The donahey law firm columbus oh

Entrepreneurship For Small Business

Application

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PREFACE ix

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C O N T E N T S I N B R I E F

PART 1 THE ENTREPRENEURIAL PERSPECTIVE 1

1 The Entrepreneurial Mind-Set 2 2 Corporate Entrepreneurship 32 3 Generating and Exploiting New Entries 56

PART 2 FROM IDEA TO THE OPPORTUNITY 83

4 Creativity and the Business Idea 84 5 Identifying and Analyzing Domestic and International

Opportunities 116 6 Protecting the Idea and Other Legal Issues for the

Entrepreneur 154

PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN 179

7 The Business Plan: Creating and Starting the Venture 180 8 The Marketing Plan 210 9 The Organizational Plan 240 10 The Financial Plan 266

PART 4 FROM THE BUSINESS PLAN TO FUNDING THE VENTURE 289

11 Sources of Capital 290 12 Informal Risk Capital, Venture Capital, and

Going Public 312

PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE 355

13 Strategies for Growth and Managing the Implications of Growth 356

14 Accessing Resources for Growth from External Sources 382 15 Succession Planning and Strategies for Harvesting and

Ending the Venture 412

PART 6 CASES 437

x

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C O N T E N T S

PREFACE viii

PART 1 THE ENTREPRENEURIAL PERSPECTIVE 1

1 THE ENTREPRENEURIAL MIND-SET 2 Opening Profile: Ewing Marion Kauffman 3 The Nature of Entrepreneurship 6 How Entrepreneurs Think 7

Think Structurally 7 Bricolage 8 Effectuation 9 Cognitive Adaptability 11

As Seen in Business News: Do Entrepreneurs Benefit from Paranoia? 12

The Intention to Act Entrepreneurially 16 Entrepreneur Background and Characteristics 17

Education 17 Age 17 Work History 18

Role Models and Support Systems 18 Moral-Support Network 19 Professional-Support Network 19

Sustainable Entrepreneurship 20 Ethics: An Organization’s Code of Ethics 21

2 CORPORATE ENTREPRENEURSHIP 32 Opening Profile: Robert Mondavi 33 Causes for Interest in Corporate Entrepreneurship 36 Managerial versus Entrepreneurial Decision Making 37

Strategic Orientation and Commitment to Opportunity 37 Commitment of Resources and Control of Resources 39 Management Structure and Reward Philosophy 39

Ethics: Do Entrepreneurs and Managers Differ in Ethical Conduct? 40

Growth Orientation and Entrepreneurial Culture 41 Establishing a Culture for Corporate Entrepreneurship 41 Leadership Characteristics of Corporate Entrepreneurs 45

Establishing Corporate Entrepreneurship in the Organization 46

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As Seen in Business News: Opportunity or Not? 48 Problems and Successful Efforts 48 Learning from Failure 49

3 GENERATING AND EXPLOITING NEW ENTRIES 56 Opening Profile: Justin Parer 57 New Entry 58 Generation of a New Entry Opportunity 59

Resources as a Source of Competitive Advantage 59 Creating a Resource Bundle that is Valuable, Rare,

and Inimitable 60 Assessing the Attractiveness of a New Entry Opportunity 62 Information on a New Entry 62

As Seen in Business News: Elevator Pitch for Project Alabama 63

Comfort with Making a Decision under Uncertainty 64 Decision to Exploit or Not to Exploit the New Entry 64

Entry Strategy for New Entry Exploitation 65 Environmental Instability and First-Mover (Dis)Advantages 66 Customers’ Uncertainty and First-Mover (Dis)Advantages 68

Ethics: Do the Right Thing 70 Lead Time and First-Mover (Dis)Advantages 70

As Seen in Business News: Provide Advice to an Entrepreneur About Being More Innovative 72

Risk Reduction Strategies for New Entry Exploitation 73 Market Scope Strategies 73 Imitation Strategies 74 Managing Newness 76

PART 2 FROM IDEA TO THE OPPORTUNITY 83

4 CREATIVITY AND THE BUSINESS IDEA 84 Opening Profile: Elon Musk—The Iron Man Entrepreneur 85 Trends 87

Wearable Trend 87 Green Trend 87 Payments 88 Maker Trend 88 Mobile Trend 88 Health Trend 88 The Internet of Things 89

Sources of New Ideas 89 Consumers 89 Existing Products and Services 89 Distribution Channels 89 Federal Government 89

xii CONTENTS

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As Seen in Business News: Does R&D Spending Correlate to Being the Most Innovative? 90

Research and Development 91 Methods of Generating Ideas 91

Focus Groups 91 Brainstorming 91 Brainwriting 92 Problem Inventory Analysis 92

Creative Problem Solving 93 Brainstorming 93 Reverse Brainstorming 94 Gordon Method 94 Checklist Method 94 Free Association 95 Forced Relationships 95 Collective Notebook Method 95 Attribute Listing 96 Big-Dream Approach 96 Parameter Analysis 96

Innovation 97 Types of Innovation 97 Defining a New Innovation (Product or Service) 98 Classification of New Products 99

Opportunity Recognition 101 Product Planning and Development Process 101

Establishing Evaluation Criteria 102 Ethics: Factors that Shape Trust in Business

and Innovation 103 Idea Stage 103 Concept Stage 104 Product Development Stage 106 Test Marketing Stage 107

E-Commerce and Business Start-Up 107 Using E-Commerce Creatively 107 E-Commerce Channels 108 Web Sites 108 Dedicated Mobile-Optimized Web Sites and Apps 109 Mobile-Optimized Web Site 110 Dedicated Mobile Apps 110 Doing E-Commerce as an Entrepreneurial Company 111

5 IDENTIFYING AND ANALYZING DOMESTIC AND INTERNATIONAL OPPORTUNITIES 116 Opening Profile: Richard China 117 Introduction 120 Opportunity Recognition and the Opportunity Assessment Plan 121 Information Sources 122

General Assistance 122

CONTENTS xiii

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General Information Sources 123 Industry and Market Information 123

As Seen in Business News: When Recession Strikes, Go Global 124 Competitive Company and Product/Services

Information 124 Government Sources 125 Search Engines 125 Trade Associations 126 Trade Publications 126

The Nature of International Entrepreneurship 126 The Importance of International Business to the Firm 126 International versus Domestic Business 126

Political 127 Economic 129 Social 131

Ethics: Aligning Corporate Social Responsibility With Company Operations 132

Technological 132 Culture 133

Language 134 Social Structure 135 Religion 135 Political and Economic Philosophy 135 Education 136 Manners and Customs 136 Aesthetics 137

Available Distribution Systems 137 Motivations to Go Global 137 Strategic Effects of Going Global 138 Foreign Market Selection 139 As Seen in Business News: Tesco Exits the U.S. Market 140 Entrepreneurial Entry Strategies 142

Exporting 142 Nonequity Arrangements 144 Direct Foreign Investment 144

Entrepreneurial Partnering 147 Aspects of International Trade 147

General Agreement on Tariffs and Trade (Gatt) 148 Trade Agreements and Free Trade Areas 148 Entrepreneur’s Strategy and Trade Agreements 148

Implications for the Global Entrepreneur 149 Appendix 5A: Example Outline of an International Business Plan 152

6 PROTECTING THE IDEA AND OTHER LEGAL ISSUES FOR THE ENTREPRENEUR 154 Opening Profile: Chet Kanojia 155 What is Intellectual Property? 156 Need for a Lawyer 156 How to Select a Lawyer 157

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Legal Issues in Setting Up the Organization 157 As Seen in Business News: Advice to an Entrepreneur

Regarding the Role of Intellectual Property in Software Start-Ups 158

Patents 159 International Patents 160 The Provisional Application 160 The Patent Application 160 Patent Infringement 161

Business Method Patents 161 Start-Up without a Patent 163 Trademarks 163 As Seen in Business News: Provide Advice to an Entrepreneur

Inventor about how to Make Patents Pay 164 Registering the Trademark 165

Copyrights 165 Trade Secrets and Noncompetition Agreements 166 Ethics: Noncompete Agreements: Do Employees Have an Ethical

Responsibility to Restrain from Revealing Trade Secrets to a New Employer? 167

Licensing 169 Product Safety and Liability 171 Insurance 171 Sarbanes-Oxley Act 173 Contracts 173

PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN 179

7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 180 Opening Profile: Steve Hafner 181 Planning as Part of the Business Operation 182 What is the Business Plan? 183 Who Should Write the Plan? 184 Scope and Value of the Business Plan—Who Reads the Plan? 185 As Seen in Business News: The Elevator Pitch 186 How Do Potential Lenders and Investors Evaluate the Plan? 186 Ethics: Protecting Your Business Idea 188 Presenting the Plan 188 Information Needs 188

Market Information 189 Operations Information Needs 192

Financial Information Needs 193 Using the Internet as a Resource Tool 193 Writing the Business Plan 194

Introductory Page 196 Executive Summary 196

CONTENTS xv

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Environmental and Industry Analysis 197 Description of Venture 199 Production Plan 201 Operations Plan 201 Marketing Plan 202 Organizational Plan 202 Assessment of Risk 203 Financial Plan 203

As Seen in Business News: An Unusual Start-Up: Elevator Pitch for Coffee Pouches 204

Appendix 204 Using and Implementing the Business Plan 204

Measuring Plan Progress 205 Updating the Plan 206

Why Some Business Plans Fail 206

8 THE MARKETING PLAN 210 Opening Profile: Neal Blumenthal 211 Industry Analysis 212

Competitor Analysis 213 Marketing Research for the New Venture 214

Step One: Defining the Purpose or Objectives 214 Step Two: Gathering Data from Secondary Sources 214 Step Three: Gathering Information from Primary Sources 215

As Seen in Business News: Provide Advice to an Entrepreneur on How to Build a Web Site 217

Step Four: Analyzing and Interpreting the Results 220 Difference between a Business Plan and a Marketing Plan 220 Understanding the Marketing Plan 220 Characteristics of a Marketing Plan 221 The Marketing Mix 223 Ethics: Employee’s Right to Privacy 224 Steps in Preparing the Marketing Plan 224

Defining the Business Situation 224 Defining the Target Market: Opportunities and Threats 225 Considering Strengths and Weaknesses 227 Establishing Goals and Objectives 228 Defining Marketing Strategy and Action Programs 228 Marketing Strategy: Consumer versus

Business-to-Business Markets 232 As Seen in Business News: Web-Based Marketing Research:

Advice to an Entrepreneur 233 Budgeting the Marketing Strategy 233 Implementation of the Market Plan 234 Monitoring the Progress of Marketing Actions 234 Appendix 8A: The Social Media Plan 238

xvi CONTENTS

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9 THE ORGANIZATIONAL PLAN 240 Opening Profile: Sara Blakely 241 Developing the Management Team 242 Legal Forms of Business 243

Ownership 243 Liability of Owners 243

As Seen in Business News: Advice to an Entrepreneur: Issues to Consider in Delegating Responsibility 244

Costs of Starting a Business 246 Continuity of Business 246 Transferability of Interest 247 Capital Requirements 247 Management Control 248 Distribution of Profits and Losses 248 Attractiveness for Raising Capital 249

Tax Attributes of Forms of Business 249 Tax Issues for Proprietorship 249 Tax Issues for Partnership 249 Tax Issues for Corporation 251

The Limited Liability Company versus the S Corporation 251 S Corporation 251

Advantages of an S Corporation 252 Disadvantages of an S Corporation 252

Ethics: What Ethical Responsibilities Does a Partner Have when there is a Conflict of Interest? 253

The Limited Liability Company 253 Advantages of an LLC 254

Designing the Organization 254 Building the Management Team and a Successful

Organization Culture 256 The Role of a Board of Directors 257 As Seen in Business News: Elevator Pitch for Unique

Travel Start-Up 258 The Board of Advisors 259 The Organization and Use of Advisors 260

10 THE FINANCIAL PLAN 266 Opening Profile: Tony Hsieh 267 Operating and Capital Budgets 269 Ethics: Ethical Dilemma 270 Forecasting Sales 271 Pro Forma Income Statements 272 Pro Forma Cash Flow 275 As Seen in Business News: What to do When

Cash Runs Out 277

CONTENTS xvii

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Pro Forma Balance Sheet 279 Break-Even Analysis 281 Pro Forma Sources and Applications of Funds 282 Software Packages 283 As Seen in Business News: Elevator Pitch

for Safe Driving Apps 284

PART 4 FROM THE BUSINESS PLAN TO FUNDING THE VENTURE 289

11 SOURCES OF CAPITAL 290 Opening Profile: Matt Flannery and Jessica Jackley 291 An Overview 293

Debt or Equity Financing 293 Internal or External Funds 294

Personal Funds 294 Family and Friends 295 As Seen in Business News: The Real Impact of Business

Incubators 296 Commercial Banks 297

Types of Bank Loans 297 Cash Flow Financing 298 Bank Lending Decisions 299

Role of the SBA in Small-Business Financing 300 Research and Development Limited Partnerships 301

Major Elements 301 Procedure 301 Benefits and Costs 302 Examples 302

Government Grants 303 Procedure 304 Other Government Grants 304

Private Financing 305 Types of Investors 305 Private Offerings 306 Regulation D 306

Bootstrap Financing 307

12 INFORMAL RISK CAPITAL, VENTURE CAPITAL, AND GOING PUBLIC 312 Opening Profile: Richard Branson 313 Financing the Business 316 Private Equity 318 Informal Risk-Capital Market 318 As Seen in Business News: Angellist—The Future of

Investing? 320

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Crowdfunding 323 Venture Capital 324

Nature of Venture Capital 324 Overview of the Venture-Capital Industry 324

As Seen in Business News: Entrepreneurs’ Preferences in Venture Capital 325

Venture-Capital Process 329 Locating Venture Capitalists 333 Approaching A Venture Capitalist 334

Valuing Your Company 335 Factors in Valuation 336 Ratio Analysis 337 Liquidity Ratios 337 Activity Ratios 337 Leverage Ratios 338 Profitability Ratios 338 General Valuation Approaches 339 General Valuation Method 340 Valuation Turned Upside Down—Evaluating an Internet

Company 341 Deal Structure 342 Going Public 343

Advantages 343 Disadvantages 344

Timing of Going Public and Underwriter Selection 346 Timing 346 The Registration Statement 347 Procedure 347

Legal Issues and Blue-Sky Qualifications 348 Legal Issues 348 Blue-Sky Qualifications 348

After Going Public 348 Aftermarket Support 349 Relationship with the Financial Community 349 Reporting Requirements 349

PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE 355

13 STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROWTH 356 Opening Profile: Brian and Jennifer Maxwell 357 Growth Strategies: Where to Look for Growth Opportunities 358

Penetration Strategies 359 Market Development Strategies 360 Product Development Strategies 360 Diversification Strategies 361

CONTENTS xix

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As Seen in Business News: To Grow or Not to Grow is the Question 362

Example of Growth Strategies 363 Implications of Growth for the Firm 363

Pressures on Human Resources 363 Pressures on the Management of Employees 364 Pressures on the Entrepreneur’s Time 364 Pressures on Existing Financial Resources 364

Overcoming Pressures on Existing Human Resources 364 Ethics: Lessons from Enron 365 Overcoming Pressures on the Management of Employees 366 Overcoming Pressures on Entrepreneurs’ Time 367

Basic Principles of Time Management 368 Overcoming Pressures on Existing Financial Resources 369

Financial Control 369 Implications of Firm Growth for the Entrepreneur 373

A Categorization of Entrepreneurs and Their Firms’ Growth 374

14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 382 Opening Profile: Bill Gross 383 Using External Parties to Help Grow a Business 384 Joint Ventures 385

Types of Joint Ventures 385 Factors in Joint Venture Success 386

Acquisitions 387 Advantages of an Acquisition 388 Disadvantages of an Acquisition 388 Synergy 389 Structuring the Deal 389

As Seen in Business News: Provide Advice to an Entrepreneur about Entering into Agreements 390

Locating Acquisition Candidates 390 Mergers 392 Leveraged Buyouts 393 Franchising 394

Advantages of Franchising—to the Franchisee 394 Advantages of Franchising—to the Franchisor 396 Disadvantages of Franchising 397 Types of Franchises 398

Investing in a Franchise 398 Ethics: Fair Enough 400 Overcoming Constraints by Negotiating for More Resources 402

15 SUCCESSION PLANNING AND STRATEGIES FOR HARVESTING AND ENDING THE VENTURE 412 Opening Profile: Maggie Magerko 413 As Seen in Business News: When Should I Sell My Business? 415

xx CONTENTS

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Exit Strategy 415 Succession of Business 416

Transfer to Family Members 416 Transfer to Nonfamily Members 417

Options for Selling the Business 418 Direct Sale 418 Employee Stock Option Plan 420 Management Buyout 420

Ethics: Involving Employees, Bankers, and Business Associates in the Problem 421

Bankruptcy—An Overview 421 Chapter 11—Reorganization 423 Surviving Bankruptcy 424 As Seen in Business News: Elevator Pitch for a Portable Router

that Provides Web Access Anywhere 425 Chapter 13—Extended Time Payment Plans 425 Chapter 7—Liquidation 426 Strategy During Reorganization 426 Keeping The Venture Going 427 Warning Signs of Bankruptcy 429 Starting Over 429 The Reality of Failure 430 Business Turnarounds 430

PART 6 CASES 437

Case 1 Turner Test Prep Co. 439 Case 2 Jim Boothe, Inventor 441 Case 3 A. Monroe Lock and Security Systems 442 Case 4 Beijing Sammies 444 Case 5 Intelligent Leisure Solutions 458 Case 6 The Beach Carrier 473 Case 7 Gourmet To Go 476 Case 8A Intervela D.O.O. Koper—Victory Sailmakers,

Part A 483 Case 8B Intervela Victory Sailmakers, Part B 490 Case 9 The Gril-Kleen Corporation 493 Case 10 Masi Technology 499 Case 11 Neomed Technologies 507 Case 12 Mayu LLC 522 Case 13 Nature Bros. Ltd. 529 Case 14 Amy’s Bread 536 Case 15 Supply Dynamics 542 Case 16 Datavantage Corporation 547 Case 17 Tire Valet: A Mobile Tire Company 557

INDEX 562

CONTENTS xxi

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1 THE ENTREPRENEURIAL

PERSPECTIVE

C H A P T E R 1

The Entrepreneurial Mind-Set

C H A P T E R 2

Corporate Entrepreneurship

C H A P T E R 3

Generating and Exploiting New Entries

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1 To introduce the concept of entrepreneurship and explain the process of

entrepreneurial action.

2 To describe how structural similarities enable entrepreneurs to make creative

mental leaps.

3 To highlight bricolage as a source of entrepreneurs’ resourcefulness.

4 To introduce effectuation as a way expert entrepreneurs sometimes think.

5 To develop the notion that entrepreneurs cognitively adapt.

6 To introduce sustainable entrepreneurship as a means of sustaining the natural

environment and communities and developing gains for others.

1 THE ENTREPRENEURIAL MIND-SET

L E A R N I N G O B J E C T I V E S

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O P E N I N G P R O F I L E

EWING MARION KAUFFMAN

Born on a farm in Garden City, Missouri, Ewing Marion Kauffman moved to Kansas

City with his family when he was eight years old. A critical event in his life occurred

several years later when Kauffman was diagnosed with a leakage of the heart. His

prescription was one year of complete bed rest; he was not even allowed to sit up.

Kauffman’s mother, a college graduate, came up with

a solution to keep the active 11-year-old boy lying in

bed—reading. According to Kauffman, he “sure

read! Because nothing else would do, I read as many

as 40 to 50 books every month. When you read that much, you read anything. So I

read the biographies of all the presidents, the frontiersmen, and I read the Bible twice

and that’s pretty rough reading.”

Another important early childhood experience centered on door-to-door sales.

Since his family did not have a lot of money, Kauffman sold 36 dozen eggs collected

from the farm or fish he and his father had caught, cleaned, and dressed. His mother

was very encouraging during these formative school years, telling young Ewing each

day, “There may be some who have more money in their pockets, but Ewing, there is

nobody better than you.”

During his youth, Kauffman worked as a laundry delivery person and was a Boy

Scout. In addition to passing all the requirements to become an Eagle Scout and a Sea

Scout, he sold twice as many tickets to the Boy Scout Roundup as anyone else in Kansas

City, an accomplishment that enabled him to attend, for free, a two-week scout sum-

mer camp that his parents would not otherwise have been able to afford. According to

Kauffman, “This experience gave me some of the sales techniques which came into

play when subsequently I went into the pharmaceutical business.”

Kauffman went to junior college from 8 to 12 in the morning and then walked two

miles to the laundry where he worked until 7 p.m. Upon graduation, he went to work

at the laundry full time for Mr. R. A. Long, who eventually became one of his role mod-

els. His job as route foreman involved managing 18 to 20 route drivers, where he

would set up sales contests, such as challenging the other drivers to get more custom-

ers on a particular route than he could obtain. Kauffman says, “I got practice in selling

and that proved to be beneficial later in life.” R. A. Long made money not only at the

www.kauffman.org

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www.kauffman.org
laundry business but also on patents, one of which was a form fit for the collar of a

shirt that would hold the shape of the shirt. He showed his young protégé that one

could make money with brains as well as brawn. Kauffman commented, “He was quite

a man and had quite an influence on my life.”

Kauffman’s sales ability was also useful during his stint in the Navy, which he joined

shortly after Pearl Harbor on January 11, 1942. When designated as an apprentice sea-

man, a position that paid $21 per month, he responded, “I’m better than an appren-

tice seaman, because I have been a Sea Scout. I’ve sailed ships and I’ve ridden in whale

boats.” His selling ability convinced the Navy that he should instead start as a seaman

first class, with a $54 monthly salary. Kauffman was assigned to the admiral’s staff,

where he became an outstanding signalman (a seaman who transmitted messages

from ship to ship), in part because he was able to read messages better than anyone

else due to his previous intensive reading. With his admiral’s encouragement,

Kauffman took a correspondence navigator’s course and was given a deck commission

and made a navigation officer.

After the war was over in 1947, Ewing Kauffman began his career as a pharmaceu-

tical salesperson after performing better on an aptitude test than 50 other applicants.

The job involved selling supplies of vitamin and liver shots to doctors. Working on

straight commission, without expenses or benefits, he was earning pay higher than the

president’s salary by the end of the second year; the president promptly cut the com-

mission. Eventually, when Kauffman was made Midwest sales manager, he made

3 percent of everything his salespeople sold and continued to make more money than

the president. When his territory was cut, he eventually quit and in 1950 started his

own company—Marion Laboratories. (Marion is his middle name.)

When reflecting on founding the new company, Ewing Kauffman commented, “It

was easier than it sounds because I had doctors whom I had been selling office sup-

plies to for several years. Before I made the break, I went to three of them and said,

‘I’m thinking of starting my own company. May I count on you to give me your orders

if I can give you the same quality and service?’ These three were my biggest accounts

and each one of them agreed because they liked me and were happy to do business

with me.”

Marion Laboratories started by marketing injectable products that were manufac-

tured by another company under Marion’s label. The company expanded to other

accounts and other products and then developed its first prescription item, Vicam, a

vitamin product. The second pharmaceutical product it developed, oyster shell calcium,

also sold well.

To expand the company, Kauffman borrowed $5,000 from the Commerce Trust

Company. He repaid the loan, and the company continued to grow. After several years,

outside investors could buy $1,000 worth of common stock if they loaned the company

$1,000 to be paid back in five years at $1,250, without any intermittent interest. This

initial $1,000 investment, if held until 1993, would have been worth $21 million.

Marion Laboratories continued to grow and reached over $1 billion per year in sales,

due primarily to the relationship between Ewing Kauffman and the people in the

4 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

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company, who were called associates, not employees. “They are all stockholders, they

build this company, and they mean so much to us,” said Kauffman. The concept of asso-

ciates was also a part of the two basic philosophies of the company: Those who produce

should share in the results or profits and treat others as you would like to be treated.

The company went public through Smith Barney on August 16, 1965, at $21 per

share. The stock jumped to $28 per share immediately and has never dropped below

that level, sometimes selling at a 50 to 60 price/earnings multiple. The associates of the

company were offered a profit-sharing plan, where each could own stock in the com-

pany. In 1968, Kauffman brought Major League Baseball back to Kansas City by pur-

chasing the Kansas City Royals. This boosted the city’s economic base, community

profile, and civic pride. When Marion Laboratories merged with Merrill Dow in 1989,

there were 3,400 associates, 300 of whom became millionaires as a result of the

merger. The new company, Marion Merrill Dow, Inc., grew to 9,000 associates and sales

of $4 billion in 1998 when it was acquired by Hoechst, a European pharmaceutical

company. Hoechst Marion Roussel became a world leader in pharmaceutical-based

health care involved in the discovery, development, manufacture, and sale of pharma-

ceutical products. In late 1999, the company was again merged with Aventis Pharma, a

global pharmaceutical company focusing on human medicines (prescription pharma-

ceuticals and vaccines) and animal health. In 2002, Aventis’s sales reached $16.634 bil-

lion, an increase of 11.6 percent from 2001, while earnings per share grew 27 percent

from the previous year.

Ewing Marion Kauffman was an entrepreneur, a Major League Baseball team

owner, and a philanthropist who believed his success was a direct result of one funda-

mental philosophy: Treat others as you would like to be treated. “It is the happiest

principle by which to live and the most intelligent principle by which to do business

and make money,” he said.

Ewing Marion Kauffman’s philosophies of associates, rewarding those who pro-

duce, and allowing decision making throughout the organization are the fundamental

concepts underlying what is now called corporate entrepreneurship in a company. He

went even further and illustrated his belief in entrepreneurship and the spirit of giving

back when he established the Kauffman Foundation, which supports programs in two

areas: youth development and entrepreneurship. Truly a remarkable entrepreneur,

Mr. K, as he was affectionately called by his employees, will now produce many more

successful “associate entrepreneurs.”

Like Ewing Marion Kauffman, many other entrepreneurs and future entrepreneurs

frequently ask themselves, “Am I really an entrepreneur? Do I have what it takes to be

a success? Do I have sufficient background and experience to start and manage a new

venture?” As enticing as the thought of starting and owning a business may be, the

problems and pitfalls inherent to the process are as legendary as the success stories.

The fact remains that more new business ventures fail than succeed. To be one of the

few successful entrepreneurs requires more than just hard work and luck. It requires

the ability to think in an environment of high uncertainty, be flexible, and learn from

one’s failures.

CHAPTER 1 THE ENTREPRENEURIAL MIND-SET 5

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THE NATURE OF ENTREPRENEURSHIP Entrepreneurship plays an important role in the creation and growth of businesses, as well as in the growth and prosperity of regions and nations. These large-scale outcomes can have quite humble beginnings; entrepreneurial actions begin at the nexus of a lucrative opportunity and an enterprising individual.1 Entrepreneurial opportunities are “those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production.”2 For example, an entrepreneurial opportunity could stem from introducing an existing technological product used in one market to create a new market. Alternatively, an entrepreneurial opportunity could be creating a new technological product for an existing market or creating both a new product/service and a new market. The recurring theme is that an entrepreneurial opportunity represents something new. However, such possibilities require an enterprising individual or a group of enterprising individuals to recognize, evaluate, and exploit these situations as possible opportunities. Therefore, entrepreneurship requires action— entrepreneurial action through the creation of new products/processes and/or the entry into new markets, which may occur through a newly created organization or within an established organization.

Entrepreneurs act on what they believe is an opportunity. Because opportunities exist in (or create and/or generate) high uncertainty, entrepreneurs must use their judgment about whether or not to act. However, doubt can undermine entrepreneurial action. Therefore, a key to understanding entrepreneurial action is being able to assess the amount of uncertainty perceived to surround a potential opportunity and the individ- ual’s willingness to bear that uncertainty. The individual’s prior knowledge can decrease the amount of uncertainty, and his or her motivation indicates a willingness to bear uncertainty.

As illustrated in Figure 1.1, the McMullen-Shepherd model explains how knowledge and motivation influence two stages of entrepreneurial action. Signals of changes in the environment that represent possible opportunities will be noticed by some individuals but not others. Individuals with knowledge of markets and/or technology are more capable of detecting changes in the external environment, and if they are also moti- vated, they will allocate further attention to processing this information. Others, how- ever, will remain ignorant of the possibility. The result of Stage 1 is an individual’s realization that an opportunity exists for someone. The individual then needs to determine whether it represents an opportunity for him or her (Stage 2). This involves assessing whether it is feasible to successfully exploit the opportunity given one’s knowledge and whether it is desirable given one’s motivation. In other words, does this opportunity for someone (third-person opportunity belief) represent an opportunity for me (first-person opportunity belief)? If the individual overcomes enough doubt to form (1) the belief that the situation represents an opportunity for someone in general, and then (2) the belief that the opportunity for someone is an opportunity for himself or herself personally, this individual may act.

Therefore, to be an entrepreneur is to act on the possibility that one has identified an opportunity worth pursuing.3 It involves entrepreneurial thinking—individuals’ mental processes of overcoming ignorance to decide whether a signal represents an opportu- nity for someone and/or reducing doubt as to whether an opportunity for someone is also an opportunity for them specifically, and/or processing feedback from action steps taken. To explain these processes more fully, we now turn to different forms of entrepre- neurial thinking.

entrepreneurial opportunities Those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production

entrepreneurial action Action through the creation of new products/ processes and/or the entry into new markets, which may occur through a newly created organization or within an established organization

entrepreneurial thinking Individuals’ mental processes of overcoming ignorance to decide whether a signal represents an opportunity for someone and/or reducing doubt as to whether an opportunity for someone is also an opportunity for them specifically, and/or processing feedback from action steps taken

6 PART 1 THE ENTREPRENEURIAL PERSPECTIVE

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HOW ENTREPRENEURS THINK Entrepreneurs think differently from nonentrepreneurs. Moreover, an entrepreneur in a particular situation may think differently from when faced with some other task or decision environment. Entrepreneurs must often make decisions in highly uncertain environments where the stakes are high, time pressures are immense, and there is considerable emotional investment. We all think differently in these strained environments than we do when the nature of a problem is well understood and we have time and rational procedures at hand to solve it. Given the nature of an entrepreneur’s decision-making environment, he or she must some- times (1) think structurally, (2) engage in bricolage, (3) effectuate, and (4) cognitively adapt.

Think Structurally Forming opportunity beliefs often requires creative mental leaps. These creative mental leaps are launched from a source—one’s existing knowledge. In the case of entrepreneurial opportunities, an example of a creative mental leap is from knowledge about existing mar- kets to a new technology that could lead to products/services that satisfy that market. Alter- natively, the creative mental leap could be from knowledge about a technology to a new market that could benefit from its introduction. Making these connections between a new product (or new service, new business model, or new technology) and a target market where it can be introduced is aided by the superficial and structural similarities between the source (e.g., the market) and the destination (e.g., technology). Superficial similarities exist when the basic (relatively easy to observe) elements of the technology resemble (match) the basic (relatively easy to observe) elements of the market. In contrast, structural similarities exist when the underlying mechanisms of the technology resemble (or match) the underlying mechanisms of the market. The entrepreneurial challenge often lies in mak- ing creative mental leaps based on structural similarities. This is best illustrated with an example based on a real case that Denis Gregoire from Syracuse University and me (Dean Shepherd from Indiana University) used as part of a study of entrepreneurial thinking.4

FIGURE 1.1 Entrepreneurial Action

Reprinted with permission from McMullen, J., and Shepherd, D. A. (2006). Entrepreneurial Action and the Role of Uncertainty in the Theory of the Entrepreneur. Academy of Management Review. 31: 132–142.

Attention stage: radical uncertainty (ignorances)

Evaluation stage: action-specific uncertainty

Entrepreneurial action:

first-person opportunity

Knowledge: feasibility

assessment

Motivation: desirability assessment

Third- person

opportunity

Knowledge: prior

knowledge

Motivation: personal strategy

superficial similarities Exist when the basic (relatively easy to observe) elements of the technology resemble (match) the basic (relatively easy to observe) elements of the market structural similarities Exist when the underlying mechanisms of the technology resemble (or match) the underlying mechanisms of the market

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The example is a technology developed by space and computer engineers at NASA’s Langley Research Center. It involves big and bulky flight simulators used by space shuttle pilots. As such, the technology’s superficial elements are very similar to a market for airline pilots training in flight simulators. In contrast, it has little superficial similarity with a target market of K–12 school children and their parents. The technology underlying the superficial situations includes attaching sensors to individuals’ forefingers to monitor the electric con- ductivity of their skin to send signals to computer processors in another machine with which the individual interacts. Ultimately, these one-to-one relationships (skin to sensor and sensor to computer) culminate into a network of higher-order relationships that reflect the overall capabilities of the technology, its aims, and/or its uses. Therefore, the technology is capable of helping shuttle pilots (or airline pilots or teenage drivers) improve their abilities to focus, pay attention, and concentrate for an extended period. Looked at in a new light, however, the technology shares high levels of structural similarities with the target market of parents who seek nonpharmaceutical alternatives to treat attention deficit (ADHD). This opportunity to apply the technology to the market of parents seeking nonpharmaceutical alternatives to treat ADHD was not obvious to individuals who were distracted from the deeper structural similarities by the superficial mismatch between the technology and the new market.

Thus, individuals who can see or create structural matches between a technology and a target market, especially in the presence of superficial mismatches, are more likely to rec- ognize entrepreneurial opportunities. Knowledge specific to a technology and/or a market can facilitate this ability,5 and the good news is that this skill can also be enhanced through practice and training.

Bricolage Entrepreneurs often lack resources. As a result, they either seek resources from others to provide the “slack” necessary to experiment and generate entrepreneurial opportunities or they engage in bricolage. By bricolage we mean that some entrepreneurs make “do by applying combinations of the resources at hand to new problems and opportunities.”6 This involves taking existing resources (those at hand) and experimenting, tinkering, repackag- ing, and/or reframing them so they can be used in a way for which they were not originally designed or conceived.7 From this process of “making do,” entrepreneurs can create oppor- tunities. Baker and Nelson (2005: 341–42) offer the following example of bricolage.

Tim Grayson was a farmer whose land was crisscrossed by abandoned coal mines. He knew that the tunnels—a nuisance to farmers because of their tendency to collapse, caus- ing mammoth sinkholes in fields—also contained large quantities of methane. Methane is another nuisance, a toxic greenhouse gas that poisons miners and persists in abandoned mines for generations. Grayson and a partner drilled a hole from Grayson’s property to an abandoned mine shaft, then acquired a used diesel generator from a local factory and crudely retrofitted it to burn methane. During the conversion process, Grayson was repeat- edly blown off his feet when the odorless, colorless gas exploded. His bricolage produced electricity, most of which he sold to the local utility company using scavenged switchgear. Because Grayson’s generator also produced considerable waste heat, he built a greenhouse for hydroponic tomatoes, which he heated with water from the generator’s cooling system. He also used electricity generated during off-peak hours to power special lamps to speed plant growth. With the availability of a greenhouse full of trenches of nutrient-rich water that were heated “for free,” Grayson realized he might be able to raise tilapia, a tropical delicacy increasingly popular in the United States. He introduced the fish to the waters that bathed the tomato roots and used the fish waste as fertilizer. Finally, with abundant meth- ane still at hand, Grayson began selling excess methane to a natural gas company. As you

bricolage Entrepreneurs making do by applying combinations of the resources at hand to new problems and opportunities

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can see from this example, bricolage is a resourceful way of thinking and behaving that represents an important source of entrepreneurial opportunities.

Effectuation As potential business leaders, you are trained to think rationally and perhaps admonished if you do not. This admonishment might be appropriate given the nature of the task, but it appears that there is an alternate way of thinking that entrepreneurs sometimes use, espe- cially when thinking about opportunities. Professor Saras Sarasvathy (from Darden, Uni- versity of Virginia) has found that entrepreneurs do not always think through a problem in a way that starts with a desired outcome and focuses on the means to generate that out- come. Such a process is referred to as a causal process. But, entrepreneurs sometimes use an effectuation process, which means they take what they have (who they are, what they know, and whom they know) and select among possible outcomes. Professor Sarasvathy is a great cook, so it is not surprising that her examples of these thought processes revolve around cooking.

Imagine a chef assigned the task of cooking dinner. There are two ways the task can be organ- ized. In the first, the host or client picks out a menu in advance. All the chef needs to do is list the ingredients needed, shop for them, and then actually cook the meal. This is a process of causation. It begins with a given menu and focuses on selecting between effective ways to prepare the meal.

In the second case, the host asks the chef to look through the cupboards in the kitchen for possible ingredients and utensils and then cook a meal. Here, the chef has to imagine possible menus based on the given ingredients and utensils, select the menu, and then prepare the meal. This is a process of effectuation. It begins with given ingredients and utensils and focuses on preparing one of many possible desirable meals with them.8

Sarasvathy’s Thought Experiment #1: Curry in a Hurry

In this example I [Sarasvathy] trace the process for building an imaginary Indian restaurant, “Curry in a Hurry.” Two cases, one using causation and the other effectuation, are examined. For the purposes of this illustration, the example chosen is a typical causation process that underlies many economic theories today—theories in which it is argued that artifacts such as firms are inevitable outcomes, given the preference orderings of economic actors and certain simple assumptions of rationality (implying causal reasoning) in their choice behavior. The causation process used in the example here is typified by and embodied in the procedures stated by Philip Kotler in his Marketing Management (1991: 63, 263), a book that in its many editions is considered a classic and is widely used as a textbook in MBA programs around the world.

Kotler defines a market as follows: “A market consists of all the potential customers sharing a particular need or want who might be willing and able to engage in exchange to satisfy that need or want” (1991: 63). Given a product or a service, Kotler suggests the following proce- dure for bringing the product/service to market (note that Kotler assumes the market exists):

1. Analyze long-run opportunities in the market.

2. Research and select target markets.

3. Identify segmentation variables and segment the market.

4. Develop profiles of resulting segments.

5. Evaluate the attractiveness of each segment.

6. Select the target segment(s).

7. Identify possible positioning concepts for each target segment.

8. Select, develop, and communicate the chosen positioning concept.

9. Design marketing strategies.

causal process A process that starts with a desired outcome and focuses on the means to generate that outcome effectuation process A process that starts with what one has (who they are, what they know, and whom they know) and selects among possible outcomes

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10. Plan marketing programs.

11. Organize, implement, and control marketing effort.

This process is commonly known in marketing as the STP—segmentation, targeting, and positioning—process.

Curry in a Hurry is a restaurant with a new twist—say, an Indian restaurant with a fast food section. The current paradigm using causation processes indicates that, to implement this idea, the entrepreneur should start with a universe of all potential customers. Let us imagine that she wants to build her restaurant in Pittsburgh, Pennsylvania, which will then become the initial universe or market for Curry in a Hurry. Assuming that the percentage of the population of Pittsburgh that totally abhors Indian food is negligible, the entrepreneur can start the STP process.

Several relevant segmentation variables, such as demographics, residential neighborhoods, ethnic origin, marital status, income level, and patterns of eating out, could be used. On the basis of these, the entrepreneur could send out questionnaires to selected neighborhoods and organize focus groups at, say, the two major universities in Pittsburgh. Analyzing responses to the questionnaires and focus groups, she could arrive at a target segment—for example, wealthy families, both Indian and others, who eat out at least twice a week. That would help her determine her menu choices, decor, hours, and other operational details. She could then design marketing and sales campaigns to induce her target segment to try her restaurant. She could also visit other Indian and fast food restaurants and find some method of surveying them and then develop plausible demand forecasts for her planned restaurant.

In any case, the process would involve considerable amounts of time and analytical effort. It would also require resources both for research and, thereafter, for implementing the market- ing strategies. In summary, the current paradigm suggests that we proceed inward to specifics from a larger, general universe—that is, to an optimal target segment from a predetermined market. In terms of Curry in a Hurry, this could mean something like a progression from the entire city of Pittsburgh to Fox Chapel (an affluent residential neighborhood) to the Joneses (specific customer profile of a wealthy family), as it were.

Instead, if our imaginary entrepreneur were to use processes of effectuation to build her restaurant, she would have to proceed in the opposite direction (note that effectuation is suggested here as a viable and descriptively valid alternative to the STP process—not as a normatively superior one). For example, instead of starting with the assumption of an existing market and investing money and other resources to design the best possible restaurant for the given market, she would begin by examining the particular set of means or causes available to her. Assuming she has extremely limited monetary resources—say $20,000—she should think creatively to bring the idea to market with as close to zero resources as possible. She could do this by convincing an established restaurateur to become a strategic partner or by doing just enough market research to convince a financier to invest the money needed to start the restau- rant. Another method of effectuation would be to convince a local Indian restaurant or a local fast food restaurant to allow her to put up a counter where she would actually sell a selection of Indian fast food. Selecting a menu and honing other such details would be seat-of-the-pants and tentative, perhaps a process of satisficing.9

Several other courses of effectuation can be imagined. Perhaps the course the entrepreneur actually pursues is to contact one or two of her friends or relatives who work downtown and bring them and their office colleagues some of her food to taste. If the people in the office like her food, she might get a lunch delivery service going. Over time, she might develop enough of a customer base to start a restaurant or else, after a few weeks of trying to build the lunch business, she might discover that the people who said they enjoyed her food did not really enjoy it so much as they did her quirky personality and conversation, particularly her rather unusual life perceptions. Our imaginary entrepreneur might now decide to give up the lunch business and start writing a book, going on the lecture circuit and eventually building a busi- ness in the motivational consulting industry!

Given the exact same starting point—but with a different set of contingencies—the entre- preneur might end up building one of a variety of businesses. To take a quick tour of some possibilities, consider the following: Whoever first buys the food from our imaginary Curry in

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a Hurry entrepreneur becomes, by definition, the first target customer. By continually listening to the customer and building an ever-increasing network of customers and strategic partners, the entrepreneur can then identify a workable segment profile. For example, if the first cus- tomers who actually buy the food and come back for more are working women of varied eth- nic origin, this becomes her target segment. Depending on what the first customer really wants, she can start defining her market. If the customer is really interested in the food, the entrepreneur can start targeting all working women in the geographic location, or she can think in terms of locating more outlets in areas with working women of similar profiles—a “Women in a Hurry” franchise?

Or, if the customer is interested primarily in the idea of ethnic or exotic entertainment, rather than merely in food, the entrepreneur might develop other products, such as catering services, party planning, and so on—“Curry Favors”? Perhaps, if the customers buy food from her because they actually enjoy learning about new cultures, she might offer lectures and classes, maybe beginning with Indian cooking and moving on to cultural aspects, including concerts and ancient history and philosophy, and the profound idea that food is a vehicle of cultural exploration—“School of Curry”? Or maybe what really interests them is theme tours and other travel options to India and the Far East—“Curryland Travels”?

In a nutshell, in using effectuation processes to build her firm, the entrepreneur can build several different types of firms in completely disparate industries. This means that the original idea (or set of causes) does not imply any one single strategic universe for the firm (or effect). Instead, the process of effectuation allows the entrepreneur to create one or more several possible effects irrespective of the generalized end goal with which she started. The process not only enables the realization of several possible effects (although generally one or only a few are actu- ally realized in the implementation) but it also allows a decision maker to change his or her goals and even to shape and construct them over time, making use of contingencies as they arise.10

Our use of direct quotes from Sarasvathy on effectuation is not to make the case that it is superior to thought processes that involve causation; rather, it represents a way that entrepre- neurs sometimes think. Effectuation helps entrepreneurs think in an environment of high uncertainty. Indeed organizations today operate in complex and dynamic environments that are increasingly characterized by rapid, substantial, and discontinuous change.11 Given the nature of this type of environment, most managers of firms need to take on an entrepreneurial mind-set so that their firms can successfully adapt to environmental changes.12 This entrepre- neurial mind-set involves the ability to rapidly sense, act, and mobilize, even under uncertain conditions.13 In developing an entrepreneurial mind-set, individuals must attempt to make sense of opportunities in the context of changing goals, constantly questioning the “dominant logic” in the context of a changing environment and revisiting “deceptively simple questions” about what is thought to be true about markets and the firm. For example, effective entrepre- neurs are thought to continuously “rethink current strategic actions, organization structure, communications systems, corporate culture, asset deployment, investment strategies, in short every aspect of a firm’s operation and long-term health.”14

To be good at these tasks, individuals must develop a cognitive adaptability. Mike Haynie, a retired major of the U.S. Air Force and now professor at Syracuse University, and me (Dean Shepherd from Indiana University) have developed a number of models of cognitive adaptability and a survey for capturing it, to which we now turn.15

Cognitive Adaptability Cognitive adaptability describes the extent to which entrepreneurs are dynamic, flexible, self-regulating, and engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environments and then acting on them. Decision frameworks are organized on knowledge about people and situations that are used to help someone make sense of what is going on.16 Cognitive adaptability is

entrepreneurial mind-set Involves the ability to rapidly sense, act, and mobilize, even under uncertain conditions

cognitive adaptability Describes the extent to which entrepreneurs are dynamic, flexible, self- regulating, and engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environments and then acting on them

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Some believe that paranoia is a psychological condi- tion that causes dysfunction. But, at least in terms of business, Andrew Grove, president and CEO of Intel Corp., believes that “Only the Paranoid Survive.” By placing yourself in a state of paranoia, you become highly concerned about, and sensitive to, threats to your company and you are motivated to take action to alleviate or eliminate those threats.

PRINCIPLES OF ACTING PARANOIA Underlying paranoia is a recognition that others want to achieve success and are willing to take it away from you. They are watching your business and how you respond to changes in the competitive environment. Therefore, Andrew Grove worries about product defects, releasing products too early, factories not per- forming efficiently, having too much (or too little) capacity, and so on. The principles of paranoia are the following:

1. Paranoia Means Not Resting on Your Laurels. This simply means that even given your past successes there are still threats out there; you must be vigi- lant to notice and then respond to these threats. Andrew Grove calls this a guardian attitude—the attitude that is required to protect the firm from potential competitor moves or other environmen- tal threats.

2. Paranoia Means Being Detail Orientated. This means attending to even the smallest details because this is a major line of defense against threats. This means attending both to the details internal to running the business and to those external including catering to the demands of your customers.

Paranoia is particularly important when the business environment is characterized in terms of high levels of competition and high number of opportunities.

THE DOWNSIDE OF PARANOIA There may be such thing as too much paranoia—too much time and effort invested in noticing and re- sponding to threats. One entrepreneur uses the exam- ples of using $500 worth of accounting time to find a $5 error (which does not make sense unless there is in- formation of a more systematic problem that led to the $5 error). Worrying “obsessively” could also be a warning sign, one that requires a remedy. Although entrepreneurs are known to often be thinking about their business, an inability to “turn it off,” at least for short periods, can cause psychological and physical problems. That is, having some work life balance can be beneficial to the individual both as an entrepreneur and as a human being.

DO ENTREPRENEURS BENEFIT FROM PARANOIA?

AS SEEN IN BUSINESS NEWS

reflected in an entrepreneur’s metacognitive awareness, that is, the ability to reflect upon, understand, and control one’s thinking and learning.17 Specifically, metacognition describes a higher-order cognitive process that serves to organize what individuals know and recog- nize about themselves, tasks, situations, and their environments to promote effective and adaptable cognitive functioning in the face of feedback from complex and dynamic environments.18

How cognitively adaptable are you? Try the survey in Table 1.1 and compare yourself to some of your classmates. A higher score means that you are more metacognitively aware, and this in turn helps provide cognitive adaptability. Regardless of your score, the good news is that you can learn to be more cognitively adaptable. This ability will serve you well in most new tasks, but particularly when pursuing a new entry and managing a firm in an uncertain environment. Put simply, it requires us to “think about thinking which requires, and helps provide, knowledge and control over our thinking and learning activities—it requires us to be self-aware, think aloud, reflect, be strategic, plan, have a plan in mind, know what to know, and self-monitor.19 We can achieve this by asking ourselves a series of questions that relate to (1) comprehension, (2) connection, (3) strategy, and (4) reflection.20

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Paranoia can also lead to fear, such as fear of failure. Fear of failure can constrict thinking and lead to inaction and inaction can make the entre- preneur’s firm more vulnerable. One entrepreneur noted that if he was fearful then his business would never have got off the ground. Indeed, per- haps entrepreneurs are already so paranoid that any more paranoia may push them over the edge of what is healthy. They may be so paranoid about the business that their words and actions begin to discourage employees and customers. That is, para- noia that your employees or customers are out to get you may lead to them leaving and creating an actual (rather than an imagined) threat to the busi- ness. Indeed, for the entrepreneur’s business to grow and achieve success, he or she may need to put some faith in the organization’s employees and customers.

“CRITICAL EVALUATION” RATHER THAN PARANOIA Perhaps the term paranoia is too loaded, and there- fore care must be taken in advising entrepreneurs that they need to become more paranoid. But Andrew Grove’s point is well taken. It might be better to talk about critical evaluation or critical analysis, which means to look at everything (suggests Stephen Markoitz, director of governmental and political relations of a small business association). He suggests

that if the entrepreneur is paranoid then he or she is unable to look at everything. That is, the entrepreneur may be particularly good at noticing threats but miss opportunities. (But is it ever possible to see and evalu- ate everything?)

Whatever it is called, the point is that entrepre- neurs are likely to keep worrying about their busi- ness, keep trying to attend to both threats and opportunities, and think constantly about how to enable their business to succeed.

ADVICE TO AN ENTREPRENEUR A friend who has just become an entrepreneur has read the above article and comes to you for advice:

1. I worry about my business; does that mean I am paranoid?

2. What are the benefits of paranoia and what are the costs?

3. How do I know I have the right level of paranoia to effectively run the business and not put me in the hospital with a stomach ulcer?

4. Won’t forcing myself to be more paranoid take the fun out of being an entrepreneur?

Source: “How Smart Entrepreneurs Harness the Power of Paranoia,” by Mark Henricks, March 1997, Entrepreneur magazine: www. entrepreneur.com.

1. Comprehension questions are designed to increase entrepreneurs’ understanding of the nature of the environment before they begin to address an entrepreneurial challenge, whether it be a change in the environment or the assessment of a potential opportunity. Understanding arises from recognition that a problem or opportunity exists, the nature of that situation, and its implications. In general, the questions that stimulate individu- als to think about comprehension include: What is the problem all about? What is the question? What are the meanings of the key concepts? Specific to entrepreneurs, the questions are more likely to include: What is this market all about? What is this tech- nology all about? What do we want to achieve by creating this new firm? What are the key elements to effectively pursuing this opportunity?

2. Connection tasks are designed to stimulate entrepreneurs to think about the current sit- uation in terms of similarities to and differences from situations previously faced and solved. In other words, these tasks prompt the entrepreneur to tap into his or her knowledge and experience without overgeneralizing. Generally, connection tasks focus on questions like: How is this problem similar to problems I have already solved? Why? How is this problem different from what I have already solved? Why? Specific to entrepreneurs, the questions are more likely to include: How is this new environment

connection tasks Tasks designed to stimulate entrepreneurs to think about the current situation in terms of similarities to and differences from situations previously faced and solved

comprehension questions Questions designed to increase entrepreneurs’ understanding of the nature of the environment

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www
How Cognitively Flexible Are You? On a scale of 1 to 10, where 1 is “not very much like me” and 10 is “very much like me,” how do you rate yourself on the following statements?

Goal Orientation

I often define goals for myself. Not very much—1 2 3 4 5 6 7 8 9 10—Very much like me like me

I understand how accomplishment Not very much—1 2 3 4 5 6 7 8 9 10—Very much of a task relates to my goals. like me like me

I set specific goals before Not very much—1 2 3 4 5 6 7 8 9 10—Very much I begin a task. like me like me

I ask myself how well I’ve Not very much—1 2 3 4 5 6 7 8 9 10—Very much accomplished my goals once like me like me I’ve finished.

When performing a task, I Not very much—1 2 3 4 5 6 7 8 9 10—Very much frequently assess my progress like me like me against my objectives.

Metacognitive Knowledge

I think of several ways to solve a Not very much—1 2 3 4 5 6 7 8 9 10—Very much problem and choose the best one. like me like me

I challenge my own assumptions Not very much—1 2 3 4 5 6 7 8 9 10—Very much about a task before I begin. like me like me

I think about how others may react Not very much—1 2 3 4 5 6 7 8 9 10—Very much to my actions. like me like me

I find myself automatically Not very much—1 2 3 4 5 6 7 8 9 10—Very much employing strategies that have like me like me worked in the past.

I perform best when I already Not very much—1 2 3 4 5 6 7 8 9 10—Very much have knowledge of the task. like me like me

I create my own examples to make Not very much—1 2 3 4 5 6 7 8 9 10—Very much information more meaningful. like me like me

I try to use strategies that have Not very much—1 2 3 4 5 6 7 8 9 10—Very much worked in the past. like me like me

I ask myself questions about the Not very much—1 2 3 4 5 6 7 8 9 10—Very much task before I begin. like me like me

I try to translate new information Not very much—1 2 3 4 5 6 7 8 9 10—Very much into my own words. like me like me

I try to break problems down into Not very much—1 2 3 4 5 6 7 8 9 10—Very much smaller components. like me like me

I focus on the meaning and Not very much—1 2 3 4 5 6 7 8 9 10—Very much significance of new information. like me like me

Metacognitive Experience

I think about what I really need Not very much—1 2 3 4 5 6 7 8 9 10—Very much to accomplish before I begin a task. like me like me

I use different strategies depending Not very much—1 2 3 4 5 6 7 8 9 10—Very much on the situation. like me like me

I organize my time to best Not very much—1 2 3 4 5 6 7 8 9 10—Very much accomplish my goals. like me like me

TABLE 1.1 Mike Haynie’s “Measure of Adaptive Cognition”

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I am good at organizing Not very much—1 2 3 4 5 6 7 8 9 10—Very much information. like me like me

I know what kind of information is Not very much—1 2 3 4 5 6 7 8 9 10—Very much most important to consider when like me like me faced with a problem.

I consciously focus my attention on Not very much—1 2 3 4 5 6 7 8 9 10—Very much important information. like me like me

My ”gut” tells me when a given Not very much—1 2 3 4 5 6 7 8 9 10—Very much strategy I use will be most effective. like me like me

I depend on my intuition to help Not very much—1 2 3 4 5 6 7 8 9 10—Very much me formulate strategies. like me like me

Metacognitive Choice

I ask myself if I have considered all Not very much—1 2 3 4 5 6 7 8 9 10—Very much the options when solving a problem. like me like me

I ask myself if there was an easier Not very much—1 2 3 4 5 6 7 8 9 10—Very much way to do things after I finish a task. like me like me

I ask myself if I have considered all Not very much—1 2 3 4 5 6 7 8 9 10—Very much the options after I solve a problem. like me like me

I re-evaluate my assumptions when Not very much—1 2 3 4 5 6 7 8 9 10—Very much I get confused. like me like me

I ask myself if I have learned as Not very much—1 2 3 4 5 6 7 8 9 10—Very much much as I could have after I finish like me like me the task.

Monitoring

I periodically review to help me Not very much—1 2 3 4 5 6 7 8 9 10—Very much understand important relationships. like me like me

I stop and go back over information Not very much—1 2 3 4 5 6 7 8 9 10—Very much that is not clear. like me like me

I am aware of what strategies I use Not very much—1 2 3 4 5 6 7 8 9 10—Very much when engaged in a given task. like me like me

I find myself analyzing the Not very much—1 2 3 4 5 6 7 8 9 10—Very much usefulness of a given strategy while like me like me engaged in a given task.

I find myself pausing regularly to Not very much—1 2 3 4 5 6 7 8 9 10—Very much check my comprehension of the like me like me problem or situation at hand.

I ask myself questions about how Not very much—1 2 3 4 5 6 7 8 9 10—Very much well I am doing while I am like me like me performing a novel task. I stop and re-read when I get confused.

Result—A higher score means that you are more aware of the way that you think about how you make decisions and are there- fore more likely to be cognitively flexible.

Source: Reprinted with permission from M. Haynie and D. Shepherd, “A Measure of Adaptive Cognition for Entrepreneurship Research,” Entrepreneurship, Theory and Practice 33, no. 3 (2009), pp. 695–714.

similar to others in which I have operated? How is it different? How is this new organi- zation similar to the established organizations I have managed? How is it different?

3. Strategic tasks are designed to stimulate entrepreneurs to think about which strategies are appropriate for solving the problem (and why) or pursuing the opportunity (and how). These tasks prompt them to think about the what, why, and how of their ap-

strategic tasks Tasks designed to stimulate entrepreneurs to think about which strategies are appropriate for solving the problem (and why) or pursuing the opportunity (and how)

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proach to the situation. Generally, these questions include: What strategy/tactic/princi- ple can I use to solve this problem? Why is this strategy/tactic/principle the most appropriate one? How can I organize the information to solve the problem? How can I implement the plan? Specific to entrepreneurs, the questions are likely to include: What changes to strategic position, organizational structure, and culture will help us manage our newness? How can the implementation of this strategy be made feasible?

4. Reflection tasks are designed to stimulate entrepreneurs to think about their understanding and feelings as they progress through the entrepreneurial process. These tasks prompt entrepreneurs to generate their own feedback (create a feedback loop in their solution process) to provide the opportunity to change. Generally, reflection questions include: What am I doing? Does it make sense? What difficulties am I fac- ing? How do I feel? How can I verify the solution? Can I use another approach for solving the task? Specific to the entrepreneurial context, entrepreneurs might ask: What difficulties will we have in convincing our stakeholders? Is there a better way to implement our strategy? How will we know success if we see it?

Entrepreneurs who are able to increase cognitive adaptability have an improved ability to (1) adapt to new situations—that is, it provides a basis by which a person’s prior experi- ence and knowledge affect learning or problem solving in a new situation; (2) be creative—that is, it can lead to original and adaptive ideas, solutions, or insights; and (3) communicate one’s reasoning behind a particular response.21 We hope that this section of the book has provided you not only a deeper understanding of how entrepreneurs can think and act with great flexibility but also an awareness of some techniques for incorpo- rating cognitive adaptability in your life.

We have discussed how entrepreneurs make decisions in uncertain environments and how one might develop an ability to be more cognitively flexible. It is important to note that entrepreneurs not only think but they also intend to act.

THE INTENTION TO ACT ENTREPRENEURIALLY Entrepreneurial action is most often intentional. Entrepreneurs intend to pursue certain opportunities, enter new markets, and offer new products—and this is rarely the process of unintentional behavior. Intentions capture the motivational factors that influence a behav- ior; they are indications of how hard people are willing to try and how much of an effort they are planning to exert to perform the behavior. As a general rule, the stronger the inten- tion to engage in a behavior, the more likely should be its performance.22 Individuals have stronger intentions to act when taking action is perceived to be feasible and desirable. Entrepreneurial intentions can be explained in the same way.

The perception of feasibility has much to do with an entrepreneurial self-efficacy. Entrepreneur’s self-efficacy refers to the conviction that one can successfully execute the behavior required; people who believe they have the capacity to perform (high self- efficacy) tend to perform well. Thus, it reflects the perception of a personal capability to do a particular job or set of tasks. High self-efficacy leads to increased initiative and persis- tence and thus improved performance; low self-efficacy reduces effort and thus perfor- mance. Indeed, people with high self-efficacy think differently and behave differently than people with low self-efficacy.23 Self-efficacy affects the person’s choice of action and the amount of effort exerted. Entrepreneurship scholars have found that self-efficacy i