Frontiers of Entrepreneurship Research 1994

Frontiers of Entrepreneurship Research
1994 Edition

1994 Summaries and Abstracts (L-M by Author)


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    ENTREPRENEURIAL TEAMS, VENTURE DEVELOPMENT AND VENTURE PERFORMANCE

    Claire Leitch

    Centre for Executive Development
    Ulster Business School
    University of Ulster
    Newtonabbey, Co Antrim BT37 0QB
    ENGLAND

    Telephone
    44-232-365060 Ext.3176

    Fax
    44-232-362831

    Principal Topics

    The link between business dynamics, in terms of the birth, death, expansion and contraction of firms (in the by now conventional components of change job accounting framework) and economic well-being at national, regional and local scales, has, in recent years, been widely accepted as important. In general, the significant role of new ventures in job generation has recently been subject to increasingly rigorous scrutiny, and the public policy options available and appropriate to maximize both the employment impact of the sector (particularly at local and regional scale) and the value of money and effectiveness of public sector support have been the subject of increasing debate.

    Methodology

    In this paper it is intended to review the current debate on small firms, new firms and growth firms as the basis for reviewing the operation of a policy of high growth potential ventures.

    Data will be generated from interactive face-to-face interviews and in-depth case study research of those individuals who formed entrepreneurial venture teams and business as a result of participating in this particular initiative.

    Major Findings

    The concept of team entrepreneurship, that is the establishment of a venture by a team rather than by an individual entrepreneur is not a new one. It is, however, almost entirely neglected in the entrepreneurship and economic development literature. This reflects inter alia, the dominance within entrepreneurship research of an implicit paradigm of individualism which makes difficult the development of alternative explanations of the new firm formation process. However, the general recognition of the importance of collective entrepreneurship as a systematic economic phenomenon corresponds with the renewed attention being given to the importance of team work and team based leadership. One of the least researched areas of entrepreneurship is that of teams and team behaviour; instead any information which has been generated has been incidental to the main focus of study.

    Previous research conducted on the impact of a business creation programme in Northern Ireland demonstrates that team based entrepreneurship can be successfully stimulated through policy intervention. However, if this type of selectively applied policy is to be developed there is a need for a much greater understanding of the dynamics of entrepreneurial team formation in programme rather than personal network contexts.

    Team assembly is a random and difficult process: the challenge for both researchers and policy makers alike is to develop an understanding of how to reduce randomness and difficulty. This paper will thus focus on the role and process of entrepreneurial team development and assess the impact of ventures created by teams of examining the nature, characteristics, growth performance and impact of the ventures created through participation on this programme.

    Conclusion

    The experience of participants in the entrepreneurial executive development programme described in this paper has demonstrated the applicability and efficacy of an action learning based approach.


    POSTED-PRICE PARADOX: EVIDENCE ON THE FLOTATION MECHANISM SELECTION PROCESS IN FRANCE

    Benoit Leleux
    Remy Paliard

    Babson College, Finance Division
    Tomasso Hall 124
    Babson Park, MA 02157

    Telephone
    617-239-5577

    Fax
    617-239-5272

    E-Mail
    "leleux@babson.edu"

    Principle Topics

    This paper extends the literature on strategic timing and pricing by IPO issuers. The existence of "windows of opportunity" in the new issues market, characterized by high levels of investor optimism and/or "receptive" equity markets, has been alluded to by studies documenting the significantly negative long-term performance of IPO shares. It is also present in papers investigating IPOs and their effect on subsequent equity offerings, as well as those investigating other decisions surrounding the IPO process itself, such as the selection of the investment bank(s), underwriter(s), and auditor(s), the decision about the fraction of equity to be sold to the public or retained, the role of venture capitalists and bank relationships, or the choice between best-effort and underwritten contracts. The choice of flotation mechanism has received scant attention so far because only fixed-price, fixed-quantity offerings are allowed in the US. The European regulatory environments, on the other hand, offer a wide choice of flotation mechanisms, including a number of sales procedures directly derived from auctions. Since the choice of flotation mechanism is also part of the general "strategic" decisions made by issuers, then one would expect that they would not only select the most appropriate time to go public but also the mechanism that would generate the highest valuation for their shares. The Posted Price Paradox refers to the selection of an informationally non-efficient mechanism by some issuers, and its survival through time. This apparent "survival of the unfit" is explained by the combination of private benefits to control and regulatory constraints which limit rationing of shares, constraining the mechanism selection process.

    Method

    A comprehensive sample of 165 French IPOs is empirically examined with respect to underpricing, long-term performance, choice of investment bankers, underwriters, auditors, choice of flotation mechanism, oversubscription, etc. Relationships are established between relevant variables using econometric tools.

    Major Findings

    The empirical investigations conducted in the paper indicate that two factors at least seem to play a crucial role in explaining the selection of an apparently non-optimal flotation mechanism:
    (1) the existence of regulatory limits on share rationing in auctions sometimes forces the use of fixed-price introductions as mechanism of last resort. This happens predominantly during "cold" issue markets, characterized by limited share offerings and strong imbalances between demand and supply.
    (2) a concern among issuers about possible losses of control (and the private benefits attached to it) resulting from increased public monitoring. In this respect, fixed-price procedures, with additional restrictions to insure dispersion to the largest shareholder base and the listing of only a small proportion of the outstanding shares, may increase managerial welfare compared to auctions. These procedures may be preferred with large manager and family shareholdings and kept under control by venture capitalist participation to the original capital structure.

    Implications

    The results outlined in the paper support the strategic behavior of IPO issuers. In particular, they extend the timing and long-term underperformance findings of Ritter (1993) to the choice of flotation mechanism. Issuers seem to be able to not only to select particularly favorable conditions to go public but also select the mechanism that will best capitalize on public enthusiasm. The paper has fundamental implications for corporate control in general, indicating how private benefits from control can actually provide incentives for management to select a non-optimal flotation mechanism. It also indicates various means to control for that problem. It also indicates some drawbacks from current rationing regulations in France and evaluates the effectiveness of various demand reduction schemes.


    IMMIGRANT ENTREPRENEURIAL ENCLAVES: THE CASE OF RUSSIAN IMMIGRANTS IN ISRAEL

    Miri Lerner

    Faculty of Management
    Tel Aviv University
    Ramat Aviv, Israel 69778

    Telephone
    972-9-540253

    Fax
    972-9-587992

    Principal Topics

    This paper explores whether immigrants from the former USSR, who came to Israel in the last three years, have established entrepreneurial enclaves.

    Entrepreneurial ethnic enclaves consist of small businesses owned by persons of a common ethnic origin and employing workers mainly of that same origin. Enclaves appear when a minority group is geographically concentrated and large enough to support a variety of businesses which generally both serve and employ group members. They are convenient niches for immigrant entrepreneurs to enter the receiving economy, as they use skills or trades they bring from their home country.

    While most enclaves are created by ethnic groups from "commercial cultures", the immigrants under study come from a non-commercial and non-entrepreneurial environment.

    The general hypothesis is that such business enclaves have in fact been created by the recent immigrants in Israel. It is hypothesized that the businesses which make up these enclaves will be largely in fields where entrance barriers are relatively low, namely, in the services. In this sector, businesses can be small and labor-rather than capital-intensive.

    Method

    The study was conducted among all the members of the New Entrepreneurs Association of Russian Immigrants in Israel (NEA). This association, the central association of new immigrant entrepreneurs, was established in September 1992, under the aegis of the Federation of Israeli Chambers of Commerce. At the time of the study, the NEA has 232 members, of whom most had arrived in early 1990s from the recent wave of immigrants from the former USSR.

    The research sample consisted of 156 immigrant entrepreneurs, interviewed by telephone using a structured questionnaire in the Russian language. The rate of response was very high (67%) due to the active endorsement by the Chairman of the Association and the high interest in the results expressed by the sample population.

    The validity of the responses was corroborated by the information in the Association's database. The nature of the method, telephone interviews, necessarily narrowed the scope of the data.

    Further information was obtained through interviews with the Chairman and the small staff of the Association, and an analysis of the Association's database.

    Major Findings

    The findings confirm the research hypotheses that Russian immigrant business enclaves have developed in Israel. The businesses that form these enclaves are generally small and located near the immigrants' places of residence; they employ mostly co-ethnics and cater mainly to the special needs and tastes of their immigrant clients or customers. As hypothesized, most of the businesses are in service-based industries, based on the technical and professional know-how of their founders. Although most of the features of these enclaves are similar to those found in the research literature describing the cases in US and Europe, some features seem to be unique to the Israeli case.

    In contrast to business owners in other entrepreneurial enclaves, the owners of the new businesses investigated in this study generally retained salaried jobs while they managed their new enterprises. This duality is apparently motivated by risk-avoidance and reflects the immigrants' caution and attempt to hold on to the best of both worlds, i.e., the security of a salaried job on the one hand, and the possibility of increased earnings on the other. This duality also suggests that these new Russian businessmen may eventually return to the salaried sector of Israel's economy, with the subsequent diminution of Russian entrepreneurial enclaves.

    Implications

    In order to survive in the long-term, Russian businesses must break out of the boundaries of the immigrant enclaves. The immigrant community's relatively small size, compared to that of the general market, along with the economic weakness and low purchasing power of its members, enable it to support only a small amount of business activity. These factors may limit the businesses' growth potential.

    The results of the study have practical implications for entrepreneurial development and support programs. They also suggest some contributions to the conceptualization of entrepreneurial immigrant enclaves as well as their several unique features in milieus such as Israel.


    THE POTENTIAL FOR BARRIERS TO GROWTH IN THE MOST PROMISING TECHNOLOGY-BASED ENTREPRENEURIAL FIRMS IN FINLAND. EMPIRICAL EVIDENCE FROM A NATION-WIDE STUDY

    Annareetta Lumme
    Kaj-Erik Relander

    SITRA, the Finnish National Fund for Research and Development
    P.O. Box 320
    00121 Helsinki, Finland

    Telephone
    358+0+618991

    Fax
    358+0+645072

    Principal Topics

    Growing entrepreneurial firms are powerful mechanisms through which new markets, industries, jobs, and wealth are created. This nation-wide study takes a new approach in studying firm growth. It quantifies the potential for growth that entrepreneurial technology-based firms embody and, subsequently, confronts the growth estimates, as given by the entrepreneurs, with the factors experienced to enhance or limit firm growth the most. Establishing the framework for a longitudinal study through the 1990's, the study focuses on estimating the internal validity of the growth data given by the entrepreneurs. The follow-up studies in years to come will be of particular interest in revealing the actual firm growth that was realized, as well as the accuracy of the analyses presented in this paper.

    Method

    The firms studied represent the first empirical evidence from a sample of 1 494 technology-based firms from various parts of Finland. Each of the 1 494 firms were singled out by local experts as being one of the most promising growth firms in the country. Altogether 150 experts were interviewed in person during November 1993 - February 1994. All firms have based their business idea on exploiting advanced technological knowledge, they are entrepreneurial, and independent, rather than subsidiaries of other firms. The sample of 190 firms studied in this paper are the production firms that had responded to the first mailing of the questionnaire in the beginning of April 1994, prior to a second mailing and telephone interviews. Potential for growth is measured as:
    (1) The highest increase in number of personnel.
    (2) The highest increase in value of sales that entrepreneurs believe their firms can realistically achieve in the next five years' time.
    Factors enhancing or limiting the potential for firm growth are measured as:
    (1) Entrepreneur's attitudes toward growth.
    (2) Constraints to growth.
    (3) Needs for enabling growth.
    (4) Challenges for growth, as perceived by entrepreneurs. Quantitative statistical methods are used.

    Major Findings

    First, firms are divided into two groups in their respective size classes: (1) Firms with high potential for growth
    (2) Firms with low potential for growth.
    Second, factors perceived by entrepreneurs to enhance or limit growth are compared between the firms of high and low potential for growth are discussed. This comparison results also in a deeper and a more realistic insight in estimating growth effects of the firms. The less conflict there is between the various data, the stronger the internal validity of the growth estimates is, and the better the data given by the entrepreneurs can be used in estimating the actual potential for firm growth.

    Implications

    The study contributes to an increased understanding on the potential for growth embodied in technology-based firms. For practitioners, it describes the types and sources of added value that technology-based firms could potentially create. The study also points out the factors that entrepreneurs experience to enhance or limit their firm future growth the most, hence clarifying the determinants of high growth rates. Based on the findings of the study, suggestions for stimulating high growth and creating a growth enabling entrepreneurial environment are presented. In regard of entrepreneurship research, the study increases knowledge on the internal validity of growth estimates given by the entrepreneurs. The more valid the data is, the better grounding it gives in developing new solutions for estimating firm potential for growth.


    HAVING BUSINESS IDEAS - CREATING A COMPANY

    Anders Lundstrom

    Small Business Research Forum
    Box 923
    S-701 30 Orebro
    SWEDEN

    Telephone
    46 19 30 62 26

    Eva-Lotta Lowstedt

    Swedish National Board for industrial and Technical Development
    S-117 86 Stockholm
    SWEDEN

    Telephone
    46 8 681 91 00

    Principal Topics

    In this report we are interested in generating knowledge about the degree in which individuals with business ideas create new companies. We have, with access to material at the Regional Development Funds in Varmland and Ostergotland, been able to follow up what has happened to a large number of individuals who, in 1988 or 1989, thought about starting their own company. The study describes what has happened to these peoples' business ideas over the past five years. It should be pointed out that this is a pilot study to generate hypothesis for coming studies within the same field.

    Method

    This report is based on interviews with a number of potential company starters. A number of possible sources were examined in order to find a good choice for telephone interviews. We wanted to have access to data which was a few years old and decided in the first instance to choose individuals who in 1988 could be regarded as having profiled themselves as potential company starters. 1988 was chosen, as we thought that five years was long enough either for the idea to have taken shape in the form of a company, or to have been discarded.

    It proved difficult to get information going back that far in time. However, at two regional development funds it was possible to carry out the research without too much extra work. Names there had been written down together with, in certain cases, telephone number and or address of those people who contacted the development fund during 1988 and 1989 in the capacity of potential company starters. In this way, a list of a total of 1,352 people was made up. It is important to note that these people were potential company starters, i.e. none of them had, at the time they were in contact with their respective development funds, started or registered their company.

    The next step in our investigation was to draw up a questionnaire for telephone interviews with the help of four economists from the college at Orebro. After having carried out about twenty trial interviews as well as having produced a form for data adaptation of the results, we had as an aim to carry out 800 telephone interviews over a period of two working months. This proved to be difficult as it took longer than expected to follow up the personal information that existed for 1988 and 1989. Many people had moved during this period, changed name or address and changed telephone number. This meant that we could only identify 668 people. During the time allocated for telephone interviews, 550 of these people were located, i.e. 82 percent. All except five of the individuals contacted were willing to answer our questions, either wholly or in part.

    Major Findings

    We see the study as the first in a series of reports intended to increase our understanding of the processes from business ideas to the start of a new company. This is why we see the following conclusions are preliminary, more as hypotheses, before knowledge of a more general character can be created.

    * A large number of those carrying a business idea tart start their own company
    * The concentration level plays an important role
    * The majority implement their business idea quite quickly
    * Few people carry their ideas for a long period of time
    * The majority have ideas for starting service companies
    * Business ideas usually have a low newness-value
    * The majority cannot give a reason for not starting a company
    * The motive for starting a company are independence and self-realisation
    * The individual background such as business experience and education plays an important role
    * Many received advice/consultation and or education/training
    * Few of those that turn to the development funds receive financial support

    Implications

    This investigation is, as we see it, one of many needed for the generation of knowledge about the processes from business ideas to the start and developing of a company. Our aim in the investigation has been limited and we have been forced to limit ourselves tot he data available. This might have resulted in our results not being representative in certain respects. In the first place we do not know how representative those individuals are that turned to one of the two development funds studied. What, for example, did the situation look like for individuals that developed business ideas without any contact with the development funds? There is certainly an over representation here of individuals that have business ideas for starting manufacturing companies. On the other hand there are great similarities in our results with what has appeared in other studies. This concerns, for example, a high survival rate, motives for starting a company, few companies that increase the number of employees, many hobby or part-time companies, many ideas aimed at a local or regional market, few companies that go bankrupt as well as many service companies.


    WHY "BUSINESS ANGELS" SAY NO: A CASE STUDY OF OPPORTUNITIES REJECTED BY AN INFORMAL INVESTOR SYNDICATE

    Colin M. Mason

    Department of Geography
    University of Southampton
    Southampton SO17 1BJ
    UNITED KINGDOM

    Telephone
    44-03 592215

    Fax
    44-03 593729

    Richard T. Harrison

    Centre for Executive Development
    Ulster Business School
    University of Ulster at Jordanstown
    Co Antrim BT37 0QB
    Northern Ireland, UK

    Telephone
    44-32 365060

    Fax
    44-32 362831

    Principal Topics

    A significant limitation of our existing knowledge concerning the reasons why informal investors reject investment opportunities is that previous research has focused on the investor rather than the deal; in other words, the factors which have been identified as "deal killers" have been based on generalised rather than deal specific information. This paper examines a sample of 35 deals that were considered and subsequently rejected by Metrogroup, a private investor syndicate in the UK, in order to examine the reasons why the syndicate decided not to invest.

    Method

    The information was gathered by means of a series of taped interviews with the syndicate's instigator, or "archangel", who described a random sample of 35 investment opportunities that the syndicate had considered and discussed the reasons why they were rejected. The analysis was based on a transcript of these interviews.

    Major Findings

    The majority of the investment proposals were rejected at the initial review stage (22 out of 35) which involved a detailed examination of the business plan, including a careful scrutiny of the financial details and, in some cases, one or more meetings with the principals. A further two businesses ruled themselves out of further consideration at this stage. Of the remaining 11 proposals which passed this initial review stage, nine were subsequently rejected after the syndicate had conducted its own detailed research on the marketplace and the principals. Metrogroup was interested in investing in the remaining two proposals, but negotiations were unsuccessful.

    Most investment opportunities were rejected for one or two reasons, with exactly half (16)rejected on the basis of a single deal killer. The most common deal rejection factors are associated with the entrepreneur/management team, marketing and finance. The syndicate was unwilling to invest in businesses that were "one man shows" and where there were significant gaps in the management team. It also rejected opportunities that were judged to have a flawed or incomplete marketing strategy. Other types of projects which were rejected because of marketing deficiencies included those which were likely to encounter distributional barriers and those which were judged to be entering highly competitive markets. Flawed, incomplete or unrealistic financial projections were also significant deal killers, especially at the initial review stage. However, factors associated with pricing and structuring of deals were of very minor significance in the rejection decision. With some specific exceptions, deals rejected at the initial review stage tended to be on the basis of the cumulation of a number of deficiencies rather than for a single reason; conversely, opportunities rejected after further research were more likely to be characterised by a single deal killer.

    Implications

    The implications of this study for entrepreneurs seeking finance from informal investors are three-fold. First, the business plan must be well-developed and realistic and reflect professional advice and input. Potential investors are likely to be turned off by proposals that are not fully worked out. Over-optimistic financial projections will create doubt as to the realistic expectations of the entrepreneur. Conversely, plans which contain specific information and insights about customers and target markets will give the potential investor confidence. The plan must also demonstrate the relevant experience and abilities of the entrepreneur and management team and indicate the ways in which any management gaps will be filled. The business plan should also be used to attract the interest of potential investors by emphasising the financial and market potential of the enterprise.

    Second, the entrepreneur must be prepared to engage in protracted negotiations. Business angels who operate via an informal investor syndicate are likely to require the entrepreneur to prepare a detailed business plan if one does not already exist, may require detailed market research to be undertaken and may suggest an alternative business strategy. Entrepreneurs should therefore allow sufficient time for raising finance from informal investors.

    Third, the case study suggests that a sequential approach to finding an investor, in which the entrepreneur will approach one potential investor at a time, rather than an open approach, in which the entrepreneur simultaneously approaches a number of potential investors, is the more appropriate strategy. Although the open approach is attractive in terms of time and the possibility that a better deal can be achieved if two or more investors are competing to make the investment, business angels are unlikely to be willing to get into a competitive situation with other potential investors and may well walk away.


    THE PERCEPTION OF OPPORTUNITY BY EUROPEAN VENTURE "ANGELS"

    Colin Mason, University of Southampton
    Daniel Muzyka, INSEAD
    Michael Hay, London Business School
    Richard Harrison, University of Ulster
    Hans Landstrom, Hogskolan I Halmstad
    Annareetta Lumme, SITRA

    INSEAD
    Boulevard de Constance
    F-77305 Fontainbleau Cedex
    FRANCE

    Telephone:
    (33) 1 60 72 40 13

    Fax:
    (33) 1 60 72 42 42

    Principal Topics

    The central focus of this work is on the criteria applied by venture angels in evaluating potential investment opportunities. In addition, the research explores the nature of the entrepreneurs private venture "angels" are looking in conjunction with their investment opportunities. This work parallels work done by a set of the authors with venture capitalists and MBO investors.

    Method

    The methods applied in this research include both exploratory and multi-dimensional scaling techniques. A small group of private investors were interviewed concerning the criteria they applied in evaluating opportunity. These were then structured into a conjoint analysis questionnaire in order to explore the relative importance of the criteria. This questionnaire (the "Opportunity Questionnaire") was completed by 34 (to date) venture angels in five different countries in Europe. In addition, a questionnaire designed to explore the leadership characteristics (the "Leadership Questionnaire") investors feel are important in an entrepreneur was also completed by the investors. A total of 56 "leadership" questionnaires have been completed to-date.

    Major Findings

    With regard to the "Opportunity Questionnaire," or questionnaire designed to explore the relative importance of a general set of factors that could describe an investment opportunity, we found there was an overall similarity in rankings between private venture angels and venture capitalists (see Muzyka, Birley, Leleux and Bendixen (BERC, 1992). This provided a general confirmation of existing research on the nature of opportunity as perceived by angles. There was a general pre-eminence of management team characteristics and skill criteria. Factors related to the strategic, product-market and financial characteristics of the opportunity were of moderate importance as compared to the management team factors. Finally, factors related to the nature of the deal and the fit between a particular investment and the investment strategy of the angel were of little importance as compared to other factors. This suggests, as was found in work by Muzyka, et. al. (BERC, 1992) regarding venture capitalists and Muzyka and Hay (BERC, 1993) regarding MBO investors, that venture angels are like any risk capital investor: open to any good investment, whether or not it fits their preconceived investment model or financial limitations. However, angels attached greater emphasis to the specific operational skills of the entrepreneur and the management team as compared to venture capitalists, which probably reflects their relative inability to switch or add players post-deal as compared with venture capitalists. The "Opportunity Questionnaire" findings also suggest that altruism, a factor posited by some researchers as important for venture angels, was found to be relatively unimportant. A cluster analysis of the findings suggest that clusters of venture angels are not as pronounced as those among venture capitalists and MBO investors. This reflects greater heterogeneity among venture angels in their apparent models of opportunity. However, the cluster analysis does suggest that there is a cluster of venture angels who actively seek concrete information on uncertain investments. We would suggest that this is characteristic of a subset of private capitalists who are likely to be quite active in searching for deals, but reluctant to invest. The cluster analysis showed no apparent clustering by "country of origin" of the venture angels. The "Leadership Questionnaire" analysis suggests a very definitive model of "leaders" sought by venture angels. They appear to be seeking individuals who possess strong framing and shaping skills: individuals who create context rather than manage it. Venture angels are seeking individuals who are more grounded in practical business process rather than those who exhibit disproportional strength in higher level organization process (such as create vision and communicating values). In addition, the analysis of the "Leadership Questionnaire," which is identical to a questionnaire distributed to MBO investors by Muzyka and Hay (BERC, 1993), suggests that venture angels are more interested in individuals who possess stronger listening skills as compared with leaders sought by MBO investors. This, and other information contained in the analysis, suggests a desire on the part of venture angels to invest in entrepreneurs who have a more open learning style. In the end, both questionnaires suggest that venture angels believe they are more dependent on the people they invest in and are looking for people who possess a strong, practical set of management and leadership competencies.

    Implications

    The implications from his work contribute to both research and practice. The research improves our understanding of the comparative model of "opportunity" which venture angels appear to possess. This is useful for researchers, those seeking capital from angels and new venture angels who may be interested in better understanding how their colleagues select investments. In addition, this work increases our understanding of the nature of entrepreneurs sought by venture angels. Clearly, angels are looking for business pioneers(individuals who possess the leadership skills to create a new business context.


    EXPLORING THE DYNAMICS OF ENTREPRENEURIAL LEADERSHIP: A CRITICAL ASSESSMENT OF CONSTRUCT VALIDITY

    Maureen McGuigan

    Centre for Executive Education
    Ulster Business School
    University of Ulster
    Shore Road
    Newtownabbey, Co Antrim BT37 0QB
    NORTHERN IRELAND

    Telephone
    44-232 365060 Ext.3173

    Fax
    44-232 362831

    Introduction

    A number of authors have recently begun to draw parallels between contemporary developments in leadership research and entrepreneurship studies. Several theories and models of leadership exist, each seeking to most clearly identify and best explain the presumably powerful effects of behaviour or personality attributes upon the satisfaction and performance of hierarchical subordinates. These theories and models fail to agree in many respects, but have in common the fact that none of them systematically accounts for much criterion variance. Arguably, at a fundamental level, too much attention has been paid to grandiose theory and not enough to research at the item level. Subsequently, partial responsibility for inconsistencies in findings is attributable to deficiencies in measurement i.e. weaknesses in the measures used. Contrary to common belief, the validity of current measures has not been adequately demonstrated.

    Such ambiguity systematically raises questions as to the utility of current entrepreneurial leadership education, training and development programmes. A severe void of evaluative research on such programmes currently exists. Indeed, a substantial proportion of the training and development literature is dominated by low-utility, anecdotal presentations. The material which exists is voluminous, non-empirical, non-theoretical and poorly written.

    One decries the proliferation of the nontheoretical and nonempirical articles which dominate the training literature. Even so, the continued outpouring of such articles, along with the ever changing array of expensive prepacked training programmes, indicates that some basic needs of training directors are not being met by what academic research has thus far provided. Clearly, the theoretical and conceptual difficulties involved in measuring and defining a theoretical model of leadership with clear and significant implications for methodological improvements in research is warranted.

    A recent review of the state of entrepreneurship research notes that entrepreneurship researchers are still using raw data in many of their studies with an emphasis upon percentages. When statistics are used, they generally are at a relatively unsophisticated level such as means, standard deviations, ranking, T-tests, and linear correlation. Undoubtedly, the methodology by which hypotheses are proven or disproven, leading to the developments of constructs and theories, is an area that requires further development or sophistication as the body of knowledge on entrepreneurship expands.

    The argument exists that what is needed is fewer case studies and more studies which are targeted to a specific population or sample and which utilise appropriate statistical techniques that would lead to the external validity of the studies. Moreover, statistical techniques to check the reliability of the data and the instruments used should further be employed.

    A fresh look at the theoretical underpinnings of the entrepreneurial leadership concept, and more important a program of empirical inquiry to explore the viability of assessment is required.

    Three interrelated questions appear relevant at this time:

    Has the investigation of entrepreneurship/leadership variables calcified to the extent that the measures have become isomorphic with the constructs? Can inconsistent research findings be attributed, at least in part, to item sets that may be less than ideal indicators of the complex and subtle abstractions they are designed to measure? Does judging particular scales as appropriate, adequate or satisfactory preclude the need for continuous evaluation and refinement of a measurement system:

    These questions challenge dependence on various measurement scales, call for reexamination of the theoretical foundations of entrepreneurship/leadership from which measures of these constructs derive, and leave open the possibility that other (and perhaps stronger) measures might be identified.

    Method

    The LISREL approach to confirmatory factor analysis (CFA) provides, perhaps, the best available test of validation research; the multitrait-multimethod framework permitting statements about the convergent, discriminant, and, ultimately, the construct validity of the measure.

    The empirical context for this research is the application of an intuitively developed leadership instrument among two samples:

    Corporate managers in a restructuring corporation; and, Senior executives in entrepreneurial companies participating in a leadership development programme

    Findings

    As yet, results are at a preliminary stage. Mean univariate skewness and kurtotic values indicate moderate non-normality of data. Work of specification of first-order factor models has begun.

    Implications

    The findings of such research are not only likely to be of theoretical importance to researchers but further of practical importance for entrepreneurial venture development. Comprehensively addressing the theoretical and conceptual difficulties involved in measuring and defining a model of entrepreneurial leadership, with clear and significant implications for methodological improvements in research is clearly long overdue.


    AN ENTREPRENEURIAL TRAGI-COMEDY: EXPLORING THE DARK SIDE OF VENTURING

    W. Ed McMullan

    Faculty of Management
    The University of Calgary
    Calgary, Alberta, CANADA

    Telephone
    413-220-6117

    Fax
    403-282-0095

    Principal Topics

    An exploration of different stressors in the early years of a new manufacturing firm.

    Method

    A case study based upon the introspection of an entrepreneurship educator starting a manufacturing company.

    Major Findings

    Throughout the entire period, stress originated from a variety of sources: implicit promises to investors, lack of money, lack of sales, co-founder problems and generally from the fact that many things took longer than expected.

    Implications

    First, entrepreneurship researchers probably should consider more study of the negative side of entrepreneurship. Second, entrepreneurship educators who start businesses may provide an interesting perspective of the subject through introspective accounts contrasting their experiences with the findings in the literature.


    ENTREPRENEURIAL STUDIES AS A SEARCH FOR SUCHNESS: A QUALQUANT FUSION

    POSTER SESSION

    G. Dale Meyer
    Mary L. Tucker

    University of Colorado
    College of Business, Campus Box 419
    Boulder, CO 80309

    Telephone
    303-442-4319

    Fax
    303-492-5962

    Principal Topics

    A review of the literature on qualitative research designs is presented. This review offers guidelines on producing rigorous research using such methods in entrepreneurship research. A comprehensive listing of types of qualitative research is presented. A three year retrospective study of five top-tier journals including the Journal of Business Venturing was conducted to categorize type of research designs accepted into three categories: Quantitative, qualitative or the hybrid qualitative-quantitative (qual-quant).

    Method

    A comprehensive literature review was conducted to identify characteristics of rigor in various qualitative research designs so that such methods might be applied to entrepreneurship research. Then, a classification schema was developed to determine the mix of qualitative and quantitative research which appear in the Academy of Management Journal, Administrative Science Quarterly, Strategic Management Journal, Organization Science, and Journal of Business Venturing. Journal editors were also surveyed regarding acceptance of qualitative research for publication.

    Major Findings

    Journal editors claim to be willing to accept qualitative research but assert that the rigor of qualitative submissions is generally very poor. Review of the literature on qualitative research offers guidelines on how to do qualitative research with acceptable rigor. A summary of these guidelines renders the following standards:

    Appropriate data collection and analysis techniques to fit and provide answers to research questions asked. The research questions should lead the data collection and analysis techniques rather that vice versa. Competent, technically correct data collection and analysis (e.g. design of instruments, conduct of interviews, sampling, data reduction and display, proper inferences, and justifiable generalizations). Complete literature review and theory identification as basis for research questions (including making as explicit as possible researcher's own subjectivity). Useful balancing of present research with broader knowledge bases from other bodies of knowledge. Cogent assessment of the value of the research findings (Howell and Eisenhart, 1990).

    Table 3 shows that quantitative studies comprise nearly 75% of the published articles in AMJ, SMJ and (surprisingly) JBV, while purely qualitative research accounts for less that 10% of accepted articles in these journals. SMJ, ASQ and OS published nearly 20% of their articles in the qual-quant category. Again, interestingly JBV seems to have moved increasingly into the quantitative camp.

    Implications

    Whereas numerous scholars argue that entrepreneurship research needs to emphasize qualitative (grounded) methods, few journals have accepted such work. If qualitative research is to be accepted for publication, researchers need to immerse themselves in standards utilizing methodologies which are clearly rigorous. The probability of publishing qualitative research has been extremely low.


    STRATEGY, STRUCTURE, AND PERFORMANCE IN FRANCHISE SYSTEMS

    Steven C. Michael

    School of Business Administration
    Mail Stop 1D1
    George Mason University
    Fairfax, VA 22030-4444

    Telephone
    703-993-1787

    Fax
    703-993-1793

    E-Mail
    smichae2@sba01.gmu.edu

    Motivation

    Franchising is an organizational form chosen by management in order to compete in product markets. In this paper the relationship among competition in product markets (strategy), the franchise contract (structure), and profit performance is explored among franchisors in the restaurant industry.

    Method

    Following the methodology of strategic taxonomies of Galbraith and Schendel (1983 SMJ), data on product market choices affecting competition (such as advertising and investment required) were factor analyzed and the results used to identify strategies. Structural variables affecting internal organization and incentives (such as royalty and partial vertical integration) were next tested for significant differences across strategies using predictions from agency theory. Observations were taken on 102 restaurant companies, including 38 of the 40 largest in the industry. Some data came from industry sources, but most came from the Uniform Franchise Offering Circular (UFOC), used by the franchisor to explain the franchise contract and describe the system to the franchisee.

    Major Findings

    Three types of strategies emerged: firms with high utilization and few locations (a Volume strategy); firms with lower sales but many locations and high advertising and promotion (a Density strategy); and firms that are geographically focused (a Focus strategy). Structural variables such as royalty rate, percentage of company owned units, and inspection of units varied systematically with the strategy chosen in ways consistent with agency theory and transaction cost economics. For example, the royalty rate was lower for the Volume strategy than for the Density strategy; because franchisee effort is more important in the execution of Volume, more incentive through a lower royalty payment is offered. But performance was independent of the choices of structure and strategy. Franchisor profitability depended upon the effectiveness with which strategy is executed (the factor score) but not upon the structural variables directly.

    Implications

    Different strategic groups for the restaurant industry exist, without appreciable differences in profitability. A given product market strategy must be implemented with a structure consistent with the strategy, granting appropriate latitude and incentives to franchisees. But when choosing structural variables, the focus must be to control agency; structural variables do not generate profits. The skill with which the strategy is executed and the capital structure of the franchisor are the only influences on profitability.


    RETURNS TO FRANCHISING

    Steven C. Michael
    Hollie J. Moore

    School of Business Administration
    Mail Stop 1D1
    George Mason University
    Fairfax, VA 22030-4444

    Telephone
    703-993-1787

    Fax
    703-993-1793

    E-Mail
    smichae2@sba01.gmu.edu

    Motivation

    Franchisees provide capital to build units and labor to manage those units within the franchise system, so compensation to franchisees should include a return to capital and a return to labor. In addition, agency theory suggests that franchisees may receive a return based on product differentiation that facilitates coordination within the franchise system. Therefore, a model of franchisee compensation was estimated to compute a return to capital, a return to labor, and a return to product differentiation.

    Method

    As part of the offering circular describing the business opportunity, many franchisors make an earnings claim stating the expected profitability of the franchise. A sample of 71 franchise companies in four broad lines of business (auto services, business services, restaurants, and retail) that disclose historical earnings of franchisees was examined. Earnings were explained using a linear regression model with initial investment required, sales generated by the franchise unit (measuring labor required), royalty charged by the franchisor (measuring labor required), royalty charged by the franchisor (measuring differentiation), the experience of the franchisee, and control variables. In addition, a quantile regression was run to estimate returns at the first quartile, the median, and the third quartile. This technique gave a profile of returns to franchising.

    Major Findings

    Franchisees are earning about four and a half percent on investment, which seems low given the risk of business failure and returns to alternative financial instruments. Franchisees are also earning four percent on sales, which approximately matches the royalty on sales charged by franchisors. Finally, differentiation has a positive influence on earnings, confirming agency theory's predictions. The profile of earnings reveals that franchisees are paid approximately the same return on capital in the high, median, or low quartile, but receive much higher returns to labor as earnings rose. Differentiation has less effect on earnings at the highest levels. The differences in returns between more profitable and less profitable franchisees depends upon unit sales.

    Implications

    First, the research measured and documented the earnings of franchisees by input. Second, the role of the franchisee is clarified. Franchisees are used both as bankers (as the popular press suggests) and as local managers (as academic research suggests), but their prosperity depends more on their managerial abilities to improve sales. Thus wealth is generated by their marketing efforts, and they are true entrepreneurs. Third, the parameters of the model provide a useful managerial tool for forecasting franchisee earnings by prospective franchisees or setting royalties by franchisors.


    BRIDGING THE GAP? MARKETING CONSULTANCY & THE SMALLER FIRM

    David Molian
    Sue Birley

    The Management School
    Imperial College
    53 Prince's Gate
    Exhibition Road
    London SW7 2PG
    UNITED KINGDOM

    Telephone
    David Molian:
    44-71 589 5111 ext. 7126

    Sue Birley:
    44-71 589 5111 ext. 7003

    Fax
    44-71 823 7685

    Principal Topics

    This study reports empirical findings on the impact of marketing consultancy on the SME sector in the UK. Prior research indicates that such consultancy frequently underperforms in terms of client firms' expectations. The firms sampled in this study have participated in a major government-sponsored initiative during 1991 and 1992. This paper describes their degree of managers' marketing orientation, the diversity of marketing practice in the firm pre and post the consultancy and respondents' views on the impact of the consultancy intervention.

    Method

    Following pre-testing by means of pilot cases, a structured six-part questionnaire was mailed to 681 addressees who were asked to give agreement/disagreement, or to evaluate effectiveness, in response to statements or questions. 1-5 Lickert scales were the prime instrument of measurement. Respondents were made up of two sample populations. The first had participated in the initiative during quarters two and three, 1991; the second group took past during the same quarter, in 1992. 193 usable responses were received. The profile of respondents was representative of all firms participating in the initiative as classified by SI Codes. Responses from the two populations were then compared for significant differences by chi-squared tests and "t" tests.

    Major Findings

    Preliminary Results showed that the populations were extremely similar across a range of measures, but diverged significantly as far as overall impact of the consultancy on the business was concerned, leading the authors to postulate a time effect. In particular: results confirmed recent empirical work on small firm orientation, with respondents endorsing key components of the marketing concept as developed by Kotler and others the consultancy had clearly impacted on the firms' marketing planning and on the general level and range of marketing activities, which had increased the consultancy was not generally perceived to have directly benefited the firm in terms of sales or profitability; conversely, a pattern emerged of a general perception that the consultancy had assisted the firm in its focus on marketing and its ability to compete.

    Implications

    The impact of consultancy intervention of this kind needs to be carefully qualified. This initial analysis supports earlier findings that questions the outcome in terms of improved financial performance; however, there may be other types of less quantifiable benefit resulting, which are manifested in increased levels of marketing activity within the firm and a greater sense of competence and focus. There also grounds for a "decay" effect, the implication for public policy-makers being that one-off consultancy exercises should be reinforced by subsequent assistance if the full benefits of intervention are to be realised.


    CULTURAL SIMILARITIES AND DIFFERENCES: A COMPARISON OF SMALL BUSINESSES AND ENTREPRENEURIAL FIRMS.

    Michael H. Morris
    Donald L. Sexton
    Foard F. Jones

    School of Business and Public Administration
    University of the Pacific
    3601 Pacific Avenue
    Stockton, CA 95211

    Telephone
    209-946-2260

    Fax
    209-946-2586

    Principal Topics

    The distinction between traditional small businesses and entrepreneurial firms was investigated. Emphasis is placed on the latter group's positive orientation toward innovation and growth, and the former group's tendency toward the status quo. Using available measures of a company's entrepreneurial orientation, samples of each type of firm were constructed. Comparisons were then made between the two samples in terms of their organizational cultures. Key cultural dimensions examined include task support, social relationships, personal freedom, individualism, need for security, work centrality, need for authority, and cooperation.

    Method

    Upper and middle-level managers from 30 firms located in Central Florida were personally administered a self-report questionnaire. Sample firms were evenly divided among the computer software, manufacturing, and hospitality industries. All had fewer then fifty employees and had been in business between three and eight years. Three respondents participated from each firm, including the president or CEO. Each respondent had been with the firm for at least three years. The instrument consisted of 109 items. Measures of entrepreneurship included a 13-item scale adapted from Miller and Friesen (1983) and others, and measures of growth orientation adapted from Davidsson (1989). Culture measures were adapted from Breer and Locke (1965), Hofstede (1980;1990), Kilmann and Saxton (1983), Earley (1989), and Wallach (1993).

    Major Findings

    Principal axis factor analysis was run on the culture measures, resulting in six factors explaining 72% of the variance. Reliabilities were computed for each factor, with the following four dimensions having acceptable reliability coefficients: task orientation, socialiability, collaboration, and individualism. MANOVA was then run to test for differences on the culture items across respondents from each firm, and across industries. As no significant differences were found, all 90 cases were used in subsequent analysis. A median split was then used to dichotomize firms based on their attitudes toward growth (positive-negative) and entrepreneurial orientation (high-low). MANOVA results indicated significant cultural differences between entrepreneurial firms and small businesses on three of the four cultural dimensions. Specifically, entrepreneurial firms tended to be more task oriented, collaborative, and collectivist.

    Implications

    The findings lend support to the distinction between traditional small businesses, or lifestyle enterprises, and entrepreneurial firms. Given the extensive emphasis on the economic contributions of the entrepreneurial sector, it is vital that a better understanding of this sector be achieved. These results suggest entrepreneurial firms develop unique cultures, at least compared to other small businesses. These cultures are centered around teamwork, a commitment to organizational over individual interests, and an orientation toward task achievement and improvement. Organizations wishing to foster entrepreneurship are encouraged to balance the individual against the team, to balance competition against cooperation, to emphasize organization-based measures of performance and rewards, and to concentrate resources on removing obstacles to task achievement.


    THE ROLE OF PROFESSIONAL ADVISERS IN THE MANAGEMENT TEAM'S SEARCH FOR VENTURE CAPITAL FINANCE IN UNITED KINGDOM MANAGEMENT BUY-OUTS AND BUY-INS

    Gordon Murray
    Bruce Nixon
    Paul Pounsford
    Mike Wright

    Warwick Business School
    University of Warwick
    Coventry CV4 7AL
    ENGLAND

    Telephone
    44-203 524622

    Fax
    44-203 524628

    Principal Topics

    The process by which management teams, wishing to finance a management buy-out or buy-in (MBO/MBI), seek to identify and subsequently select a venture capital partner was studied. Of particular emphasis was the role played by the external, key professional adviser including the level of influence ascribed to the adviser by management. The study also sought to understand holistically the venture finance raising process from the perspective of the management team as clients of professional service providers in order to highlight marketing opportunities for venture capitalist or professional intermediary firms.

    Method

    A sample of seventy CEO respondents was randomly selected from a population of 153 UK based, MBOs/MBIs, of between (2-10 million deal size, created in the period January 1991 to June 1993. All respondents had successfully raised initial equity funding from a venture capitalist. Five respondents were initially interviewed personally. The remaining sixty five managers were interviewed by telephone using a semi-structured interview schedule. All respondents were senior founder members of the MBO/MBI teams. The intervention of the key professional adviser in the management team's search for venture capital was differentiated into his/her role in i) the identification of a subset of potential venture capital investors and ii) in the final selection of a venture capital partner. The respondents were subsequently asked to complete a short postal questionnaire giving their satisfaction ratings with the overall performance of their venture capitalist investor and their key professional adviser. A number of statistical tests were undertaken in order to determine those factors which had influenced the management teams' satisfaction with both funders and advisers.

    Major Findings

    In forty percent of all sampled firms, the management team had identified a number of prospective venture capital investors prior to recruiting their key professional adviser. The adviser was highly influential in identifying potential sources of venture capital funding on only 25% of occasions. In the final decision to select a particular venture capital partner, the influence of the key professional adviser was strongly subordinate to that of the management team. Only 9% of respondents acknowledged the key professional adviser as being highly influential in this decision. More specialist venture capital providers, although having a smaller market share than 3i plc or the major clearing banks' venture capital subsidiaries, were accorded higher satisfaction rating for their overall performance. Satisfaction with key professional advisers appeared to be higher for those management teams undertaking the larger deals (L6-10 million). Respondents' satisfaction with the venture capitalist funder was associated with satisfaction with the team's key professional adviser.

    The respondents were almost universal in their criticism of the complexity and inefficiency of the venture finance raising process. Complaints were particularly leveled at the degree of duplication of effort by the various professional parties involved in the deal arrangements, and the practice by some venture capitalists of unilaterally changing elements of the agreed deal at a very late stage of the negotiations. Given that the majority of MBOs/MBIs were a result of corporate head-offices' decision to hive of the managers' division or enterprise, the potential new owners were under severe pressures to both demonstrate their credibility to vendors and to meet the deadlines for the funding arrangements. Last minute changes to the negotiated funding package were therefore seen as unethical and a significant additional negative factor in an already highly stressful situation.

    Implications

    In an increasingly mature and competitive market for MBOs/MBIs in the UK, management teams of attractive potential investments are increasingly able to negotiate from greater strength. Managers are also now becoming more informed and/or better advised regarding the nature of the MBO/MBI financing process as are their professional advisers. Until the onset of recession in the UK, venture capital providers could exploit the relatively ill informed management team. Pressures on venture capitalists to improve the efficiency of the process and to become more 'client centred' were not great given that the overwhelming majority of managers would only ever undertake an MBO/MBI once in their careers. The research frequently indicated a surprisingly limited influence of the key professional adviser in the capital search process. This has major implications for those venture capital firms that concentrate exclusively on professional intermediaries in order to generate attractive deal flow. The dissatisfaction of many managers with the fund raising process and its apparently unnecessary complexity and duplication would also suggest that the managements' professional advisers are not always meeting the expectations of their clients. It is suggested that this situation is unstable and reflects a still immature industry in terms of its service performance. It is further suggested that these inefficiencies also represent an opportunity for venture capital and/or professional intermediary firms to gain competitive and cost advantages by re-engineering the process to meet legitimate client expectations.


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    Last updated November 11, 1996 by Frank Lafleur