AN APPLICATION OF THE MODEL OF THE PRE-FIRM
In this section, the model of the pre-firm is applied to the case of the creation of U-Haul.
In 1945, Leonard Schoen started with the following idea: One way rentals of moving vans/trucks. In transforming this idea into U-Haul, he had to make the following entrepreneurial decisions:
1. Decisions involving resources
How many moving vans/trucks should he buy?
How many locations would he need to open?
2. Decisions involving stakeholders
How many employees should he hire? (One per location? Or more?)
Who should he raise the capital from?
3. Decisions involving the environment
Should he open a few locations regionally-or go national at once?
How should he establish his market presence-advertise? If so, how?
Putting it all together, how should he price the product?
If each of these entrepreneurial decisions is examined only within its own domain, the best theory and practice within the domain fail to lead to a good decision. That is why for many years, no firm arose to satisfy a growing demand during the high-production war years for this particular service. In fact, when this case is used in a class discussion in a business school, students typically come to the conclusion that this is not a viable project-the resource constraints overwhelm any attempt to price the service viably.
Schoen's solution exchanges resource constraints for a variety of stakeholder constraints to create an almost instantaneous national presence. He convinced several friends and family members to individually make down payments on trucks and lend him the use of the trucks; he contracted with a national chain of gas stations for the use of their locations; the customers advertised U-Haul's existence through the name and the uniquely painted trucks; and with hardly any employees and a ridiculously small outlay of funds, U-Haul came into being .
The role of the entrepreneur is also starkly highlighted in this application of the model of the pre-firm-because it brings out the importance of implementation in the entrepreneurial process. The conceptual solution of the problem of one way rentals of moving vans is no more than a necessary condition for U-Haul to come into existence. Sufficiency is provided by the implementation of the conceptual solution. In this case, implementation calls for very specific abilities from the entrepreneur in personally persuading each stakeholder and creating a feasible set of contracts.
The decisions that Schoen made in creating U-Haul also precluded a high concentration of ownership-he had to considerably dilute his ownership in implementing the pre-firm. Understanding U-Haul's pre-firm decisions could presumably help us anticipate and explain possible agency problems in its future. U-Haul carries within its pre-firm the reason for its form, structure, scope and strategic potential.
THE PRE-FIRM-EMPIRICAL INVESTIGATIONS
While a considerable body of literature-both theoretical and empirical-exists to inform our understanding of the three entrepreneurial decision domains of resources, stakeholders and the environment as they occur in a firm, very little work has been done to connect them with the domain of the entrepreneur and thereby understand the pivotal role of the pre-firm in economics.
The model of the pre-firm presented in this paper has been used by the author to construct a set of generic decision problems characterizing the entrepreneurial process. This set of decision problems is being used in an empirical study of 45 successful entrepreneurs in the US. The purpose of the study is to build a cognitive profile of the expert entrepreneur (the word expert is used here in the context of the cognitive science literature on experts and novices-Ericsson & Simon, 1993) that can be used to develop historical, empirical and experimental research programs to study the pre-firm and build its theory. Preliminary results from a pilot study indicate that entrepreneurs do focus on constraints more than on expected outcomes; and tend to develop a purely subjective vision of future demand that influences most of their entrepreneurial decisions.
THE PRE-FIRM-POSSIBILITIES FOR THEORETICAL LINKAGES
This section briefly sketches examples of possible payoffs that building a theory of the pre-firm could bring to existing theories of the firm.
Schumpeter and Kirzner-precursors to the idea of the
Every pre-firm is an opportunity for the economy to create novelty. Although they did not precisely articulate a theory of the pre-firm, Schumpeter and Kirzner recognized its potential for economic novelty from two complementary perspectives (Kirzner, 1992). While Schumpeter described the entrepreneur as the creator of disequilibrium, Kirzner saw him/her as a recognizer of disequilibrium who moves the economy back to equilibrium. Together they provide the seeds of the insight presented in this paper: viz., the entrepreneurial process is essentially a pre-firm process and differs substantially from the received concept of the "firm" in economics and consequently its relation to equilibrium processes also is different from that of the firm..
Profit maximization versus value creation in the pre-firm
Researchers in the area of entrepreneurship have long understood the importance of differences between profits and value-especially in the macro-economic arena. While an individual firm can make profits by merely redistributing the wealth in an economy, true value creation involves an increase in the aggregate wealth of the economy as a whole (Venkatraman, 1996). A good theory of the pre-firm should tell us which entrepreneurial decisions lead merely to profit making and which ones lead to value creation.
The role of the pre-firm in the development of non-profit
For-profit firms are only a small subset of social institutions in general. Is there, then, a theory of the pre-firm for social institutions other than economic firms? Even more interestingly, why are there non-profit enterprises? Or conversely, why are there for-profit firms? Questions such as these could be studied to lead to valuable insights through the development of a detailed theory of the pre-firm that is effectively generalized to include other types of social institutions. An example is the health-care industry where both non-profit and for-profit firms compete.
The pre-firm and the emergence of firm diversity
The issue of firm diversity is at the heart of strategic theories of the firm. An understanding of the pre-firm in general, and the role of the entrepreneur in particular, can lead to a meaningful understanding of firm diversity. For example, even in a mundane industry such as manufacturing ice cream, the role of the entrepreneur is crucial in explaining firm diversity-the development of a firm such as Ben & Jerry's cannot be explained merely through arguments about strategic concepts or other economic artifacts.
In addition to the examples listed above, several questions in areas such as agency theory, contract theory, capital theory, theories of growth, etc., can be traced back to the pre-firm and understood in terms of the role of initial conditions and entrepreneurial decisions-a perspective that has thus far been largely ignored by these areas.
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Last Updated 03/01/98