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5.1 Overview of Entrepreneurship

Learning Objectives

  1. Discuss what is meant by entrepreneurship.
  2. Discuss the relationship between opportunity and entrepreneurship.
  3. Understand the key factors affecting entrepreneurial viability.
  4. Explain the different motivations for entrepreneurs.
  5. Understand what intrapreneurship is and how it relates to entrepreneurship.
  6. Discuss the challenges facing entrepreneurs.

What Is Entrepreneurship?

Entrepreneurship is to a large degree a mind-set, always striving to do new things in an innovative and better way. The meaning of entrepreneurship is derived from the French seventeenth-century term for someone who “undertakes” and more specifically someone who undertakes a specific project or activity. In the nineteenth century, the French economist Jean Baptiste Say refined the meaning of entrepreneurship to individuals who create value by shifting resources from lower- to higher-valued activities. The higher value activities can be activities that bring value to both individuals and society.

It is the twentieth-century thought on entrepreneurship from Joseph Schumpeter, an Austrian born and then Harvard University–based economist and sociologist, which has most influenced contemporary thinking about entrepreneurship. In Schumpeter’s view, entrepreneurs are innovators who drive the “creative destructionA description of the overall lifecycle of business in which technologies, goods, and services are constantly being replaced by new technologies, goods, and services with the result of making the economy stronger and society better off.” process, reforming or revolutionizing the pattern of production. In many respects, sustainable businesses are significantly changing, if not revolutionizing, the patterns of production and service delivery, transforming business practices in ways that benefit the environment and society.

Sidebar

More Than Half Million New Businesses a Month Created in the United States

According to the Kauffman Index of Entrepreneurial Activity,Ewing Marion Kauffman Foundation, “‘Jobless Entrepreneurship’ Tarnishes Steady Rate of U.S. Startup Activity, Kauffman Study Shows,” news release, March 7, 2011, http://www.kauffman.org/newsroom/jobless-entrepreneurship-tarnishes-steady-rate-of-us-startup-activity.aspx. a leading indicator of new business creation in the United States, 3.4 of every 1,000 American adults created a business per month in 2010, or 565,000 new businesses, a rate that remained consistent with 2009 and represents the highest level of entrepreneurship over the past decade and a half.

Another helpful view of entrepreneurship is provided by the twenty-first-century management scholar Peter Drucker. Drucker suggests that entrepreneurs always search for change, respond to it, and exploit it as an opportunity. Entrepreneurs take risks in starting new activities and take on significant personal responsibility. Many sustainability entrepreneurs perceive opportunities emanating from increased public concern about the environment and climate disruption and are responding to this opportunity with profit-making ventures that address these concerns.

Putting these perspectives together, entrepreneurship can be viewed as

  • recognizing change,
  • pursuing opportunity,
  • taking on risk and responsibility,
  • innovating,
  • making better (higher value) use of resources,
  • creating new value that is meaningful to customers,
  • doing it all over again and again.

And entrepreneurship is an attitude and drive to pursue opportunity and create something new and of value.

Entrepreneurial Opportunities

Many different conditions in society can create entrepreneurial opportunitiesOpportunity for new goods and services, which are present as the result of forces—such as changes in knowledge and understanding, the development of a new technology, shifting demographics, a political change, or changing attitudes and norms—that give rise to new preferences and concerns. for new goods and services. Opportunity conditions arise from a variety of sources. At a broad societal level, they are present as the result of forces—such as changes in knowledge and understanding, the development of a new technology, shifting demographics, political change, or changing attitudes and norms—that give rise to new preferences and concerns. These forces constantly open up new opportunities for entrepreneurs.

Related to sustainability concerns, certain demographic shifts and pollution challenges create opportunities. For example, with 50 percent of the world’s population, for the first time in history, now living in urban areas, city air quality improvement present opportunities for entrepreneurs.

Urban Congestion

The entrepreneur must first recognize the opportunity and then innovate by proposing a business solution that provides an attractive alternative to customers. A solution is just the first step in the process, the entrepreneur must also investigate the economic value of and business proposition emanating from that opportunity. They must research the market to understand how their potential product or service provides value to a customer and whether the amount a customer is willing to pay, which reflects the value of the product or service to the customer, exceeds the costs to provide that value, product, or service to the customer. In this way, the entrepreneur is contributing to economic growth and society by providing customers with goods and services whose costs to provide are less than their value to consumers.

An entrepreneur can come up with a new approach that meets a customer’s need or want, but if not enough customers are willing or able to pay a price above the cost of that product or service, it will not be financially viable. Therefore the opportunity becomes a true business opportunity when it is of sufficient scale and value—that is, revenues will cover costs and promise to offer net revenue above operating costs after the initial startup investment expenditures are repaid.

Entrepreneurial Resources

Successful entrepreneurial efforts require the mobilization of a wide array of resources quickly and efficiently. All entrepreneurial ventures have to have resources such as capitalAn input to entrepreneurial activities and that in this context refers to financial resources or assets to support the business activity., talent and know-how (e.g., accounting and finance, operations, management, legal, and regulatory), equipment, and facilities. Breaking down a venture’s required resources offers a picture of the components required and when they are needed. Resource needs change over the growth stages of a venture; at each stage, the entrepreneur should be clear about the priority resources that enable moving to the next stage of venture development.

While management teams must be recruited relatively quickly, typically there are one or two individuals who initially drive the entrepreneurial process through hard work and determination to succeed. As the business grows, the business team becomes the key factor. The entrepreneur’s skills, education, and capabilities must be augmented and complemented by the competencies of other team members.

It is essential to have adequate financial resources when starting any new entrepreneurial activity; this is no different for sustainable business activity. Funding can come from a variety of sources including personal savings, credit lines of entrepreneurs, family members, friends, and other sources. Depending on the type of business, venture capital or other investors may be an option. Typically, a company might acquire investors if there are expectations for high growth in the industry. Clean technologyProducts or services that reduce energy consumption or environmental impact. Examples include renewable energy, green chemistry, and energy efficient transportation. is an industry sector that can potentially attract investors for this reason.

All the previously stated resources in the entrepreneurial process are important, but the single most important factor is the individual entrepreneur—that is, their ability to identify a market opportunity and develop a creative response to that opportunity with market potential, to get a product or service out, to sell to customers, to organize an organizational team, and to garner the confidence of potential investors. Entrepreneurs must have passion, drive, excitement, and unique capabilities to do what they do.

Entrepreneurship is not constrained to starting a private for-profit company. While the definition of entrepreneurship is commonly assumed to be individuals creating new for-profit enterprises and pursuing private benefit, entrepreneurship and entrepreneurial innovation can occur in a variety of settings including small or large companies, nonprofits, and government agencies. And entrepreneurship can be focused on a local, national, or global marketplace. The Simply Green case in this textbook is focused on a sustainability entrepreneur serving a local market. Chapter 13 "Case: Strategic Mission–Driven Sustainable Business: Stonyfield Yogurt" tells the story of Gary Hirshberg, the highly successful Stonyfield Yogurt entrepreneur competing in a global market with a sustainability mission. Entrepreneurship focused on bringing value to society is often referred to as social entrepreneurshipIndividuals who act as an agent of change for the society. They take innovative approaches to existing systems to develop sustainable solutions for the purpose of changing society for the better., while entrepreneurship focused on individual and private enhancement of value is simply called entrepreneurship.

Why Do Entrepreneurs Do It?

The only factor found to be associated consistently with becoming an entrepreneur is that one or both of your parents were entrepreneurs.[citation redacted per publisher request]. This suggests that if the entrepreneurial path is familiar to you, then you are more likely to follow that path yourself.

Beyond having the common trait of having parents who were entrepreneurs, there are many personal reasons why individuals decide to become entrepreneurs. Becoming an entrepreneur can be motivated by personal interests and values, the prospects of financial rewards, or lifestyle preferences. It is also sometimes driven by “necessity” when there is a paucity of other employment or income-earning opportunities.

The motivations for being an entrepreneur include the ability to pursue a passion or interest that is exciting and one feels deeply about. It can include the opportunity to create something new, enhance one’s personal reputation, and make an impact or a difference in customers’ and employees’ lives and in society in general. All of these are motivations for many sustainability entrepreneurs.

The motivation for becoming an entrepreneur can also be driven by a desire to be independent, to be your own boss, to make your own decisions, and to make your own schedule. This moves into the so-called lifestyle motivations for being an entrepreneur—to have a more flexible work schedule that allows time for other activities including more time for family and recreational and creative pursuits.

Intrapreneurship

While entrepreneurship is normally thought of as starting a new business, it applies to applying innovation to existing organizations. Often, this type of entrepreneurial activity is distinguished as intrapreneurship (meaning entrepreneurship from within). IntrapreneurshipApplying entrepreneurship in an existing organization. applies the entrepreneurial mindset characterized by innovation, risk taking, and flexibility to an established firm. The objective is to enhance the ability of an established firm to react to market opportunities in a timely and effective manner much like start-up ventures do. Large established companies like General Electric (GE) often encourage intrapreneurship to foster innovation and accelerate new product development, to take advantage of a new opportunity, or to assess feasibility of a new process or design.

Sidebar

Jack Welch at GE: An Industry Leader as an Intrapreneur

Some of the greatest business leaders of the past century made their early mark in business as intrapreneurs. For example, former General Electric (GE) chairman Jack Welch made a name for himself by building GE’s engineering plastics business as if he were starting his own company.

GE invested about $1.8 billion in 2010 on research and development of clean technologies. This investment helped lead to the development in 2010 of twenty-two new products and solutions such as WattStation, a user-friendly charging station designed to accelerate the adoption of plug-in electric vehicles, and Nucleus, a smart meter technology that helps homeowners manage energy use. The program called “ecomagination” is a competitive force for growth across GE’s businesses. With $85 billion in sales and services since 2005, ecomagination is a business strategy that represents an area of continued strength for the company. GE’s ecomagination report is available at http://www.ecomagination.com/progress.

Entrepreneurial Risk and the Importance of Resilience and Persistence

Being a successful entrepreneur is not easy and there is no guarantee of success. It requires broad competence across a range of functional areas—including finance, accounting, strategy, marketing, management and operations, and strong interpersonal skills. There are also significant risks and significant likelihood of failure. Part of being an entrepreneur is assessing and managing risk.

Also part of being an entrepreneur is being resilient and persistent. As an entrepreneur, there will always be challenges and difficult times and being able to endure through the tough times and being persistent in working to achieve success is critical for entrepreneurs. Remember that even Steve Jobs got removed from his position at Apple before he came back to transform the company with the introduction of innovative new products including the iPod, iPhone, and iPad.

Sidebar

What Is a Business Plan?

A business plan for an entrepreneur, in its simplest definition, will define where the entrepreneur expects the business to be within a certain period of time and how the entrepreneur plans on getting there. It can serve as an effective tool to manage entrepreneurial risk. It should include details about financing, target market and customers, competitors, and organizational development, including staffing. A business plan is for starting a business as blueprints are for building a home—they are essential.

More business start-ups fail before four years than make it to their fifth year according to the US Small Business Administration. The risks and failures can come from internal factors—such as limited access to funding, poor planning and decision making, or the idea just simply being a bad idea for a business. Failure can also be a result of external factors beyond the entrepreneur’s influence, such as weak economic conditions and changing public policies, that can have profound market implications. Also with entrepreneurship—and with ownership, independence, and decision-making authority—comes significant responsibility and the potential for high personal stress and possible burnout.

While this chapter highlights several entrepreneurial success stories, it is important to understand that not all ideas for businesses are good business opportunities. Potential customers have to perceive that the product has value to them (above its cost and better than the products or services provided by competitors) and have the means and desire to purchase it. Furthermore, the pricing options have to cover expenses, and funds have to be available to finance the start-up of the business before revenue from sales cover expenses. These various dimensions must be explored rigorously before a business is launched. While business plans can serve multiple purposes, the first and most important reason for writing a business plan is to test whether an idea is truly an economically promising market opportunity.

Key Takeaways

  • Entrepreneurship is the introduction of a new product or service through the creation of a new company or the innovation of an existing organization.
  • Entrepreneurs search for change, respond to the change, and seize on the change as an opportunity.
  • Entrepreneurship requires hard work, dedication, passion, resilience, and persistence.
  • Entrepreneurship is to a large degree a mind-set, always striving to do new things in an innovative and better way.
  • Entrepreneurs require access to capital, equipment, land, talent, and business know-how.
  • Intrapreneurship refers specifically to entrepreneurial activity that originates from within an existing company.
  • The key elements of entrepreneurial success include recognizing change, identifying market opportunities inherent in that change, and delivering value to customers by addressing customer needs or problems associated with the change.

Exercises

  1. Search online for a recent article discussing an entrepreneurial venture, a start-up company. Describe the venture, the motivation for the start-up, and the background of the entrepreneur.
  2. Reflect on your personal experiences. Have you had personal experience with an entrepreneur or have you thought about starting your business?
  3. Search online for an article about sustainability entrepreneurship in an existing business. Write a paper discussing the activity, the role that innovation and entrepreneurship played in the activity, and the tangible business benefits the company experienced from the new sustainability activity.