The Entrepreneurial Process

Seeing and Seizing Opportunities

Nils Nilsson

• Editore: Routledge
• Anno: 2021
• ISBN:
  9781000373295
• Edizione: 1
• Argomento: Betriebswirtschaft
• Categoria: Unternehmertum

This book provides an understanding of 'opportunity recognition' as a catalyst and crux of the entrepreneurial process. Grounded in research, it introduces the key concepts at the heart of entrepreneurship theory and practice and demonstrates how entrepreneurship differs from management in language, priorities and practice.

The book's central framework is mapped around 'seeing and seizing opportunities', where the entrepreneur enters a situation, eventually sees an opportunity and takes it through a process of idea development into an actionable entrepreneurial initiative. This captures the book's four core elements: person(s), environment, opportunity and process. The Entrepreneurial Process is unique in its explanation of how key concepts are related and how they can be applied practically to business models, plans and action. Case studies from real-life organizations, reflective questions and short exercises throughout encourage student learning and enable true engagement with the subject matter, building students' entrepreneurial efficacy.

A 'one-stop shop' of key theoretical perspectives on entrepreneurship, opportunity recognition and business modelling, this textbook is essential for undergraduate and postgraduate students on introductory entrepreneurship and enterprise courses. Its practical and applied nature also makes it suitable for MBA and executive education.

Online resources include chapter-by-chapter PowerPoint slides and a test bank of questions.

1
THE RISE, FALL AND RETURN OF THE ENTREPRENEUR

A brief history

Life can only be understood looking backward but has to be lived looking forward.

(Søren Kierkegaard, Journals IVA.164, 1843)

The economy as a zero-sum game

Back in the Middle Ages, a wave of economic development that presaged future periods of economic growth took place in Europe. Supported by the development of an international legal framework, commerce on a global scale developed. At the same time, emergent legal systems protected private ownership and developed mechanisms for resolving disputes in an efficient manner. Knowledge became more accessible thanks to the development of the printing press and the founding of the first universities. Feudal rule and the guild system continued, however, to hamper economic development, and before the development of the nation state there was little reason to associate commerce with either power or prosperity. As a consequence, the commercial sector remained weak, and merchants and traders had low social status.

Economic thinking of the time was based on the model of a ‘zero-sum game’, where one player’s gain is another’s loss. Consequently, profit was considered morally dubious, as it was presumed to have been acquired at someone else’s expense. Thus, commerce and the profit motive were thought to pose a potential threat to the God-given order and stability of society. In other words, conserving the ‘old order’ – not creating a new one – was the norm among the leading circles and the environment fostered few distinct ideas about economic growth or enterprise.

The physiocrats and the entrepreneur

In the 1700s in France a group of industrialists, intellectuals and writers joined together to form a group, which they called Les économistes. The group are generally considered the pioneers that broke the trail for classical, modern political economy. Working in the period of transition from an agrarian to a proto-industrial economy, they argued that the soil is the only true source of wealth and profit, whereas all other branches of industry are sterile and unproductive: ‘On ne peut pas manger les écroux’ (‘You can’t eat nuts and bolts’) as the physiocrats put it.

Paradoxically, it was in this essentially deterministic intellectual setting, where the economy was seen to obey unchanging laws of nature that must be obeyed, that the idea of the ‘entrepreneur’ was conceived.

Figure 1.1 Essai sur la nature du commerce en général. Cantillon may well have gained recognition as the ‘father of political economy’, had he not been murdered mid-career. Today, Adam Smith is commonly recognized as the ‘father’ and Cantillon the ‘cradle’ from which he emerged.

The term ‘entrepreneur’ was coined by the physiocrat, Richard Cantillon (1680–1734), an Irishman with a Spanish name, who lived and worked in France. His Essai sur la nature du commerce en général, published in 1755 (the manuscript was finished 1730), is now considered a ‘classic’ after long years in oblivion (Figure 1.1). Many today rank Cantillon as the actual father of modern economics, inasmuch as he was the first to offer a concept of the economy as a system. Adam Smith, who is generally assigned the paternity, was not interested in the entrepreneur as such, but instead cast the capitalist – s/he who makes capital available – in the leading role (more on this later).

Cantillon’s main claim to fame was his recognition that someone among the players in an economy has to assume and manage the risk and uncertainty that arise in business. He called this risk manager an ‘entrepreneur’ and made a clear distinction between the entrepreneur and the provider of capital/the capitalist.

Cantillon conceived of his entrepreneur primarily as a middleman between the landowner and the buyers (‘entre’ means, among other things, ‘between’ in French), explaining that the role of the entrepreneur was not to produce – that was the landowner’s and farmers task – but to assess the demand for products and, on the basis of these judgements, assume the risk associated with buying up products at a given price and then selling them at an as yet unknown price. Thus, Cantillon’s entrepreneur was not necessarily creative, other than having an ability to predict what was waiting around the corner.

By using this ability to foresee and exploit price fluctuations, unseen by other players, the entrepreneur not only made money, but, on a higher level, restored the balance between supply and demand. For Cantillon, this stabilization of economic circulation, the economic flow, was one of the entrepreneur’s most decisive contributions.

The concept of the economic flow or circulation was introduced by the physiocrats, who were the first to conceive of the economy as a system of interdependencies, in this case between landowners, farmers and buyers. Figure 1.2 has influenced many subsequent conceptions in classical political economy, not least the general equilibrium theory.

Figure 1.2 Cantillon’s economic game plan (ecosystem). A reconstruction of Cantillon’s thoughts about the economic game plan and its actors. The circular and the reciprocal interdependencies are already there. Even in this agrarian economy the entrepreneurs stood for the dynamics and the energy. The property owners dominated but were passive. The politicians were not players yet – this came with Adam Smith and his ‘political economy’.

Source: Adapted from Cantillon ([1755] 2010).

Others in the physiocratic community developed this conception of economic systems further and assigned yet another role to the entrepreneur: introducing new methods and new products, and discovering and developing new markets (i.e. the entrepreneur as innovator).

A few decades later, Jean-Baptiste Say (1767–1832) described entrepreneurs as those who organize and combine the factors of production, and specifically those who ‘shift economic resources out of an area of lower, and into an area of higher productivity and greater yield’ (Say, [1836] 2013). Expanding the roles of the entrepreneur in this way, Say launched the idea of the entrepreneur as a generator of value in the economy.

Prophetic in his time, Say also discussed the future importance of technology and knowledge as drivers of economic development. He recognized the fluid nature of knowledge and its ability to spread beyond national frontiers and concluded that individual nations don’t need to produce scientific findings themselves, but could benefit from knowledge arrived at elsewhere.¹

Say was also ahead of his time with what is now called ‘Say’s law’: the notion – radical at the time – that ‘supply creates its own demand’. By this he wished to demonstrate how production that finds its market generates forces so that the economy as a whole expands: ‘The more who produce, the more who are able to consume’ (Say, [1836] 2013). In doing so, he introduced a dynamic component into an otherwise closed, static cycle and cast light on the nature of interdependencies between the parts and the whole.

Say and Cantillon are also interesting for their launching of the notion of subjective utility (i.e. the utility that a customer perceives, which feeds into the value, and thus the price of a good). Their recognition, that there is more to prices than the cost of production, represented a clear departure from the conventional wisdom of their time and is central to our thinking today.

It appears that Cantillon, Say and others in the ‘French school’ of the 1700s already had a sophisticated understanding of how the economy worked. They saw it as an integral system, full of dynamic interdependencies; they recognized the importance of knowledge to economic development and the subjective aspects of people’s assessments of utility. Not least, they pointed out the unique and crucial functions that the entrepreneur performs in the economic arena.

One may wonder whether these insights have anything to do with the fact that Cantillon and Say, among others, were at once businessmen and observers/scholars. They were what we might today call ‘action researchers’. Their dual roles may well have sharpened their eye for the dynamics of the economic system.

In the short term, however, the ideas of the ‘French school’ were soon pushed to the margins of economic thought as new ideas about ‘production function views’, ‘invisible hands’, ‘price mechanisms’ and ‘equilibriums’ came to the fore in an increasingly technocratic and mechanistic discourse.

In this new discourse buyers and sellers were seen to act and react according to predetermined laws, akin to the laws of Newtonian physics, that guided supply and demand toward equilibrium and perfect allocation of resources. The task of the entrepreneur, to stress the system toward change, is taken over by systemic forces, whereas the role of human creativity is marginalized. ‘In particular, the development of what came to be known as the “production function view”… was a deathblow to the theory of entrepreneurship in the context of firm organization’ (Foss & Klein, 2012).

Classical political economy and the exit of the entrepreneur

Only a couple of decades after Cantillon’s book, Adam Smith (1723–1790) published his treatise, The Wealth of Nations, a revolutionary, iconoclastic work that overturned most of the economic thinking that had preceded it. In it, Smith set out a framework for economic thinking that is influential to this day. He showed how self-interest serves the public interest and argued forcefully that economic life should be kept free from political intervention for the sake of economic growth, introducing the ageless metaphor of the ‘invisible hand’ – a force that allocates resources to the greatest benefit, if left to operate without interference. In this regard, we may say that he recognized the importance of what are now called ‘institutional factors’ for economic growth.

Smith also put some energy into launching the concept of the division of labour as the key to prosperity and growth, using the now famous example of a needle factory that increased its productivity by 400 per cent when it abandoned handicraft production in favour of a division of labour. The cornerstones for assembly-line production were now in place.

As already indicated, Adam Smith’s prime interest lay with factors that contributed to growth and prosperity, but if we search for the entrepreneur in Smith’s writings, we search in vain. On the other hand, when we examine his theories, we are left with an inkling that there must be an ‘X factor’, an unnamed ‘ghost’ who organizes and orchestrates the division of labour, specialization and effectivization, and that ‘ghost’ might be identical with the entrepreneur. In this connection, some have inferred that Smith understood the role of the entrepreneur in a dynamic economy. Nevertheless, the fact remains that his belief in automatic, spontaneous forces located above the individual (the ‘invisible hand’) foretold the notion that human beings – the entrepreneur included – played no significant role and were therefore relegated to the background, far from centre stage, where the French school had placed them.²

David Ricardo (1772–1823), even more inspired by the natural sciences, spoke of ‘gravity’ as the law that automatically drew the economy toward its ultimate destiny – a perpetual, static state in which growth was no longer necessary and harmony prevailed. If any change occurred in Ricardo’s economic system, it was due to ‘forces of nature’ in the economy and laws of motion, not the will or actions of a wilful entrepreneur. Human beings played no active role but were presumed merely to react rationally to various economic stimuli. In short, they were reduced to Homo economicus (economic man).

Here, entrepreneurs are not only upstaged and marginalized, they are excluded from the cast. Labour, land and real capital are the focal productive factors, and the ways they combine and interact are the result of the ‘production function’ and more generally the ‘system’ and its irrepressible forces – what we today call ‘market forces’.

Another difference in Ricardo’s work was his methodology. Whereas Smith and previous thinkers worked inductively and empirically in their quest for general principles, Ricardo worked deductively, drawing logical conclusions and constructing models from a set of assumptions, often in mathematical form. Ricardo’s method subsequently became the norm in political economy, which departed even further from the methods of Adam Smith and his predecessors and their more verbal and anecdotal mode of presentation.

Thus, we have two contrasting systems of thought, two different metaphors. One a more Darwinist, evolutionary process where the final outcome is unknown (the French school), versus a more Newtonian, mechanistic process toward a predetermined end (harmony): the one dynamic and voluntary (steered by human will), the other static and deterministic (steered by laws of nature) – an alternative phraseology that inspir...