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4.1 Entrepreneurial Process
- Understand the constituent elements of the entrepreneurial process.
- Gain appreciation for how the elements fit together to form a whole.
In this chapter, we examine the ways in which entrepreneurial ventures combine the classic entrepreneurial process with sustainability concepts. This combination encompasses design approaches and corporate competencies that generate new offerings that achieve revenue growth and profitability while enhancing human health, supporting ecological system stability, and contributing to the vitality of local communities. This chapter shows the interconnections across sustainability, innovation, and entrepreneurship to give the reader greater understanding of a current global phenomenon: the search for new products, technologies, and ways of conducting business that will replace the old with designs intended to help solve some of society’s most challenging issues.
When products are designed and business strategies are structured around systems thinking that is associated with sustainability, the outcome, as in any system composed of interacting and interdependent parts, emerges as larger than the sum of its constituent elements. So we should keep in mind, as we dissect the entrepreneurial process into its core elements, that we do so for analytic purposes—first to understand the individual parts and then to see how they come together. Once that picture is clear, the reader will have gained new insights into what entrepreneurs active in the sustainability innovation space actually do. The Walden Paddlers case discussed in Chapter 4 "Entrepreneurship and Sustainability Innovation Analysis", Section 4.5 "Adaptive Collaboration through Value-Added Networks", is a representative example of this approach.
Bear in mind that sustainability, innovation, and entrepreneurship are terms used to represent a wide range of ideas, depending on the context. However, just because they have come into common use and have been interpreted broadly does not mean they cannot be defined in focused and practical ways to help guide entrepreneurial individuals in business. Individuals and companies are, in fact, implementing sustainability designs and strategies through the use of innovative initiatives. At the present time, these three terms—sustainability, innovation, and entrepreneurship—are our best and most accurate descriptors of what is happening in the marketplace. No one term covers all the ground required. In the following sections, we examine entrepreneurial process and then discuss sustainability concepts to explain how the necessary parts merge to create a holistic picture.
Entrepreneurial activity can seem mysterious for those not familiar with the phenomenon. US culture has created heroic myths around its most famous entrepreneurs, reinforcing the idea that entrepreneurship is about individuals. As a consequence, many people believe those individuals are born entrepreneurs. In fact, it is more accurate to talk about entrepreneurship as a process. More frequently than not, a person becomes an entrepreneur because she or he is compelled to pursue a market opportunity. Through that activity—that process—entrepreneurship unfolds. A typical story of entrepreneurship is one in which the entrepreneur is influenced by his or her engagement with favorable conditions, circumstances in which an idea comes together successfully with a market opportunity. An individual has an idea or sees a problem needing a solution and generates a way to meet that need. A new venture is initiated and, if successful, an ongoing business created. Thus entrepreneurship—the creation of new ventures as either new companies or initiatives within larger organizations—is about the process of individuals coming together with opportunities, resulting in specific customers being provided with new goods and services.
For purposes of this discussion, entrepreneurship is not constrained to starting a company. While that definition is commonly assumed, entrepreneurship and entrepreneurial innovation can occur in a variety of settings including small or large companies, nonprofit organizations, and governmental agencies. Entrepreneurship emerges under widely diverse circumstances, typically in response to new conditions and in pursuit of newly perceived opportunities. We focus here not on the average new venture set up to compete under existing rules against existing companies and delivering products or services comparable to those already in the market. Rather, our focus is on entrepreneurial innovators who forge new paths and break with accepted ways of doing business, creating new combinations that result in novel technologies, products, services, and operating practices—that is, substantial innovation.
In that regard, our approach is aligned with entrepreneurship as defined by twentieth-century economist and entrepreneurship scholar Joseph Schumpeter, who pointed out that change in societies comes as a result of innovation created by entrepreneurs. His emphasis was on innovation and the entrepreneur’s ability through innovation to generate new demand that results in significant wealth creation. Peter Drucker, a twentieth- and twenty-first-century scholar of entrepreneurship, echoed similar ideas many decades later. Entrepreneurship is innovative change through new venture creation; it is the creation of new goods and services, processes, technologies, markets, and ways of organizing that offer alternatives with the intention of better meeting people’s needs and improving their lives. Innovation encompasses the creative combination of old and novel ideas that enables individuals and organizations to offer desired alternatives and replacements for existing products and services. These innovative products and ways of doing business, typically led by independent-thinking entrepreneurial individuals, constitute the substitutions that eventually replace older products and ways of doing things. Sustainability entrepreneurship and innovation build on the basics of this accepted view of innovation and entrepreneurship and extend it to encompass life-cycle thinking, ecological rules, human health, and social equity considerations.
Understanding entrepreneurial processes and the larger industrial ecosystem at work requires that we break down the subject matter into separate pieces and then recombine them. The pieces need to be examined on their own merit and then understood in relation to one another. We start with understanding the entrepreneurial process and move to examining the elements of sustainability innovation. Each piece is a necessary, but not sufficient, part of the puzzle. By examining the pieces carefully, we can see in Chapter 4 "Entrepreneurship and Sustainability Innovation Analysis", Section 4.1 "Entrepreneurial Process", how the entrepreneurial process unfolds and in Chapter 4 "Entrepreneurship and Sustainability Innovation Analysis", Section 4.2 "Systems Thinking", what entrepreneurial leaders do to integrate sustainability principles.
Bear in mind that the mental exercise required in the following discussion is useful not only as an analytic approach for entrepreneurs or investors but also to set out core business plan elements. Business plans require elaboration on the market opportunity, a thorough understanding of what the entrepreneur brings to the business and the qualifications of the management team, and a clear articulation of the product or service offered and why a customer would purchase it. The business plan also must discuss the resources needed to launch the business and the market entry strategy proposed to establish early sales, lock in reliable suppliers, and provide a platform for growth. Thus learning and applying the analytical steps discussed in this section has direct synergies with writing a business plan.
Analysis of Entrepreneurial Process
Successful entrepreneurship occurs when creative individuals bring together a new way of meeting needs and a market opportunity. This is accomplished through a patterned process, one that mobilizes and directs resources to deliver a specific product or service to customers using a market entry strategy that shows investors financial promise of building enduring revenue and profitability streams. Sustainability adds to the design of a product and operations by applying the criteria of reaching toward benign (or at least considerably safer) energy and material use, a reduced resource footprint, and elimination of inequitable social impacts due to the venture’s operations, including its supply-chain impacts.
Entrepreneurial innovation combined with sustainability principles can be broken down into the following five key pieces for analysis. Each one needs to be analyzed separately, and then the constellation of factors must fit together into a coherent whole. These five pieces are as follows:
- Product concept
- Entry strategy
Successful ventures are characterized by coherence or “fit” across these pieces. The interests and skills of the entrepreneur must fit with the product design and offering; the team’s qualifications should match the required knowledge needed to launch the venture. The market opportunity must fit with the product concept in that there must be demand in the market for the product or service, and of course, early customers (those willing to purchase) have to be identified. Finally, sufficient resources, including financial resources (e.g., operating capital), office space, equipment, production facilities, components, materials, and expertise, must be identified and brought to bear. Each piece is discussed in more detail in the sections that follow.
The opportunity is a chance to engage in trades with customers that satisfy their desires while generating returns that enable you to continue to operate and to build your business over time. Many different conditions in society can create opportunities for new goods and services. As a prospective entrepreneur, the key questions are as follows:
- What are the conditions that have created a marketplace opportunity for my idea?
- Why do people want and need something new at this point in time?
- What are the factors that have opened up the opportunity?
- Will the opportunity be enduring, or is it a window that is open today but likely to close tomorrow?
- If you perceive an unmet need, can you deliver what the customer wants while generating durable margins and profits?
Sustainability considerations push this analysis further, asking how you can meet the market need with the smallest ecological footprint possible. Ideally, this need is met through material and energy choices that enhance natural systems; such systems include healthy human bodies and communities as well as environmental systems. Sustainability considerations include reducing negative impact as well as working to improve the larger system outcomes whenever and wherever financially possible. Let us examine the different pieces separately before we try to put them all together. The Walden Paddlers case in Chapter 4 "Entrepreneurship and Sustainability Innovation Analysis", Section 4.5 "Adaptive Collaboration through Value-Added Networks", provides a company example to apply these concepts in their entirety.
Opportunity conditions arise from a variety of sources. At a broad societal level, they are present as the result of forces such as shifting demographics, changes in knowledge and understanding due to scientific advances, a rebalancing or imbalance of political winds, or changing attitudes and norms that give rise to new needs. These macroforces constantly open up new opportunities for entrepreneurs. Demographic changes will dictate the expansion or contraction of market segments. For example, aging populations in industrialized countries need different products and services to meet their daily requirements, particularly if the trend to stay in their homes continues. Younger populations in emerging economies want products to meet a very different set of material needs and interests. Features for cell phones, advanced laptop computer designs, gaming software, and other entertainment delivery technologies are higher priorities to this demographic group.
Related to sustainability concerns, certain demographic shifts and pollution challenges create opportunities. With 50 percent of the world’s population for the first time in history living in urban areas, city air quality improvement methods present opportunities. Furthermore, toxicological science tells us that industrial chemicals ingested by breathing polluted air, drinking unclean water, and eating microscopically contaminated food pass through the placenta into growing fetuses. We did not have this information ten years ago, but monitoring and detection technologies have improved significantly over a short time frame and such new information creates opportunities. When you combine enhanced public focus on health and wellness, advanced water treatment methods, clean combustion technologies, renewable “clean” energy sources, conversion of used packaging into new asset streams, benign chemical compounds for industrial processes, and local and sustainability grown organic food, you begin to see the wide range of opportunities that exist due to macrotrends.
When we speak of an opportunity, we mean the chance to satisfy a specific need for a customer. The customer has a problem that needs an answer or a solution. The opportunity first presents itself when the entrepreneur sees a way to innovatively solve that problem better than existing choices do and at a comparable price. Assuming there are many buyers who have the same problem and would purchase the solution offered, the opportunity becomes a true business and market opportunity. When opportunities are of a sufficient scale (in other words, enough customers can be attracted quickly), and revenues will cover your costs and promise in the near term to offer excess revenue after initial start-up investment expenditures are repaid, then you have a legitimate economic opportunity in the marketplace.
It is important to understand that ideas for businesses are not always actual opportunities; unless suppliers are available and customers can be identified and tapped, the ideas may not develop into opportunities. Furthermore, an opportunity has multiple dimensions that must be considered including its duration, the size of the targeted market segment, pricing options that enable you to cover expenses, and so forth. These dimensions must be explored and analyzed as rigorously as possible. While business plans can serve multiple purposes, the first and most important reason for writing a business plan is to test whether an idea is truly an economically promising market opportunity.
The opportunity and the entrepreneur must be intertwined in a way that optimizes the probability for success. People often become entrepreneurs when they see an opportunity. They are compelled to start a venture to find out whether they can convert that opportunity into an ongoing business. That means that, ideally, the entrepreneur’s life experience, education, skills, work exposure, and network of contacts align well with the opportunity.
However, before we talk about alignment, which is our ultimate destination, we look at the entrepreneur. Consider the individual entrepreneur as a distinct analytic category by considering the following questions:
- Who is this person?
- What does this person bring to the table?
- What education, skills, and expertise does this person possess?
Like the opportunity, the entrepreneur can be broken down into components. This analysis is essential to understanding the entrepreneur’s commitment and motivations. Analysis of the entrepreneur also indicates the appropriateness of the individual’s capacities to execute on a given business plan. The components are as follows:
- Values. What motivates the individual? What does he or she care enough about to devote the time required to create a new venture?
- Education. What training has the individual received, what level of formal education, and how relevant is it to the tasks the venture requires to successfully launch?
- Work experience. Formal education may be less relevant than work experience. What prior jobs has the individual held, and what responsibilities did he have? How did he perform in those positions? What has he learned?
- Life experience. What exposure to life’s diversity has the individual had that might strengthen (or weaken) her competencies for building a viable business?
- Networks. What relationships does the individual bring to the venture? Have her prior experiences enabled her to be familiar and comfortable with a diverse mix of people and institutions so that she is able to call upon relevant outside resources that might assist with the venture’s execution?
If any one category could claim dominance in shaping the outcome of an innovative venture, it is that of the entrepreneur. This is because investors invest in people first and foremost. A good business plan, an interesting product idea, and a promising opportunity are all positive, but in the end it is the ability of the entrepreneur to attract a team, get a product out, and sell it to customers that counts. While management teams must be recruited relatively quickly, typically there is an individual who initially drives the process through his or her ability to mobilize resources and sometimes through sheer force of will, hard work, and determination to succeed. In challenging times it is the entrepreneur’s vision and leadership abilities that can carry the day.
Ultimately, led by the entrepreneur, a team forms. As the business grows, the team becomes the key factor. The entrepreneur’s skills, education, capabilities, and weaknesses must be augmented and complemented by the competencies of the team members he or she brings to the project. The following are important questions to ask:
- Does the team as a unit have the background, skills, and understanding of the opportunity to overcome obstacles?
- Can the team act as a collaborative unit with strong decision-making ability under fluid conditions?
- Can the team deal with conflict and disagreement as a normal and healthy aspect of working through complex decisions under ambiguity?
If a business has been established and the team has not yet been formed, these questions will be useful to help you understand what configuration of people might compose an effective team to carry the business through its early evolutionary stages.
Successful entrepreneurial processes require entrepreneurs and teams to mobilize a wide array of resources quickly and efficiently. All innovative and entrepreneurial ventures combine specific resources such as capital, talent and know-how (e.g., accountants, lawyers), equipment, and production facilities. Breaking down a venture’s required resources into components can clarify what is needed and when it is needed. Although resource needs change during the early growth stages of a venture, at each stage the entrepreneur should be clear about the priority resources that enable or inhibit moving to the next stage of growth. What kinds of resources are needed? The following list provides guidance:
- Capital. What financial resources, in what form (e.g., equity, debt, family loans, angel capital, venture capital), are needed at the first stage? This requires an understanding of cash flow needs, break-even time frames, and other details. Back-of-the-envelope estimates must be converted to pro forma income statements to understand financial needs.
- Know-how. Record keeping and accounting and legal process and advice are essential resources that must be considered at the start of every venture. New ventures require legal incorporation, financial record keeping, and rudimentary systems. Resources to provide for these expenses must be built into the budget.
- Facilities, equipment, and transport. Does the venture need office space, production facilities, special equipment, or transportation? At the early stage of analysis, ownership of these resources does not need to be determined. The resource requirement, however, must be identified. Arrangements for leasing or owning, vendor negotiations, truck or rail transport, or temporary rental solutions are all decision options depending on the product or service provided. However, to start and launch the venture, the resources must be articulated and preliminary costs attached to them.
The Product/Service Concept
What are you selling? New ventures offer solutions to people’s problems. This concept requires you to not only examine the item or service description but understand what your initial customers see themselves buying. A customer has a need to be met. He or she is hungry and needs food. Food solves the problem. Another customer faces the problem of transferring money electronically and needs an efficient solution, a service that satisfies the need. Automatic teller machines are developed and services are offered. Other buyers want electricity from a renewable energy source; their problem is that they want their monthly payments to encourage clean energy development, not fossil fuel–based electricity. In any of these situations, in any entrepreneurial innovation circumstance in fact, as the entrepreneur you must ask the following questions:
- What is the solution for which you want someone to pay?
- Is it a service or product, or some combination?
- To whom are you selling it? Is the buyer the actual user? Who makes the purchase decision?
- What is the customer’s problem and how does your service or product address it?
Understanding what you are selling is not as obvious as it might sound. When you sell an electric vehicle you are not just selling transportation. The buyer is buying a package of attributes that might include cutting-edge technology, lower operating costs, and perhaps the satisfaction of being part of a solution to health, environmental, and energy security problems.
Another category to examine carefully at the outset of a venture is market entry strategy. Your goal is to create something where nothing previously existed. Mobilizing resources, analyzing your opportunity, producing your first products for sale—none of these proves the viability of your business. Only by selling to customers and collecting the payments, expanding from those earliest buyers to a broader customer base, and scaling up to sufficient revenue streams to break even and then profit do you prove the enduring viability of the enterprise. Even then, a one-product operation is not a successful business; it is too vulnerable. A successful entrepreneur should consider additional products or services. Living through the early stages of a venture educates you about the customer and market and can point you to new opportunities you were unable to see previously. Your product concept at the end of year two may be, and often is, different from your original vision and intent.
The process of entrepreneurship melds these pieces together in processes that unfold over weeks and months, and eventually years, if the business successful. Breaking down the process into categories and components helps you understand the pieces and how they fit together. What we find in retrospect with successful launches is a cohesive fit among the parts. The entrepreneur’s skills and education match what the start-up needs. The opportunity can be optimally explored with the team and resources that are identified and mobilized. The resources must be brought to bear to launch the venture with an entry strategy that delivers the product or service that solves customers’ problem. Disparities among these core elements are signs of trouble. If your product launch requires engineering and information technology expertise and your team has no one with that knowledge, your team does not “fit” with the product. If you launch the product and have insufficient funds to sustain operations, perhaps you did not adequately calculate the capital resources required to reach the break-even point. Each category must be analyzed and thoroughly understood and all puzzle pieces joined to create the integrated picture required for financial success. In Chapter 4 "Entrepreneurship and Sustainability Innovation Analysis", Section 4.2 "Systems Thinking", we will look at the core elements of sustainability innovation.
- Entrepreneurship is the creation of new ways of meeting needs through novel products, processes, services, technologies, markets, and forms of organizing.
- Entrepreneurial ventures can be start-ups or occur within large companies.
- Entrepreneurship is an innovation process that mobilizes people and resources.
- Key to entrepreneurial success is the fit among the entrepreneur/team, the product concept, the opportunity, the resources, and the entry strategy.
- In small teams, identify a successful entrepreneurial venture in your community and interview the entrepreneur or members of the management team. Define and describe the key elements of the entrepreneurial process for this enterprise. Analyze the fit between the entrepreneurial founder and the product or service, the fit between the product and the opportunity, and the fit between the resources and the entry strategy.