The Nature and Importance of Entrepreneurs

1. Hisrich
Peters
Shepherd
Chapter 1
The Nature and
Importance of
Entrepreneurs
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 1-2
Nature and Development of
Entrepreneurship
 Entrepreneur – An individual who takes
initiative to bundle resources in
innovative ways and is willing to bear
the risk and/or uncertainty to act.
Or
 Entrepreneur – An individual who gather
resources to create an economic activity
while bearing different types of social and
economic risks.

3. 1-3
Nature and Development of
Entrepreneurship
 Entrepreneurship is the process of creating
something new (1) with value of devoting the
necessary time and effort (2) assuming the
accompanying financial, psychic, and social
risks (3) and receiving the resulting rewards
of monetary and personal satisfaction and
independence (4).
 Being an entrepreneur today:
1. Involves creation process.
2. Requires devotion of time and effort.
3. Requires assumption of necessary risks.
4. Involves rewards of being an entrepreneur.

4. 1-4
Nature and Development of
Entrepreneurship
1. Involves creation process
 Creating something new of value to the
audience for which it is developed
 Audience could be:-
a. The market of buyers in the case of a business
innovation
b. The hospital’s administration in the case of a new
admitting procedures and software
c. Prospective students in the case of a new course or
even college of entrepreneurship
d. The constituency for a new service provided by a
nonprofit agency

5. 1-5
Nature and Development of
Entrepreneurship
2. Requires devotion of 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 operational
3. Requires assumption of necessary risks.
 Risks take a variety of forms, depending on the
effort of the entrepreneur, but usually center
around financial, psychological, and social areas.

6. 1-6
Nature and Development of
Entrepreneurship
4. Involves rewards of being an entrepreneur.
 Rewards include independence, followed by
personal satisfaction.
 Profit for entrepreneurs; the monetary reward
comes into play sometimes considered as success.

7. 1-7
The Entrepreneurial Decision
Process
 Deciding to become an entrepreneur by
leaving present activity
 Millions of companies are formed despite recession,
inflation, high interest rates, lack of infrastructure,
economic uncertainty, and the high probability of failure.
 Although no one knows the exact number in the united;
states estimates indicate that 1.1 to 1.9 million new
companies formed in a year.
 The entrepreneurial decision process
entails a movement, from something to
something – a movement from a present
lifestyle to forming a new enterprise

8. 1-8
The Entrepreneurial Decision
Process
Change from present lifestyle
Work environment
disruption
Form new enterprise
Desirable
1.Cultural
2.Sub-cultural
3.Family
4.Teachers
5.Peers
Possible
1.Government
2.Background
3.Marketing
4.Role models
5.Financing

9. 1-9
The Entrepreneurial Decision
Process
 Change from present lifestyle
 The decision to leave a career or lifestyle is not an easy
one. It takes a great deal of energy and courage to
change and do something new and different.
1. Work environment (R&D and Marketing)
 While working in technology (research and development)
individuals develop new product ideas or processes and
often leave to form their own companies when these new
ideas are not accepted by their employers (R&D).
 Similarly, individuals in marketing become familiar with
the markets and customers unfilled wants and needs,
and they frequently leave to start new enterprises to fill
these needs (Marketing).

10. 1-10
The Entrepreneurial Decision
Process
2. Disruption (a negative force)
 A significant number of companies are formed by
individuals who have retired, who are relocated due to a
move by the other member in a dual career family, or
who have been fired.
 There is possibly no greater force than personal
dislocation to galvanize (shock into taking action) a
person’s will to act.
 The decision to start a new company occurs
when an individual perceives that forming a
new enterprise is both desirable and
possible.

11. 1-11
The Entrepreneurial Decision
Process
 Desirability of new venture formation
 Aspects of a once situation that make desirable to start a
new enterprise are culture, subculture, family, teachers
and peers
1. A culture that values an individual who successfully
creates a new business will spawn more venture
formation than one that does not. The American culture
places a high value on being a success and making
money – all aspects of entrepreneurship. (Culture)
2. Many subcultures that shape entrepreneurial value
systems operate within a cultural framework. For-
example Route 128 (Boston), Silicon Valley (California),
Denver etc. (Subculture)

12. 1-12
The Entrepreneurial Decision
Process
 Desirability of new venture formation
3. Studies of companies in a variety of industries
throughout the world indicate that a very high
percentage of the founders of companies had
fathers/mothers who valued independence. The
independence achieved by company owners,
professionals, artists, professors, or farmers permeates
their entire family life giving encouragement and value to
their children’s company-formation activity. (Family)
4. Encouragement to form a company is further stimulated
by teachers, who can significantly influence individuals to
regard entrepreneurship as desirable and viable career
path. (Teachers)

13. 1-13
The Entrepreneurial Decision
Process
 Desirability of new venture formation
5. Finally peers are very important in the decision to form a
company. An area with an entrepreneurial pool and a
meeting place where entrepreneurs and potential
entrepreneurs can discuss idea, problems, and solution
spawns more new companies than an area where these
are not available. (Peers)

14. 1-14
The Entrepreneurial Decision
Process
 Possibility of new venture formation
 Factors making possible to create a new venture are
government, background, marketing, role models,
financing.
1. The government contributes by providing the
infrastructure to help and support a new venture (e.g.
roads, communication, transportation system, utilities,
tax rate and economic stability). (Government)
2. Entrepreneur must have the necessary background.
Formal education and previous business experience give
the skills needed to form and manage a new enterprise.
(Background)

15. 1-15
The Entrepreneurial Decision
Process
 Possibility of new venture formation
3. Marketing also plays a critical role in forming a new
company. In addition to the presence of a market of
sufficient size, there must also be a level of marketing
know how to put together the best total package of
product, price, distribution (placement) and promotion
needed for successful product launch. (Marketing)
4. A role model can be one of the most powerful influences
in making company formation seem possible. To see
someone else succeed makes it easier to picture yourself
engaged in a similar activity. (Role models)
5. Finally financial resources must be readily available.
Although most of the start up money for any new
company comes from personal savings, credit, friends,
family and relatives, there is often need for addition seed
capital. (Financing)

16. 1-16
Types of Start-ups
1. Lifestyle-firm: A small venture that supports the
owners and usually have little opportunities to
grow and expand
 A lifestyle firm is privately held and achieve modest
growth due to the nature of the business, the objectives
of the entrepreneur, and the limited money devoted to
research and development.
 This type of firm may grow after several years to 30-40
employees and have annual revenues of about $20
million

17. 1-17
Types of Start-ups
2. Foundation company: A type of company formed
from research and development that usually does
not go public.
 The foundation is created from research and
development and lays the foundation for a new business.
 This type of startup rarely goes public, it usually draw
the interest of private investors only, not the venture-
capital community.
 This firm can grow in 5-10 years from 40-400 employees
and from $10 million to $20 million in yearly revenues.

18. 1-18
Types of Start-ups
3. High-potential venture (These firms are also called
gazelles): A venture that has high growth
potential and therefore receives great investor
interest and are integral to the economic
development of an area.
 High-potential venture is the one that receives the
greatest investment interest and publicity. While the
company may start out like a foundation company, its
growth is far more rapid.
 After 5-10 years the company could employ around 500
employees with $20 million to $30 million in revenue.

19. 1-19
Role of Entrepreneurship in
Economic Development
 The role of entrepreneurship in economic
development involves more than just increasing
per capital output and income; it involves initiating
and constituting change in the structure of
business and society. This change is accompanied
by growth and increased output, which allows
more wealth to be divided within the various
participants.
 Innovation is depicted as a key to economic
development, not only in developing new products
(or services) for the market but also in stimulating
investment interest in the new ventures being
created.

20. 1-20
 Defining a New Innovation (Product or
Service)
 Newness can be:
 In the consumer concept.
 A change in the package or container.
 Slight changes or modifications in the appearance of
the product. (Industrial market)
 Companies also add products to their product
line that are already marketed by other
companies; products are new to the
manufacturer but not the consumer.
Defining Innovation

21. 1-21
Innovation
 Types of Innovation
 Breakthrough
 Breakthrough – New products with some technological
change e.g. Virtual 3D Glasses, telephone, alkaline
batteries
 Fewest number of innovations.
 Establishes the platform on which future innovations in
an area are developed.
 Should be protected by patents, trademarks, and
copyrights.

22. 1-22
 Technological
 Technological – New products with significant
technological advancement e.g. Nokia 3310 to Nokia
Lumia or cassettes to CD’s
 Occurs more frequently; not at the same level of
breakthrough inventions.
 Offers advancements in the product/market area.
 Needs to be protected.
Innovation (cont.)

23. 1-23
 Ordinary
 Ordinary - New products with little change e.g. Smart
Phone series S3, S4, S5
 Occurs most frequently.
 Extends a technological innovation into a better
product or service or one that has a different market
appeal.
 Usually come from market analysis and pull, not
technology push.
Innovation (cont.)

24. 1-24
Role of Entrepreneurship in
Economic Development
 Product-evolution process - Process through
which innovation is developed and commercialized
through entrepreneurial activities (see Figure 1.1).
 Iterative synthesis - The intersection of knowledge
and social need that starts the product
development process (III)
 Iterative synthesis often fails to evolve into a
marketable innovation and is where the
entrepreneur needs to concentrate his/her
efforts such as:-
 Expertise in this area
 Matching the technology with the appropriate market
and making the needed adjustments

25. 1-25
Figure 1.1 - Product Evolution
I. Recognition of social needs
II. Initiation of technological innovation
III. Iterative synthesis leading to invention
IV. Development phase
V. Industrial phase

26. 1-26
Role of Entrepreneurship in
Economic Development
 Regardless of innovation level of uniqueness or
technology, each innovation evolves into and
develops towards commercialization through one of
three mechanisms.
 Entrepreneurship:
 Government as an innovator: a government active in
commercializing technology e.g. JF-17 (Dubai-show)
 Intrapreneurship: Entrepreneurship within an existing
organisation. In the present era of hyper-competition, the
need for new products and the intrapreneruial spirit have
become so great that more and more companies are
developing an intrapreneruial environment, often in the
form of strategic business unit (SBU’s).