RISK AND THE ENTREPRENEURIAL PROCESS: A CASE STUDY APPROACH
Paul D. Hannon
Durham University Business School
Mill Hill Lane
County Durham, UK
The number of corporate middle managers and executives losing their positions has been steadily increasing on both sides of the Atlantic from the 1970s onwards (Gibb, Cross and Slater 1983; Syedain, 1991; Sexias, 1991). Despite these developments, few of these skilled and experienced people actually apply their talents through opportunities for self-employment or running small businesses (Dopson and Stewart, 1990). In fact, according to the British Institute of Management only a small percentage aspire to owner-management (Wheatley, 1992).
This study proposes that the individual's perception of, and attitude towards, 'risk' is the major barrier to this form of entrepreneurship and prevents the transfer process from employee-management to owner-management working effectively. It further explores if those that have successfully made the transfer have only done so involuntarily. It assesses individual characteristics and provides insights into indicative risk-personality types.
A purposive sample of 10 owner-managers of small businesses in the North-East of England with previous experience at middle/senior management level was investigated. Whilst the businesses represent a range of sectors and ages, none were older than 10 years, and all employed less than 50 employees, with a turnover of less than £500,000. Four 'Theory Sketches' were established based on expectations arising from the literature review. The study adopted an initial qualitative approach using a semi-structured interview technique. A specific framework for the study was developed from previous relevant studies (Cooper, 1971; Richardson and Clarke, 1991; MacCrimmon and Wehrung, 1990) and the researchers personal experience of working with such a client group for several years. In addition, each interviewee completed responses to a range of Likert statements, which were subsequently analyzed using appropriate one-sample tests for small samples, i.e. the Chi-Squared Test and the Kalmogorov-Smirnov Test.
Summarizing the responses for the sample group, the results indicated that:
- failure will be avoided at all costs. It is associated with loss of respect.
- uncertainty and ambiguity are difficult to deal with. This is a dichotomy for people trying to realize future dreams.
- a preference exists for operating within the 'comfort zone' and hence offering a perceived security.
- difficulty exists in making objective risk assessments.
From the one-sample tests, some congruence was identified between response patterns. This enabled particular risk-personality profiles to be proposed.
In conclusion it can be stated that most managers who move into business ownership do not voluntarily initiate the transfer process. A strong peer group perception exists that many managers consider making the transfer but never act upon it because their own perception of the risk involved is too high. There was no evidence to suggest that any of the owner-managers were high risk-takers or completely risk-averse. However, when the failure of their business is at stake bold risk-taking behaviour is displayed. Few had clear criteria for making objective judgments about the degree or level of risk involved in making risk decisions or an understanding of the implications of their actions for themselves, their business, and their family life. There is wide spread confusion about what constitutes risk, how it is measured and how it is managed.
In the policy arena, the UK Government's new Business Link initiative for targeted support to growing SMEs, could be far more successful if cognizance was taken of the owner's lack of ability and confidence to make appropriate risk assessments. This not only contributes to ultimate business failure but also prevents inherent potential being maximized. The targeting of limited resources could possibly be improved if simple indicators were used to identify relevant risk-personality types.
For educationalists, the focus is on identifying the most effective learning environment for developing relevant skills and behaviours within the individual. Attention to process skill development is critical in helping with the handling of ambiguity, coping with uncertainty and generally creating a low-uncertainty avoidance culture within the organization. More fundamental aspects of objective risk assessment and risk management are required to be fully integrated into entrepreneurship development programs in the UK. Methodological approaches based on peer group self-help processes and action learning groups provide increased opportunities for the entrepreneur.
From a corporate perspective, risk-averseness prevents the manager achieving full potential, with the main focus being on survival. It also ignores the opportunity for increased spin-off/new venture creation which improves the overall dynamics of a business. Entrepreneurship also suffers from the individuals lack of risk-taking ability and self-confidence, but is influenced most strongly by the risk/failure culture within the organization. Frustrated entrepreneurs (or entrepreneurs) are bad for business.
With a small sample, caution must be exercised. The research highlights indicative risk-personality profiles which may be useful in the ways identified above. However, more research is recommended. Firstly, in the further development of appropriate statements that hold true at a significant level of difference. These will then form the basis of 'type indicators'. Secondly, it is important to now conduct similar research with other comparative groups, for instance:
- middle managers who have considered owner-management but failed to make the transfer process
- owner-managers who were not previously middle managers
- female middle managers and owner-managers
- managers and owners from different ethnic cultures, race, location
- young and old managers
- young and old businesses at different stages in development
It is also critical to understand the relationship between individual risk-taking behaviour, organizational risk-taking culture and short-term and long-term business performance.
Richard T. Harrison
Claire M. Leitch
Ulster Business School
University of Ulster at Jordanstown
Co Antrim BT37 0QB
Northern Ireland, UK
Colin M. Mason
Department of Geography
University of Southampton
Southampton S017 1BJ
The current phase of socioeconomic modernization and associated cultural and political transformations parallels the radical forms of restructuring which began towards the end of the nineteenth century: both fin de siecle periods resonate with similarly transformative socio-spatial processes and there is an altered culture of time and space with new visions and designs for the future.
This present shift to flexible forms of specialization and accumulation is reflected in the deconstruction of established organizational forms, structures, relations and practices, and in a process of reconstruction and reorganization in which capitalism is becoming ever more tightly organized through dispersal, geographical mobility, and flexible responses in labour markets, labour processes and consumer markets.
It is in this context that the contribution of information technology and developments in telecommunications technology - summarized in the development of the concept of the information economy - become critical, for they provide the technical means through which productive decentralization can be effectively realized. In short, information and knowledge have become crucial variables in so far as they permit corporations to decentralize and yet continue to exercise effective administrative or organizational control over an extended production network.
This trend has particular implications for the development of an understanding of the process of entrepreneurship at the end of the twentieth century. Global entrepreneurship in the sense of a start-up that from its inception derives resources (sales revenues, financing, people, raw materials, supplies and ideas) from multiple countries and is geographically unlimited in its creator's vision and its potential is an emerging focus of research attention: it is increasingly clear that the conditions which reduce the significance of space and spatial relations for the corporate economy also reduce its significance for the entrepreneurial start-up, and provide opportunities for the development of new forms of entrepreneurship.
In this paper we provide an account of the development of the entrepreneurial business in the video production/entertainment services industry as an in-depth case study of global entrepreneurship. This case study is based on three sources of information:
- secondary data on the background to and development of the company;
- information prepared by the company for a presentation to potential investors (including informal investors) in its search for second round financing;
- interviews with key venture personnel involved in the globalization process at the following start-up.
Enviro Men Production Ltd was conceived in 1990 to produce an environmentally aware TV cartoon series for children. The company has two dimensions: a TV production company making TV programmes; and a global marketing/image merchandising company exploiting the commercial spin-off potential of the concept. The core team includes experienced TV writers and composers (with BAFTA, EMMY and GRAMMY awards), TV executives and experienced business executives. Storyboarding, animation and stylist expertise was added to the team from the US.
Resource acquisition and business development has been conceived from the outset on a global scale. In addition to the core UK/US team of 14 plus four consultants, this global start-up has been based on:
- an animation contract with Jade Animation Productions Ltd, a Shenzen, China based subsidiary of a Hong Kong public listed company
- an international merchandising contract with INI Entertainment Group Inc., who also have worldwide T.V. distribution rights.
- PR and marketing for the Environ Men concept is based in Hollywood, CA
- legal protection of trade mark rights is in place through solicitors Clifford Chance in London
- capital raising, beyond the first and second rounds of pre-production finance raised from informal sources, is handled internationally by accountants Baker Tilly
- merchandise manufacture will be located in China, through contracts with one of the three major international toy manufacturers/distributors (Mattel, Hasbro and Bandai).
- TV sales will initially be in the US, moving internationally as contracts are signed at MIPCOM and the NATPE show (the major world TV syndication show).
This case study represents an illustration of the extent to which start-up entrepreneurship in the information economy is an increasingly global phenomenon. A key feature of the Environ Men case is that the prospects for success of a small start-up venture with little more initially than an idea are crucially dependent on first, building a credible and experienced team with technical, industry specific and general business experience; and second, on developing a network of partnerships, strategic alliances and contractual relationships with key resources internationally to create exploitable competitive advantage. One of the implications of this case is that successful entrepreneurship in the global information economy is increasingly dependent on the successful exploitation of global corporate networks, working through rather than recreating the existing corporate structure. One implication is, therefore, that dispersal such as that described in this paper is contributing to the tighter organization of capital. If so, we may need to reconceptualize our understanding of entrepreneurship more explicitly as a contextual rather than independent phenomenon.
Dr. Charles W. Hofer
University of Georgia
Terry College of Business
Department of Management
411 Brooks Hall
Athens, GA 30602
This paper identifies ten major financial determinants of successful venture performance. In genera, new ventures that followed most of the proposed guidelines succeeded, while those that violated most of them failed.
The fifteen propositions examined in this study were deduced from the application of four financial concepts to the new venture situation. They were:
(1) break-even analysis;
(2) cash flow analysis;
(3) sustainable growth analysis; and
(4) capital structure analysis.
The propositions were tested using a convenience sample of 10 new venture startup cases drawn from a variety of sources. Every case which contained the full range of data for testing the propositions were used.
The data were analyzed using pattern recognition statistics that compared the "actual" case data with the "patterns" proposed by the guidelines deduced from the four basic financial constructs described above.
Ten of the fifteen propositions were "corroborated" at very high levels of statistical significance despite the small samples involved. One of the guidelines was rejected strongly, while three received limited support. All of the ventures that met seven or more of the 10 key guidelines were successful, while all of the ventures that did not satisfy seven or more of the 10 key guidelines failed. In general, most of the break-even analysis, cash flow analysis, and capital structure analysis guidelines were corroborated.
There are two levels of implications of this study.
The first is that a set of 10 statistically significant guidelines for structuring the financial strategies and policies of new ventures was developed. While these guidelines should be tested further on a larger sample, they provide a useful set of prescriptions for the improvement of a new venture startup practice.
The second, and more significant, implications derive from the "corroboration" of the new approach to entrepreneurship research developed in this study, an din an associated study on "The Marketing Imperatives of New Ventures." both studies deduced a set of very precise presentations for new venture startups based on existing concepts in the finance and marketing areas. Both studies than "tested" these propositions on small samples using pattern recognition statistics. Both also generally indicated either extremely strong statistical significance of the propositions on strong rejection of the propositions, i.e., there were few "in-between" findings.
In short, these studies have tested a new approach to theory building and theory testing in the entrepreneurship area, and both have shown that this new approach works very well.
Center for Entrepreneurship
Wichita State University
1845 N. Fairmount
Wichita, KS 67208-1595
The rise in dynamic entrepreneurship in Central and Eastern Europe has produced a growing concern for measuring the effects of investment in entrepreneurship education in the former communist countries of Europe and for determining whether other theories and techniques developed in the United States apply to other countries. This study measures and analyzes the impact of entrepreneurship education on entrepreneurial attitudes of participants in a four week U.S. designed entrepreneurship course delivered at Comenius University in Bratislava, Slovakia. The study utilizes the Entrepreneurial Attitude Orientation scale developed by Robinson and others. The research is unique due to the lack of experience the people of Slovakia have had with free market economics, business ownership, and the concepts of entrepreneurship.
The study utilizes a quasi-experimental research design, consisting of three independent groups, one experimental group, and two control groups in Bratislava, Slovakia. The experimental group consisted of undergraduate students enrolled in a Business Management program at Comenius University. They self-selected into a four-week entrepreneurship course taught by U.S. instructors with considerable university teaching and practitioner experience. The second group consisted of undergraduate students enrolled in the same program but who did not participate in the entrepreneurship program. The third group consisted of entrepreneurs located in the Bratislava area. For all groups except for the business group, pre- and post-test measures were obtained using the EAO. The EAO and an added demographic scale where first translated and back translated to ensure accuracy and minimize cultural bias. Co-authors from within the country reviewed the scale items to ensure cultural relevance. Subjects in the experimental group and the first control group completed the questionnaire at the beginning and end of the study with a third measurement obtained at a three month interval. Comparisons were made between the groups as well as within the groups (between the pre-test and post-test data). This enabled us to examine:
(1) The effects of self-selection in the entrepreneurship program,
(2) The effect of the entrepreneurship education program on the entrepreneurial attitudes of participants, and
(3) The differences between students and practitioners.
The EAO proved reliable for all four sub-scales in the Slovakian environment, although the self-esteem sub-scale, as measured by Cronbach's alpha, proved to be less robust than had been found in western countries in previous research studies. A second finding showed an effect of self selection, as has been hypothesized. The study also found a significant positive effect for self-esteem and personal control for the experimental group, and no temporal effect.
This study has important applications for both practitioners and academics in the area of entrepreneurship. It is useful to practitioners in understanding the mind-set of entrepreneurs and academics in the pedagogical design and implementation of educational programs in the emerging democracies in Central Europe. The study is useful to policy makers allocating investment dollars in training to developing countries. It strongly suggests that such investment can help to overcome the fatalistic attitudes that have been found historically relevant in Central European regions lacking cultural and infrastructure support for entrepreneurial development. The study also supports attitude theory as a productive research stream for understanding entrepreneurship.
Deirdre A. M. Hunt
Management & Marketing Department
Aras na Laoi
University College Cork
The SME in the EU is now seen as the Principal agent of economic growth. This is dependent on SME's trading globally. Conceived of independent entities, this seems unlikely conceived of as network players, this seems feasible especially if the SME trading network utilizes telematic technology. A critical review of SME network theory forms the basis for an examination of SME trading and information networks in Europe, against which recent and ongoing SME telematic trading networks research being carried out by the author are evaluated.
A critical literature review of both SME network and telematic network writing formed the basis for original research into sharply contrasted SME networks in mainland and offshore Europe. These two sources provided the background to an examination of contrasts in telematic based international SME trading networks found among 60 SME manufacturing enterprises in rural areas in County Cork in Ireland and among four SME institutions in France, Spain and Germany.
The existing telematic literature is deficient in so far as it conceptualizes SME in terms of single and unattached entities. As confirmed in the existing SME literature, SME's in the research study existed embedded in complex trading and informational networks. The existing SME network literature to date appears to have largely ignored the use of telematic trading networks for levels of acquisition and use across five EU Member States providing the basis for telematically based international trading. In contrast to the existing SME network literature, such networks however were not physically locally grounded in any one physical place but existed across widely separated geographical locations limited only by access to telematic technology. Access itself was found to be culturally determined. Little attention has been paid in the literature to the way in which the exact configuration of the network may be effected by cultural considerations and with that the ease of entry into network arrangements. Analysis of existing SME network arrangements showed sharp contrast within European Union members. These differences were of relevance to SME telematic trading networks in so far as they appear to allow prediction of stability over time, direct access and use of telematic based services categorized into trading and informational facilities. Three contrasted models of internationally telematically trading SME networks were distinguished. Model one confirmed in essence but internationalized the existing lead model already found in the literature. Model two identified a micro enterprise international trading network whilst model three identified an internationally connected SME oriented informational milieu and pre trading network.
The need for dialogue as between telematic hardware and software R and D manufacturers is acute if the opportunities for telematically based trading now appearing are to be fully utilized by SME's. At a public sector policy level, the strengths and weaknesses of the different models for sustaining and expanding international trade need to be fully thought through in order to ensure that the considerable investments required will lead to the development of telematic based networks that will grow and create sustainable economic development internationally.
Bruce A. Kirchhoff
New Jersey Institute of Technology
Newark, NJ 07102
Robert E. McAuliffe
Wellesley, MA 02157
How do environmental regulations affect firm formation rates? Meyer (1992) provided evidence that stronger environmental regulations were positively correlated with state growth rates, but his analysis only considered simple correlations between environmental regulations and state growth and did not consider multiple factors that could cause such a relation. Does variation in environmental regulation by state affect firm foundation rates?
Kirchhoff and McAuliffe (1989) found that firm formation rates across the 48 contiguous states were correlated with long term economic growth, educational expenditures and population growth among other variables. In this paper, we extend our 1989 analysis to consider the impact of state environmental rankings on firm formation rates using the U.S. Establishment and Enterprise Microdata (USEEM) data from the Small Business Data Base. States were ranked according to their environmental regulations in a study by Duerksen (1983) which ranked states according to twenty three environmental indicators. These rankings were used by Meyer (1992) in his study of the impact of environmental regulations on state growth and are also employed here. The impact of state environmental rankings on new firm formation rates was analyzed over the 1978-1984 period.
Surprisingly, state environmental rankings have little effect on new firm formation rates across states over this period. In part, this result can be explained by multicollinearity between the environmental rank measure and other variables included in the study. It is also possible that the measure of state environmental regulations is inappropriate. Nevertheless the result is unusual and warrants further study.
Russell M. Knight
Western Business School
University of Western Ontario
Canada N6A 3K7
A comparison of the perceived barriers to innovation, as perceived by corporate managers, entrepreneurs and academics in Canada, the U.S.A. and New Zealand, is the topic of the study. The types of barriers studied fall into four categories: government, economic, organizational and social. Gateways or incentives to cure these barriers are also examined and the literature on barriers to innovation is explored.
Responses to a mail survey from 189 Canadian corporate managers, 38 entrepreneurs and 22 scholars of entrepreneurship from across Canada are compared to similar responses from 75 American corporate managers, 61 American entrepreneurs and 20 American scholars and with responses from 50 New Zealand corporate managers, 47 New Zealand entrepreneurs and 12 scholars from New Zealand. Responses are compared by respondent group and by type of barrier to innovation.
The ranking of the importance of the different types of barriers to innovation is exactly opposite in Canada to those found in the U.S. and New Zealand. Whereas American and Kiwi respondents blamed governments, the economy, organizations and social factors in that order for imposing a variety of barriers to innovation, Canadian managers, entrepreneurs and scholars ranked these factors exactly opposite in relative importance. The major gateways or avenues for curing these barriers were overwhelmingly attributed to government as being their responsibility.
The major implications are for the various levels of government in changing their regulatory practices and taxation legislation to provide incentives to the private sector for innovation, rather than barriers. Specific recommendations to government in terms of economic management of the economy are also provided, followed by suggestions on how organizations might change their management practices and changes in our social systems, such as education, to encourage more innovation and entrepreneurship.
Kjell R. Knudsen
Donald G. McTavish
Richard E. Braun
University of Minnesota Duluth
Center for Economic Development
150 School of Business and Economics
10 University Drive
Duluth, Minnesota 55812
Outcomes for 112 proposed start-ups and expansions involving 149 participants in the UMD Entrepreneurial Development Program (EDP) are examined. The panel of businesses represent 91 planned start-ups and 21 planned expansions. The firms group of participants came into the EDP in 1988 and the last group included completed the initial training in 1993. The EDP cumulative panel data represent a unique opportunity to follow budding entrepreneurs as they go from the idea stage to researching their ideas for start-ups and expansions, to actual business planning and ultimately the test of their ideas through the financing and operating stage. The panel is examined in terms of personal and business variables. Outcomes are examined in terms of whether a business plan was completed, a business was started, and whether it is continuing.
Data on businesses and participants included in the EDP cumulative panel examined were obtained on a survey completed at the beginning of each 8 week program as well as a follow up at the end. Additional information was obtained through a mail survey conducted during the spring of 1994 with a telephone follow up. In addition, the staff member in charge of the EDP program maintains contact with all participants that can be reached.
Of the 112 businesses that comprise the cumulative panel, 78 completed either a start-up or expansion plan. Further, 38 of the 112 are still in business and 9 are still pursuing the original business idea. Ten started a business, but are no longer in business and 3 that were in business at the start of their program are no longer in business. Fifty-two never started a business. Of these, 33 made a conscious decision; the others we don't know about.
Of the 91 start-ups and 21 expansions proposed, 20 start-ups and 18 expansions are in business today for a total of 38. It is important to note that this does not represent survival rates for start-ups, but rather conversion rates for what Reynolds (1994) calls firms in gestation to fledgling firms and fledgling firms to established new firms. In terms of start-ups, the EDP should be seen as a process of increasing the rate of conversion from nascent entrepreneur to fledgling new firm. For existing firms with expansion plans, the process may be seen as increasing the conversion of fledgling firms to established new firms.
Building on this thinking, and cumulating over the period 1988-93, the EDP produced an overall nascent to fledgling conversion rate of 33% as 30 of 91 potential start-up efforts resulted in an actual business. It is interesting to note that the conversion rates for 1988-90 and 1991-93, 32% and 30% respectively, are comparable to the overall rate. If the conversion rate from fledgling to mature businesses is defined as being in business three or more years (including existing businesses that initially sought expansion), the EDP during the period 1988-90 produced a conversion rate of 68% as 21 fledgling firms out of 31 start-ups and expansions were still in business in 1994.
Investments in systematic programs to assist nascent entrepreneurs and fledgling new firms appear to pay off in much higher conversion rates and survival rates than what has been reported by Reynolds (1994) for statistically representative samples. Further documentation of such programs and their outcomes are needed.
University of Warsaw International Postgraduate Management Center
Nowy Swiat 4
00-400 Warsaw 132
Post Office Box 6
Charles R.B. Stowe
Huntsville, Texas 77341
Entrepreneurship in the Polish transition economy has passed through three stages. The first stage was the early birth and "charmed" childhood of easy entrepreneurial opportunities arising from inefficiencies of command economy. This was followed by an adolescent period when Polish entrepreneurs unsheltered by bureaucratic anomalies of the centrally planned economy suddenly found themselves competing in real markets. Poland is now entering an adult stage of a free market economy. A survey that included in depth interviews reveals the strategies that entrepreneurs employed during each phase of the transition and concludes that some of them have turned "ugly ducks into beautiful swans".
A survey of 80 Polish mid-level managers of state-owned enterprises and 15 in-depth interviews with chief executive officers of state owned enterprises and entrepreneurs. Informal surveys gathered from several top and medium level executive training sessions.
The pre-transition period of the 1980s offered Polish entrepreneurs almost unlimited markets due to the irrationalities of the command economy. This first phase did not provide entrepreneurs with experience in meeting competition through innovation and marketing. The second phase from 1990-1993 was characterized by intense competition from Western companies while at the same time markets contracted both internally and externally. Entrepreneurs have used different strategies to cope with the new situation which through the learning process leads some of them to the adult stage while others dropped out.
Polish entrepreneurs have responded to changes in their economic environment. Changes in the development of the Polish infrastructure will determine whether Polish entrepreneurs will be able to transform their ugly ducks (early entrepreneurial ventures) into beautiful swans (organizations capable of competing in global economy).
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