Enterprise and Small Business Principles
The entrepreneurial process
This chapter will focus on research-based insights into the entrepreneurial process. By that is meant the process of setting up a new business activity resulting in a new market offer. This new offer may be made by a new or an existing firm, although the main focus here is on the start-up of new, independent firms. Further, the new offer may be innovative, bringing to the market something that was not offered before, or imitative, i. e. a new competitor enters the market with products or services very similar to those other firms are already offering. While the latter type of process may be less complex and also have less market impact it entails most of the steps that typically have to be taken in order to get a business up and running. If successful it also shares, at least to some degree, the consequences that signify entrepreneurial processes:
■ it gives consumers new choice alternatives,
■ it gives incumbent firms reason to shape up, and
■ it attracts additional followers to enter the market, further reinforcing the first two effects (Davidsson, 2004).
Besides, imitative start-ups outnumber by far innovative ones (Reynolds, Bygrave and Autio, 2003; Samuelsson, 2004).
It is worth emphasising that the start-up of a new business activity is a process and not an event. Different types of research have shown that this process entails quite a number of behaviours or activities, which can take anything from a couple of months to several years to complete. Further, business start-ups do not all follow one and the same process. On the contrary, it has been shown that any sequence of events is possible, including having first sales before thinking of starting a business (Carter, Gartner and Reynolds, 1996). Neither is it likely that one particular set-up of the process is universally the right way to go. Being emergent and inherently uncertain phenomena, business start-ups typically involve a wrestling or tension between the planned, systematic, (pre)determined and rational(istic) on the one hand, and the serendipitous, creative, experimental and flexible on the other. This is a theme that will be returned to throughout this chapter.
It is possible, however, to bring some order to this chaos. One way of doing so is to conceptually distinguish between - and discuss separately - two sub-processes of the entrepreneurial process, discovery and exploitation (Shane and Venkataraman, 2000). The former refers to the conceptual and cognitive side of business creation, i. e. coming up with an initial business idea and the subsequent elaboration, adaptation and honing of it. Exploitation refers to the actual behaviours and activities undertaken to realise this idea, for example marshalling and combing resources, and convincing would-be customers. Another way to bring some order is to analyse under what circumstances which type of process is likely to work better. As shall be seen, certain characteristics of the business idea, the environment, the individuals involved and the stage of development of the venture are suggestive in this regard.
In this chapter these two ways of giving structure and direction to the exposition will be used. Before deepening the discussion of discovery and exploitation, however, the question of what particular actions or behaviours need to be undertaken in the entrepreneurial process will be explored further.
There are four learning objectives in this chapter:
1 To understand the process nature of entrepreneurship.
2 To recognise the existence, core contents and interrelatedness of two entrepreneurial sub-processes - discovery and exploitation.
3 To appreciate the non-existence of a universally best approach to exploiting venture ideas.
4 To understand under what conditions a systematic, planned and linear process may be suitable, and when a more iterative and flexible process is appropriate.
■ process ■ discovery ■ exploitation ■ business planning ■ effectuation
■ uncertainty ■ venture idea ■ individual ■ environment
7.3 Steps in the entrepreneurial process
What, more precisely, is it that one has to do in order to get a business up and running? Gartner and Carter (2003) list no less than 28 ‘gestation behaviours’ that have been investigated in empirical research, ranging from saving money through to listing a separate telephone number for the company, to having paid taxes on revenue from the firm. Davidsson and Honig (2003) expand a similar list to 46 possible steps to be taken. Although not even that list is an exhaustive account of what founders can and sometimes have to do in order to get a business up and running, such a detailed level will not be dwelt upon here. A more fruitful categorisation for the current purpose may be the eight ‘cornerstones’ of business development that Klofsten (1994; cf. Davidsson and Klofsten, 2003) arrived at after studying a number of start-up processes close up. In the list below other influential entrepreneurship researchers’ support for the centrality of these cornerstones has been added:
1 The business idea. A clear idea should be developed concerning what the firm will offer the market; how and for whom this creates value; and how enough of that value can be appropriated so that the venture becomes profitable. The critical importance of the value creation and appropriation mechanisms is also emphasised by many other researchers (Alvarez and Barney, 2004; Amit and Zott, 2001; McGrath, 2002).
2 The product. A functional product or service has to be developed. Obviously the emerging business needs something attractive to sell and consequently the provision of new or ‘future’ products and services is what Shane and Venkataraman (2000) point out as the essence of entrepreneurship.
3 The market. The target market must be defined in geographical and/or demographic terms. Other scholars emphasise that when the product or service is innovative the market may need to be created before it can be defined (Sarasvathy, 2001).
4 The organisation. An organisation must be created, which coordinates the purchasing, production, marketing, financing, controlling and distribution activities that are needed in order to serve the market in a legal and profitable manner. The pre-eminence of organisation creation as the core outcome of the entrepreneurial process has been especially advocated by Gartner (Gartner, 1988; Gartner and Carter, 2003).
5 Core group expertise. The competencies most crucial for the business’s success must be hired into or developed in the management team. Shane has used both in-depth and broadly based data to provide compelling evidence of the importance of the founders’ prior knowledge (Delmar and Shane, 2003b; Shane, 2000).
6 Core group commitment. The key individuals must have sufficient commitment to the start-up. In support of this notion, Baum and Locke (2004) recently demonstrated the importance of passion and tenacity for the long-term success of the new venture.
7 Customer relations. In order to achieve first sales, trustful relationships with prospective customers have to be developed. For example, Bhave (1994) observes that most of the entrepreneurs he studied had their initial customers lined up well before product creation.
8 Other relations. Other key relations must also be developed, for example with suppliers, investors or government agencies. One of the most important insights from systematic entrepreneurship research is that it is much more a social game than merely an individual one. For example, Davidsson and Honig (2003) showed that social capital, or developing one’s business network, is very important for making progress in the start-up process (cf. also Aldrich and Zimmer, 1986; Birley, 1985).
Klofsten (1994) emphasises the importance of reaching at least a minimum acceptable level on all cornerstones; excelling at a few may not help if others are severely underdeveloped. While Klofsten does not point out a particular sequence in which to develop the cornerstones, Delmar and Shane (2003c), based on interviews with expert entrepreneurs, suggest the following sequence of start-up behaviours is advisable.
■ Write a business plan.
■ Gather information about customers.
■ Talk to customers.
■ Make financial projections.
■ Establish a legal entity (i. e. register a sole proprietorship, partnership or limited liability company).
■ Obtain permits and licences (as needed).
■ Secure intellectual property (e. g. patents, trade marks, industrial design protection, copyright, etc.) as far as possible.
■ Seek financing.
■ Initiate marketing.
■ Acquire inputs.
One aspect particularly worth noting about this sequence is that it progresses from activities that require no or little financial commitment to those that are more demanding in this regard. This is an issue where there is widespread consensus among entrepreneurship scholars. In many cases it is advisable that the founders get their business up and running at very low cost through so-called financial bootstrapping (Bhide, 1992; Winborg and Landstrom, 2001). This refers to all the smart ways founders can find to get ahead without financial outlays. Illustrations of this will be found in short descriptions of the Sports Bra and Nantucket Nectars cases later in this chapter. Far more controversial is the priority Delmar and Shane (2003c) give to the written business plan. This is a very tricky issue, and the fact is that researchers using the very same data arrive at different conclusions (Delmar and Shane, 2003c; Honig and Karlsson, 2001; Samuelsson, 2004). Delmar and Shane’s research suggests that advance planning is beneficial (Delmar and Shane, 2003a). However, this does not necessarily mean that sticking to the plan is a good strategy. The business plan has several potential roles or uses:
1 It can be an analysis tool used internally to go through the strengths and weaknesses of the venture as well as the threats and opportunities potential customers, competitors and other environmental conditions present.
2 It can be a communication tool that explains the logic and goals of the business to other parties, such as banks, venture capital firms and the government agencies that issue required licences and permits.
3 Writing a plan may increase the entrepreneur(s)’ own commitment to the realisation of the project (cf. Cialdini, 1988). As noted above, Klofsten (1994) points out commitment as one of the eight cornerstones.
4 Finally, the plan can be used as a blueprint, as a detailed guide to action. First you plan, and then you do what the plan states.
Few would argue with the first three points. In particular, it is widely acknowledged that a written business plan makes it easier to get investors to accept the business concept. In the light of extant research the more questionable part of the planning emphasis is (blind) use of the plan as a guide to action. When something new is launched on the market, customers’ and competitors’ reactions are very difficult to predict. The business environment is uncertain and rapidly changing. Under such conditions, sticking to the plan may blindfold the entrepreneur(s) not only to possible and necessary adaptations that can save the future of the venture, but also to positive deviations from the plan, for example that much bigger sales and profits than those originally predicted are attainable.
To sum up this section, a range of activities need to be carried out after a business idea is first conceived and before the business is steadily up and running. Some researchers, like Klofsten, emphasise the importance of not neglecting any critical dimension. Others, like Delmar and Shane, suggest that a certain sequence of activities leads to better results. Either way, it is clear that starting a business is a process; there is no way all the necessary activities could be conducted at once. The next section will take a closer look at the discovery part of this process.
