Organizing Entrepreneurship

Anna Grandori, Laura Gaillard Giordani

• Publisher: Routledge
• Year: 2011
• Print ISBN: 9780415570374
• eBook ISBN: 9781136717857
• Topic: Business
• Subtopic: Business General
• Index: Business

Entrepreneurship has regained centre stage in the contemporary knowledge-intensive and innovation-driven economy, as well as in research. Integrating classic and recent insights into the organization, economics and management of entrepreneurial activities, Organizing Entrepreneurship aims to blend rigor with relevance, and connects theory with practical problems around key questions, such as:

• Is there any method in having 'good ideas' and discovering opportunities?
• Through which mechanisms can human, social, technical and financial resources be attracted and dedicated to new projects?
• Which alternative governance and organizational structures are to be considered for the constitution and organization of a new firm?
• To grow or not to grow? (Or how to grow without up-sizing)?
• How do you organize grown-up firms in an entrepreneurial mode?
• How can environments and external institutions help?

Original case studies are discussed and integrated throughout the text, which reflect a wide range of sectors (from agri-business to high tech) and countries (including emerging economies). Providing a unique resource for students and instructors of entrepreneurship and organization, this book also offers new insights to entrepreneurs and investors in the organization of new firms, as well as to managers striving to infuse entrepreneurial behaviors into their already established firms.

1 Sources of Entrepreneurship

Opportunities

Chapter 1 Contents*

1.1 Structural sources of opportunities: reducing and creating disequilibria

1.2 Relational sources of opportunities: social network management

1.3 Cognitive sources of opportunities: entrepreneurial decision making

Texts on entrepreneurship typically provide reviews of the main “alternative theories of entrepreneurship” that economic and management scientists have produced (Casson 2003; Shane 2003). Rather than being seen as alternative theories though, these contributions can be understood and used as indicating a variety of “sources” of entrepreneurship or “types of opportunities” that can be recognized by decision makers. Defining a reasoned repertory, if not a typology, of the kind of phenomena that constitute an entrepreneurial opportunity is important, if not necessary, for being able to “recognize”, let alone “craft” them. We cannot recognize something if we do not have an idea or model of what it is. Unfortunately most treatments of opportunity recognition do not provide suggestions of what to look at for having a chance to recognize an opportunity, or of what to do for creating one. The typical treatment of the opportunity recognition problem is to provide a substantive list of things – trends and changes in demand, technology environments, culture, demography, etc. – that is practically too wide for guiding action (i.e. approximately amounts to saying that you can look to anything) and conceptually never exhaustive (so that the relevant thing for you may not always have been included). Therefore, we are rather going to treat and classify opportunities in an applied decision-making perspective, translating the main “theories” of entrepreneurship into categories of opportunities, so as to support their recognition and construction.

A second premise is useful. Entrepreneurial opportunities are often defined as “changes” – in technology, social customs, political conditions, legislation, demography, or “gaps” (e.g. between supply and demand) (e.g. Drucker 1985; Shane 2003). What is more helpful in these definitions of opportunities is not the substantive list of factors (i.e. social, psychological, technical, etc.) but the conceptualization of the sources of opportunities as “changes” and “gaps and disequilibria”. If we focus on that part of the definition, rather than on the substantive list of factors, we are led to ask whether there cannot be other types of sources that are not “gaps” or “changes”. And in fact there are, since new ideas that turn into opportunities may stem from “new ways of seeing” things (that perhaps have always been there), or from imagining things “as they might be” rather than as they are, or from connecting things that were not connected, with no need for external change.

We shall therefore define entrepreneurial opportunities as any possibility of new value-generating economic activity, and use a classification of opportunities that is both more conceptual and more “actionable”, since it implies different types of entrepreneurial action. We shall use the term “sources” of opportunities in the same ways in which it is used in the social sciences for other complex concepts, such as “the sources of power” (Fisher 1983), with the aim of helping in understanding and building the entity in question. Actually, the just quoted classic paper on the sources of negotiating power is inspiring in this respect; and in fact the power to act, shape things and successfully negotiate with other actors is a capacity more related than is usually acknowledged with the capacity of exploiting opportunities. Negotiation theorists usefully indicated that negotiating power has structural sources (e.g. resources commanded), but also relational sources (the management of relationships) and cognitive sources (clever judgments and proper decision making). Analogously, entrepreneurial opportunities have structural bases in “gaps” and “changes” economic and technical reality, can leverage on networks of relationships, and require sound judgment and decision making for being discovered. The three sections of this chapter examine these three sources of good opportunity definition respectively.

1.1 Structural Sources of Opportunities: Reducing and Creating Disequilibria

The entrepreneurship story summarized in Box 1.1, simple as it is, illustrates various structural sources of opportunities and ways to identify and exploit them, discussed next.

Box 1.1 Jack Brash (JB)

Jack Brash was born in 1912, from Polish immigrants in London. When Jack was still very young, his father abandoned his mother, who was forced to work making fashion garments. She worked from home, was paid piece-rate and Jack helped her with the outwork in the evenings after school.

Jack was quiet and withdrawn, and did not do well at school. Leaving school at the earliest opportunity, he became an errand boy and then a shop assistant. Finding that another steady job was hard to obtain, he resolved to go into business on his own.

It was a time of high unemployment, and many of the unemployed were so poor that they financed themselves by selling off family heirlooms. Jack noticed that if they were to sell locally their items would have “gone for a song”. His experience with fashion garments had taught him that, while many people were poor, there were still those rich enough to afford expensive goods, if you knew where to find them. His idea was therefore to buy in bulk from the local neighborhood and sell to West End dealers at a much higher price. He soon learnt from experience what sort of things the West End dealers were looking for and actively tried to find them in his neighborhood, or even making some modifications (for example, changing frames to mirrors) so as to satisfy demand. He offered discounts to the dealers he knew for larger orders and for cash in advance. In this way, he collected enough cash to finance production activities, beyond the commercial activity.

The business took off, unit costs fell as batch size increased, and Jack accumulated some financial resources. He immediately began to look around for something to do with these. He knew that the mirrors sold because of the frame design and thought that the same sort of frame could be used for pictures, prints and photographs as well. So these products were added to his range.

Jack also gave thought to how to reduce costs and prices. He realized that he could cut out some of the dealers and sell direct to the public. Without the dealers’ margin, he could sell more units at a lower price. He looked for premises in an attractive area where the market was bigger, beat competition on price, and eventually acquired the local dealer’s stock and activity.

War broke out in 1939. Jack sold his business while it was still doing well and invested the proceeds in jewelry. He kept his savings throughout the war in this form. During the war, he nevertheless found a way of doing business by running the stores on an airfield. Times were tough, but he had the chance to come into contact with many people and to help them survive. After the war, Jack kept in touch with them, and some of them repaid the favor by investing in his business ventures or introduced Jack to useful contacts in his long entrepreneurial career thereafter.

Source: adapted from Casson (2003)

A first class of structural economic sources of entrepreneurship is constituted by market disequilibria and “imperfections”, which can be exploited by entrepreneurial action. They have been called “Kirznerian opportunities”, after Kirzner’s view of entrepreneurial action as “equilibrating” and supporting the functioning of markets. They include the following:

1 A classic way in which entrepreneurs can contribute to the efficient functioning of markets is through innovations bringing about “cost reduction” so that, through competition, “price correction” is obtained (Kirzner 1973). They include classic innovations in technologies, production processes or products themselves, reducing production cost. For example, the “modularization” of products is a broad innovation in product structure allowing the production of customized objects at a much lower cost.

In addition, innovations in organizational processes that reduce transaction costs are possible (Leibenstein 1968) and should be emphasized. In fact, in innovation practice (and theory) attention is predominantly paid to product and production process innovations. It is thus worth highlighting that it is possible to build entrepreneurial action on the reduction of “transaction costs”; that is, the invention of organizational solutions that reduce free riding, agency costs, control costs, negotiation and intermediation costs. A “high-tech” example would be how internet technology has sustained the flourishing of direct selling through the internet. But a pertinent example would also be the re-emergence of “old-tech” “street markets”, or otherwise physical markets, selling natural food where farmers cut out dealers and sell directly to the public. In the JB case, the idea to reduce costs and prices by cutting out dealers and selling direct to the public was a case of price correction through the reduction of transaction costs.

2 Space for entrepreneurial action is generated by connecting offer to demand that is unlikely to be meet “spontaneously”. Entrepreneurship can occur as an act of intermediation (Casson 1982). For example, Jack Brash connected two social groups with complementary preferences: a group of people interested in selling “old stuff” to which they assigned low value (while needing money) with another group interested in buying the old stuff as high-value “antiquities”. This case is different from the former, as it is not based on cost reduction but rather on value increase. In fact, the price was “corrected upward” toward the higher value assigned to old furniture as “vintage” stuff.

Since these opportunities exploit “gaps” or “holes” in the webs of exchanges, the type of entrepreneurial action responding to them has been called “gap filling” (Casson 1982) or “hole bridging” (Burt 2002). As the economist Liebenstein identified earlier and clearly described (1978: 45; Casson 1982: 217), if we represent an economy as a set of nodes (producers and consumers) and ties or “pathways” of exchanges between nodes, then the “perfect competition model would be represented by a net that is complete: one that has pathways that are well-marked and well-defined, well-marked and well-defined nodes … and each node deals with every other node”. In reality however, markets are rarely “perfect” and “complete”; “there are ‘holes’ and tears in the net [italics added], obstructions (knots) along the pathways, and some nodes and pathways, where they exist, are poorly defined and poorly marked”.

3 A more potent way of filling a gap in the market structure is that of creating an offer responding to an unmet demand, which entails more than the act of connection, since it implies the creation of a new product or service that was not previously offered. This is the case of “missing markets” and “missing products”, which are also conceivable as particular types of “market failure” or disequilibria (Milgrom and Roberts 1992) and is the most obvious terrain in which entrepreneurship is both most needed and most likely to flourish. The search for, and detection of, unfulfilled needs, either perceived or not (yet) perceived by potential users, is the type of entrepreneurial action that can lead to the detection of missing markets. They may be constituted by problems for which people or firms have no current “buyable” solution.

One simple reason may be that no one has yet detected the need and provided the product or service. This may be the case for self-provided services and self-made products and are therefore good areas to consider. For example, the “travel accounting service”, developed and successfully sold by some tour operators, was based on the observation that travel expenses were outside of the control of many firms and no service of this type was offered by the market.

A second reason is that unresolved “technical puzzles” prevented the construction of these products. In this case, the source of opportunities is a “missing product” problem instead of a missing market. Here, technical problem solving is required and not merely “alertedness” (see section 1.3 on cognitive sources).

A third reason is that the need is perceived in general and generic terms, but has not been operationalized – by the potential users or providers – into specific objects or services satisfying the need. For example, today people may have a generic need for more natural products, environmental safety and entertainment. Missing markets and missing products may be identified by asking with which existing or emerging new products and services those needs can be satisfied. However, these needs are broad enough to be responded to by an almost infinite array of products and services. The most promising responses can then be identified by matching those broadly defined “external” opportunities with the resources and response capabilities of a given actor.

Therefore, in generating hypotheses on which products or services may meet unfulfilled needs (a market-driven criterion) a resource-based criterion is also required. Among the many (actually infinite) possible new products or services, it would be more effective and efficient to think of something that may be better realized by starting with the entrepreneur’s distinctive resources and competences. Actually, an analysis of resources may even suggest opportunities, thereby configuring a second type of structural economic source of entrepreneurial opportunities: resource-based opportunities. They are not rooted in exogenous changes or gaps but are creatively imagined as possible uses of existing resources. We can distinguish two ways of developing resource-based opportunities.

1 An important contribution to understanding the resource-based sources of entrepreneurship is the view of the firm offered by Edith Penrose (1959). She made the important observations that (a) resources typically come in bundles, especially when they are human capabilities embodied in people; (b) they are typically multi-functional; that is, they can generate a variety of services; and thus (c) they are typically acquired or accumulated in excess with respect to t...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of boxes
• Acknowledgments
• Introduction
• 1. Sources of entrepreneurship: opportunities
• 2. Entrepreneurial resources: access problems and networked solutions
• 3. Entrepreneurial firms
• 4. The internal and external growth of entrepreneurial firms
• 5. Organizing entrepreneurship in established firms
• 6. Organizing environments for entrepreneurship
• References
• Index