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Gain Entrepreneurship Success through Swiftness and Experimentation
J. ROBERT BAUM
Entrepreneurs face higher uncertainty, risk, and barriers to market entry than established businesses. Risk is high because entrepreneurs typically introduce new products, new processes, and/or new business models. Little market information is available, and products or processes may be untested. However, the reward for being first to serve a market niche or for establishing a learning site in new market territory can be astounding. Sergey Brin, Larry Page, Steven Jobs, Oprah Winfrey, Bill Gates, and Michael Dell survived resource shortages, failed products, skeptics, and production challenges to make a positive difference for all of us - and for themselves. They did it, in part, through rapid introduction and continuous improvement of new products, services, and business types. Thus, I explain and promote two key entrepreneurship principles: gain entrepreneurship success through swiftness and experimentation.
Swiftness and experimentation are demonstrated predictors of venture success (Baum and Bird, in press). In 1996, Sergy Brin and Larry Page, founders of Google, needed computing capacity to continue experimentation with their latest search engine. Instead of waiting to acquire enough money to purchase a large server, they quickly moved through an eight iteration experiment and found a way to link multiple borrowed servers together to create a network of inexpensive PCs. This pattern of swiftness through rapid experimentation was repeated as they: (1) acquired a terabyte of discs and built their own computers in their dorm room, (2) negotiated with their first $100,000 investor for only five minutes, and (3) “ . . . in short order, . . . introduced improved posting, post removal, and threading of the 500 million-plus messages exchanged . . .” (pp. 5 of 22: www.google.com/corporate/history.html).
Obviously, Google’s founders were skilled programmers with good ideas, but this is not sufficient to build a successful new business. I focus on successful exploitation of good ideas. Over time, successful entrepreneurs modify their initial vision, initial plans, and products to fit their improved understanding of the market. In this chapter, I prescribe swiftness and experimentation as the best way to adapt to shifting market demands; swiftness and experimentation involve intense initial market monitoring, rapid variation, fast reintroduction, and follow-up monitoring. Swift entrepreneurial action is apparent when entrepreneurs move from step to step during their problem solving and opportunity taking without delay between steps and with fast paced thinking and action. Swift actors reach conclusions and accomplishments surprisingly fast.
As shown in the Figure 30.1, I review the important factors that affect swiftness and experimentation and focus on four that have demonstrated significant relationships with successful entrepreneurial behavior and subsequent venture success: creativity, tenacity, entrepreneurial self-efficacy, and goal setting. I elaborate the explanation of entrepreneurial self-efficacy by explaining the two types of experience that have the greatest impact on improved entrepreneurial self-efficacy, and I describe ways to enhance creativity, goal setting, swiftness, and experimentation.
I begin with a review of the importance of entrepreneurship and explain what scholars mean when they refer to “entrepreneur” and “entrepreneurship.” I follow with an explanation of the unique and extremely important context that surrounds entrepreneurial behavior. The context helps us understand the types of factors that enable and motivate entrepreneurs to enact successful behaviors such as swiftness and experimentation. I describe swiftness and experimentation and explore factors that increase thinking and acting speed and inspire an effective and continuous search for improved products, processes, and business models.
FIGURE 30.1 Gain entrepreneurship success through swiftness and experimentation
Successful entrepreneurship is important because it creates wealth through conversion of technological and organizational innovation into valued products and services (Schumpeter, 1934). It also motivates established competitors to improve their products and processes. The Organization for Economic Cooperation and Development (OECD) stated that “Entrepreneurship is central to the functioning of market economies.” The US Small Business Administration went even further to declare, “ . . . the crucial barometer of economic freedom and well-being is the continued creation of new and small firms in all sectors of the economy by all segments of society.”
Brin, Page, Jobs, Winfrey, Gates, and Dell are “ideal type” entrepreneurs; they built large well-known organizations that have enhanced our lives. Their companies are big now, but once they were only small new ventures. Indeed, most founders establish ventures that continue as small businesses for life. But even these new permanently small businesses are a major economic force. Taken together, US firms with fewer than 500 employees account for 51% of private sector output, employ 51% of private sector workers, and constitute 99% of all employers.
In summary, those who found and operate new successful ventures and new small businesses are important in terms of their impact upon absolute GNP and employment and their potential for social and economic impact. Indeed, entrepreneurship through establishment of new independent businesses was so successful in the US during the 1980s and 1990s in creating new jobs that it overcame the elimination of over 5 million jobs in established big business (Kirchhoff, 1997). On the other hand, over 50% of new ventures fail within five years in the US (Aldrich, 1999); thus, it is important to understand the factors that influence new venture creation and growth.
Hundreds of conceptions - “entrepreneur,” “entrepreneurship,” and “entrepreneurial” - exist. These include “successful small businesspersons,” “retired founders,” “failed founders,” and “managers.” To avoid confusion about what I mean by entrepreneur and to avoid a discussion about “who is an entrepreneur,” I focus on early stage entrepreneurs who intend to make a significant difference in people’s lives - entrepreneurs with big dreams and high potential. No studies that included the solitary self-employed or small business managers were used. The people who start these high potential high growth companies are involved in a process of discovery, evaluation, and exploitation of opportunities that will introduce new products, services, processes, ways of organizing, or markets” ( Venkataraman, 1997).
There are many indicators of venture success (entrepreneur’s personal satisfaction, rates of commercialized innovation, rates of improvement in market efficiency, etc.); however, venture growth is the best general indicator of entrepreneurship success because venture growth reflects personal and market gains (Kirzner, 1985). Venture growth is a measurable and well-understood entrepreneurship goal. Covin and Slevin (1997) explain that venture growth is the essence of entrepreneurship.
The entrepreneurship process begins with exploration for ideas and proceeds through opportunity evaluation and recognition to start-up. Start-up is followed by emergence (revenues and employees), and, finally, early stage growth. Although the principles described in this chapter apply in all venture stages, the research findings that I draw upon are based upon studies of early stage companies that were founded with plans for major growth. Early stage growth was taken as the best predictor of ultimate success. Experimentation and swiftness are also important during exploration, opportunity recognition and evaluation, start-up, and emergence. Furthermore, the conclusions that are drawn herein about behaviours that impact venture success may also apply to ambitious managers everywhere.
The entrepreneurship context
Entrepreneurs face extreme situations because their work involves disruptive change. They create new markets where none existed and enter established markets with new products. Sometimes they displace other companies and employees, so their gains may create losses for others. Obviously, aggressive competitive challengers may appear. Little or no information is usually available to guide entrepreneurs’ expectations about new marketing and organizational outcomes, and products may be introduced with limited market trials in attempts to stay ahead of competitors. Unless intellectual property is protected, competitive advantages may be temporary as competitors with valuable substitutes emerge.
Few entrepreneurs have sufficient financial resources to acquire complete facilities, process systems, equipment, and professional talent; and few can support start-up losses alone. The financing challenge is heightened in rapidly growing new ventures as investment demands accelerate and cash dwindles. Entrepreneurs are frequently forced to accept capital from financiers who negotiate from aggressive and powerful positions and who minimize their investors’ risk by setting high goals for the entrepreneurs and offering just-in-time cash. Thus, entrepreneurs who manage high potential start-ups with outside financing confront a threatening array of continuous demands for high performance, and they experience a continuous and stressful sense of urgency as they worry about survival (Smith and Smith, 2000).
Thus, starting, running, and making a successful business is usually a very difficult undertaking. There are many tasks involved. For example, formulating the basic vision, finding investors, hiring competent people, finding a suitable location, making the product, finding customers, building a sales force, beating out competitors, dealing with lawsuits and government regulations, and overcoming setbacks at every phase.
In summary, high growth entrepreneurs function in the midst of high uncertainty, urgency, surprise, complexity, personal risk, and resource scarcity (Baum, Frese, Baron, and Katz, 2006; Smith and Smith, 2000). High speed continuous improvements are required to replace continuous erosion of competitive advantages (Baum et al., 2006; Eisenhardt, 1989). High uncertainty increases the value of fast decision making and fast action, and minimal resources drive entrepreneurs to experiment with vigilant monitoring and continuous adaptation to gain and maintain competitive advantages. Entrepreneurship is not a career for the fainthearted.
SWIFTNESS - PRINCIPLE 1
Swiftness is beneficial for high growth entrepreneurs because they gain little by waiting. High growth entrepreneurs face new or immature markets with scant existing information, so the only way to get market information is through entry. Market acceptance or rejection is full of important information, and it speeds the search for the right products, services, markets, and organization forms ahead of competitors.
So the principle offered here is based on the simple question, “Why wait for certainty when it does not exist when you start something new?” Why not act quickly to uncover potential markets? Taken together, it is not surprising that experienced entrepreneurs advise, “Just start, move quickly, and watch the unfolding action for answers and opportunities” (Jones, 1993, p. 110).
In other words, early action can generate information, dynamic learning, and knowledge ahead of rivals. Unexpected opportunities sometimes emerge but only if action is started. Swiftness increases the number of trials that can be attempted within time and resource constraints, thereby providing more information and narrowed confidence intervals.
Swiftness has appeared as a prescription and organizational competency in studies of product development projects (Eisenhardt and Tabrizi, 1995), global competition (Stalk and Hout, 1990), and successful competitive actions (Ferrier, Smith, and Grimm, 1999). Fast decisions, which lead to swiftness, have related positively with firm performance in new industries (Eisenhardt, 1989) and in new ventures in mature industries (Baum and Wally, 2003).
EXPERIMENTATION - PRINCIPLE 2
“Experimentation” involves repeatedly conducting trials or tests to discover something that is not known. It involves continuous searches for betterment with repeated goal-driven revision (Thomke, 2003). Particularly, in the new venture context, experimentation appears as actions toward goals that will involve new (or better) products, services, processes, or organizations. Experimentation connotes use of a conceptual model and controls across the trials in contrast with “trial and error” which reflects a more random set of variables for each trial. Both experimentation and trial and error suggest repeated cycles of action with monitoring and revision or reformulation.
Other concepts are related to experimentation, and understanding their characteristics may help us grasp the meaning and usefulness of experimentation for entrepreneurs. For example, improvisation is extemporaneous composition and execution of novel actions (Miner, Bassoff, and Moorman, 2001). Monitoring and revision are not included in conceptions of improvisation; however, follow-up is implicit because improvisation is short-term, real-time learning.
“Bricolage” is similar to improvisation but with resources strictly limited to those that are “available” (Baker, Miner, and Eesley, 2003). Some studies of improvisation have focused on resource conditions, suggesting that improvisation occurs only with resources in hand (e.g. in the style of improv theatre); however, most do not imply resource constraints. “Flexibility” and “adaptation” are more general “change behaviors” that are triggered by changed “situations.”
The entire set of change behaviors is most useful for information gathering, learning, resource conservation, and opportunity taking when follow-up involves close monitoring of responses from markets, employees, and stakeholders. It is important to control the unfolding action and reformulation or revision so that the experimenting entrepreneur can know which, among many possible variations, is working and which are not working.
Experimentation is useful for high growth entrepreneurs, because it reveals information about potential markets where no markets exist. Experimentation reveals customer reactions to disruptive product, service, and business model introductions in existing markets (Bhide, 2000, p. 60), and it may enable recovery from poor past decisions or missed opportunities. Experimentation exposes competitors’ “barriers to entry” and guides the rapid changes that are required (Smith and Smith, 2000); it may also expose opportunities to build new products or offer new services. Thus, the fast-moving unresolved markets that entrepreneurs face and their inability to get “hard” information to guide foresight require experimentation.
Recent research about entrepreneurs indicates that successful entrepreneurs are comfortable enacting changes to cope with processes, products, or markets that do not meet their goals (Baum and Bird, in press). Miner et al. (2001) and Hmieleski and Corbett (2006) found that entrepreneurial behaviors related to experimentation (improvisation and trial and error) are used by entrepreneurs to deal successfully with their changing urgent situations, and Eisenhart (1989) observed “unintended trial actions” among the successful entrepreneurs whom she studied. Thus, past research findings and evaluation of the HGEs’ situation point to the value of experimentation for new venture growth.
There are many important factors that inspire and enable swiftness and experimentation. I focus on creativity, tenacity, self-efficacy, and goal setting as primary predictors because each has been consistently important across entrepreneurship studies.
Creativity
Creativity is intellectual inventiveness. It is the ability to generate high quality novel ideas that meet the needs of a task or context. Those who have high creativity challenge the status quo and seek alternative ways to solve problems and gain advantage from opportunities. Creativity is a stereotypical trait of entrepreneurs, the movers and shakers behind creative destruction (Schumpeter, 1934). Those entrepreneurs who do not have creativity must look elsewhere for innovations by partnering with an inventor or developer through licensing or joint venturing. Of course, some entrepreneurs simply copy the basic ideas of others, like discount retailer Sam Walton, and express their creativity through innovative execution of the idea.
High growth entrepreneurs need creativity to commercialize their products and service their customers successfully because creativity enables option generation. Those who are creative enough to envision multiple novel paths to get their products to market and who are sufficiently creative to envision the multiple outcomes from each path are advantaged because they can conduct multiple market experiments. Similarly, high creativity speeds the conception and description of variant paths which may speed market trials. Thus, creativity may enable entrepreneurs who are more creative to avoid delays as they search for options.
Sometimes, option generation is urgent. Surprise barriers to success emerge, and high creativity entrepreneurs are better able to quickly see novel ways to solution. For example, in Sam Walton’s early years, he was surprised at the ability of competitors to retain their customers - even though they charged more for their goods than he charged. In a flash of creativity - and action over two days - he conceived, designed, selected, and began work on his first store. It was to be located in a small community where existing competition was weak, and it was supposed to be very large with broad and deep stocks of general merchandise and with costs so low that customers would travel from a large region to shop (Huey and Walton, 1992).
I have discussed the importance of creativity for option generation during market entry. Entrepreneurs also need creativity during the idea-getting and opportunity recognition stages, but I have not focused on these stages. Nevertheless, entrepreneurs who can quickly envision a whole set of market options and outcomes have a competitive advantage at all stages.
Tenacity
Tenacity, or perseverance, is a trait that involves sustaining goal-directed action and energy even when faced with obstacles. Tenacious people do not give up when things go wrong.
Tenacity has been identified consistently as an archetypical entrepreneurship trait because the business start-up process involves confrontation of formidable barriers to market entry. Research points to one trait above others that sets the successful apart from failures. They did not give up when things went wrong. They were tenacious (Gartner, Gatewood, and Shaver, 1991).
Tenacity is important for high growth entrepreneurs because they must be able to conduct extensive, even continuous, experiments. They must persist with their search for options and solutions and continue market monitoring after they institute trials. Monitoring must persist following revision of products and services.
Nearly all entrepreneurs at some point in their careers confront difficult obstacles (e.g. barriers to entry) or have setbacks (e.g. a product that does not work as planned, cost overruns). Some will even fail completely (and have to start over). If making a new business succeed or making an existing business grow were easy, then almost anyone would be able to do it. But, only a relatively small number of people are successful entrepreneurs. Shaver and Scott (1991) note that successful entrepreneurs pick themselves up after failure, in part because they attribute failure to bad luck or insufficient effort on their part. They assume that if they work harder, they will succeed. In a study of 217 inventors, those who had a higher adversity quotient (able to recover from bad news) founded more businesses (Markman, Balkin, and Baron, 2002). Baum, Locke, and Smith (2001) found that the trait of tenacity contributed to venture growth even with a six-year time lag between the measurement of the trait and subsequent performance.
There are many examples of tenacity among entrepreneurs. FedEx was on the verge of bankruptcy for three years until Fred Smith made it work. Mary Kay Ash staggered through the death of two husbands, the failure of her first beauty show, and a disastrous sales decline before making her beauty products company a huge international success. It took Bill Gates and Microsoft seven years to develop a viable Windows operating system. Sam Walton failed with a drug chain, a home improvement center, two hyper marts, and some disastrous store openings, but he made it big in the end with Wal-Mart’s magnet stores in low competition locations.
It can be asked: where does a successful entrepreneur draw the line between productive tenacity and foolish persistence (Locke, 2000)? Sometimes it is hard to tell until after the fact, especially in the case of an entirely new product, but one common type of foolish persistence is to stick to a strategy that worked in the past, even in the face of mounting evidence that the competitive environment is radically changing. Consider Henry Ford’s refusal to abandon the Model T - which had been a best selling car for 19 years - in the face of threats from General Motors. By the time Ford developed new models, GM had snatched away Ford’s position as the number one car company in the world - a position which Ford never regained. One guideline then is that an entrepreneur should keep close tabs on the outside world when deciding whether or not to retain or abandon a strategy or product. If the product is totally new, the entrepreneur has to decide if there is enough cash flow to keep the project going (Locke and Baum, 2007).
In summary, tenacity is important for experimentation and venture success because entrepreneurs who hold stubbornly to their goals and who hate to give up increase their chances of finding the solution for a market need. Baum et al. (2001) found that tenacity was the most powerful trait predictor of new venture growth.
Entrepreneurial self-efficacy
It is not enough for entrepreneurs to be creative and tenacious; they must also be confident that they have everything that they need to perform a task. Confidence is reflected in “self-efficacy,” the belief or degree of confidence that someone has the ability to successfully perform a task (see Chapter 10, this volume). Bandura (1997) and a subsequent meta analyses by Judge and Bono (2001) point to the central role of self-efficacy in causing high performance through its impact on motivation; Stajkovic and Luthans (1998) explained that self-efficacy enhances focus, direction, persistence, and intensity of action.
Without self-efficacy, little will happen. I point to high self-efficacy as a factor that enhances experimentation and swiftness because both behaviors will only occur when entrepreneurs are sufficiently confident that they can move quickly and successfully. When entrepreneurs have confidence, they can, with sufficient trials, find market acceptance.
Entrepreneurship researchers have quantitative evidence that general self-efficacy predicts new venture creation (Markman et al., 2002) and venture growth (Baum and Locke, 2004). Chandler and Jansen (1992) found a significant relationship between general self-confidence (measured to yield self-efficacy) and early stage venture performance.
Self-confidence specifically about entrepreneurship was studied by Chen, Green, and Crick (1998). The authors defined entrepreneurial self-efficacy (ESE) as “the strength of a person’s belief that he or she is capable of successfully performing the various roles and tasks of entrepreneurship.” It consisted of five factors: innovation, risk taking, marketing, management, and financial control. Higher ESE distinguished entrepreneurs from managers.
Similarly, higher ESE predicted higher “experimentation” and higher “swiftness” in a recent empirical study (Baum and Bird, in press). Thus, I employ it here as an important factor that impacts the principle studied: gain entrepreneurship success through swiftness and experimentation.
Goal setting
Goal-setting theory (Locke and Latham, 2002) has shown that specific, difficult goals lead consistently to higher performance than vague and/or easy goals. Goal setting works most effectively when people are committed to their goals and have feedback regarding their progress in relation to their goals (see Chapter 9, this volume).
No other theory of motivation has deeper or broader empirical support at the individual, group, and unit level (Landy and Becker, 1987; Locke and Latham, 1990, 2002). Entrepreneurship theorists cite goals as an important factor in venture growth (Covin and Slevin, 1997) and new venture survival (Carsrud and Krueger, 1995). An empirical study of the effects of entrepreneurs’ characteristics found that goals had a direct effect on firm growth over six years (Baum and Locke, 2004). In another study Tracy, Locke, and Renard (1999) found significant relationships between the financial, growth, and innovation goals of entrepreneurs in the printing business and corresponding performance measures obtained two years later.
I employ goal setting here as a predictor of entrepreneurs’ swiftness and experimentation because goals help motivate people to use suitable task strategies or to search for suitable strategies, if they lack the knowledge they need. Swiftness and experimentation are suitable strategies for the entrepreneurship context wherein uncertainty is high because new markets and products are untested. Sufficient information is not available to reduce uncertainty about market performance or financial returns, so those who set specific, difficult growth goals choose strategies and related behaviors that yield more information faster.
CEO goal setting is an ideal practice in new ventures because CEOs in small firms have relatively direct control over the actions that lead to goal accomplishment. In larger more established firms, there are more layers and most work is delegated. Furthermore, firm strategies in large organizations may be more complex than those in smaller companies and, thus, more prone to error. Complex strategies are also less easily and less rapidly changed when problems occur and decision makers may not have the knowledge required to achieve the goals. In summary, entrepreneurial goal setting in the new venture setting provides a potent competitive advantage, compared with the effects in larger established companies, because it directly inspires the entrepreneur’s swiftness and experimentation.
There are many organization characteristics (e.g. structure and size) and external conditions (e.g. industry, economic conditions, and zeitgeist) that impact successful new venture creation (Baum et al., 2001; Rauch and Frese, 2000). I point particularly to industry dynamism, regional munificence, and organization resources because in multiple research studies they have interacted most strongly with entrepreneurs’ behavior to affect venture success (Baum and Wally, 2003; Covin and Slevin, 1997).
Industry dynamism
Dynamism (instability or turbulence) refers to the level of environmental predictability; it is manifested in the variance in the rate of market and industry change and the level of uncertainty about forces that are beyond the control of individual businesses. Dynamism creates competitive advantages for entrepreneurs because new ventures are typically more nimble (responsive) than big companies. In contrast, dynamic markets challenge large cumbersome companies when product revision is required - and product revision is almost always a characteristic of dynamic industries. Indeed, Eisenhardt (1989) and Judge and Miller (1991) found that fast-paced settings with rapid changes in demand and discontinuous outcomes motivated fast decision making and action and yielded profits for those who were able to respond. Thus, dynamism enhances (moderate positively) the effects of swiftness and experimentation.
Many dynamic markets are caused by new technologies (Eisenhardt and Tabrizi, 1995), and many high growth entrepreneurs are leading technology innovators. Although some second-movers gain competitive advantage by quickly copying the first mover, most technology entrepreneurs count first-mover advantages as more important for success (Ferrier et al., 1999). Thus, technology entrepreneurs need to master fast decision making and swiftness to capture fleeting advantages. Furthermore, if information is scarce, resource-poor entrepreneurs are not disadvantaged because rich established competitors cannot gain information by outspending the upstarts.
In contrast, dynamism has been cited as a challenge for entrepreneurs because it increases the difficulty of understanding supplier and customer markets (Priem, Rasheed, and Kotulic, 1995). Valuation of strategic options is difficult because there are many options with low probabilities, and risk is high because sufficient resources are required to sustain firms during the downside of large operating variances (Bourgeois, 1980). Nevertheless, most entrepreneurs claim that they can beat larger established companies in dynamic markets (Eisenhart and Tabrizi, 1995).
Some have suggested that swift is not better, and this may be true in some cases; however, in dynamic situations, Eisenhardt (1989) found that fast decision makers were also more comprehensive and more successful. Some unsuccessful entrepreneurs lurch quickly from one bad idea to another, so I emphasize that decisions, even when swift, should be based on reason and reality. Decisions should be the result of thought, not change for the sake of change.
Regional munificence
Regional munificence (capacity) refers to the local environment’s support for organizational growth. In established industries, it is manifested in high industry sales growth (Dess and Beard, 1984). Munificent environments provide a reserve against competitive and environmental threats through availability of sufficient financing, intellectual support from institutions, and developed human resource markets. Both new ventures and larger competitors benefit from environmental munificence. For example, the availability of financing and skilled labor is good for both.
However, one can argue that munificent environments diminish the value of new ventures’ experimental behavior, causing a negative interaction between experimentation and entrepreneurship success. To explain, a benefit of experimentation is that minimal financial resources are applied in each trial. Most new high growth ventures cannot obtain sufficient financial support, so experimentation is a mandate. However, if the region is rich in financial resources it may be better for a new venture to gain market information by financing entrance to multiple markets with multiple products simultaneously. Despite conflicting theories about the effects of munificence, Baum and Bird (in press) found that regional munificence enhanced the interaction between rapid change behaviors and new venture growth in the graphics industry.
In light of the competing effects of munificence, I suggest that entrepreneurs evaluate the region and the nature of competition in the industry to be clear about the value of experimentation in high munificence regions.
Organization resources
Whereas dynamism and munificence are industry forces that have different effects when they interact with entrepreneurial behavior, high organization resources are almost always beneficial (Baum and Bird, in press; Smith and Smith, 2000). In short, the greater the internal resources of a venture, the greater the benefit from positive entrepreneurial behavior. For example, rich organization resources such as financing and human resources enable higher growth without money worries and enable management growth without hiring challenges. For example, after Sam Walton saved sufficient money from his first six years of operations, he was able to experiment more freely with different practices and promotions (Huey and Walton, 1992). When these worked in his experimental store, he replicated the practice in his two other stores. A well-financed venture is nearly always better off than its poor cousin. Similarly, a well-staffed venture is nearly always better off than an understaffed venture (Stevenson, 1985). Nevertheless, there is anecdotal evidence of negative effects of excess resources. For example, IBM had many programmers and Microsoft had few when they worked jointly, but the Microsoft programmers were more effective than the IBM programmers because they worked more efficiently and designed with cost minimization in mind.
Industry forces and organizational forces are important, but entrepreneurship is fundamentally personal. It takes human vision, intention, and work to conceive and convert business ideas to successful products and services. Through their thinking and action, entrepreneurs themselves integrate human and financial resources to organize, produce, and market products and services that yield value for customers and workers. According to venture financiers, entrepreneurs’ personal characteristics (individual differences) are the most important factors for business success - even more important than the business idea or industry setting (Shepherd, 1999; Zopounidis, 1994). Thus, external forces amplify the effects of entrepreneurial behavior, but good entrepreneurial behavior is a first order condition.
High levels of creativity, tenacity, entrepreneurial self-efficacy, and goal setting enable and motivate swiftness and experimentation which, in turn, yield high venture growth. But, how can an entrepreneur - or wannabe entrepreneur - gain creativity, tenacity, self-efficacy, and goal setting? I explore the possibilities and offer suggestions. This brief treatment of learning opportunities points to the importance of venture and industry experience, as well as the value of building relationships with expert models. It also suggests that creativity-building and goal-setting educational programs may enhance one’s creativity and inclination to set effective goals.
I address the value of venture and industry experience primarily for improvement of entrepreneurial self-efficacy; however, relevant experience can also expose wannabe entrepreneurs to leaders/entrepreneurs who are models of tenacious behavior and goal setting. Ideally, wannabe entrepreneurs should work for a new venture or entrepreneurial company, and they should focus on the pace and process of product and service development. Those fortunate enough to work with an entrepreneur in the industry of their choice may also gain from industry creativity programs and cultures. Indeed, consider the proliferation of successful new ventures in communities such as Silicon Valley and the Boston technology crescent. Concentrated industry communities offer relevant opportunities for learning from others, and this condition should figure in career choice.
Improving your creativity
Creativity is often described as a trait - a human characteristic that is inherent and stable. However, hundreds of psychology professionals promote their creativity education programs at company sponsored seminars and trade shows based upon evidence that creativity has been enhanced with training (Runco, Plucker, and Lim, 2000). Most professionals employ group exercises involving analogies, brainstorming, cross-fertilization, devil’s advocacy, lateral thinking, or vertical thinking. I think that most wannabe entrepreneurs should engage with these programs because they offer hope for improving personal creativity. Some lessons learned in group sessions can translate to solitary thinking, and solitary thinking is the mode for entrepreneurs. In particular, a focus on the creative process and practices such as divergent thinking appear to improve creativity in high uncertainty settings (Mumford, Supinski, Baughman, Constanza, and Threlfall, 1997).
Relevant experience enhances creative processes such as brainstorming (even at a personal level). For example, Angel Johnson Organics (AJO), an early marketer of organic foods, was unsuccessful in placing products in established supermarkets. A creative AJO marketing manager who had worked for Honest Tea, a sugar-free iced tea manufacturer, noticed the success that Honest Tea had in health-oriented institutions such as gymnasiums and hospital facilities. After a brainstorming session with her sales, marketing, and operations staff, she developed a refrigerated display cabinet that enabled the successful introduction of her organic fruit and vegetable products to health-oriented institutions. Success led to a joint venture with Honest Tea and subsequent placement of AJO and Honest Tea products in established supermarkets. Thus, I prescribe industry experience to enhance creative thinking processes that focus on generating product and marketing options.
Improving your tenacity
Tenacity is a trait, a predisposition. It is far more difficult to change traits such as tenacity or perseverance through training or experience than to change behavior. (Of course, behavior itself is hard to change.) However, extended exposure to successful others who are tenacious may raise a person’s intention to be more tenacious (Bhide, 2000). Also, motivation through goal setting, external rewards, and punishment may inspire tenacity (Locke and Latham, 1990). Locke and Latham also explain that self-efficacy, which can be acquired, may increase tenacity.
Improving your entrepreneurial self-efficacy
Self-efficacy reflects past experience and attainment, but more importantly, the conclusion one has drawn about one’s capacity for performance attainment from past experiences. Entrepreneurs can improve their entrepreneurial self-efficacy by gaining relevant experience.
Often entrepreneurial self-efficacy is developed from childhood experiences in which one undertakes independent projects (e.g. running a paper route, building a computer and selling it), masters difficulties, and succeeds. Confidence may also stem from one’s awareness of one’s own cognitive abilities.
Entrepreneurs’ most valuable experiences are related to time spent starting a new company or with others who start new companies. The new venture situation is dominated by newness; however, all is not totally new. Some decision processes, resource aggregation activities, customer fulfillment conditions, and market characteristics appear and reappear. Through prior venture experience, entrepreneurs’ mental structures about new venture processes are continuously used, revised, and reused. Indeed, multiple entrepreneurship researchers have found significant positive relationships between “habitual” or repeat entrepreneurs and venture start-up and growth (Davidsson and Honig, 2002).
The second important type of experience for developing entrepreneurial self-efficacy is industry experience. Herron and Robinson (1993) posit that industry knowledge and related industry networks are important assets in specifying the new venture’s need for resources, finding those resources, selecting partners, and structuring more flexible resource contracts. Herron and Robinson (1993) found that 15% of new venture performance variance was accounted for in terms of the entrepreneur’s technical industry experience. Financiers also point to specific career experience as most important for predicting entrepreneurs’ job performance. Indeed, venture capitalists note that industry and technology experience, when related with the products, processes, or business models proposed for financing, are among the most important personal characteristics of the entrepreneur (Smith and Smith, 2000).
Improving your goal setting
Chapter 9 of this volume explains that personal and employee performance can be improved through goal setting. Goal setting motivates entrepreneurial behavior, so it improves the pace of action and the rate of experimentation in new ventures. Those who aspire to venture success should devote their time, money, and other resources to personal and organizational goal setting.
In the early growth stages of a new venture, goal setting may be highly personal. The solitary entrepreneur who maintains a timeline with goals will have an important tool for personal motivation and for attraction of financial and human resources. Such a formal written timeline should include benchmarks such as: complete prototype, obtain patent or copyright, sell first unit, employ operations manager, attain $300,000 annual revenue rate, cash breakeven, profitable, etc. As the venture team is formed, the goals/timeline should be formalized, communicated, and updated to include team members’ views about important indicators of success and the appropriate levels of the indicators.
It is important to develop compensation schemes that motivate team members on the basis of performance goals. These may include cash awards, stock options, and non-cash rewards. Incentive practices are addressed in Chapter 12 of this volume. In particular, goal-based pay for performance, including the entrepreneur’s own compensation, is important. As the organization develops, the range of goals should be expanded to include product improvement (pace of innovation and level of product and market experimentation), product quality, and market penetration. Similarly, the range of goal-based rewards should be expanded to include recognition and increased non-cash benefits, and regular team/employee sessions should address employee knowledge about goals and associated rewards.
Again, wannabe entrepreneurs may gain knowledge about goal setting through relevant venture and industry experience. Management by objective (MBO) seminars are based in goal theory, and they offer guidance about the types of goals and rewards that are most effective. I recommend exposure to these programs and emphasize that specific challenging goals are effective for personal and venture success through all levels of the new venture and through all stages of new venture creation.
Note that early MBO programs failed because managers set their own goals and were judged only on goal success, so they set easy goals to be sure of personal success while their firms often failed. To prevent this, goals below the CEO level must be assigned and/ or stretch (very hard) goals should be encouraged with the proviso that goal failure will not be punished as long as the manager has made a creative effort to improve. At GE, Jack Welch set minimum goals which were mandatory and also stretch goals which were meant to encourage innovation but did not have to be met on a regular basis.
EXCEPTIONS
Swiftness is usually better than slow action because more work is accomplished, more value is added, and learning opportunities appear in advance of competitor’s learning. However, even high growth entrepreneurs have periods when urgency is not great - when sufficient time and resources are available for a thorough and comprehensive information search and analysis, and swiftness is not important. So it may be all right to pause, but realize that downtime can be used (1) to gain advance learning about how to find the needed explicit information or (2) to find the best way to conduct the evaluation of new ideas.
Lad and Hooker Beer
Brothers Hans and Heinrich Stolzfus experimented with beer making when they were teenagers. Despite their parents’ concern and complaints, they secretly brewed small batches and sold it to friends. Their circle of friends grew, and their passion for beer making was carried to UCLA in 1996. Hans was admitted to the Liberal Arts program and Heinrich entered the Business School. The brothers set up a small propane brew pot in their dorm room and sold ice cold home brew privately to their classmates. Their beer was good and within one semester their volume had grown beyond their wildest dreams. At the end of 1998, the brothers were brewing a keg a day and the activity attracted unwanted institutional attention.
Hans moved quickly to rent a garage in Culver City and began to brew larger quantities. He successfully obtained a license to make and distribute limited quantities of the home brew. Hans entered the brothers’ beer in the Great American Beer Festival and won a gold medal. Upon graduation, Heinrich joined his brother. Heinrich believed that they could expand the operation, so they borrowed $100,000 through an SBA loan guaranteed by their parents. The beer began to attract public attention because the brothers established a social mission connection. They donated $2 to California’s Safe Driver Foundation for every keg sold. This experiment worked well. Newspaper and TV publicity followed, and demand increased dramatically.
In 2003 on a Monday morning, the owner of a Coors distributorship explained that the Coors company now allowed their distributors to carry a limited number of craft beers. The owner had been impressed with the progress of Lad and Hooker beer and liked the relation with the Safe Driver Foundation. He explained that he wanted to distribute Lad and Hooker beer. Quickly, in two days, the three settled on terms of the potential deal. The brothers would have to sign an exclusivity agreement and a contract that described volume-sensitive returns for the brothers (the brothers’ share of revenues increased as volume increased). The distributorship owner explained that the brothers would have to develop a dark and light Lad and Hooker beer. If they agreed and if they established a relationship with a reputable brewer, the distributor would carry their accounts payable with a charge of 1% of the average balance every month. The distributor insisted that the brewer would have to match the brothers’ quality and satisfy demand. The distributor insisted that when the contract rolled over, he must have a right of first refusal to match any competing arrangement that the brothers found. Overall, the arrangement was sufficient for the brothers to begin development and explore expanded markets. Importantly, the brand was protected for the brothers.
On Wednesday, a wealthy friend, also taken with the product and interested in the social mission, offered to finance the brothers’ expansion in return for 51% of the stock of the business. Uncertainty about whether the brothers should continue to do everything themselves, partner with the distributor, or take their angel friend’s offer caused debates and two sleepless nights. However, they decided that they must act quickly to grow the business because another craft brewer had begun to make contributions to a regional charity.
On Saturday morning, the brothers agreed to the distributors’ arrangement for one year, and asked their friend to “hold” his offer for a year. As the arrangement developed with the Coors distributor, Hans began to experiment with dark and light beer formulae and Heinrich set about to find a brewer who could brew for them and who would let Hans and Heinrich control the formula. Both initiatives moved quickly and successfully.
In 2004, the arrangement with the distributor was renewed for five years and the brothers’ beer continued to dominate the regional craft beer market. Their competitor never grew and it faded from the market. Hans and Heinrich expanded their product to Oregon and Washington State and reported profits of $890,000 in 2007 with 100% of the stock in their hands. Between 2004 and 2008, Lad and Hooker beer was packaged in bottles and cans. An innovative Christmas 12-pack with the social mission contribution emblazoned on the package became a best seller for the distributor and the brothers. However, along the way experiments with bar and restaurant distribution failed. Experiments with contributions to Mothers Against Drunk Driving failed to attract sufficient attention in the region, and a buyout discussion with the distributor failed (the brothers proposed that they purchase the distributorship, and the distributor countered with an offer to buy Lad and Hooker).
Currently, Hans and Heinrich continue with the Coors distributor, but they are evaluating the possibility of establishing their own distribution network, developing Lad and Hooker soda, and development of a Brew Pub featuring Lad and Hooker beer.
Staub’s Famous Draft and Grub
In 1960, Marlan Staub’s family had operated a Coors distributorship in Philadelphia, PA. Coors beer was not pasteurized in the 1960s, and it was shipped in refrigerated trucks to Pennsylvania and sold at a premium. Selling shipped beer at a premium was against Coors policy, but the alternative for Coors was to fight a growing black market for their fine Colorado beers. Over 30 years, Coors and the family business profited with little apparent change. Marlan worked in the family business before it closed in 1996. Folks said that Coors lost its special attraction in the region, and that Staub Beer Distributors was slow to find alternative products. Staub Beer Distributors continued to pay the family members exceptional salaries, even as the volume fell in the early 1990s. The cash drain made it impossible to field an aggressive sales force or to promote Coors beer at the levels demanded by Coors. The family business closed in 1996.
Marlan liked beer and he needed to do something to support his young family. He had desperately tried to find financing for the family business in its dying days, so he had local “angel financing” connections. He decided to lean on the two things that he knew about: beer and financing.
Marlan read two books about beer making and decided that he could do it. In addition, his exposure to Coors plant tours for their distributors gave him confidence to start his own beer operation, so he decided to open a brew pub in Reading, PA, and make and sell Staub’s Famous Draft and Grub.
Marlan figured that he would need $1 million to purchase a used craft beer still and to begin operations in a vacant factory building in Reading. Three months after he decided to brew and open the brew pub, Marlan found a great deal on a used 100% copper still and purchased it for $115,000, which left him with $25,000 in savings. He made a minimum down payment ($5000) on the factory building and received a contract that required no principle payments for a year. Marlan spent three months placing the copper still in the building, and planning the space for the restaurant. During this period, Marlan received publicity from an admiring newspaper, his family, and the public for his entrepreneurial vision. Many were thrilled that an old industrial building would be restored.
Eight months after conception, Marlan employed a friend to develop the first beer, a hearty dark beer, and he paid him $70,000 per year plus a promise of a share of the company. Again, he drew upon his dwindling savings.
Marlan spent five more months designing the renovations for the building. He finally asked contractors to bid on the renovation 14 months after the initial purchase (at the 12th month, the bank reluctantly extended the principal free mortgage period). Unfortunately, renovation costs and the cost of restaurant fixtures were finally quoted at $1.4 million. The plumbing cost for the still exceeded estimates by $40,000. Marlan told local reporters that the renovation delays were temporary.
Four months later, at the 17th month, Marlan had finally prepared advertising and brochures that he planned to use to raise $1.5 million from community angels. Several history buffs agreed to give Marlan $300,000 for convertible stock in the new company, and two beer loving angels came forward with an additional $158,000. After an extended period of soul-searching, which involved using angel money to pay the factory building mortgage, Marlan decided to move forward with a partial renovation. It was two whole years after his decision to open before Marlan awarded a contract for a partial renovation of the factory building for $400,000. He employed his friend, the brew master, to guide the renovation. His hope was that evidence of construction would inspire investors to come forward who had not responded to the initial offering. Meanwhile he had not been doing much experimenting with the beer itself. Unfortunately, Marlan failed to make new contacts for financing and the contractor ended up suing Marlan for late payment 16 months after the plan to open a brew pub occurred. The contractor now owns the building and its contents: a still, 110 bar stools, 16 old tables, and a grand opening poster advertisement with a box of unsent fundraising brochures. The endless delays, all of which cost a great deal of money, doomed the business to failure.
CONCLUSION
This chapter promotes swiftness and experimentation as entrepreneurial behaviors that contribute to new venture success. Entrepreneurship occurs in the midst of uncertainty, risk, and competitive barriers that are associated with new market entry with new products, processes, and business models. Swiftness and experimentation are sensible responses because they produce market feedback where little information exists. Information can guide revision of market offerings - even revision of market and business model choices to yield attractive profitable offerings.
Creativity, tenacity, self-efficacy, and goal setting are among the factors that enable swiftness and experimentation, which has been confirmed in entrepreneurship research. The factors that contribute to the focal entrepreneurial behaviors, presented here as principles of entrepreneurship, are enhanced with industry and venture experience, as well as learning from expert models and creativity and goal-setting enhancement programs.
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Venture change
In most successful ventures, the product, processes, or business model that ultimately finds market acceptance and profitability are some variation of the original market entry. Choose an example and write a short history (two paragraphs) of the changes that have occurred. Identify the period from market entry to today and point to evidence of swiftness and experimentation.
If you do not have an idea yourself, you could write about laptop computers, the automobile, or mobile telephones. If you can, indicate which of the original entrants survived.
Business venture idea
Divide into groups of 3-6 people. Come up with an idea for a new business venture, and assume that you have $2 million in financing. If your new venture idea could be copied, how fast would you have to move to introduce your first product? How fast would you need to expand from your local market? Assuming everything does not go as planned, what types of experiments could you try to see if some variant on your original idea might work?