Entrepreneurship: Theory and Evidence

Giovanni Battista DagninoUniversity of Catania

June 8, 2011

Agenda

- Insights from 2 Conferences in Sicily

- Basic Data and Essential Indicators

- Demistifying Entrepreneurship: Animal Spirits

- Popular Wisdom, Press and the Entrepreneur(s)

- Strategic Entrepreneurship

- Theories of Entrepreneurship

New Frontiers in New Frontiers in Entrepreneurship: Entrepreneurship:

Strategy, Governance Strategy, Governance and Evolutionand Evolution

New Frontiers in New Frontiers in Entrepreneurship: Entrepreneurship:

Strategy, Governance Strategy, Governance and Evolutionand Evolution

University of CataniaUniversity of CataniaCatania, May 23-25 2007Catania, May 23-25 2007

SMS Special Conference

Institutions @ the Conference

University of Catania

Strategic

ManagementSociety

New Frontiers in Entrepreneurship: Strategy Governance and Evolution by Giambattista Dagnino, Rosario Faraci, David Audretsch e Bob Hoskisson Catania, May 23-25 2007

www.taorminaprivateequity2008.net

Taormina, July 18 2008

I DATI DI BASE

Camera Commercio Milano 9 Gennaio 2009

- 323 mila le nuove imprese avviate nei primi 9 mesi del 2008 in Italia

- Roma capofila con 24.530 nuove imprese (7,6%), seguita da Milano

- la Lombardia è prima fra le regioni (16,5%), seguita dal Lazio (10,3%) e dalla Campania (8,8%) - fra i comparti produttivi, primo è il commercio (20%), seconde le costruzioni (16%), cui conseguono i servizi alle imprese (8%) - l’agricoltura (8%) e il manifatturiero (7%) ricoprono rispettivamente la quarta e la quinta posizione

ESSENTIAL INDICATORSNEW FIRMS

- Natality rate

- Mortality Rate

- Natality-Mortality = Net growth/decline

- Natality/Mortality rate

- Venture Capital Deals and B-Angels No./Deals

- Incubators Figures and Special Laws Data

ESSENTIAL INDICATORSESTABLISHED FIRMS

- New Patents

- Newly Funded R&D Projects

- New R&D Centers Established

- Number of New-Hired Researchers

- Knowledge Spillovers and Spin-offs

Table 2 - Evolution of European BANs' Activity

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Number of BANs 66 132 155 177 197 231* 228* 211* 236* 301*

Number of angels 1.487 2.333 3.129 4.34713.21

812.773 8.227 10.331 15.578

Number of deals 320 416 454 573 600 580 653 843 1.130

Deals/angel 0,22 0,18 0,15 0,13 0,05 0,05 0,08 0,08 0,07

Average amount of the deals

n/a n/a n/a n/a n/a n/a200.17

8£177.31

1£163.01

1£

Source: Elaborations on Eban (2005), (2008)

* Data refer to Mid-Year

As Baumol eloquently remarks, the study of business without an understanding of entrepreneurship is like the study of Shakespeare in which "the Prince of Denmark has been expunged from thediscussion of Hamlet“

Demistifying Entrepreneurship….

ANIMAL SPIRITS

ANIMAL SPIRITS

John Maynard Keynes (1883-1946)

Popular Popular WisdomWisdom

Popular Popular WisdomWisdom

Popular Popular PressPress

Popular Wisdom: The Long-Popular Wisdom: The Long-JumperJumper

Richard Richard BransonBranson

Mario Moretti Mario Moretti PolegatoPolegato

Renzo RossoRenzo Rosso

Renzo Rosso (President Diesel) “In Diesel we do what we like and what we would like to wear” Company Mission

Marketing and Store Managers

Designers and Strategists

TREND SETTERS

OPINIONLEADERS

MARKET BULK

Renzo Rosso (President Diesel) “Trendsetters are those people who have to look within the jacket to know which brand are they wearing, and that usually buy in second-hand shops, to be able to mix and match different pieces of what they like ” Personal interview, September 2000

REFRESHING

WATERWORLD

Spring/Summer 2005

StyleBURBERRYA. DELL’ACQUA G. ARMANI

EmmaEmma

Bill GatesBill Gates

The Rockefeller BrothersThe Rockefeller Brothers

Adriano OlivettiAdriano Olivetti

MESSRS FIAT

Early days

Yesterday

Today

VallettaG. Agnelli sr.

G. Agnelli jr.

Romiti

Marchionne

J. Elkann

Bernie Ecclestone in Formula 1

VALUE CREATEDExtracted US $ 1.4 billion

through a bond offering

Sold 75% non controlling stake for Us $ 2.1 Billion (thus valuing the company in excess for 2.1/.75 and that is 2.8 billion)

This is consistent with THE TIMES estimate that in 2002 said that his net worth was 2.9 billion pounds

THE COIN’S FLIPSIDE

THE COIN’S FLIPSIDE

?

It’s It’s Impossible Impossible to Teach!!to Teach!!

Two Extremes Views

RecurringRecurringEternal Eternal

PrinciplesPrinciples

The emerging The emerging art of art of

entrepreneurinentrepreneuringg

Strategic Entrepreneurship

A new approach that involves simultaneous opportunity-seeking and advantage-seeking behaviors and results in

superior firm performance. Small entrepreneurial ventures are effective in identifying opportunities, but

are less successful in developing competitive advantages needed to appropriate value from those opportunities. In

contrast, large established firms are relatively more effective in establishing competitive advantages, but are

less able to identify new opportunities

Strategic entrepreneurship is the integration of entrepreneurial (i.e., opportunity seeking actions) and strategic (i.e., advantage-seeking actions) perspectives to design and implement entrepreneurial strategies that create wealth Strategic entrepreneurship is entrepreneurial action that is taken with a strategic perspective

Multidisciplinary roots……

Strategic Entrepreneurship

Venkataraman and Sarasvathy (2001) use a metaphor based on William Shakespeare’s renown drama Romeo and Juliet They suggest that strategic management research that does not integrate an entrepreneurial perspective is like ‘the balcony without Romeo’They argue that entrepreneurship research without integration of a strategic perspective is like ‘Romeo without a balcony’In the words of Venkataraman & Sarasvathy, entrepreneurial action is the ‘Romeo on the balcony’

Strategic Entrepreneurship

Theories of Entrepreneurship

Schumpeterian Approach

Entrepreneurial Opportunities

Entrepreneurial Action and Hypercompetition

The Schumpeterian Approach An entrepreneur is an individual who has a

definitive action-plan and strategy to realize a business venture

Creativity is the trait that evolves new and unique ideas and innovation

It requires seeing and conceptualizing things from newer and unexplored angles

Innovation is the ability to apply creative solutions to problem to enhance

organizational productivityIt is imperative for the entrepreneur to apply innovation towards accomplishment of long-

term business goals

The Schumpeterian Approach

Creative DestructionIn Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power

Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, Kmart, Sears) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction

Types of Innovation-Generating Creative Destruction in an Industry

- New markets or products - New equipment - New sources of labor and raw materials - New methods of organization or management - New methods of inventory management - New methods of transportation - New methods of communication (e.g., the Internet) - New methods of advertising and marketing - New financial instruments - New ways to lobby politicians or new legal strategies (though many economists would argue that this last is not a genuine example of creative destruction!)

Entrepreneurial Opportunities

The field of entrepreneurship concerns the scholarly examination of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated, and exploited (Venkataraman, 1997) Consequently, the field involves the study of sources of opportunities, the processes of

discovery, evaluation, and exploitation of opportunities, and the set of individuals who

discover, evaluate, and exploit them (Shane and Venkataraman, 2000)

Entrepreneurial Opportunities

The problem with this approach is that entrepreneurship involves the nexus of two phenomena:

(a) the presence of lucrative opportunities and

(b) the presence of enterprising individuals

Sets of research questions about Sets of research questions about entrepreneurshipentrepreneurship:

(1) why, when, and how opportunities for the creation of goods and services come into existence

(2) why, when, and how some people and not other discover and exploit these opportunities; and

(3) why, when, and how different modes of action are used to exploit entrepreneurial opportunities

Entrepreneurial Opportunities

Peter Drucker (1985) has described three different categories of opportunities:

(1)the creation of new information, as occurs with the invention of new technologies;

(2) the exploitation of market inefficiencies that result from information asymmetry, as occurs across time and geography; and

(3) the reaction to shifts in the relative costs and benefits of alternative uses for resources, as occurs with political, regulatory, or demographic changes

Entrepreneurial Opportunities

- Disequilibrium (Schumpeter)

- Discovery (Kirzner)

- Asymmetries of Information and Beliefs

- Intuition and Foresight

- Duration of an Opportunity

Entrepreneurial Opportunities

- Optimization and Mechanical Calculations

(Baumol)- Counterfactual Thinking

- Information Corridors

- Cognitive Properties and Individual Differences (Simon & March)

Entrepreneurial Opportunities

Entrepreneurial Action

and Hypercompetition

The Dynamics of Entrepreneurship

Successful Entrepreneurs and Intrapreneurs Compete Against Much Larger Rivals

Entrepreneurship and Temporary Advantages

Successful Entrepreneurs and Intrapreneurs Compete Against

Much Larger Rivals

Successful Entrepreneurs and Intrapreneurs Compete Against

Much Larger Rivals

How Do They Do it?How Do They Do it?

Successful Entrepreneurs and Intrapreneurs Compete Against

Much Larger Rivals

White Space and Attacking the Center of GravityWhite Space and Attacking the Center of Gravity

Successful Entrepreneurs and Intrapreneurs Compete Against

Much Larger Rivals

Falling

Entry

Barriers

Hypercompetition

White Space Capitalizes on the Four Driving Forces of Hypercompetition

Rising Deep Pockets

Accelerating

Technological

Change

Fragmenting and Escalating Customer Demands

Finding White SpaceFinding White Space

Jim Stengel, Head of Marketing at P&G:

Follow Seven Principles• Really watch the consumer closely to

see what he does, not what he said• Identify an unmet need and consumer

psychology behind it• Create truly category-building

innovations, not just another flavor of ice cream

• Look for partners to satisfy the consumer need if unable to leverage core technologies

• Leverage your brands• Large launch, Leverage Distribution

Muscle • Manage the pipeline

White Space Avoids CompetitionWhite Space Avoids Competition

$100 MM New Markets Identified Unfilled Consumer Need

Swiffer (and Swiffer vac) Mopping with water is too much trouble Wiping up the small pile of dirt left behind

Febreze Scentstories (“Scent player” with fan and 5 alternating scents)

Artificial smell of existing air fresheners Strong smell at the source only Same smell is monotonous

Crest WhiteStrips Coffee/smoking stains on teeth Dentist too expensive

Tide with Downy Forgetting to add softener to laundry cycle

Mr. Clean Auto Dry Carwash (nozzle filters out minerals causing spots)

Water spots spoil car shine after washing

Disruption and Unsustainable Advantage

CompetitiveAdvantage

Short Periodof Advantage

LaunchRapid Counter

Attack or Disruption

Time

CompetitiveAdvantage

Periodof Advantage

Launch Slow CounterAttack

Time

Stability and Traditional Sustainable Advantage

Entrepreneurship is the Source of Temporary Advantage

Entrepreneurship is the Source of Temporary Advantage

Advantage

Long-Term Advantage

Time

Temporary Advantage is the New Source of Strategic Dominance

Time

A Series of Advantages

Advantage

Sequences of Temporary Advantages Must be Planned by Entrepreneurial

Firms

Time

Advantage

Doing

Setting Up

Planning

Envisioning

Four Virtually Simultaneous Organizations

Set Your Time Pacing Interval

Type of Disruption

High

Fluctuating Equilibrium

(Near Equilibrium)

Disequilibrium

(Chaos)

Low

Equilibrium

(Stability)

Punctuated Equilibrium

(Periodic Disequilibrium)

Competence Neutral/

Enhancing

Competence Destroying

Frequency of Disruption

This Changes the Level of Turbulence

Turbulence is Disruption of the Status QuoTurbulence is Disruption of the Status Quo

Time

Equilibrium

Turbulence

Time

Punctuated Equilibrium

Turbulence

Time

Fluctuating Equilibrium

Turbulence

Time

Disequilibrium

Turbulence

This Changes the How Firms Compete

The Nature of Change Changes the Nature of Competition

Type of Disruption

High

Fluctuating Equilibrium

Leverage & Layer Core Competencies

Disequilibrium

Hypercompetitive Strategies

Low

Equilibrium

Strong Barriers & Monopoly Power

Punctuated Equilibrium

Strategy as Revolution

Competence Neutral/

Enhancing

Competence Destroying

The Frequency of Change and Strategy

What is Your Dream?

Entrepreneurship: Theory and Evidence

Giovanni Battista DagninoUniversity of Cataniadagnino@unict.it

May 28, 2012