BUSINESS SCHOOL Entrepreneurship & Innovation MGMT8608 · Case Study Analysis ... Main Causes of Failure among Start Up Ventures Underestimation of start up time Undercapitalization

© Mazzarol 2012 all rights reserved

Entrepreneurship & Innovation MGMT8608

TOPIC 3: THE ENTREPRENEURIAL PROCESS

BUSINESS SCHOOL

The University of Western Australia © Mazzarol 2012 all rights reserved

Learning Outcomes

Consider the role of creativity in entrepreneurship & innovation.

Understand the entrepreneurial process.

Understand the theory of effectuation.

Understand the factors likely to trigger or serve as a barrier to entrepreneurial activity.

Understand the new venture screening process.

Understand the role of creativity and how rich pictures can be used to stimulate creative thinking.

Understand the application of applied creativity tools to solving complex problems.


Entrepreneurship as a process

Use your intuition because it never lies to you. Surround

yourself with good quality people who are more

experienced than you and learn from them, surrounding

yourself with “equals” is a waste of time. Build a network

of positive people to support you. Think like a millionaire,

don’t be frightened to take risks and invest money, and

believe in yourself.

• - Philippa Kerslake, owner of Pip’s Cooking School


Case Study Analysis

In relation to the Malcolm & Richard

cases: • What might explain the reasons why Richard

launched his business and Malcolm did not?

• What advice could you give to Malcolm to

help him get his business idea off the ground?

• What advice could you give to Richard about

what he should do to ensure the long-term

sustainability and growth of his fledgling

business?

Comparing Malcolm & Richard with

the “APEC Small Business Cases”

• What are the main characteristics of

success in small ventures?

• What lessons could these cases have

for Malcolm and Richard?


The Entrepreneurial Process

Opportunity Recognition

Marshalling of

Resources

Developing Capability


Two Types of Opportunity - Theory

Example:

• Creation of “Starbucks Coffee”.

Decision making context:

• Uncertainty.

Nature of opportunity:

• Opportunities do not exist

independently of the entrepreneur.

• Requires application of

evolutionary realist philosophy

Nature of entrepreneurs:

• May or may not differ from non-

entrepreneurs prior to event.

Example:

• Invention of the iPhone.

Decision making context:

• Risky.

Nature of opportunity:

• Opportunities exist independent of

the entrepreneur.

• Requires application of a “realist”

philosophy.

Nature of entrepreneurs:

• Differ in some important ways

from the non-entrepreneur prior to

the event.

Discovery Opportunity

Source: Alvarez and Barney 2007

Creation Opportunity


Two Types of Opportunity - Process

Leadership:

• Based on charisma.

Decision Making:

• Iterative, inductive, incremental, using biases

& heuristics, focused on affordable loss.

Human Resources Practices:

• General & flexible human capital recruited

from existing social networks.

Strategy:

• Emergent & changing.

Finance:

• “Bootstrapping” plus friends, family & “fools”.

Marketing:

• Marketing mix may fundamentally change as

new opportunities emerge.

Sustained Competitive Advantage:

• Tacit learning in path dependent process may

sustain advantages.

Leadership:

• Based on expertise & experience.

Decision Making:

• Risk-based data collection & decision tools

• Opportunity cost analysis.

Human Resources Practices:

• Specific human capital recruited broadly.

Strategy:

• Relatively complete & unchanging.

Finance:

• Externally sourced e.g. banks & VC funds.

Marketing:

• Marketing mix changes generate new

opportunities.

Sustained Competitive Advantage:

• Speed, secrecy, isolating mechanisms.

Discovery Opportunity

Source: Alvarez and Barney 2007

Creation Opportunity


Opportunity Screening – 3M Analysis M

ark

et What is the customer

need?

What is the product/service?

What is the size, structure, growth rate and demand capacity of the market?

What market share is attainable?

What are the barriers to market entry?

Money What is the investment

requirement?

What are the fixed & variable costs?

What is the gross profit margin?

What is the profit after tax?

What is the time to break-even?

What are the cash flow dynamics?

What are the ROI & IRR capital requirements?

Managem

ent Is there potential for

value adding?

How much control is there over resources?

What is the timing?

What is the room for error?

Is there an exit strategy?

Who will comprise the team?

Is there a suitable fit?


Poor Opportunity Recognition

Lack of objective evaluation

No insight into the market

Inadequate understanding of

the technical requirements

Poor financial understanding

Lack of uniqueness

Ignorance of legal issues


The Entrepreneurial Process

Opportunity Resources

Team

Ambiguity

Uncertainty

Exogenous Forces Fits & Gaps

Capital Market Context

Business Plan

Communication

Creativity Communication

Source: Timmons 1999


The 10 Myths of Entrepreneurship


Who I am…

Individual level

• traits, tastes, abilities

Firm level

• physical resources

Economy level

• demographics

What I know…

Individual level

• knowledge corridors

Firm level

• human resources

Economy level

• technology regimes

Whom I know…

Individual level

• social networks

Firm level

• organization resources

Economy level

• socio-political institutes

The Effectuator’s (Given set of means)

Imag

inati

o

n

Effect Human

aspirations

Effect

Effect

Effect

Effect

Effect

Effect

Co

ntin

gen

cie

s

Affordable

Loss

Acceptable

Risk

Strategic

partnerships

The logic of

control

The Effectuator’s (Contingent aspirations)

Human

aspirations

Human

aspirations

Human

aspirations

Human

aspirations

Theory of Effectuation

Source: Sarasvathy 2001


Thinking Exercise

What are the two main types of

opportunity?

How do they differ?

What is 3M Analysis?

What are the key characteristics of

poor opportunity recognition?

What is the entrepreneurial

process?

What are the 10 myths of

entrepreneurship?


The Stages of Start-Up

Iterative Process

Start Up

Negotiate &

Acquire Resources

Identify Resources

Valid Idea

Raw Idea

Acquire Motivation

Fail Succeed

• in relation to a market need

• at an appropriate scale


A model of enterprise

formation

PERSONAL BACKGROUND:

Age

Gender

Previous employment

Family and ethnic group

Education

ENVIRONMENT:

Industry

Social

Economic

Political

Infrastructure development

INTENTIONALITY

DECISION:

ABANDON (Triggers < Barriers)

DECISION:

FOUND (Triggers > Barriers)

Source: Volery, Mazzarol, Doss & Thein, 1997


Triggers & Barriers to Enterprise

Formation


Barriers to New Venture Creation

Hard Reality Lack of

resources Compliance

Cost

Triggers for New Venture Creation

Creativity Autonomy Money Market

opportunity Invest Status


Differences between Starters & Non-Starters

Starters Non-Starters

Most important trigger

• The desire to create

Most important barrier

• Finding suitable employees

Most important trigger

• To work in a location of choice

Most important barriers

• Risks greater than expected

• No one to help me



Main Causes of Failure among Start Up Ventures

Underestimation of start up time

Undercapitalization

Overestimation of the market size & potential

Lack of expertise by management

Lack of working capital

Confusion of cash flow over profit

Wrong location of the business

No unique selling point

Recruitment of the wrong people to staff it

Failure to monitor the business performance

Failure to retain profits in the business to fund growth


The Role of Creativity

Creativity is important because it:

• Is the foundation for the generation of ideas that lead to improved systems

• Innovation comes directly from creative thinking

However, to be useful in business creativity must:

• Be a goal oriented process

• Revolve around individuals & their approach to problem solving

It is also important to recognise that:

• Everybody has creative thinking potential!


The Creative Thinking Process

Creative Process

incubation

ideas

Evaluation &

implementation

Knowledge accumulation

Source: Kuratko and Hodgetts 2004


Enhancing Your Own Creativity

Engage in regular creative thinking exercises

Try identifying those personal habits and perceptions that may be blocking your creative thinking

Aim to perceive in a relational mode:

• Trolley + Suitcase = suitcase with wheels

• Igloo + Hotel = ice palace

• Copier + Telephone = fax machine

• Bell + Clock = alarm clock

Can you think of other examples?


Creativity Exercise

Relational Perspectives:

• In groups elaborate on how the following pairs complement each other:

– Nut & Bolt

– Husband & Wife

– Athlete & Coach

– Chocolate cake & Ice Cream

Functional Perspectives: • Think and record as many

possible functions for: – A Chair

– A Coat Hanger

– The “Office Gossip”


Components of Creativity

motivation

expertise creative thinking

skills


Encouraging Creativity in Teams

Match people with the right tasks

Give them freedom to develop

their own process

Give them adequate resources

Build diverse, mutually supportive

teams

Make individuals know that their

work is valued

Demonstrate team leader support

through organisational values &

systems

Learn to tolerate & manage

“creative abrasion”


Creativity under time pressure

On an expedition

Creative thinking focuses on:

- Generation of ideas not seeking problems

- Individual collaboration

On a Mission

Creative thinking focuses on:

- One or a few activities

- Concentration of human effort

- Identifying problems & exploring new ideas

On Autopilot

Creative thinking is:

- Not encouraged by management

- Undertaken via group collaboration

On a Treadmill

Creative thinking is:

- Difficult due to lack of focus

- Little concentration of effort

- Fragmented over time

Source: Amabile, Hadley & Kramer, 2002

Likelihood

Of creative

Thinking

Time Pressure

High

High

Low

Low


Fact Finding

Problem Definition

Planning

Acceptance Winning

The SIMPLEX Applied Creativity Process

Generating Implementing

Optimizing Conceptualizing Source: Basadur 2002


Innovative Results System

DIVERGE CONVERGE

IDEATION

NO JUDGMENT

NO LOGIC

Relax

Quantity

Stream of options

Radical options

Think in pictures

Build onto fragments

Options

Points of view

Possibilities

Facts

Opinions

Items

Ideas

Things

Problems

Solutions

Actions

EVALUATE

YES JUDGMENT

YES LOGIC

Clarify meanings

Use relevant criteria

Focus of a few things

Consider risky options

Modify and refine

Move toward action

Source: Basadur 2002


Creative Problem Solving – Rich

Pictures

A technique to stimulate creativity

Able to generate large numbers of ideas without analysis or evaluation

Process: • Teams of 5 to 7 divergent & fluid

thinkers

• Engender a relaxed & playful atmosphere

• Identify a problem & collect facts

• Draw 2 pictures – “Status Quo”

– “Preferred Future”

– No words allowed

• Describe the picture of the present – No judgments or ridicule

• List the key issues arising & write a clear problem statement

• Describe the picture of the future

• List the key ideas arsing & prepare a list of potential solutions


Sir Ken Robinson – Do Schools Kill Creativity?


Group Discussion

Using the Simplex System and

Rich Pictures process:

• Identify the underlying causes

of the problems identified by

Ken Robinson?

• Summarise these into a

problem statement?

• Identify potential solutions to

overcome the problem.


End of Presentation

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BUSINESS SCHOOL Entrepreneurship & Innovation MGMT8608 · Case Study Analysis ... Main Causes of Failure among Start Up Ventures Underestimation of start up time Undercapitalization