (Amazon) is an alumnus of Princeton and Google's founders Sergey Brin and Larry Page graduated from Stanford.

Would you make a good entrepreneur?
All too often, everyone believes themselves to be the right sort of person to set up a business. Unfortunately, the capacity for self-deception is enormous. When a random sample of male adults were asked recently to rank themselves on leadership ability, 70 per cent rated themselves in the top 25 per cent; only 2 per cent felt they were below average as leaders. In an area in which self-deception ought to be difficult, 60 per cent said they were well above average in athletic ability and only 6 per cent said they were below.
A common mistake made in assessing entrepreneurial talent is to assume that success in big business management will automatically guarantee success in a small business.
Rate yourself against the characteristics shown in Table 8.1 and see how you stack up as a potential business starter. A score of over 30 suggests you have what it takes and less than 20 should be treated as a warning signal. Get a couple of people who know you well to rate you too, so you get an unbiased opinion.

TABLE: Business starter attribute check
 

You can find out more about whether or not entrepreneurship would be right for you by taking one or more of the many online entrepreneurial IQ-type tests. 

Entrepreneurial categories
Entrepreneurs are usually associated with successful businesses such as those run by Alan Sugar, Richard Branson, Bill Gates or Roman Abramovich. There are, however, several different types of entrepreneurial ventures, not all associated either with making money or with charismatic leadership. The following are the main subsidiary categories of entrepreneurial organization.

Social entrepreneurs
A social entrepreneur is concerned primarily with achieving sustainable social change, though in many respects the strategies they employ to achieve those goals are similar to those used by other entrepreneurs. The idea of social business is fast becoming mainstream. There is an annual Queen's Award for Industry for Sustainable Development, an ACCA Award for the Best Social Accounts and a School for Social Entrepreneurs (www.sse.org.uk) which helps would-be social entrepreneurs to get started. The Schwab Foundation (www.schwabfound.org) covers much the same ground in the United States. Columbia Business School's MBA programme has an elective course on Social Entrepreneurship as part of its Research Initiative on Social Entrepreneurship (www.riseproject.org/cbsprofiles.html). Students complete projects where they shadow leading social entrepreneurs and social investors for a semester and details of all their case studies are published on their website. Stanford Graduate School of Business (www.gsb.stanford.edu/exed/epse) with its Executive Program in Social Entrepreneurship and Harvard's Strategic Perspectives in Non-profit Management (www.exed.hbs.edu/programs/spnm) take the subject to the heart of mainstream business education.
According to government statistics, around 55,000 businesses trade with a social or environmental purpose across the UK. They contribute almost £27 billion to the national economy and substantially benefit their local communities by creating employment opportunities, providing ethical products and services, and reinvesting surpluses into society. The primary motivation for social entrepreneurs is to build an ethical venture that is of benefit to the wider community. As one social entrepreneur put it, 'I am trying to build a little part of the world in which I would like to live.' Money is important, but getting rich is not.
Oneworld Health (www.oneworldhealth.org), established by Victoria Hale, a social entrepreneur and pharmacologist based in San Francisco, is as different from mainstream drug companies as it is possible to be. It has as its vision to 'serve as a positive agent for change by saving lives, improving health, and fulfilling the promise of medicine for those most in need' and for its values 'Integrity, Courage, Collaboration'. Oneworld assembles experienced and dedicated teams of pharmaceutical scientists; identifies the most promising drugs and vaccine candidates; and develops them into safe, effective and affordable medicines. It partners with companies, non-profit hospitals and organizations in the developing world to conduct medical research on new cures. Then it manufactures and distributes newly approved therapies such as those that tackle malaria, the cause of 300–500 million acute illnesses and over one million deaths annually.
The company scours the shelves of big pharmaceutical companies looking for drugs that for some reason failed to get to market, perhaps because the market proved too small, the benefits too few or that in some other way won't meet the needs of an affluent Western market. Hale even persuaded The University of California, Santa Barbara to donate a patent for a discovery involving the novel use of calcium channel blockers to control the schistosomiasis parasite. Hale and her team believe that that there are huge inefficiencies in the way Western world drugs are currently devised and produced, and with $140 million from the Bill and Melinda Gates Foundation they intend to improve on that situation.

Intrapreneur
The Economist of 25 December 1976 carried a survey called 'The coming entrepreneurial revolution' in which Norman Macrae, the magazine's deputy editor and considered by many as one of the world's best economic forecasters, contended that methods of operation in business were going to change radically in the next few decades. The world, Macrae argued, was probably drawing to the end of the era of big business corporations; it would soon be nonsense to have hierarchical managements sitting in skyscrapers trying to arrange how brainworkers (who in future would be most workers) could best use their imaginations. The main increases in employment would henceforth come either in small firms or in those bigger firms that managed to split themselves into smaller and smaller profit centres that in turn would need to become more and more entrepreneurial.
Two years later, in an article headed 'Intra-Corporate Entrepreneurship – Some Thoughts Stirred Up by Attending Robert Schwartz's School for Entrepreneurs', Gifford Pinchot III and his wife Elizabeth S Pinchot began the process that would lead to their coining the word 'intrapreneuring'. Their organization, Pinchot & Company (www.pinchot.com), based around the proposition that you don't have to leave the corporation to become an entrepreneur, advanced the idea that the way for big business to adapt was to create an environment where managers could behave as though they were entrepreneurs, but within the business, using its resources. By 1992 the term intrapreneur had been added to the third edition of The American Dictionary of the English Language. 3M's Post-It Note, a product of an entrepreneurial team 'bootlegging' company resources, is an example from one of Pinochet's list of Fortune 500 clients. Others include Apple, DuPont, Cable & Wireless, Nabisco and Proctor & Gamble.
 

Intrapreneurs, unlike entrepreneurs, don't have 'doing their own thing' at the top of their list of motivators. They feel happier in the comfort zone afforded by a corporate structure and the resources and respectability that provides.

Family business
Family firms make up around 70 per cent of businesses worldwide and account for a substantial proportion of GDP. Many of the world's leading corporations originated as family firms and retain cultural distinctiveness as a result. According to Nigel Nicholson, who runs the Family business elective at the London Business School (LBS), the financial crisis has illustrated, 'with their long time scales, adaptive cultures and vision-led leadership many are much better fitted to prosper in turbulent times than many PLCs'. Indeed the PwC (PricewaterhouseCoopers) 2011 Family Business Survey in which they talked to more than 1,600 family business owners and managers in 35 countries, the largest of its kind ever to be conducted, supports this hypothesis. Of the firms surveyed, half had achieved growth in 2011, with 20 per cent reporting significant growth. A further 20 per cent at least maintained their position. Only 14 per cent had suffered a significant reduction in sales and for the most part they were in the construction industry.

Succession planning and dispute resolution are the Achilles heels of the family business. Less than 33 per cent of family businesses are passed on to the second generation and barely 13 per cent survive through to the third generation. So much for the bad news; the ones that do manage the succession planning process effectively can be very successful. ALDI (short for 'Albrecht Discounts'); Michelin (controlled and run by François Michelin, his son Edouard and their partner René Zingraff); and Mars (founded by Minnesotans Frank and Ethel Mars, who invented the Milky Way bar) are among the world's biggest family businesses (check out Family Business Magazine at www.familybusinessmagazine.com, then 'Oldest Family Companies' for a full list). The Family Firm Institute (www.ffi.org), the International Centre for Families in Business (www.icfib.com), Peter Leach LLP (www.peter-leach.com), who started the Family Business Centre at accountants BDO Stoy Hayward and now runs it as a stand-alone venture, and the Family Business Institute (http://familybusinessinstitute.com) are organizations dedicated to providing education and networking opportunities for family businesses, as well as help with succession planning.

Business incubators: where entrepreneurs hang out
Science parks, technology innovation centres and various permutations of the words business, incubator, venture, research and programme are all used to describe the process of incubation. With this approach, job and business creation is paramount.
Innovation centres: In application of new research. So innovation centres are often based on a university campus where the business and research communities can meet informally and share knowledge. Germany, Taiwan, Singapore, the Netherlands, Ireland and the Scandinavian countries have plumped for innovation centres as a way to commercialize the output of university or government research. Jobs and business are created, but the main aim is to recover monies spent and to provide a war chest for future research.

Science parks: Countries such as Korea and Japan have emphasized science parks as the approach to increasing research related activities. This means that research takes priority over any business or jobs that may be created and those that are should be directly related to the science park itself.
Business incubators: Here the emphasis is on creating new business enterprises, with or without the use of new technologies. Countries such as China, the Philippines, Trinidad and Tobago and Nigeria (with the assistance of the United Nations Found for Science and Technology Development) have moved into the business incubation approach.
Finding an incubator
The National Business Incubator Association (www.nbia.org/links_to_member_incubators/index.php) maintains a directory of some 1,900 incubators in over 60 countries. They also maintain a directory of international incubation associations (www.nbia.org/links_to_member_incubators/international.php).