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8 ! Entrepreneurship ----~----r·--------------- ------- ---~- --------------------------------------- --· ·- --

ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIN D-5 ET

1 To introduce the concept of entrepreneurship and explain the entrepreneurial process.

To introduce effectuation as a way that expert entrepreneurs sometimes think.

3 To develop the notion that entrepreneurs learn to be cognitively adaptable.

4 To acknowledge that some entrepreneurs experience failure and to recognize the

process by which they maximize their ability to learn from that experience.

5 To recognize that entrepreneurs have an important economic impact and an ethical and

social responsibility.

I ----------------------------------·---------- ----···- --·-·- --------------· ___________ _!_~~~-~:_~~~~i_p~ E_ig_h~~i~~-~----~--

OPENING PROFILE

EWING MARION KAUFFMAN

Born on a farm in Garden City, Missouri, Ewing Marion Kauffman moved to Kansas City

with his family when he was eight years old. A critical event in his life occurred several

years later when Kauffman was diagnosed with a leakage of the heart. His prescription

was one year of complete bed rest; he was not even allowed to sit up. Kauffman's

mother, a college graduate, came up with a solution to

keep the active 11-year-old boy lying in bed-reading.

According to Kauffman, he "sure read! Because nothing

else would do, I read as many as 40 to 50 books every

month. When you read that much, you read anything. So I read the biographies of all

the presidents, the frontiersmen, and I read the Bible twice and that's pretty rough

reading."

Another important early childhood experience centered on door-to-door sales.

Since his family did not have a lot of money, Kauffman would sell 36 dozen eggs col-

lected from the farm or fish he and his father had caught, cleaned, and dressed. His

mother was very encouraging during these formative school years, telling young Ewing

each day, "There may be some who have more money in their pockets, but Ewing, there

is nobody better than you."

During his youth, Kauffman worked as a laundry delivery person and was a Boy

Scout. In addition to passing all the requirements to become an Eagle Scout and a Sea

Scout, he sold twice as many tickets to the Boy Scout Roundup as anyone else in Kansas

City, an accomplishment that enabled him to attend, for free, a two-week scout sum-

mer camp that his parents would not otherwise have been able to afford. According to

Kauffman, "This experience gave me some of the sales techniques which came into

play when subsequently I went into the pharmaceutical business."

Kauffman went to junior college from 8 to 12 in the morning and then walked two

miles to the laundry where he worked until 7 p.m. Upon graduation, he went to work

at the laundry full time for Mr. R. A. Long, who would eventually become one of his

role models. His job as route foreman involved managing 18 to 20 route drivers, where

he would set up sales contests, such as challenging the other drivers to get more cus-

tomers on a particular route than he could obtain. Ewing says, "I got practice in selling

and that proved to be beneficial later in life." R. A. Long made money not only at the

1 0 I Entrepreneurship

4 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

laundry business but also on patents, one of which was a form fit for the collar of a

shirt that wou ld hold the shape of the shirt. He showed his young protege that one

could make money with brains as well as brawn. Kauffman commented, "He was quite

a man and had quite an influence on my life."

Kauffman's sales ability was also useful during his stint in the Navy, which he joined

shortly after Pearl Harbor on January 11, 1942. When designated as an apprentice sea-

man, a position that paid $21 per month, he responded, "I'm better than an apprentice

seaman, because I have been a Sea Scout. I've sailed ships and I've ridden in whale

boats." His selling ability convinced the Navy that he should instead start as a seaman

first class, with a $54 monthly salary. Kauffman was assigned to the admiral's staff,

where he became an outstanding signalman (a seaman who transmitted messages from

ship to ship), in part because he was able to read messages better than anyone else due

to his previous intensive reading. With his admiral's encouragement, Kauffman took a

correspondence navigator's course and was given a deck commission and made a nav-

igation officer.

After the war was over in 1947, Ewing Kauffman began his career as a pharmaceu-

tical salesperson after performing better on an aptitude test than 50 other applicants.

The job involved selling supplies of vitamin and liver shots to doctors. Working on

straight commission, without expenses or benefits, he was earning pay higher than the

president's salary by the end of the second year; the president promptly cut the com-

mission. Eventually, when Kauffman was made Midwest sales manager, he made 3 per-

cent of everything his salespeople sold and continued to make more money than the

president. When his territory was cut, he eventually quit and in 1950 started his own

company-Marion Laboratories. (Marion is his middle name.)

When reflecting on founding the new company, Ewing Kauffman commented, "It

was easier than it sounds because I had doctors whom I had been selling office supplies

to for several years. Before I made the break, I went to three of them and said, 'I'm

thinking of starting my own company. May I count on you to give me your orders if

I can give you the same quality and service?' These three were my biggest accounts

and each one of them agreed because they liked me and were happy to do business

with me."

Marion Laboratories started by marketing injectable products that were manufac-

tured by another company under Marion's label. The company expanded to other ac-

counts and other products and then developed its first prescription item, Vicam, a vitamin

product. The second pharmaceutical product it developed, oyster shell calcium, also

sold well.

To expand the company, Kauffman borrowed $5,000 from the Commerce Trust

Company. He repaid the loan, and the company continued to grow. After several years,

outside investors could buy $1,000 worth of common stock if they loaned the company

$1,000 to be paid back in five years at $1,250, without any intermittent interest. This

initial $1,000 investment, if held until1993, would have been worth $21 million.

Marion Laboratories continued to grow and reached over $1 billion per year in

sales, due primarily to the relationship between Ewing Kauffman and the people in

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CHAPTER 1 ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIND-SET 5

the company, who were called associates, not employees. "They are all stockholders,

they build this company, and they mean so much to us," said Kauffman. The concept

of associates was also a part of the two basic philosophies of the company: Those who

produce should share in the results or profits, and treat others as you would like to be

treated.

The company went public through Smith Barney on August 16, 1965, at $21 per share.

The stock jumped to $28 per share immediately and has never dropped below that level,

sometimes selling at a 50 to 60 price/earnings multiple. The associates of the company

were offered a profit-sharing plan, where each could own stock in the company. In

1968 Kauffman brought Major League Baseball back to Kansas City by purchasing the

Kansas City Royals. This boosted the city's economic base, community profile, and civic

pride. When Marion Laboratories merged with Merrill Dow in 1989, there were 3,400

associates, 300 of whom became millionaires as a result of the merger. The new com-

pany, Marion Merrill Dow, Inc., grew to 9,000 associates and sales of $4 billion in 1998

when it was acquired by Hoechst, a European pharmaceutical company. Hoechst Marion

Roussel became a world leader in pharmaceutical-based health care involved in the dis-

covery, development, manufacture, and sale of pharmaceutical products. In late 1999

the company was again merged with Aventis Pharma, a global pharmaceutical company

focusing on human medicines (prescription pharmaceuticals and vaccines) and animal

health. In 2002, Aventis's sales reached $16.634 billion, an increase of 11.6 percent

from 2001, while earnings per share grew 27 percent from the previous year.

Ewing Marion Kauffman was an entrepreneur, a Major League Baseball team

owner, and a philanthropist who believed his success was a direct result of one funda-

mental philosophy: Treat others as you would like to be treated. "It is the happiest

principle by which to live and the most intelligent principle by which to do business

and make money," he said.

Ewing Marion Kauffman's philosophies of associates, rewarding those who produce,

and allowing decision making throughout the organization are the fundamental con-

cepts underlying what is now called corporate entrepreneurship in a company. He

went even further and illustrated his belief in entrepreneurship and the spirit of giving

back when he established the Kauffman Foundation, which supports programs in two

areas: youth development and entrepreneurship. Truly a remarkable entrepreneur,

Mr. K, as he was affectionately called by his employees, will now produce many more

successful "associate entrepreneurs."

Like Ewing Marion Kauffman, many other entrepreneurs and future entrepreneurs

frequently ask themselves, "Am I really an entrepreneur? Do I have what it takes to be

a success? Do I have sufficient background and experience to start and manage a new

venture?" As enticing as the thought of starting and owning a business may be, the

problems and pitfalls inherent to the process are as legendary as the success stories.

The fact remains that more new business ventures fail than succeed. To be one of the

few successful entrepreneurs requires more than just hard work and luck. It requires

the ability to think in an environment of high uncertainty, be flexible, and learn from

one's failures.

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6 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

e11trepre11eur An individu al who takes

initiative to bundle

resources in innovative ways and is willing to

bear the risk and/ or

uncertainty to act

NATURE AND DEVELOPMENT OF ENTREPRENEURSHIP Who is an entrepreneur? What is entrepreneurship? What is an entrepreneurial process? These frequently asked questions reflect the increased national and international interest in entrepreneurs by corporate executives, venture capitalists, university professors and stu- dents, recruiters, and government officials. To an economist, an entrepreneur is one who brings resources, labor, materials, and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations, and a new order. To a psychologist, such a person is typically driven by certain forces- the need to obtain or at- tain something, to experiment, to accomplish, or perhaps to escape the authority of others. To one businessman, an entrepreneur appears as a threat, an aggressive competitor, whereas to another businessman the same entrepreneur may be an ally, a source of supply, a cus- tomer, or someone who creates wealth for others, as well as finds better ways to utilize re- sources, reduce waste, and produce jobs others are glad to get. 1

Although being an entrepreneur means different things to different people, there is agree- ment that we are talking about a kind of behavior that includes: (1) initiative taking, (2) the organizing and reorganizing of social and economic mechanisms to bundle resources in in- novative ways, and (3) the acceptance of risk, uncertainty, and/or the potential for failure. 2

Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time, and/or career commitment to provide value for some product or service. The product or service may or may not be new or unique, but the entrepreneur must somehow infuse value by receiving and bundling the necessary skills and resources. 3

To be inclusive of the many types of entrepreneurial behavior, the following definition of entrepreneurship will be the foundation of this book:

Entrepreneurship is the process of creating something new with value by devoting the neces- sary time and effort; assuming the accompanying financial, psychic, and social risks and un- certainties; and receiving the resulting rewards of monetary and personal satisfaction. 4

This definition stresses four basic aspects of being an entrepreneur. First, entrepreneur- ship involves the creation process--creating something new of value. The creation has to have value to the entrepreneur and value to the audience for which it is developed. This au- dience can be (1) the market of organizational buyers for business innovation, (2) the hos- pital's administration for a new admitting procedure and software, (3) prospective students for a new course or even college of entrepreneurship, or (4) the constituency for a new serv- ice provided by a nonprofit agency. Second, entrepreneurship requires the devotion of the necessary time and effort. Only those going through the entrepreneurial process appreciate the significant amount of time and effort it takes to create something new and make it op- erational. As one new entrepreneur so succinctly stated, "While I may have worked as many hours in the office while I was in industry, as an entrepreneur I never stop thinking about the business."

The third part of the definition involves the rewards of being an entrepreneur. The most important of these rewards is independence, followed by personal satisfaction, but mone- tary reward also comes into play. For some entrepreneurs, money becomes the indicator of the degree of success achieved. Assuming the necessary risks and uncertainties is the final aspect of entrepreneurship. Because action takes place over time, and the future is un- knowable, action is inherently uncertain. 5 This uncertainty is further enhanced by the nov- elty intrinsic to entrepreneurial actions, such as the creation of new products, new services, and new ventures. 6 Entrepreneurs must decide to act even in the face of uncertainty over the outcome of that action. Therefore, entrepreneurs respond to, and create, change through

Entrepreneurship, Eighth Edition 1 3 - ------ ------------ -------------- ---------------------------------------------------------------- ------------r-----

entrepreneurial action

Refers to behavior in

response to a judgmental

decision under uncertainty

about a possible

opportunity for profit

entrepreneurial process

The process of creating

something new with value

by devoting the necessary

time and effort, assuming

the accompanying

financial, psychic,

and social risks and

uncertainties, and

receiving the resulting

rewards of monetary and

personal satisfaction

opportunity identification

The process by which an

entrepreneur comes up

with the opportunity for a

new venture

CHAPTER 1 ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIND-SET 7

their entrepreneurial actions, where entrepreneurial action refers to behavior in response to a judgmental decision under uncertainty about a possible opportunity for profit.7 We now offer a process perspective of entrepreneurial action.

THE ENTREPRENEURIAL PROCESS The process of pursuing a new venture is embodied in the entrepreneurial process, which involves more than just problem solving in a typical management position. 8 An entrepre- neur must find, evaluate, and develop an opportunity by overcoming the forces that resist the creation of something new. The process has four distinct phases: (1) identification and evaluation of the opportunity, (2) development of the business plan, (3) determination of the required resources, and (4) management of the resulting enterprise (see Table 1.1). Although these phases proceed progressively, no one stage is dealt with in isolation or is totally completed before work on other phases occurs. For example, to successfully iden- tify and evaluate an opportunity (phase 1), an entrepreneur must have in mind the type of business desired (phase 4) .

Identify and Evaluate the Opportunity

Opportunity identification and evaluation is a very difficult task. Most good business opportunities do not suddenly appear, but rather result from an entrepreneur's alertness to possibilities or, in some cases, the establishment of mechanisms that identify potential op- portunities. For example, one entrepreneur asks at every cocktail party whether anyone is using a product that does not adequately fulfill its intended purpose. This person is con- stantly looking for a need and an opportunity to create a better product. Another entrepreneur

TABLE 1.1 Aspects of the Entrepreneurial Process

Identify and Evaluate the Opportunity

• Opportunity assessment

• Creation and length of opportunity

• Real and perce ived Value of opport\Jnity

• Risks and returns of opportunity

• Opportunity versus personal skills and goals

• Competitive environment

Develop Business Plan

• Title page

• Table of Contents

• Executive Summary

• Major Section

1. Description of Business

2. Description of Industry

3. Technology Plan

4. Marketing Plan

5. Financial Plan

6. Production Plan

7. Organization Plan

8. Operational Plan

9. Summary

• Appendixes (Exhibits)

Resources Required

• Determine resources needed

• Determine existing resources

• Identify resource gaps and available suppliers

• Develop access to needed resources

Manage the Enterprise

• Develop management style

• Understand key variables for success

• Identify problems and potential problems

• Implement control systems

• Develop growth strategy

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8 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

window of opportunity

The time period available

for creating the new

venture

always monitors the play habits and toys of her nieces and nephews. This is her way of looking for any unique toy product niche for a new venture.

Although most entrepreneurs do not have formal mechanisms for identifying business opportunities, some sources are often fruitful: consumers and business associates, members of the distribution system, and technical people. Often, consumers are the best source of ideas for a new venture. How many times have you heard someone comment, "If only there was a product that would ... " This comment can result in the creation of a new business. One entrepreneur's evaluation of why so many business executives were complaining about the lack of good technical writing and word-processing services resulted in the creation of her own business venture to fill this need. Her technical writing service grew to 10 em- ployees in two years.

Because of their close contact with the end user, channel members in the distribution system also see product needs . One entrepreneur started a college bookstore after hearing all the students complain about the high cost of books and the lack of service provided by the only bookstore on campus . Many other entrepreneurs have identified business opportunities through a discussion with a retailer, wholesaler, or manufacturer's repre- sentative. Finally, technically oriented individuals often conceptualize business opportu- nities when working on other projects. One entrepreneur's business resulted from seeing the application of a plastic resin compound in developing and manufacturing a new type of pallet while developing the resin application in another totally unrelated area-casket moldings.

Whether one identifies the opportunity by using input from consumers, business associates, channel members, or technical people, each opportunity must be carefully screened and evaluated. This evaluation of the opportunity is perhaps the most critical element of the entrepreneurial process, as it allows the entrepreneur to assess whether the specific product or service has the returns needed compared to the resources required. As indi- cated in Table 1.1, this evaluation process involves looking at the length of the opportu- nity, its real and perceived value, its risks and returns, its fit with the personal skills and goals of the entrepreneur, and its uniqueness or differential advantage in its competitive environment.

The market size and the length of the window of opportunity are the primary bases for determining the risks and rewards . The risks reflect the market, competition, technology, and amount of capital involved. The amount of capital needed provides the basis for the re- turn and rewards. The methodology for evaluating risks and rewards, the focus of Chap- ters 7 and 10, frequently indicates that an opportunity offers neither a financial nor a per- sonal reward commensurate with the risks involved. One company that delivered bark mulch to residential and commercial users for decoration around the base of trees and shrubs added loam and shells to its product line. These products were sold to the same cus- tomer base using the same distribution (delivery) system. Follow-on products are important for a company expanding or diversifying in a particular channel. A distribution channel member such as Kmart, Service Merchandise, or Target prefers to do business with multi- product, rather than single-product, firms.

Finally, the opportunity must fit the personal skills and goals of the entrepreneur. It is particularly important that the entrepreneur be able to put forth the necessary time and ef- fort required to make the venture succeed. Although many entrepreneurs feel that the desire can be developed along with the venture, typically it does not materialize. An entrepreneur must believe in the opportunity so much that he or she will make the necessary sacrifices to develop the opportunity and manage the resulting organization.

Opportunity analysis, or what is frequently called an opportunity assessment plan, is one method for evaluating an opportunity. It is not a business plan. Compared to a business

-oji

business plan The

description of the future

direction of the business

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CHAPTER 1 ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIND-SET 9

plan, it should be shorter; focus on the opportunity, not the entire venture; and provide the basis for making the decision of whether or not to act on the opportunity.

An opportunity assessment plan includes the following: a description of the product or service, an assessment of the opportunity, an assessment of the entrepreneur and the team, specifications of all the activities and resources needed to translate the opportunity into a viable business venture, and the source of capital to finance the initial venture as well as its growth. The assessment of the opportunity requires answering the following questions:

• What market need does it fill?

• What personal observations have you experienced or recorded with regard to that market need?

• What social condition underlies this market need?

• What market research data can be marshaled to describe this market need?

• What patents might be available to fulfill this need?

• What competition exists in this market? How would you describe the behavior of this competition?

• What does the international market look like?

• What does the international competition look like?

• Where is the money to be made in this activity?

Develop a Business Plan A good business plan must be developed to exploit the defined opportunity. For example, a business plan is often required to obtain the resources necessary to launch the business. Writing a business plan is a very time-consuming phase of the entrepreneurial process. An entrepreneur usually has not prepared a business plan before and does not have the re- sources available to do a good job. Although the preparation of the business plan is the fo - cus of Chapter 7, it is important to understand the basic issues involved as well as the three major sections of the plan (see Table 1.1). A good business plan is essential to developing the opportunity and determining the resources required, obtaining those resources, and suc- cessfully managing the resulting venture.

Determine the Resources Required The entrepreneur must determine the resources needed for addressing the opportunity. This process starts with an appraisal of the entrepreneur's present resources. Any re- sources that are critical need to be differentiated from those that are just helpful. Care must be taken not to underestimate the amount and variety of resources needed. The en- trepreneur should also assess the downside risks associated with insufficient or inappro- priate resources.

The next step in the entrepreneurial process is acquiring the needed resources in a timely manner while giving up as little control as possible. An entrepreneur should strive to main- tain as large an ownership position as possible, particularly in the start-up stage. As the business develops, more funds will probably be needed to finance the growth of the ven- ture, requiring more ownership to be relinquished. The entrepreneur also needs to identify alternative suppliers of these resources, the focus of Chapter 11, along with their needs and desires. By understanding resource supplier needs, the entrepreneur can structure a deal that enables the resources to be acquired at the lowest possible cost and with the least loss of control.

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10 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

causal process A process that starts with a

desired outcome and

focuses on the means to

generate that outcome

effectuation process A

process that starts with

what one has (who they

are, what they know, and

whom they know) and

selects among possible

outcomes

Manage the Enterprise After resources are acquired, the entrepreneur must use them to implement the business plan. The operational problems of the growing enterprise must also be examined. This in- volves implementing a management style and structure, as well as determining the key variables for success. A control system must be established so that any problem areas can be quickly identified and resolved. Some entrepreneurs have difficulty managing and grow- ing the venture they created.

HOW ENTREPRENEURS THINK Entrepreneurs think differently than nonentrepreneurs. Moreover, an entrepreneur in a particular situation may think differently when faced with a different task or decision environment. Entrepreneurs must often make decisions in highly uncertain environments where the stakes are high, time pressures are immense, and there is considerable emo- tional investment. We think differently in these environments than we do when the nature of a problem is well understood and we have time and rational procedures at hand to solve it. Given the nature of an entrepreneur's decision-making environment, he or she must sometimes (1) effectuate, (2) be cognitively adaptable, and (3) learn from failure . We now discuss the thought process behind each of these requirements.

Effectuation As potential business leaders you are trained to think rationally and perhaps admonished if you do not. This admonishment might be appropriate given the nature of the task, but it appears that there is an alternate way of thinking that entrepreneurs sometimes use, es- pecially when thinking about opportunities. Professor Saras Sarasvathy (from Darden, University of Virginia) has found that entrepreneurs do not always think through a problem in a way that starts with a desired outcome and focuses on the means to generate that out- come. Such a process is referred to as a causal process. Our description of the entrepre- neurial process in the preceding section reflects a causal explanation. But, entrepreneurs sometimes use an effectuation process, which means they take what they have (who they are, what they know, and whom they know) and select among possible outcomes. Profes- sor Saras is a great cook, so it is not surprising that her examples of these thought processes revolve around cooking.

Imagine a chef assigned the task of cooking dinner. There are two ways the task can be organ- ized. In the first, the host or client picks out a menu in advance. All the chef needs to do is list the ingredients needed, shop for them, and then actually cook the meal. This is a process of causation. It begins with a given menu and focuses on selecting between effective ways to pre- pare the meal.

In the second case, the host asks the chef to look through the cupboards in the kitchen for possible ingredients and utensils and then cook a meal. Here, the chef has to imagine possible menus based on the given ingredients and utensils, select the menu, and then prepare the meal. This is a process of effectuation. It begins with given ingredients and utensils and focuses on preparing one of many possible desirable meals with them. 9

SarasvathY.s Thought Experiment #1: Curry in a Hurry

In this example I [Sarasvathy] trace the process for building an imaginary Indian restaurant, "Curry in a Hurry.'' Two cases, one using causation and the other effectuation, are examined. For the purposes of this illustration, the example chosen is a typical causation process that

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CHAPTER 1 ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIND-SET 11

underlies many economic theories today- theories in which it is argued that artifacts such as firms are inevitable outcomes, given the preference orderings of economic actors and certain simple assumptions of rationality (implying causal reasoning) in their choice behavior. The cau- sation process used in the example here is typified by and embodied in the procedures stated by Philip Kotler in his Marketing Management (1991: 63, 263), a book that in its many editions is considered a classic and is widely used as a textbook in MBA programs around the world.

Kotler defmes a market as follows : "A market consists of all the potential customers shar- ing a particular need or want who might be willing and able to engage in exchange to satisfy that need or want" (1991 : 63). Given a product or a service, Kotler suggests the following pro- cedure for bringing the product/service to market (note that Kotler assumes the market exists):

l. Analyze long-run opportunities in the market.

2. Research and select target markets .

3. Identify segmentation variables and segment the market.

4. Develop profiles of resulting segments.

5. Evaluate the attractiveness of each segment.

6. Select the target segment(s).

7. Identify possible positioning concepts for each target segment.

8. Select, develop, and communicate the chosen positioning concept.

9. Design marketing strategies.

10. Plan marketing programs.

11. Organize, implement, and control marketing effort.

This process is commonly known in marketing as the STP-segmentation, targeting, and positioning- process .

Curry in a Hurry is a restaurant with a new twist- say, an Indian restaurant with a fast food section. The current paradigm using causation processes indicates that, to implement this idea, the entrepreneur should start with a universe of all potential customers. Let us imagine that she wants to build her restaurant in Pittsburgh, Pennsylvania, USA, which will then become the initial universe or market for Curry in a Hurry. Assuming that the percentage of the population of Pittsburgh that totally abhors Indian food is negligible, the entrepreneur can start the STP process .

Several relevant segmentation variables, such as demographics, residential neighbor- hoods, ethnic origin, marital status, income level, and patterns of eating out, could be used . On the basis of these, the entrepreneur could send out questionnaires to selected neighbor- hoods and organize focus groups at, say, the two major universities in Pittsburgh. Analyz- ing responses to the questionnaires and focus groups, she could arrive at a target segment- for example, wealthy families, both Indian and others, who eat out at least twice a week. That would help her determine her menu choices, decor, hours, and other operational de- tails. She could then design marketing and sales campaigns to induce her target segment to try her restaurant. She could also visit other Indian and fast food restaurants and find some method of surveying them and then develop plausible demand forecasts for her planned restaurant.

In any case, the process would involve considerable amounts of time and analytical effort. It would also require resources both for research and, thereafter, for implementing the market- ing strategies. In summary, the current paradigm suggests that we proceed inward to specifics from a larger, general universe- that is, to an optimal target segment from a predetermined market. In terms of Curry in a Hurry, this could mean something like a progression from the entire city of Pittsburgh to Fox Chapel (an affluent residential neighborhood) to the Joneses (specific customer profile of a wealthy family), as it were.

Instead, if our imaginary entrepreneur were to use processes of effectuation to build her restaurant, she would have to proceed in the opposite direction (note that effectuation is suggested here as a viable and descriptively valid alternative to the STP process-not as a

18 I Entrepreneurship -- -r

12 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

normatively superior one). For example, instead of starting with the assumption of an existing market and investing money and other resources to design the best possible restaurant for the given market, she would begin by examining the particular set of means or causes available to her. Assuming she has extremely limited monetary resources-say $20,000-she should think creatively to bring the idea to market with as close to zero resources as possible. She could do this by convincing an established restaurateur to become a strategic partner or by doing just enough market research to convince a financier to invest the money needed to start the res tau- rant. Another method of effectuation would be to convince a local Indian restaurant or a local fast food restaurant to allow her to put up a counter where she would actually sell a selection of Indian fast food. Selecting a menu and honing other such details would be seat-of-the-pants and tentative, perhaps a process of satisficing. 10

Several other courses of effectuation can be imagined. Perhaps the course the entrepreneur actually pursues is to contact one or two of her friends or relatives who work downtown and bring them and their office colleagues some of her food to taste. If the people in the office like her food, she might get a lunch delivery service going. Over time, she might develop enough of a customer base to start a restaurant or else, after a few weeks of trying to build the lunch business, she might discover that the people who said they enjoyed her food did not really enjoy it so much as they did her quirky personality and conversation, particularly her rather un- usual life perceptions. Our imaginary entrepreneur might now decide to give up the lunch busi- ness and start writing a book, going on the lecture circuit and eventually building a business in the motivational consulting industry!

Given the exact same starting point- but with a different set of contingencies-the entrepre- neur might end up building one of a variety of businesses. To take a quick tour of some possi - bilities, consider the following: Whoever first buys the food from our imaginary Curry in a Hurry entrepreneur becomes, by definition, the first target customer. By continually listening to the customer and building an ever-increasing network of customers and strategic partners. the entrepreneur can then identify a workable segment profile. For example, if the first cus- tomers who actually buy the food and come back for more are working women of varied eth- nic origin, this becomes her target segment. Depending on what the first customer really wants. she can start defining her market. If the customer is really interested in the food, the entrepre- neur can start targeting all working women in the geographic location, or she can think in terms of locating more outlets in areas with working women of similar profiles-a "Women in a Hurry" franchise?

Or, if the customer is interested primarily in the idea of ethnic or exotic entertainmenl rather than merely in food, the entrepreneur might develop other products, such as catering services, party planning, and so on-"Curry Favors"? Perhaps, if the customers buy food from her because they actually enjoy learning about new cultures, she might offer lectures and classes, maybe beginning with Indian cooking and moving on to cultural aspects , including concerts and ancient history and philosophy, and the profound idea that food is a vehicle of cultural exploration-"School of Curry"? Or maybe what really interests them is theme tours and other travel options to India and the Far East- "Curryland Travels"?

In a nutshell, in using effectuation processes to build her firm, the entrepreneur can build several different types of firms in completely disparate industries. This means that the original idea (or set of causes) does not imply any one single strategic universe for the firm (or effect). Instead, the process of effectuation allows the entrepreneur to create one or more several pos- sible effects irrespective of the generalized end goal with which she started. The process not only enables the realization of several possible effects (although generally one or only a few are actually realized in the implementation) but it also allows a decision maker to change his or her goals and even to shape and construct them over time, making use of contingencies as they arise. 11

Our use of direct quotes from Sarasvathy on effectuation is not to make the case that :- is superior to thought processes that involve causation; rather, it represents a way that trepreneurs sometimes think. Effectuation helps entrepreneurs think in an environment o=

entrepreneurio.l mind-set

Involves the ability to

rapidly sense, act, and

mobilize, even under

uncertain conditions

cognitive adaptability

Describes the extent to

which entrepreneurs are

dynamic, flexible, self-

regulating, and engaged

in the process of

generating multiple

decision frameworks

focused on sensing and

processing changes in

their environments and

then acting on them

comprehension questions

Questions designed to

increase entrepreneurs'

understanding of the

nature of the environment

Entrepreneurship, Eighth Edition 19

CHAPTER 1 ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIND-SET 13

high uncertainty. Indeed organizations today operate in complex and dynamic environ- ments that are increasingly characterized by rapid, substantial, and discontinuous change. 12

Given the nature of this type of environment, most managers of firms need to take on an entrepreneurial mind-set so that their firms can successfully adapt to environmental changes. 13 This entrepreneurial mind-set involves the ability to rapidly sense, act, and mobilize, even under uncertain conditions. 14 In developing an entrepreneurial mind-set, individuals must attempt to make sense of opportunities in the context of changing goals, constantly questioning the "dominant logic" in the context of a changing environment and revisiting "deceptively simple questions" about what is thought to be true about markets and the firm. For example, effective entrepreneurs are thought to continuously "rethink current strategic actions, organization structure, communications systems, corporate culture, asset deployment, investment strategies, in short every aspect of a firm's operation and long-term health." 15

To be good at these tasks individuals must develop a cognitive adaptability. Mike Haynie, a retired major of the U.S. Air Force and now professor at Syracuse University, has developed a number of models of cognitive adaptability and a survey for capturing it, to which we now tum. 16

Cognitive Adaptability Cognitive adaptability describes the extent to which entrepreneurs are dynamic, flexible, self-regulating, and engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environments and then acting on them. Decision frameworks are organized prior knowledge about people and situations that are used to help someone make sense of what is going on. 17 Cognitive adaptability is reflected in an entrepreneur's metacognitive awareness, that is, the ability to reflect upon, understand, and control one's thinking and learning. 18 Specifically, metacognition describes a higher-order cognitive process that serves to organize what individuals know and recognize about themselves, tasks, situations, and their environments to promote ef- fective and adaptable cognitive functioning in the face of feedback from complex and dynamic environments. 19

How cognitively adaptable are you? Try the survey in Table 1.2 and compare yourself to some of your classmates. A higher score means that you are more metacognitively aware, and this in tum helps provide cognitive adaptability. Regardless of your score, the good news is that you can learn to be more cognitively adaptable. This ability will serve you well in most new tasks, but particularly when pursuing a new entry and managing a firm in an uncertain environment. Put simply, it requires us to "think about thinking which requires, and helps provide, knowledge and control over our thinking and learning activities-it requires us to be self-aware, to think aloud, to reflect, to be strategic, to plan, to have a plan in mind, to know what to know, to self-monitor.20 We can achieve this by asking our- selves a series of questions that relate to (1) comprehension, (2) connection, (3) strategy, and (4) reflection. 21

1. Comprehension questions are designed to increase entrepreneurs' understanding of the nature of the environment before they begin to address an entrepreneurial challenge, whether it be a change in the environment or the assessment of a potential opportunity. Understanding arises from recognition that a problem or opportunity exists, the nature of that situation, and its implications. In general, the questions that stimulate individu- als to think about comprehension include: What is the problem all about? What is the question? What are the meanings of the key concepts? Specific to entrepreneurs, the

AS SEEN IN ENTREPRENEUR MAGAZINE

WHAT ME WORRY? HOW SMART ENTREPRENEURS HARNESS THE POWER OF PARANOIA

Depending on whom you're talking to, paranoia is: (1) a psychotic disorder characterized by delusions of persecution, (2) an irrational distrust of others, or (3) a key trait in entrepreneurial success.

Sound crazy? Not according to Andrew S. Grove, president and CEO of Intel Corp. in Santa Clara, California, and author of Only the Paranoid Survive (Doubleday/Currency). The title of Grove's book comes from an oft-repeated quote that has become the mantra of the chip king's rise to the top of the technology business.

"I have no idea when I first said this," Grove writes, "but the fact remains that, when it comes to business, I believe in the value of paranoia." To those who suffer from clinical delusions of persecution, of course, paranoia is neither a joke nor a help. How- ever, in a business context, the practice of voluntarily being highly concerned about potential threats to your company has something of a following.

"If you're not a little bit paranoid, you're compla- cent," says Dave Lakhani, an entrepreneur in Boise, Idaho, who offers marketing consulting to small busi- nesses. "And complacency is what leads people into missed opportunities and business failure. rr

PICK YOUR PARANOIA Being paranoid, according to Grove, is a matter of re- membering that others want the success you have, paying attention to the details of your business, and watching for the trouble that inevitably awaits. That basically means he is paranoid about everything. "I worry about products getting screwed up, and I worry about products getting introduced prematurely," Grove writes. "I worry about factories not performing well, and I worry about having too many factories."

For Grove, as for most advocates of paranoia, be- ing paranoid primarily consists of two things. The first is not resting on your laurels. Grove calls it a "guardian attitude" that he attempts to nurture in himself and in Intel's employees to fend off threats from outside the company. Paranoia in business is also typically defined as paying very close attention to the fine points. "You need to be detail-oriented about the most important things in your business," says Lakhani. "That means not only making sure you're working in your business but that you're there every day, paying attention to your customers. rr

As an example of paranoia's value in practice, Lakhani recalls when sales began slowly slumping at a retail store he once owned. He could have dis- missed it as a mere blip. , Instead, he worried and watched until he spotted a concrete cause. "It turned out one of my employees had developed a negative attitude, and it was affecting my business," Lakhani says. "As soon as I let him go, sales went back up."

The main focuses of most entrepreneurs' paranoia, however, are not so much everyday internal details as major competitive threats and missed opportunities. Situations in which competition and opportunity are both at high levels are called "strategic inflection points" by Grove, and it is during these times, typi- cally when technology is changing, that his paranoia is sharpest.

Paranoia is frequently a welcome presence at ma- jor client presentations for Katharine Paine, founder and CEO of The Delahaye Group Inc. In the past, twinges of seemingly unfounded worry have caused Paine to personally attend sales pitches where she learned of serious problems with the way her firm was doing business, she says. The head of the 50-person Portsmouth, New Hampshire, marketing evaluation research firm traces her paranoid style to childhood days spent pretending to be an Indian tracking quarry through the forest. When she makes mental checklists about things that could go wrong or op- portunities that could be missed, she's always keep- ing an eye out for the business equivalent of a bent twig. "If you are paranoid enough, if you're good enough at picking up all those clues, you don't have to just react," says Paine, "you get to proact and be slightly ahead of the curve."

PARANOID PARAMETERS There is, of course, such a thing as being too para- noid. "There are times when it doesn't make any sense," acknowledges Lakhani. Focusing on details to the point of spending $500 in accounting fees to find a $5 error is one example of misplaced paranoia. Worrying obsessively about what every competitor is doing or what every potential customer is thinking is also a warning sign, he says. Lack of balance with in- terests outside the business may be another. "If your whole life is focused around your work, and that's

Emrep""'"''h;p, E;ghth Ed•;o, I --··---··------------------·-- ·---- ·--·--- -·---------- ·- ---- --- ·- -· -------- ----- -·-- ------- ---- ----~

the only thing you're thinking about 24 hours a day, that becomes detrimental," Lakhani says.

For Paine, failing to act is a sign that you're going past beneficial paranoia and into hurtful fear. "Fear for most of us results in inaction-absolute death for an entrepreneur," she says. "If we feared the loss of a paycheck or feared entering a new market, none of our businesses would have gotten off the ground."

All this may be especially true for small-business owners. While paranoia may be appropriate for heads of far-flung enterprises, some say entrepre- neurs are already too paranoid. It's all too easy for entrepreneurs to take their desire for independence and self-determination and turn it into trouble, says Robert Barbato, director of the Small Business Insti- tute at the Rochester Institute of Technology in Rochester, New York. Typically, entrepreneurs take the attitude that "nobody cares as much about this business as I do" and exaggerate it to the point of hurtful paranoia toward employees and even cus- tomers, he says. "They're seeing ghosts where ghosts don't exist," warns Barbato.

That's especially risky when it comes to dealing with employees. Most people-not just entrepreneurs- do their work for the sense of accomplishment, not because they are plotting to steal their em- ployer's success, Barbato says. He acknowledges this may be a difficult concept for competition-crazed entrepreneurs-especially those who have never themselves been employees-to understand. "People who own their own business are not necessarily used to moving up the ranks," Barbato notes. Entrepre- neurs must learn to trust and delegate if their busi- nesses are to grow.

PRACTICAL PARANOIA No matter how useful it is, paranoia may be too loaded a label for some entrepreneurs. If so, critical evaluation or critical analysis are the preferred terms of Stephen Markowitz, director of governmental and

political relations of the Small Business Association of Delaware Valley, a 5,000-member trade group. The dis- tinction is more than name-deep. "When I say 'critically evaluate,' that means look at everything," Markowitz explains. "If you're totally paranoid, the danger is not being able to critically evaluate everything."

For example, Markowitz says a small retailer threatened by the impending arrival of a superstore in the market would be better served by critically evaluating the potential for benefit as well as harm, instead of merely worrying about it. "If you're para- noid," he says, "you're not going to critically evaluate how it might help you."

Whatever name it goes by, few entrepreneurs are likely to stop worrying anytime soon. In fact, experience tends to make them more confirmed in their paranoia as they go along. Paine recalls the time a formless fear led her to insist on going to a client meeting where no trouble was expected. She lost the account anyway. "The good news is, my paranoia kicked in," she says. "The bad news is, it was too late. That made me much more paranoid in the future."

ADVICE TO AN ENTREPRENEUR A friend who has just become an entrepreneur has read the above article and comes to you for advice:

1. I worry about my business; does that mean that I am paranoid?

2. What are the benefits of paranoia and what are the costs?

3. How do I know I have the right level of paranoia to effectively run the business and not put me in the hospital with a stomach ulcer?

4. Won't forcing myself to be more paranoid take the fun out of being an entrepreneur?

Source: Reprinted with permission of Entrepreneur Media, Inc., "How Smart Entrepreneurs Harness the Power of Paranoia," by Mark Henricks, March 1997, Entrepreneur magazine: www.entrepreneur.com.

connection tasks Tasks

designed to stimulate

entrepreneurs to think

about the current situation

in terms of similarities to

and differences from

situations previously

faced and solved

questions are more likely to include: What is this market all about? What is this tech- nology all about? What do we want to achieve by creating this new firm? What are the key elements to effectively pursuing this opportunity?

2. Connection tasks are designed to stimulate entrepreneurs to think about the current situation in terms of similarities to and differences from situations previously faced and solved. In other words, these tasks prompt the entrepreneur to tap into his or her knowledge and experience without overgeneralizing. Generally, connection tasks focus on questions like: How is this problem similar to problems I have already

22 I '"'""'"'"""'' ~·-· --'"·~--- -t---~· --··- ·--- --- ·---· ---- ·-- -·-- ·- --- -· ----- ----------- -· -------- ----·----- ·-----------·· ----------· ·-· --- --------- ---------------------- - I

16 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

TABLE 1.2 Mike Haynie's "Measure of Adaptive Cognition"

How Cognitively Flexible Are You? On a scale of 1 to 10, where 1 is "not very much like me," and 10 is "very much like me," how do you rate yourself on the following statements?

Goal Orientation

I often define goals for myself.

I understand how accomplishment of a task relates to my goals.

I set specific goals before I begin a task.

I ask myself how well I've accomplished my goals once I've finished.

When performing a task, I frequently assess my progress against my objectives.

Metacognitive Knowledge

I think of several ways to solve a problem and choose the best one.

I challenge my own assumptions about a task before I begin.

I think about how others may react to my actions.

I find myself automatically employing strategies that have worked in the past.

I perform best when I already have knowledge of the task.

I create my own examples to make information more meaningful.

I try to use strategies that have worked in the past.

I ask myself questions about the task before I begin.

I try to translate new information into my own words.

I try to break problems down into smaller components.

I focus on the meaning and significance of new information.

Metacognitive Experience

I think about what I really need to accomplish before I begin a task.

I use different strategies depending on the situation.

I organize my time to best accomplish my goals.

Not very much-1 2 3 4 56 7 8 9 10--Very much like me like me

Not very much-1 2 3 4 5 6 7 8 9 10--Very much like me like me

Not very much-1 2 3 4 56 7 8 9 10--Very much like me like me

Not very much-1 2 3 4 5 6 7 8 9 10--Very much like me like me

Not very much-1 2 3 4 56 7 8 9 10--Very much like me like me

Not very much-1 2 3 4 5 6 7 8 9 10--Very much like me like me

Not very much-1 2 3 4 56 7 8 9 10--Very much like me like me

Entrepreneurship, Eighth Edition

CHAPTER 1 ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIND-SET 17

I am good at organizing information.

I know what kind of information is most important to consider when faced with a problem.

I consciously focus my attention on important information.

My "gut" tells me when a given strategy I use wi ll be most effective.

I depend on my intuition to help me formulate strategies.

Metacognitive Choice

I ask myself if I have considered all the options when solving a problem.

I ask myself if there was an easier way to do things after I finish a task.

I ask myself if I have considered all the options after I solve a problem.

I re-evaluate my assumptions when I get confused.

I ask myself if I have learned as much as I could have after I finish the task.

Monitoring

I periodically review to help me understand important relationships.

I stop and go back over information that is not clear.

I am aware of what strategies I use when engaged in a given task.

I find myself analyzing the usefulness of a given strategy while engaged in a given task.

I find myself pausing regularly to check my comprehension of the problem or situation at hand.

I ask myself questions about how well I am doing while I am performing a novel task. I stop and re-read when I get confused.