Part 1

Chapter 1
Pre-start-up phase: Opportunity recognition and
evaluation
Introducing Entrepreneurship
 Learning outcomes
• Describe entrepreneurship

• Conceptualise entrepreneurship

• Contrast between entrepreneurship and small businesses

• Outline the entrepreneurship process

• Evaluate the dynamics of the entrepreneurship process

• Appraise the relevance of entrepreneurship in South Africa

• Discuss the evolution of the field of entrepreneurship

 Entrepreneurship as a field of Study
• The study of entrepreneurship is a process of conceptualisation and execution.

• Entrepreneurs are born not made:

o Entrepreneurship is an inherent trait that cannot be nurtured.
o Increasing empirical evidence that suggests that teaching of entrepreneurial skills spurs new venture creation

• Entrepreneurial ventures are crucial to innovation, productivity and effective competition.

• Introduction of entrepreneurship into higher education institutions are:

o Graduate unemployment
o Paradigm shift – from being an employee to becoming an employer
o Entrepreneurs as drivers of the engine of growth, the private sector
o Enhancing human resources of African economies towards self-employment
o Entrepreneurial and innovative skills for renewal of African countries decaying public institutions
o Entrepreneurial and innovative skills for renewal of African countries decaying public institutions
 Conceptualising Entrepreneurship
• The word entrepreneur comes from the French – ‘Entreprendre’ – which means ‘to undertake’

Behavioural Definitions

• Schumpeter – The entrepreneur is an innovator who carries out new combinations of economic
development, which are new goods, a new method of production, new markets, new sources of raw
materials, or a new organisational form
• Kirzner – The entrepreneur is someone who facilitates adjustment to change by spotting
opportunities for profitable arbitrage.
• Knight – the entrepreneur deals with the uncertainty attached to the exploitation of opportunities
• Shane and Venkataraman – Entrepreneurship focuses on the central question of the entrepreneur
– why, when and how some people and not others discover and exploit opportunities.
 Conceptualising Entrepreneurship
Process Definition

• Stoner, Freeman, and Gilbert – Entrepreneurship is the seemingly discontinuous process of

combining resources to produce new goods and services

• Hisrich & Peters – Entrepreneurship is the process of creating something new with value by
devoting the necessary time and effort, assuming the accompanying financial, psychic and social
risks, and receiving the resulting rewards of monetary and personal satisfaction and
independence.
 Conceptualising Entrepreneurship
Outcomes Definitions

• Jean-Baptiste Say – The entrepreneur shifts economic resources out of an area of low productivity into an
area of higher productivity and greater yield

• Gartner – Entrepreneurship is the creation of new organisations

• Wennekers and Thurik – The entrepreneur is considered to be self-employed; based on the notion that a
person can either be unemployed, self-employed, or in wage employment. It is measured either
statistically, through the number of self-employment (as ILO’s surveys) or dramatically, through the rate of
start-ups (as in the series of GEM reports).
 Conceptualising Entrepreneurship
Theoretical Approaches to understanding entrepreneurship:
1. Socio-psychological:

Max Weber’s – The Protestant Ethic and the Spirit of Capitalism:

• Prudence
• Hard work
• Sobriety
• Trustworthiness
• Fulfilment of Promises
• Contribute to the success of Capitalism
 Conceptualising Entrepreneurship
Theoretical Approaches to understanding entrepreneurship:

2. Socio–cultural Approach

Cultural change through the transformation of human agents and their socio-economic setting. Consideration
of past and present:
• Political;
• Social; and,
• Economic institutions
And their associations with current values, motivations and incentives and their conditioning effect on current
role structures
 Conceptualising Entrepreneurship
Theoretical Approaches to understanding entrepreneurship:
3. Macroeconomic Approach

Recognises that in the formation of a macroeconomic model of entrepreneurship; ‘There are difficulties
distinguishing between supply and demand determinants.
 
•Supply schedule:
o Socio-psychological and cultural variables/Stock of Human Capital of the Individual
 
•Demand Schedule: Entrepreneurial goods and services
o Production factor prices
o Existing and transferable technology
o Consumer Income
 Conceptualising Entrepreneurship
Similarities in entrepreneurship definitions:
• Innovation
• Value creation
• Opportunities recognition and exploitation
• Creative process
• Risk-taking
• Resourcefulness.
 Conceptualising Entrepreneurship
The entrepreneur (what an entrepreneur does):

• Identifies opportunities for goods and services

• Is creative and innovative
• Starts own enterprise
• Manages own enterprise
• Organises and controls resources to ensure profit
• Is able to market a product, concept or service
• Obtain financial means
• Is willing to take calculated risks
 Different domains of Entrepreneurship

1. Corporate Entrepreneurship, Intrapreneurship, or Corporate Venturing

2. Technological Entrepreneurs

3. Social Entrepreneurship

4. Family Business
Entrepreneurship Distinguished from Other Management Forms
Entrepreneurship vs Conventional Management

• Management is concerned with managing the existing resources, while entrepreneurship focuses on the initial
detection of a new venture, which involves idea examination, opportunity development and resource location.

Managers Entrepreneurs
Preoccupied with optimisation – optimising resources and Creation in the venture – visionaries who create unique
reducing inefficiencies businesses by planning in greater detail and by injecting a sense
of purpose and identity by projecting into the future

Cost-cutting and re-engineering exercises Adaptable and able to detect and garner resources to exploit
opportunities

Plan, organise, manage human resources, lead, and control, Greater bias towards creativity
drawing parallels between management and business
administration
Entrepreneurship Distinguished from Other Management Forms
Entrepreneurship vs Conventional Management
Produces results through managing resources – Enhanced entrepreneurial behaviour, fostering
such as human resources to develop and self-reliance and bridges the gap between
implement effective systems functional areas

Employees who were not involved in starting the In the start-up phase, multidisciplinary and
venture process orientated, resourceful and manage
enterprise entirely, up until the venture is grown

Realises the vision through systematic analysis Actualises planning through the vision
and implementation
Entrepreneurship Distinguished from Other Management Forms
Three factors distinguish entrepreneurial ventures from small businesses:

1. Innovation
Schumpeter (1930s) - entrepreneur as an innovator
• A creative act and an innovation
• Entrepreneurship is about creating something that didn’t previously exist.
• Exploit change as an opportunity for a different business or service.
• Has to address market needs, and requires entrepreneurship if it is to achieve commercial success
Entrepreneurship Distinguished from Other Management Forms
Three factors distinguish entrepreneurial ventures from small businesses:

2. Potential for Growth

• Successful ventures achieve high-performance both in sales growth and profitability, with
different developmental pathways for young firms.
• Growth is an important indicator for entrepreneurs that their businesses are in fact developing
and that their efforts are paying off.
• Growth can be – a range of products, developing the resource base, venturing into new markets,
building a stronger organisation.
Entrepreneurship Distinguished from Other Management Forms
Three factors distinguish entrepreneurial ventures from small businesses:
3. Strategic Objectives
• A fundamental posture, instrumentally important to strategic innovation, particularly under
shifting external environmental conditions.
• Important considering that entrepreneurial ventures are usually more vulnerable to external
influences, since their competitive advantages tend to be less sustainable than larger firms within
the changing environment.
• Positive correlation between strategy and performance in terms of profitability
• Strategic objectives can be described as: sustainable competitive advantage, market development
or growth, market share, market position.
 Entrepreneurship in African societies
Although Africa is largely characterised as a collectivist nation, there is a school of
thought that believes that capitalism was practiced in Africa long before colonisation;
the amount of cattle possessed was a barometer for measuring an individual’s wealth.
Another school of thought argues that socialism has been part of Africa because of its
collectivist society.
Research supports a notion of community influence and has found that entrepreneurs
who contribute personally and professionally to their community, and who are
supported by their community, are more likely to be successful.

Batho Pele Principle

 The entrepreneurial process
The process of pursuing a new venture is embodied in the entrepreneurial process. The new
venture creation process is the fundamental activity of entrepreneurship.
There are six process components observed by scholars as being commonly shared by
entrepreneurs:
• Locate business opportunities;
• Accumulate resources;
• Market products and services;
• Produce products;
• Build organisations; and,
• Respond to government and society
 The entrepreneurial process
The process of pursuing a new venture is embodied in the entrepreneurial process. The new
venture creation process is the fundamental activity of entrepreneurship.
There are six process components observed by scholars as being commonly shared by
entrepreneurs:
• Locate business opportunities;
• Accumulate resources;
• Market products and services;
• Produce products;
• Build organisations; and,
• Respond to government and society
 The entrepreneurial process
The newness attached to this process is linked to products, processes, markets, or technologies where
the firm is considered a new entrant or supplier to a market. The entrepreneurial process includes
establishing (or creating) a business and developing it into a thriving and responsive enterprise. The
steps include:
 Identifying, measuring, and refining an opportunity from multiple ideas;
 Formulating a business plan;
 Marshalling resources;
 Organising and mobilising the entrepreneurial team; and,
 Overseeing new venture creation and growth
• Competitive advantage means outperforming competitors in these areas, thus distinguishing an
organisation.
 The entrepreneurial process
New venture creation takes place in a four-phase framework or entrepreneurial
tasks briefly explained:
1.The searching phase
2.The planning phase
3. The marshalling phase
4.The implementation phase
 The entrepreneurial process through effectuation
Motivations include:
1.Need for achievement;
2.Locus of control;
3.Desire for independence;
4.Passion; and,
5.Drive
Cognitive factors:
6.Knowledge;
7.Skills; and,
8.Abilities
 Typologies and differential impacts of entrepreneurs

Entrepreneurs are now seen as individuals with cognitions, capabilities, and

intentions that are all shaped by institutions and have different interests and
potential economic impact.
High growth versus replicative entrepreneurship
High-impact (productive) entrepreneurs have been defined as entrepreneurs
inclined to pursue growth and innovation and are actors that intensify competition,
provide the largest potential for new jobs, and enhance economic growth.
These businesses have long-term effects on economic growth and job creation
where unemployment, poverty, and inequality are prevalent.
 Typologies and differential impacts of entrepreneurs
Baumol suggests that innovative entrepreneurs are the exception, while most founders belong to
what Schumpeter calls the ‘Cluster of followers’.
High growth versus replicative entrepreneurship
Replicative (unproductive) entrepreneurship produce or sell goods and services already present in
the marketplace, but in different locations.
• Entrepreneurs channel their effort in different directions depending on the quality of the
prevailing economic, political, and legal institutions.
• Institutional factors provide incentives for rent-seeking entrepreneurial activities (such as crime
and corruption) versus socially productive entrepreneurial activities (such as the establishment of
new enterprises).
• Good institutions channel effort into productive entrepreneurship, sustaining rates of economic
growth.
 Typologies and differential impacts of entrepreneurs
Necessity (Survivalist) versus Opportunity-based (improvement-driven)
Entrepreneurship
The GEM report defines necessity-based entrepreneurs as those that are pushed
into starting businesses because there are no other work options and need a
source of income for themselves and their families.
Necessity-based entrepreneurs are lucky to 1 additional member of the business in
its entire existence; which is often short-lived.
Opportunity-motivated entrepreneurs are those entering entrepreneurship
primarily to pursue an opportunity even when they have other employment
possibilities to improve their income or for independence.
 Typologies and differential impacts of entrepreneurs
Necessity (Survivalist) versus Opportunity-based (improvement-driven)
Entrepreneurship
The GEM report defines necessity-based entrepreneurs as those that are pushed
into starting businesses because there are no other work options and need a
source of income for themselves and their families.
Necessity-based entrepreneurs are lucky to 1 additional member of the business in
its entire existence; which is often short-lived.
Opportunity-motivated entrepreneurs are those entering entrepreneurship
primarily to pursue an opportunity even when they have other employment
possibilities to improve their income or for independence.