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| ISBN-13: | 9788885486737 |
|---|---|
| Publisher: | EGEA Spa - Bocconi University Press |
| Publication date: | 03/01/2019 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 122 |
| File size: | 3 MB |
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CHAPTER 1
Entrepreneurial Management Theory: What the Academics say
Research into entrepreneurship has been occupied with different aspects of the pheneomen. Economists such as Schumpeter (1934), Kirzner (1973) and the various research teams behind the Global Entrepreneurship Monitor (GEM, 1999-2012), have been occupied with the study of the relationship between entrepreneurship and economic efficiency. Management scholars, on the other hand, have been approaching the field from two distinct angles and have created two distinct schools of thought. One school of thought views entrepreneurship as a phase of organizational development. According to this "organizational development" approach, firms start small and entrepreneurial research is the study of how these small enterprises are managed and grown. Research in this tradition defines the concept of entrepreneurship on the basis of the object which is being managed: a start-up, a Small and Medium Sized Entreprise (SME), a family owned SME or a small non-profit organization. The tools, methods and best practices that are identified to support the growth of these entities in terms of more revenues and a higher level of profitability are the same tools and methods taught, used and recommended for established "non-entrepreneurial" firms. They include:
1. Strategy and Plans: Business Planning, Marketing Planning and Succession Planning.
2. Organisation: Better and clearer corporate governance systems, clearer definition of managerial roles and responsibilities, professional management, entry requirements and family pacts (for Family Owned Business-FOB).
3. Systems: Efficiency and detail in accounting, IT, Human Resources (HR) etc.
In this tradition, the distinctiveness of entrepreneurship is more about what is being managed, than how it is managed.
In contrast to this school of thought, which, by the way, dominates most business school courses on the subject, we have a tradition that associates entrepreneurship not with a specific context (start-up, SME, FOB, non-profit), but with a distinct way of managing. I refer to this school of thought as the "Entrepreneurial Management" school. Within this tradition, entrepreneurship is a distinctive way of managing something. It's a distinct way to make decisions, to allocate resources and to organize.
Research in this area has come a long way. From some early conceptual ideas developed at the beginning of the 1980s, a substantial body of scientific research based on how expert and successful entrepreneurs think and make decisions and on how companies that are successful and efficient in growing new business are managed now exists. This body of knowledge allows us to create a clear identikit or DNA of what it means to manage something in an "entrepreneurial" way.
1 Early conceptualization of entrepreneurial management: Howard Stevenson at Harvard Business School
The first attempts at conceptualizing entrepreneurship as a "management approach" can be traced back to the early 1980s when Harvard Business School (HBS) Dean John MacArthur asked Howard Stevenson to return to HBS and take charge of the entrepreneurship activities. When Stevenson returned he felt that a "systematic and academic approach" was needed, and with a small group of faculty members he developed a "theory" that defined entrepreneurship on the basis of five distinct behaviors:
1. The tendency to seek out opportunities.
2. A willingness to act quickly in the light of an opportunity.
3. Multistaged commitment of the resources at hand.
4. Skilful use of leased and/or temporary resources.
5. An interest in building a network rather than a hierarchy.
In a classic working paper from 1983, Stevenson contrast this entrepreneurial approach to a more traditional, administrative, approach referred to as a "trustee" approach. Six behavioral/decision making dimensions are identified where entrepreneurial management differs from trustee/administration. The first of these dimensions is referred to as "Strategic Orientation". In a modern take, this dimension refers to how companies and managers drive value creation. In an administrative domain, value is created through a better and more efficient management of existing resources. Many of the tools and approaches used in the administrative domain are the ones that are normally taught in MBA programmes: 1) Information and accounting systems that allow managers to identify where costs are incurred so a cost-benefit analysis can be performed. 2) Organisational Design (OD) and Organizational Behaviour (OB) tools that are meant to allow for a more efficient organization of human resources. 3) Operations and supplychain tools that allow for an efficient use of logistics and production resources. 4) Planning tools that allow for efficiency in time-allocation of resources. Management way of creating economic value is to use these tools to get more output from the existing resource base without increasing the cost. It's an efficiency based driven value creation. In contrast to an efficiency-based value creation drive, Stevenson identifies an "opportunity-driven" orientation. Firms and managers that have this approach seek to create economic value through the pursuit of new business opportunities, entering into new markets and launching new products. In real life these two value-creation schemes obviously co-exist. Companies like to look for both new revenue streams while paying attention to efficiency at the same time but Stevensons; point is that a continuum between the two approaches exists and that some managers and firms are more on the opportunity-driven side than others; and what characterizes the entrepreneurial manager and the entrepreneurial firm is precisely a bias toward value creation through opportunity pursuit.
The second and third dimension identified by Stevenson regard the way in which resource allocation decisions are taken, and the way in which resources are allocated through the early development stages of the project. All economic activity requires an allocation/commitment of resources. In the administrative domain the decision making process is long and based on many stages of approval. In a large multi-business firm that wishes to enter into a new market the process typically starts with a memo describing the idea, then a person is asked to write a business plan and a small budget for market research might need to be approved. A finished business plan is discussed and approved, and then perhaps a budget is defined that will require additional approval. If the decision is strategic the move might even require HQ approval. In other words it is a multistage process with a relatively long duration. But once the final decision is made, a full budget is typically allocated.
In contrast to this type of resource commitment decision process, the entrepreneurial approach is faster, less planned and more intuitive. A less analytical, more intuitive and faster process of course increases the risk of making mistakes, so to compensate for a riskier decision making process, entrepreneurial management is characterized by a different type of resource allocation, namely in small portions so as to minimize the financial exposure in each phase. This entrepreneurial way of allocating resources is found in most entrepreneurial finance situations. Venture Capited seed-funds use milestone financing and are actually fairly parsimonious in the allocation process; the absolute minimum amount of money is allocated to reach the next proof-of-concept stage, and this is exactly the same mindset and managerial approach that Stevenson identifies as distinctive in this domain.
This combination of quick decision making and propensity towards action rather than analysis and a prudent and parsimonious resource deployment strategy which is typical for entrepreneurial management has been analysed from a risk management perspective by Dickson and Giglierano. According to these authors there are two different types of business risks: Sinking the Boat and Missing the Boat. The first type, Sinking the Boat, is the risk associated with launching a venture and not getting the expected returns. This type of risk can be reduced with planning time. If the venture team writes a business plan, conducts a market research survey, does pilot tests and so on, the risk of throwing good money after a bad project is reduced. But, often in business there is another risk. This risk, which Dickson and Giglierano refer to as Missing the Boat, stems from the fact that most business ventures have a narrow opportunity window. If a new project is not launched in a timely manner, competitors might launch earlier or market conditions might change, thereby altering the conditions for adequate returns. This type of risk is NOT reduced with planning time, it increases.
As indicated in Figure 1, the combination of the two types of risk constitutes what is referred to as total risk. From this perspective, the entrepreneurial decision making process and resource deployment strategy can be explained as a risk management approach. The speed and action propensity is explained by the clear perception of a Missing the Boat risk, whereas the parsimonious resource deployment strategy is a way to manage the Sinking the Boat risk.
A projection of this approach to decision making in a typical large administrative firm would highlight that managers in these firms weigh the Sinking the Boat risk as more important than Missing the Boat and therefore engage in more detailed and longer planning activities to reduce this type of risk.
The fourth and fifth distinctive characteristics of an entrepreneurial management approach as originally defined by Stevenson regard a certain flexibility with regard to the resources employment necessary to launch and run the venture. In a combination of necessity and choice, the entrepreneurial manager acquires and/or uses resources that are not necessarily owned. The control of these resources can be obtained through temporary use (borrowing), rent or frequently through bartering and partnering. The result of this process is that entrepreneurial projects and ventures are managed as networks rather than a hierarchy. In the administrative domain these resource acquisition and employment solutions are rare. As a result of possibility and choice, administrative firms prefer higher levels of ownership and direct control of resources. The preferred organizational choice is therefore typically a simple buyer-supplier relationship for sourced inputs and ownership of resources.
As an example of flexible, networked resource acquisition in new venture management, consider a young MBA start-up entrepreneur about to launch a fashion blog/e-commerce/portal/community. Our young entrepreneur knows that traffic is key so a decent budget for site design, Search Engine Optimization (SEO), ads, banner exchange, landing pages and so on is needed – at least 100.000. The traditional, "administrative", approach, would favour control and ownership and therefore acquire the traffic for cash through different types of supplier contracts. Partly because of necessity, partly because of a different mindset, our young fashion entrepreneur scrambles together a network of partners where most of the exchanges are dealt with in kind or equity: 1) to build up the website our entrepreneur uses her network to get hold of a IT professional in Bangalore with whom an agreement to built the website in exchange for a small equity share and some profitsharing is made. 2) Through another contact an exchange agreement with a national newspaper looking to strengthen its fashion contents/community is set up. Under the agreement the newspaper will advertise the portal but integrate the blog and comments on their own site for free. Similar in-kind deals are struck for merchandising and commerce. The portal is set up strongly and powerful by without the use of a lot of cash, but by giving up some equity and control (strategic control).
This type of resource acquisition/resource pool setup is typical for entrepreneurial managers because it allows a distribution and reduction of risk, without compromising the quality of the deployed resources, and therefore ensures start-up speed.
Consider, in contrast, a new venture project launched within an existing administrative organization: a top ranked, prestigious, European business school. The executive education market in Europe is a stagnant mature market, in which growth has to come from expanding into new segments. Geographical expansion is an obvious option. In China for example there is a growing market for executive training. It is becoming expensive for foreign companies to have a lot of ex-pat managers, so local Chinese managers are replacing the ex-pats. These local managers do not always share or possess the management approaches favoured by foreign companies, for example in the area of HR, so there is a market opportunity for business schools to train managers locally in China. Our European Business School has spotted this, but fails to penetrate the market because of lack of contacts and appropriate marketing approaches. Almost by accident the European Business School is contacted by a headhunter firm that has placed hundreds of locals managers in foreign firms, and therefore knows who they are and knows the firms well. The headhunter sees an opportunity for a partnership to design and launch training courses with the Business School: resources and skills are complementary – a win-win situation. Unfortunately for both partners, the Business School wants control. The school's marketing department refuses any talk about co-branding but is willing to pay for the contacts. The Chinese headhunter is not interested in becoming a database company, however, and refuses. No business is done. Instead the business school invests millions in setting up a stand-alone, mono-branded campus in Shanghai. Verdict for returns is still out, but the risk profile is high.
The two examples illustrate the difference in resource acquisition and marshalling approach between what we have called entrepreneurial and administrative management.
Stevenson's framework is summarized in Figure 2.
2 Beyond the early conceptualization efforts: Operationalization and empirical evidence
The early conceptualization efforts undertaken by Stevenson in the area of defining entrepreneurial management as a unique management approach has been the starting point for a number of more "scientifically" oriented studies. Researchers such as Covin, Slevin, Dess, Lumpkin, Wiklund, Davidsson and Brown have all constructed valid and operational scales for the five dimensions and investigated various relationship between entrepreneurial strategy making and firm performance. The crucial findings of these studies are not so much the performance relationships, which are difficult to interpret because the investigated organisations of course need to manage both entrepreneurial ventures and on-going concerns, but the fact that research has shown that the entrepreneurial management schemes are empirically consistent and observable.
In a similar fashion to the early entrepreneurial management scholars mentioned above, a group of researchers around Darden Business Schools including Saras Sarasvathy, in the early 2000s began to re-brand and reinvestigate the entrepreneneurial management approach. Looking at how expert entrepreneurs make business decisions, Sarasvathy has identified a decision-making scheme referred to as "Effectuation". This way of analyzing a business problem and making decisions differs from traditional managerial decision making schemes, referred to as "Causation", in the same way as Stevenson's promoter orientation differs from an administrative approach.
Sarasvathy identifies five decision making principles that characterize entrepreneurial decision making and contraposes these principles to traditional managerial/"causal" principles. The principles are depicted in Table 1.
As in the case of Stevenson's principles, Sarasvathy indicates that effectuation is a kind of heuristic decision making system or dominant logic rather than precise rules.
The first of the principles, bird-in-hand principle, describes two things. The first is that entrepreneurs are means driven rather than goal driven. Entrepreneurs tend to develop and change project development goals as functions of the means available. Means can be financial and human resources, but also, for example, customers and revenues. A consequence of a means driven approach is that goals for entrepreneurial managed projects can and often do change over time. If a customer from an unplanned or unforeseen target segment shows up, entrepreneurial managers could decide to change strategy overnight to get some early customers and fast sales. This is a management approach which is in contrast to a lot of the logics taught in business schools. In business schools, both in strategy and marketing, managers are told that sticking to a strategy is useful and that business decisions should not be based on marketing research with limited population data. Business schools often preach that two birds in the bush are better than one in the hand and that firms should plan to go for them. Entrepreneurs think differently.
(Continues…)
Excerpted from "Start-up Entrepreneurship"
by .
Copyright © 2019 Bocconi University Press.
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Table of Contents
Introduction SMART entrepreneurship: Managing the uncertainties and risks associated with starting up a new venture,
1 Entrepreneurial Management Theory: What the Academics say,
1 Early conceptualization of entrepreneurial management: Howard Stevenson at Harvard Business School,
2 Beyond the early conceptualization efforts: Operationalization and empirical evidence,
3 Managing uncertainty and risk: an integrative approach,
2 Steps, Methods, Arrangements, Resources & Traits. A SMART Entrepreneurial Approach,
3 Opportunity Identification,
1 Opportunities based on macrotrends,
2 Opportunities based on living the experience,
3 Opportunities created through scientific discovery,
4 Opportunities created through market replication,
5 Innovation approaches to opportunity identification,
4 Opportunity Evaluation,
1 Test for clarity,
2 Test for coherence,
3 Test for sustainability,
5 Validation,
1 The potential client interview,
2 Lead-user involvement,
3 Pre-selling the concept (crowd-funding),
4 Beta testing and minimal viable products,
5 Market research and experiments,
6 Early Stage Resource Acquisition and Marshalling,
7 Third-Party Financing and Business Planning,
1 Funding stages,
2 Business planning: Format structure and style of a business plan,
3 The pitchdeck and one-page version of the business plan,
8 Growth & Exit Management,
9 Practical Arrangements,
10 The Entrepreneurial Mindset,
11 Conclusions,
Appendix A – Bartlex Pitchdeck,
Appendix B – Bartlex One Pager,
References,