ENT 440 Exam 1
Opportunities to Ventures
* Not all great ideas become great businesses - Market/demand might not exist - Business model may not be feasible - Skills/abilities might not match - Idea is not better/faster/cheaper than alternatives
What is Entrepreneurship?
- Any attempt to create a new business - Art & craft of the creative, the unexpected, and the exceptional - Critical Thing is learning curve/managing mistakes * The working definition of entrepreneurship is, "Opportunity recognition & action under conditions of extreme uncertainty.
Entrepreneurial Cognition
- Cognition: The mental functions, processes (thoughts), and states of humans - Social Cognition Theory: Knowledge structures can be ordered to optimize personal effectiveness - Entrepreneurial Cognition: Knowledge structures involving opportunity evaluation, venture creation, and growth
Four Actions Framework of Blue Ocean Strategy
- Eliminate: Which of the factors that the industry takes for granted should be eliminated? - Reduce: Which factors should be reduced well below the industry standard? - Raise: Which factors should be raised well above the industry standard? - Create: Which factors should be created that the industry has never offered?
The Dark Side of Entrepreneurship = Personal Risk
- Financial Risk (uncertainty vs salary): Entrepreneurs often don't have a steady income and have to work to obtain their next paycheck, sacrificing a steady salary for the promise of a successful enterprise. - Family and social risk (competing commitments of work and family): make it difficult for entrepreneurs to balance between these interests - Career Risk (loss of employment security): the loss of employment security heightens the importance of the new venture to succeed - Psychic Risk (psychological impact of failure): high likelihood of setbacks along the way, entrepreneurs must be able to handle the psychological impact of failure
Switching Costs
- Financial: exit fees, search costs, compatible equipment - Cognitive: learning - Psych: lock-in, personal relationships
Legal Issues and Adoption
- Lobbying efforts by incumbents - Patent Infringement - Product Liability - Personal Scandals Legal issues can be a major impediment to adoption, and often young, new firms don't have the necessary resources to deal with these issues on top of other processes necessary for getting their product and company off the ground. Sometimes entrepreneurial firms face fierce resistance by incumbent (already existing) companies in an industry who don't want to be disrupted by the new firm. These companies may choose to lobby legislatures to make laws restricting entry and operations in the industry. For example, ride-sharing companies like Uber and Lyft are facing heavy resistance by taxi and limousine unions and lobbyist groups when expanding to new cities around the world. Other legal challenges, like product defects, introduce liability issues and the negative reputation from bad press can critically injure a new firm, who doesn't necessarily have the experience or goodwill to overcome such negative perception. Tesla has come under scrutiny for a fatal car crash in which its "autopilot" technology failed to identify an obstacle; "hoverboards" have caught on fire and exploded, causing damage and initiating recalls and negative perceptions, hurting the adoption of this new product. Further, entrepreneurial firms might think they have created something new and innovative, but could infringe on existing patents owned by other firms. Even if the innovative product might not infringe on a patent, young firms might not have the financial resources or legal expertise to fight the incumbent in court and would therefore be forced to cease and desist future business activities. Finally, personal scandals, such as company leaders being indicted for fraud, embezzlement, sexual harassment, and so forth can derail a young company from being accepted by the marketplace.
Stepwise Feasibility Approach
- Market: Is there a market for the product/service? Is customer demand sufficient enough to support the idea? - Technical: Is the idea technically plausible? Do we have the capabilities to produce it? - Financial: Is the profit margin worth the risk involved? Is the business model financially viable and sustainable? - Competitive: Is the idea better/faster/cheaper, than competitors' products? Is it unique in a way that adds value? What might be the competitive response by rivals when the product/service is released? - Organizational: Are you the right organization to release and manage the new product/service?
Entrepreneurship = Opportunity Recognition & Action under extreme uncertainty
- Opportunity is a market failure or an imperfect market: customers want something but they can't get it. They have a problem but no effective solution exists, or a better solution is possible + - Creative problem solving / strategizing and due diligence: entrepreneurial action is needed to creatively solve those problems in a manner for which customers are willing to pay and will adopt. = - Manage and reduce the risk-reward equation and act: Entrepreneurs must manage and reduce the risk-reward equation (for customers and for themselves) and must then ACT with the tenacity to push an idea through to reality
Trends
- Societal Trends: Aging demographics, health and fitness growth, senior living - Technology Trends: Mobile (cell phone) technology, e-commerce, Internet advances - Competitive Trends: Innovations from rivals in and out of industry, market adoption - Economic TrendsHigher disposable incomes, dual wage-earner families, performance - Government Trends: Increased regulations, petroleum prices, terrorism
Network Effects
- Value increases with more users -> Can help increase switching costs for current customers -> "Chicken and egg" problem can impede growth
Blue Ocean
- When firms compete directly, blood is in the water - Instead, swim to where no other sharks compete - Change market boundaries and industry structure - Focus on differentiation AND low cost strategies = "Value Innovation" ** new markets
Pitfalls in Selecting New Ventures
- lack of objective evaluation - no real insight into the market - inadequate understanding of technical requirements - poor financial understanding - lack of venture uniqueness - ignorance of legal issues The order of these activities is important. If an entrepreneur is not able to satisfy the first step, namely whether a market even exists for the product or service, then she can stop and doesn't need to worry about the next step, which is determining if it is actually technically possible, and so forth. Put another way, it doesn't matter how competitive or financially viable a product or service is, if nobody wants to buy it or if the entrepreneur can't build it, none of the other issues matter. Similarly, if competitors are already doing it better, faster, and/or cheaper than the focal firm can do it, it won't matter how effectively organized it is. Even if all of the following areas are positively assessed, one of the most common pitfalls for entrepreneurs is a lack of objective evaluation. Oftentimes, entrepreneurs are so close to their ideas (their "babies") they are not able to admit flaws or shortcomings, which leads to pursuing an idea that is most likely to fail. Other potential pitfalls for startups can include no real insight into the market, inadequate understanding of technical requirements, poor financial understanding, lack of venture uniqueness, and/or ignorance of legal issues.
Entrepreneurial Ego
- overbearing need for control/perfectionism - sense of distrust/paranoia - overriding desire for success (can't admit defeat or failure) - unrealistic optimism (inability to accept criticism or mentoring)
Reasons for Starting a Venture
- personal characteristics - environment - venture * All 3 lead into Entrepreneurial Motivations
Different Approach to Entrepreneurship: Startup Loop of Despair and Lean Entrepreneurship
-Startup Loop of Despair: - Idea -> build -> brand -> customer -> back around to again - ideas are generated to solve a particular problem, a product is built around that idea, it is branded and marketed, and then the customer decides whether this solves her particular problem by purchasing the product. what if the customer doesn't like or is not willing to pay for this solution? The entrepreneur must take this feedback into consideration to come up with a new solution, build that, brand it, and then present it to the customer to determine its success. However, this process requires a great deal of resources in the form of time, effort, energy, and money, most of which is severely limited for entrepreneurial firms and has been coined the "Startup Loop of Despair." Lean Entrepreneurship: - Idea -> customer -> build -> brand - A recent trend in entrepreneurship changes the sequence of events from this traditional model and involves the customer much earlier in the process. The "Lean Entrepreneurship" approach follows the following sequence: idea, customer, build, brand and is designed to waste a lot fewer resources to arrive at the appropriate customer solution.
Sources of Innovative Ideas
1) Black Swan Events: low-likelihood, high-impact events very few people could have expected, such as the 9/11 terrorist attacks 2) Mismatch: customer expectations are not being met 3) Process Needs: customers are doing something one way but want to improve how it's being done 4) Changes in market, demographics, perceptions, technology: industry/market conditions (competitor actions, customer preferences, and the general evolution in the marketplace), demographics (age, gender, income, nationalities), perceptions (more demand for healthy, environmentally-friendly, made in USA products and services), and/or technologies/science/capabilities (some of which may occur in other industries)
Entrepreneurial Process
1) Identifying opportunities 2) Generating creative solutions 3) Assessing / quantifying risk 4) Assembling resources 5) Presenting solution to audience (business)
Creative Process
1) Knowledge Gathering: where the entrepreneur identifies and investigates a potential opportunity, focusing on the problem to be solved 2) Incubation: subconscious activity where potential solutions can marinate without being actively processed. Some activities that stimulate incubation include exercise, sleep, menial tasks, and brief distractions 3) Idea Generation: entrepreneur is actively engaged in creating and brainstorming possible solutions 4) Hypothesis Testing & evaluation: These ideas must be vetted to see if they will indeed solve the identified problem
User Entrepreneurs
1) Often best ideas come from customers/users 2) Identify the problem from personal experience 3) But the solution could be too idiosyncratic: needs to solve a lot of peoples problems Opportunity identification: is central to entrepreneurship, which involves the creative pursuit of ideas and an innovative process to come up with "good ideas."
Entrepreneurship: More than the mere creation of a new business
1) Seeking Opportunities 2) Creative problem solving 3) Taking risks beyond security 4) Tenacity to push an idea through to reality
Successful Model of Entrepreneurship
1) Talent (can do): It takes a lot of experience, expertise, and various characteristics to engage in entrepreneurial activity, and this guides the entrepreneur in what types of activities for which she is most suited 2) Passion (want to do): Passion is often necessary to keep the entrepreneur engaged and willing to sacrifice what is necessary to make an entrepreneurial endeavor successful 3) Need (people will value): encapsulates market demand for the particular solution the entrepreneur is intending to provide. Without the need, no matter what solution the entrepreneur comes up with or how brilliant it is, the entrepreneurial endeavor is likely to fail 4) Conscience (should do): whether or not the entrepreneur should engage in such an activity ** At the intersection of all of these is what I call the "Ultimate Zone of Success." In this context, "success" is not limited to just financial success, but overall happiness and satisfaction with all areas of life. When all of these areas are aligned, the likelihood of success and happiness is greatly increased.
Why Become an Entrepreneur?
1. The need for independence/autonomy/flexibility (no boss) 2. The need for personal development/challenge 3. Follow an idea/passion 4. Welfare (philanthropic) considerations 5. Leave a legacy 6. Follow role models
Red Queen
Competitive interactions based on: - Innovation - Learning - Evolution - Increased performance for both firms - Usually, incremental changes that accumulate over time - Schumpeter's view of creative destruction * This theory focuses on the competitive interactions between a small number of firms. when one firm does something new (or different), the other firms must match this and then do something new (or different) of their own. In this way, firms continually push each other to be more innovative and can help them all to increase their performance, which in turn helps them better meet the needs of customers
Characteristics of the Entrepreneurial Mindset
Determination and perseverance, Drive to achieve, Opportunity orientation, Initiative and responsibility, Persistent problem solving, Seeking feedback, Internal locus of control, Tolerance for ambiguity, Calculated risk taking, High energy level, Creativity and innovativeness, Vision, Passion, Independence, Team building
The Entrepreneurial Experience
Entrepreneurs: •Create ventures much as an artist creates a painting •Are formed by the lived experience of venture creation Experiential Nature of Creating a Sustainable Enterprise: •Emergence of the opportunity •Emergence of the venture •End emergence of the entrepreneur
Entrepreneurial Imagination and Creativity
How entrepreneurs do what they do: - Creative thinking + systematic analysis = success - Seek out/create unique opportunities to fill needs and wants - Turn problems into opportunities
Austrian Economics
Idea of Perfect Competition 1) Homogeneous commodity: all the characteristics of the product are identical 2) Large number of relatively small actors: no monopoly 3) Free entry and exit: no barriers 4) Complete knowledge of relevant factors (including customers): - The solution of the economic problem of society is in this respect always a voyage of exploration into the unknown, an attempt to discover new ways of doing things better than they have been done before. - Hayek, 1949
When Enterprising People and Opportunities Meet
Individual-Opportunity Nexus: The action of entrepreneurship occurs when enterprising individuals (entrepreneurs) meet opportunities
Austrian Economics, cont.
Schumpeter, 1934: - Environment (Macro) - Disequilibrium - "Creative Destruction" New: -Goods, Methods of production, Markets, Sources of supply, Organizations of any industry, New combinations mean the competitive elimination of the old Kirzner,1973: - Individual - Equilibrium - Information asymmetry or Uncertainty/Risk - "Entrepreneurial Alertness" The main differences between Kirzner and Schumpeter are the sources of entrepreneurial activity. Kirzner's entrepreneur focused on solving information breakdowns in the market by informing the market of price differences, product characteristics, market opportunities. Schumpeter's entrepreneur created new opportunities by changing product characteristics, searching for new ways to do things, and creatively innovating to improve performance and solve perceived market failures.
