KEDGE BUSINESS SCHOOL
Master’s Thesis
A comparative study of the strategic decision making processes in
established corporations and startups
Nicolas MORIN
30/06/2017
Table of contents
Introduction: ............................................................................................................................... 1
I) The fundamental differences between entrepreneurial ventures and established
corporations ................................................................................................................................ 4
A)
General characteristics ................................................................................................. 4
1)
Definition of a startup .............................................................................................. 4
2)
General characteristics of an established corporation: ............................................. 8
3)
The general characteristics that differentiate a startup from an established
corporation........................................................................................................................ 10
B)
Differences in terms of objectives ............................................................................. 14
1)
The approach towards innovation .......................................................................... 14
2)
Business objectives ................................................................................................ 20
C)
II)
The external forces of the firms ................................................................................. 23
1)
Organizational ecology and Industry forces. ......................................................... 23
2)
The institutional environment for entrepreneurship and established business ...... 29
A traditional perspective on strategic decision making.................................................... 35
A)
1)
The profile of the CEO and top management vs Entrepreneur ................................. 35
Psychological attributes ......................................................................................... 35
Decision-making differences between an Entrepreneur and a CEO ......................... 45
2)
B)
Non-psychological attributes ................................................................................. 45
A utility function perspective on strategic decision making ..................................... 49
1)
The utility function of the entrepreneur ................................................................. 49
2)
The utility function of the CEO ............................................................................. 53
C)
The traditional strategic orientation derived from a top management perspective ... 54
III) A systematic review on the impact of Entrepreneurial Marketing in developing
corporations .............................................................................................................................. 60
A)
Definitions ................................................................................................................. 60
B)
H1: The younger the firm, the more power the founder has on decision making ..... 65
C)
H2: The younger the firm, the less structured their business processes are .............. 69
D)
H3: network and a strong personal brand are key for EM to succeed ....................... 73
Conclusion and limitations. ...................................................................................................... 78
References ................................................................................................................................ 80
Table of illustrations ................................................................................................................. 85
About the author:
My name is Nicolas Morin – a French graduate student from KEDGE Business School. I speak
three languages and have been passionate about entrepreneurship and strategy since a very
young age. I pursued this interest by setting up a mechanic workshop at 15 and by getting
involved in different startup projects. I also founded a publishing company and wrote two books
about fitness and nutrition.
Different cultures are another passion of mine and I’ve had the privilege of living in five
different countries – thanks to various internships, exchange semesters, and other such
programs. These experiences have allowed me to learn about decision making processes in
various contexts and environments – which explains my thesis.
Before working for UPS as a Global Product Strategy Analyst (part of the AIESEC traineeship
program), most of my professional experience lay in startups. While these and small businesses
rely on a combination of intuition and statistics for making decisions, established corporations
must be even more critical about how they evaluate opportunities due to their impact on
stakeholders.
The UPS policy book, itself, states that: “We look for opportunities to expand into new markets
and we evaluate the impact of our expansion on our company, people, customers, shareowners,
and communities.”
I therefore want to take an empirical look into the factors which affect decision-making, and
how such differs between startups and established corporations.
You can reach me at renner.morin.n@gmail.com or through my LinkedIn profile at
https://www.linkedin.com/in/nicolas-morin-69388a100/
0
Introduction:
This section provides a greater overview of the topic by linking it with current business
trends and explains how this paper is structured.
The 21st century is seeing massive disruptions in established industries by creating new trends.
Tesla, Airbnb, and Uber are new players that are changing existing ways of doing business.
Their visionary founders challenge the status-quo and are redefining the way value is delivered.
We live in very interesting times. Intense competition, entry barriers, and industry forces
created by very established players are being challenged or made irrelevant.
Not too long ago, the taxi industry could never have imagined the threat that Uber now poses
to their business. The latter’s “Blitzkrieg” policies have succeeded in grabbing more than 50%
of the market share in the United States, alone1.
The same goes for the hotel industry. Airbnb was the product of two entrepreneurs who had to
go through almost 30 credit cards between them before they finally hit the big time. Their big
time meant that anyone anywhere can make money by renting their property out to anyone. But
such also had a big impact on the profit margins of a hotel industry that cannot compete in terms
of price – burdened as they are by industry regulations that they, themselves, helped to pass.
These examples are just the tip of the iceberg. The result is that many traditional industries are
under threat, while those that still survive will never be the same. These changes are fueled by
the development of new technologies, as well as the capacity of entrepreneurs to recombine or
rethink established business models.
To be competitive and profitable, a company must find a way to deliver greater value than its
competitors. This is the basic definition of “competitive advantage” as described by Porter2 in
the early 1980s. To outperform the competition, firms must either provide solutions at cheaper
prices than the competition (cost leadership), or be seen as unique (differentiation). Those who
are very innovative can redefine markets and pursue both strategies simultaneously.
Consumers have also changed a lot. New technologies allow them to quickly compare
alternatives, get instant feedback, and engage in the development process of the final product.
They have switched from one-way unilateral communication sustained by traditional marketing
approaches, to a two-way responsive communication thanks to the development of social
media.
According to the television bureau of advertising (2009), social media, defined by “online
technologies, practices, or communities that people use to generate content and share opinions,
insights, experiences, and perspectives with each other,” are enabling a shift from a traditional
1
https://www.bloomberg.com/news/articles/2017-01-26/uber-takes-majority-of-ground-transport-market-for-u-sbusiness-travelers
2
Porter, (1980) identified a competitive advantage as: "A function of either providing comparable buyer value
more efficiently than competitors, which is low cost, or performing activities at comparable costs, but in unique
ways that create more buyer value than competitors; and hence, command a premium price, which is
differentiation."
1
perspective to “an expanded dialogue between company and consumer” (Matthews, 2011).
New ventures are capitalizing on this change to deliver a version of the company’s capabilities
that match the needs of customers.
The macro-environment is also being transformed and emerging markets are on the rise,
changing the way we produce and consume. A greater concern towards the environment,
sustainability, and fairness is also opening new ways for companies to differentiate themselves.
Almost everyone knows of Mark Zuckerberg (Facebook), Drew Houston (Dropbox), and Elon
Musk (Tesla). Chances are, however, that the same does not apply to Jeffrey R. Immelt (CEO
of General Electric – the 4th largest company in the world as per market capitalization in 2016),
Daren Woods (CE of Exxon Mobile – the 5th largest company in the world as per market
capitalization in 2016), or Matthias Müller (CEO of Volkswagen – the 8th largest company in
the world in terms of revenue as of 2016).
Driven by their vision and passion, entrepreneurs are already distinguishing themselves from
the traditional top-management of a firm. There seems to be specific psychological
characteristics, as well as leadership styles, that enable entrepreneurs to be considered as “men
apart” (Gartner, 1989).
According to Lumpkin, G.T. and Dess, G. (1996), “the history of entrepreneurship is filled with
stories of self-determined pioneers who had a unique, new idea – a better idea – and made a
business out of it.”
A lot of research has been focused on the role of entrepreneurs and their startups. Few, however,
have tried to explain what differentiates entrepreneurs and startups from the CEOs of
established players.
More specifically, how do we define an entrepreneur and a startup in terms of orientation, goals,
and aspirations, and what makes them so different from all the established firms? What are the
key strategic decision making processes that make startups so innovative, yet also very risky
compared to key industry players who are always late in catching the new trends?
The goal of this paper is to examine the key differences in the strategic decision making
processes that exists between CEOs and entrepreneurs, as well as between startups and
established corporations.
To do so, we will first start by defining what a startup is and how different it is from an
established corporation. After carefully reviewing all of the main characteristics, we will move
to an economic perspective (approach towards innovation) and an ecology perspective (industry
forces and founding rates), and finally, to a macro-environment perspective (New Institutional
Economics and PEST framework).
We will then focus on describing who the CEOs are and how different their thought process is
as compared to founders and entrepreneurs. Psychological characteristics and nonpsychological attributes will be considered in order to derive, from the current research stream,
some specific heuristics and their utility function. This will allow us to get an understanding
of the traditional marketing approach and orientation of established corporations.
2
In the last section, we will look into what defines an entrepreneur and provide a systematic
review of what is now called Entrepreneurial Marketing (EM), as well as the Entrepreneurial
Orientation (EO) of the firm.
Three hypotheses will be tested and verified by looking at the current results in empirical
research.
•
•
•
H1: The younger the firm, the more power the founder has on the decision-making
process.
H2: The younger the firm, the less structured their marketing processes are.
H3: A strong personal brand and network are vital for EMs to succeed.
We will then present our conclusions, discuss the limitations of this paper, and suggest new
perspectives for empirical research.
3
I)
The fundamental differences between entrepreneurial
ventures and established corporations
A) General characteristics
1) Definition of a startup
This section defines a startup by analyzing its core characteristics and purpose. It will
then integrate different theories and definitions with a focus on the one most relevant for
our analysis.
Startups have always been a very difficult concept to scientifically define. First, how do we
make a clear distinction between a startup and a Small and Medium Sized Enterprise (SME)?
Both are new businesses and correspond to the definition of Storey & Greene (2010), that: “A
new business is a new transacting entity that did not exist in a previous time period, is not
owned by an existing business, and is not a simple change of ownership.”
A better definition could involve the following characteristics (Woywode, M., 2014):
•
Is its own entity or is separate from the existing personal activities of the owner/s
•
Involves some activity (transactions)
•
Is legally independent from other businesses
•
It was not acquired from others (i.e. a sole transfer of ownership with no other changes)
•
It has a unique name
•
It is not a change of location or a changed name of an existing business.
Paul Graham, co-founder of the Y Combinator (the biggest venture capitalist firm in terms of
amount invested) said that, “A company five years old can still be a startup, ten [years old]
would start to be a stretch.”
The Global Entrepreneurship Monitor (GEM), the largest international study of the adult
population engaged in entrepreneurial activity, considers the early-stage entrepreneurship
profile as follows: it is a combination of the nascent entrepreneur stage (0 – 3 months) and the
owner manager of a new-business (up to 3.5 years old).
4
The following graph presents an overview established by the GEM in 2014.
Figure 1: Entrepreneurship Stages Representation (GEM, 2014)
Both startups and SMEs are in the Total early-stage Entrepreneurial Activity (TEA). We can
therefore argue that being a newly established business is not enough to differentiate a startup
from an SME.
Startups have mostly been exclusively associated in the press with new technologies. Most
journalists, in fact, consider startups as being a newly started tech company. This definition is
incomplete, however. It fails to consider the degree of innovation a startup represents. Can a
new time management app be considered a startup, for example? Especially since there are
already more than a hundred alternatives available on the market?
According to Adora Cheung3, cofounder and CEO of Homejoy, a “startup is a state of mind.
It’s when people join your company and are still making the explicit decision to forgo stability
in exchange for the promise of tremendous growth and the excitement of making immediate
impact [sic].”
Nor is she the only one who thinks so. Russel D’Souza4, cofounder of Seatgeek, suggests that,
“It stops being a startup when people don’t feel as though what they are doing has impact.”
The central idea behind a startup could therefore be about making an impact and challenging
the status-quo.
Guy Kawasaki5, a Silicon Valley based author, speaker, and entrepreneur goes even further by
saying that, “Entrepreneurship is no longer a job title. It is the state of mind of people who want
to change the future.”
3
https://www.forbes.com/pictures/emjl45hjge/adora-cheung-left-cofounder-of-homejoy/#66c9d2993894
https://www.forbes.com/sites/natalierobehmed/2013/12/16/what-is-a-startup/#40440c914044
5
In the introduction of his book, the Art of the Start (2004)
4
5
It is an entrepreneur’s passion (defined by the Merriam-Webster6 website as an “intense,
driving, or overmastering feeling or conviction”) that may make the difference between startups
and SMEs.
To challenge the status-quo, startups need to grow and they need to do it fast if they want to
survive. Most do, yet most also fail after a couple of years. An entrants’ life is “nasty, brutish
and short” (Geroski, 2011).
According to a study published by the U.S Small Business Administration7 (SBA), only 66%
of newly established businesses survive more than two years, and 44% survive after five. So
are startups rising stars or dying meteors?
This growth orientation or willingness to become a “dynamic capitalist” contributes, in a very
disproportionate way, to employment and to the Gross Domestic Product (GDP) of a country.
In fact, 4% of entrants create up to 50% of jobs (Kirchhoff, 1994).
It also corresponds to the concept of “Gazelles” identified by Birch (1981) as agile growth
oriented to “at least 20% growth a year for four years” and with above average profitability
(Birch, 1981). This contrasts with the idea of mice (small businesses) that are very flexible but
likely to stay small compared to elephants (large corporations that have significant market
power but are very slow in adapting to change).
There is therefore a need to develop a definition that integrates the newness of a firm together
with its purpose. Researchers have failed to come up with a real scientific definition of a startup,
so we will have to turn to definitions from the business world.
The definition that best fits the context of a startup, according to Steve Blank, serialentrepreneur and academician, is “a temporary structure, designed to find a repeatable and
scalable business model.”
A business model is commonly defined by the answer to the following question: “how are we
going to generate money?” It is therefore the core of any business.
Joan Magretta, author of “Why Business Models Matter?”8, takes it a step further by splitting
the business model into two perspectives:
•
•
The first part is mostly related to the production and design processes:
“Part one includes all the activities associated with making something: designing it,
purchasing raw materials, manufacturing, and so on.”
The second part is the second and final step of the business model:
“Now that we have a product or a service ready to be sold, how do we manage to reach
the market and find consumers?”
6
https://www.merriam-webster.com/dictionary/passion
https://www.sba.gov/sites/default/files/Business-Survival.pdf
8
https://hbr.org/2002/05/why-business-models-matter
7
6
Magretta adds another interesting perspective to distinguish between business models and
competitive strategies – a business model is how you intend to run your business whereas a
competitive strategy relies on the willingness to find ways to outperform the competition.
Another definition of a business model is given by Osterwalder and Pigneur in “Business Model
Generation”9 – a business model summarizes how an organization “creates, delivers, and
captures value.”
Thanks to these definitions, we can understand that a startup’s function is not to exist forever.
It is driven by the willingness to find a unique way of sustainably creating, delivering, and
capturing value. It is putting into practice the entrepreneur’s vision into a viable and profitable
venture.
9
https://strategyzer.com/books/business-model-generation
7
2) General characteristics of an established corporation:
Startups are a challenging concept to define and the same can be said of established
corporations. Though more stable characteristics exist to define a Multinational
Corporation (MNC), we will also explain the specific characteristics of dominant industry
players.
Existing business literature has not yet clearly defined what an established corporation is. For
the sake of our analysis, we will focus on key industry players that can be defined as follows:
•
Businesses that have been around for more than 3.5 years. It means that the business has
already gathered some experience and networks within a specific industry, and therefore
does not suffer from the liability of newness.
This term, originally defined by Stinchcombe in 1965, argues that younger firms tend
to have a higher death rate. This is due to the constellation of problems they face related
to the founding of their firm – such as the lack of networks or the reliance on a small set
of customers.
•
•
•
•
We also need to consider the size of the firm. Those that have more than 250 employees
are usually considered to be large. Also, according to investor words, a large-sized
company should achieve more than $5.75 million of turnover per year to be considered
“large.”
Key industry players are those that have a significant relative market share in the
industry they operate in. We will focus on companies with more than 10% relative
market share and therefore have reasonable industry power. This definition is extremely
important since we will be talking about organizational ecology and network influences.
Firms should be stock-listed, and therefore answer to a wide-array of stakeholders –
including the shareholders of the company. It means that established players face both
internal and external pressure from various stakeholders.
It should already have an established corporate structure, with a top management and a
top-down hierarchy. Though some very established players (such as Zappos, for
example) have more of a flat structure, everyone knows who does what and who has
more decision-making power than another (as per tenure, position occupied, or shares
of the company owned).
Defining an established corporation in these terms allows us to compare startups with
established corporations. In terms of objectives, key industry players have already found their
business model. Their objective is therefore limited to keeping or improving their competitive
position and reaping the most profit.
8
Differentiating startups from established corporations can also be done by looking at the
specific stages that define their activity. The following graph by Thierry Janssen10, an associate
partner with Just in Time Management group, allows us to establish a clear distinction between
established industry players and startups.
Firm Stages
Seed
Startup
Growth
Established
Expansion
Mature
Exit
Figure 2: Firm Stages
The graph shows that what is considered as the startup stage includes the seed (which is usually
pre-startup or before the company gets started) and the real startup stage. The growth stage is a
transitionary state where a startup is going to turn into an established player in a given industry.
There is no specific timeline on this graph because we can argue that these stages can occur at
different times for different companies. Also, this graph gives a rather high-level overview and
does not necessarily consider the small transitionary phases for each step.
So all the stages, from “established” to the exit of the firm (when a firm decides to leave a
specific industry or is driven out of the market by going bankrupt) will be the ones we consider
when it comes to distinguishing between startups and established corporations. If firms survive
the growth stage, it is likely that the “established” part will represent a very significant portion
of their life.
10
https://www.linkedin.com/in/thierryjanssen/?ppe=1
9
3) The general characteristics that differentiate a startup from an established corporation
This section will compare the key tangible and intangible characteristics that will enable
us to get a clear picture on what differentiates a startup from an established corporation.
According to Storey & Greene (2010) there are a couple of key differences that are worth
mentioning when it comes to comparing startups (or small businesses in general) as compared
to established corporations.
The first group gravitates around uncertainty – not to be confused with risk, which can be
calculated or estimated through a statistical model based on previous experience (Knight, 1921).
On the contrary, an uncertain situation is so unique that it is not possible to draw any kind of
model to evaluate the outcomes.
Startups and established corporations are very different when it comes to uncertainty.
According to Storey and Greene (2010), the former tends to face more external uncertainty
from the macro-economic environment and industry.
Being new in a market means that they don’t have the necessary experience to know about the
underlying driving forces in the industry. Though a very important cause of startup failures,
these external drivers have been given only “scant attention in the literature” (Berryman, 1983).
On the other hand, established businesses tend to face internal uncertainty – the strategy defined
by top-management might not be implemented as planned. This probability is also next to
impossible to define (Storey, 2010).
Moreover, Storey and Greene (2010) identified three types of uncertainty:
•
Market uncertainty
Small or new businesses tend to be price-takers because the volume of their output is
too low to have a significant impact on price. On the other hand, large and established
corporations are price-makers – meaning that they can influence the entire industry with
their pricing policy.
A good example of this is how Free entered the French telecommunication market. The
Iliad group’s Free entered the French market back in 2012, slashed their prices, and
snatched up more than 10% of the market shares within a couple of months. Being
backed up by a very large company enabled Free to stand up against the retaliation of
the French telecom “cartel.”11
Young firms or startups also face market uncertainty because they often depend on one
large customer, have low economies of scale, and might face retaliation from established
incumbents inside the specific industry they are entering.
11
https://www.nextinpact.com/archive/34135-telephonie-cartel-condamnation.htm
10
•
Customer uncertainty
Any new business can define its cost structure, though their selling price can remain
unknown. This is tied up to the fact that newly established businesses are price takers –
both from their suppliers (who are usually much bigger and therefore have a stronger
bargaining power) and their customers (who, especially in the beginning, tend to be
much larger).
Large businesses already have an extended list of customers, making their whole
operation less risky because even if one fails to pay, the portfolio is spread enough to
absorb the shock. They can also rely on their previous market experience and their
extensive market network to anticipate changes from all sides.
•
Aspirational uncertainty
Entrepreneurs usually have a wide-array of motivations which aren’t always purely
monetary. This is unlike CEOs who must answer to a wide range of stakeholders and
are more incentivized by their pay-structure. So, entrepreneurs have a vision, even
though they may not yet have their objectives clearly laid down.
To foster entrepreneurship, several mechanisms can be used to limit risk and uncertainty. This
includes creating a Limited Liability company which limits investment by outsourcing and
focusing on a more short-term approach.
Uncertainty aside, there are other differences between startups and established corporations,
including:
•
•
•
Risk of failure
Startups have a higher risk of failure due to the risk-taking approach of their founder
and the overall degree of innovation of their business model. Though prominent firms
can also fail (Enron, WorldCom, GM, etc.), such tends to be less likely because of the
risk control mechanisms they have in place.
Market Power
Large firms have reached “a critical mass” of users (Blind, 2004) and trigger the
bandwagon effect. In today’s economic environment, reaching a critical mass of users
can be a key to success – especially when it comes to new technologies. Limited market
power is also associated with a limited geographic presence, market image, and loyalty.
Management
Smaller firms tend to have a more flexible management style and a more decentralized
structure. As the firm gets older, more processes are put into place to ensure efficiency,
and as a consequence, the established firm tends to become more bureaucratic
(Weber, 1921). Bureaucracy is defined by standardized procedures and clearly defined
job roles.
11
•
•
•
•
•
•
Motivation of owner
While the founder/entrepreneur pursues both monetary and non-monetary goals (Guth,
1990) shareowners of a company are mostly monetarily oriented (earnings per share
and stock price).
Brand
While established players can capitalize on their brand recognition and awareness to
sustain their marketing efforts and their strategy, smaller firms are not yet known on
the market and must build a reputation for themselves.
Wages and benefits for workers
Large organizations can have a much bigger budget for their employees’ compensation
and benefits. This is mostly because their business is already up and running, and has
probably already broken even.
Workforce
Large corporations tend to be crowded with senior and experienced workers, especially
in management. Startups, on the other hand, tend to have a much younger and more
creative workforce.
Human Resources
While it is very likely that any large corporation will have a specific Human Resources
(HR) department staffed with professionals, the HR management in newly established
businesses tend to be taken care of by the founder.
Training and recruitment
Established corporations can afford a budget for training their employees to enable
them to broaden their skill sets. Startups mostly rely on peer and informal training, as
it is more flexible and less costly.
The recruitment process is also totally different in an established corporation as
compared to a startup. While the former will give a lot of importance to the educational
background of the applicant, the latter will mostly focus on what the potential new
employee can do and what his/her mindset is. Startups are made up of small teams for
which a high degree of fit is required.
•
Sources of finance
Big corporations can get access to financing capital easily – assuming they have sound
management and a healthy balance sheet. They usually finance themselves, however,
by raising extra capital, getting a loan from a bank, or even using available funds from
their subsidiaries.
Startups and newly founded firms will mostly rely on bootstrap. They might get a seed
investment from a business angel depending on their network and their idea. It’s
unlikely that they’ll get a Series A investment (usually provided by Venture
Capitalists), however, unless they can show a solid proof of concept.
12
The following chart summarizes the key differences between startups and established
corporations:
Summary of the key differences
Characteristics
Startups
Established corporations
High
Low – Medium
Market Uncertainty
High
Low
Customer Uncertainty
Medium
–
High
Low
Aspirational Uncertainty
High
Low
Risk of failure
Limited
Strong
Market Power
Flexible
Bureaucratic
Management
Multiple
Return on Investment
Motivation of owner
Unknown
Strong
Brand
Comprehensive
Wages and benefits for Limited
workers
Jack of all trades
Experts
Workforce
Limited
Specific department
Human resources
Informal and unplanned, Formal and planned, based
Training and recruitment
based on a high degree of fit on expertise
Bootstrapping,
business Capital raise, loan from
Source of finance
angels and venture capitalists banks, internal finance
Figure 3: Summary of the key differences between startups and established corporations
All the aforementioned factors are going to affect how both established corporations and
startups define their objectives.
13
B) Differences in terms of objectives
1) The approach towards innovation
This section will compare the approach of established players and startups in terms of
innovation. After defining what innovation is, we will look at specific theories and use
them as a support to analyze different approaches towards innovation.
Innovation is about the formulation of new ideas or processes. It is defined by Fagerberg (2003)
as “the first occurrence of an idea for a new product or process.”
Innovation takes the whole process one step further because it is “the first commercialization
of the idea” (Fagerberg, 2003). Innovation is therefore all about the practical application of new
inventions into marketable products or services.
The following process summarizes the steps involved:
Idea:
Invention:
Innovation:
Conceptual
representation
Initial
development
Marketable
offering
Figure 4: Steps in the innovation process
Schumpeter sees innovation as something that changed the market in a profound way.
Consequently, firms that innovate are extremely likely to become market leaders and gain a
significant competitive advantage over their competitors (Schumpeter J. , 1934).
Lumpkin & Dess (1996) defined it as “the firm’s tendency to engage in, and support new ideas,
novelty, experimentation, and creative process or research and development activities which
may result in new products, services, or technological processes.” (Lumpkin, 1996).
A good example of the differences between the two is the case of MP3. This music format was
invented by Karlheinz Brandenburg with his team at the FrauenhoferInstitute12. The idea was
protected by a patent and licensed to other corporations which generated $143 million in
licensing revenues in 2005, alone.
But it was turned into an invention by Apple, which used the MP3 standard for the iPod, iTunes,
and iStore. Capitalizing on this invention and turning it into a marketable product by building
specific synergies, Apple increased their revenue from 2004 to 2005 by $3.2 billion. This
ecosystem created a much better market appeal for the MP3 player and enabled it to reach a
broader set of users, which in the end, generated a lot of revenue.
12
https://www.iis.fraunhofer.de/en/ff/amm/prod/audiocodec/audiocodecs/mp3.html
14
This example corresponds to the theory that returns from an invention are likely to be minimal
as compared to an innovation (Astebro, 2003).
Though most innovations are never turned into products or services, both inventions and
innovations are critical to economic development (Astebro, 2003).
Startups go for more radical innovations and correspond more to the profile of entrepreneurship
as identified by Schumpeter. Schumpeter considers entrepreneurs to be exceptional people with
a specific set of abilities that enable them to be the drivers of change in the market through
radical innovations.
Damanpour F. identified radical innovations as “those that produce fundamental changes in the
activities of an organization and large departures from existing practices” as compared to
incremental innovations which are “those that result in a lesser degree of departure from
existing practices” (Damanpour, 1996).
Radical innovations may also be seen as potentially generating an extraordinary economic
performance and may be described as the engine of economic growth (Wiklund J., 2003). What
is more, Kropp et al. (2006) identified innovativeness as a vital factor for new business success.
Schumpeter’s initial theory was that innovation is driven by entrepreneurs and that their startups
are a disequilibrium force which strongly contrasts with the static model of market equilibrium
in neo-classical models (Schumpeter, 1934).
Through the process of “creative destruction,” entrepreneurs (here labeled as innovators) will
drive existing established corporations out of business by taking their market shares. In so
doing, they will expand overall economic activity by destroying existing market structures.
Entrepreneurs and their innovations act as a “disequilibrium” force which challenges existing
market structures.
New founded firms and innovations are based, according to Schumpeter, on three types of
changes:
•
•
•
Technological changes
Enables the allocation of resources in different and potentially more productive ways.
Political and regulatory changes
Re-allocates resources to new uses in more profitable ways or ways that re-distribute
wealth from one member of society to another
Social and demographic changes
Transfers information about ways of more productive resource allocation and creating
new economies of scale for some types of entrepreneurial activities.
15
Schumpeter also distinguishes five types of innovation:
• Introduction of a new good or significant improvement
• Introduction of a new method of production
• Opening of a new market
• Utilization of a new source of supply for raw materials or conquest for new types of
half-manufactured goods
• The creation of a new type of industrial organization
Innovation in startups are therefore brutal driving forces that strongly rely on innovativeness
and uniqueness. Indeed, startups tend to correspond to the dynamics of innovation model
identified by Taylor and Taylor (Taylor, 2012).
Figure 5: Innovation characteristics over time
In its early stage, a startup relies on a low capital intensity project (especially when developing
the Minimum Viable Product or MVP), but a very high degree technology or business model
novelty as identified by the matrix of Ramanda Nanda13 at Harvard Business School.
Startups can usually choose to innovate into one of the following dimensions according to Rama
Velamuri (Professor of Entrepreneurship at the China Europe International Business School):
• Business Model
• Market
• Product
13
https://hbr.org/2015/09/case-study-should-this-startup-take-vc-money-or-try-to-turn-a-profit
16
Figure 6: Innovation dimensions
Accumulating innovation into the three dimensions is not sustainable and is therefore referred
to as the suicide cube. Trying to be overly innovative is a very risky strategy, especially when
it comes to startups evolving in a very hostile environment.
Speaking of innovation, we can reasonably argue that startups also try to innovate to create a
new market for themselves. This theory is called the Blue Ocean Theory and was identified by
Kim and Mauborgne in 200414.
Through innovation, startups are willing to create uncontested market spaces, make the
competition irrelevant by breaking the value/cost trade-off, and overall create and capture a
new market demand that did not previously exist. This is commonly referred as the
“reconstructionist” view.
The Blue Ocean Strategy was not necessarily developed exclusively for startups. In fact, a lot
of well-known companies such as Nintendo, IKEA, and le Cirque du Soleil were successfully
able to implement this type of strategy to distinguish themselves from the competition.
What differentiates startups and established businesses is that startups strive to create Blue
Oceans right from the start. Startups are not the result of pressure from the competition, but are
rather a strong willingness to challenge the establishment.
Taking this perspective into account, we can argue that most established corporations are
therefore stuck in a Red Ocean environment. They are competing in existing market places,
often crowded by strong incumbents. And rather than making the competition irrelevant, they
are doing their best to outperform their peers. They are part of a structural view for which the
goal is to build a competitive position within a closed industry.
14
https://hbr.org/2004/10/blue-ocean-strategy
17
Indeed, researchers have found that as firms grow, they develop specific hierarchies that are not
up to the task of absorbing external information, especially from informal contacts (Berger,
2004). Such, therefore, diminishes the sources and variance of ideas, leading in the end, to a
focus on incremental innovation (Dobrev, 2003).
They are therefore, according to Kim & Mauborgne, either settlers whose value curves conform
to the basic shape of the industry, or migrators who are trying to change the competitive
environment through incremental innovation but are still stuck within Red Oceans.
Established corporations are consequently more arbitrageurs than innovators. This concept is
part of the Austrian perspective on Entrepreneurship, first presented by von Hayek in 1949. The
top management of key industry players are equilibrium forces and stress the role of discovery
(alertness) that recombine industry resources into a more optimal level. As opposed to
Schumpeter, Hayek sees the entrepreneurial activity as an equilibrium force (Hayek & F.A,
1949).
They therefore do not require new information or a very innovative approach. Rather, they are
less innovative and rely on previously undetected market imperfections to outperform the
competition. Their competitive advantage is based on their capacity to incrementally improve
their offering at a faster rate than the competition.
Hayek identified four specific roles for the entrepreneurial activity of a firm, which are to:
• Fill market shortages
• Whittle away surpluses
• Eliminate quantity gaps
• Bring the market back to equilibrium by correcting earlier entrepreneurial errors
The following chart summarizes the differences between the two approaches:
Schumpeterian vs Kiznerian opportunities
Schumpeterian Approach
Kiznerian Approach
Dis-equilibrating
Equilibrating
Require new information
Do not require new information
Very innovative
Lie in previously undetected imperfection
Rare
Common
Involve creation
Limited to discovery
Figure 7: Difference between Schumpeterian and Kiznerian opportunities
An important factor to note, however, is that though most of the established firms are very slow
to innovate, they have the resources and capabilities to acquire innovative startups, and
therefore, acquire new expertise or competitive advantages with a less risky approach.
Nowadays, most of the very innovative startups are being acquired by strongly established firms
with immense cash flows available to them (Google, Apple, Facebook, etc.).
18
This means that established corporations can also innovate and practice entrepreneurship – but
in a different way. According to Schollhammer (1982), firms can use an “acquisitive” type of
entrepreneurship by entering new markets only through the acquisitions of other players. This
approach involves little to no innovativeness and may not involve a lot of risk, especially if the
buyer has a lot of resources available.
Recent examples of these acquisitions include: Apigee (acquired by Google for $625 million),
Oculus (acquired by Facebook for more than $2 billion) and Turi (acquired by Apple for $200
million). It means that established companies stay innovative through a process of acquisition
as well as developing their own incubators for startups.
There are also companies that rely solely on imitation. A common example of this would be the
difference between Sony and Matsushita (also nicknamed “Maneshita denki” in Japanese –
meaning "electronics that have been copied"). While Sony keeps innovating (they invented the
Walkman, for example), Matsushita will enter the market once the innovators have developed
it and rely on their superior marketing and operational capabilities to capture it (Lieberman,
1988).
This different approach towards innovation has an impact on a firm’s objectives, as well as on
how they try to build their competitive advantage.
19
2) Business objectives
This section explores the differences in terms of business objectives that condition the way
both startups and established corporations base their decision making
As mentioned earlier, a startup is a temporary structure designed to search for a repeatable and
scalable business model (definition by Steve Blank), whereas an established corporation is
looking to find the right strategic approach to outperform the competition and generate superior
returns. These differences in perspective will strongly affect the way goals are planned and
decisions are made.
Though both strive to develop a sustainable competitive advantage (SCA) identified as
valuable, rare, difficult to imitate, and organizationally viable (Barney, 1991), their approaches
will be quite different.
What is valuable is determined by the customer perception of the good or the service. To find
a way to be competitive, a firm must produce it at a cheaper cost or at a higher perceived value
by combining several processes from the value chain identified by Porter.
Figure 8: The value chain identified by Porter (1985)
To do so, established corporations try to accumulate key resources, achieve better economies
of scale, or differentiate themselves through incremental innovation to achieve an SCA. If well
executed, the chosen strategy will turn into a competitive position that is rare enough it cannot
easily be copied.
The resource-based view suggests that above-average returns for any firm are largely
determined by the characteristics within the firm. The focus is therefore on developing or
obtaining valuable resources or capabilities which are difficult or impossible for rivals to imitate
(Penrose, 1959).
20
Established businesses with strong power in the industry can influence not only the market, but
also all the forces in their external environment. In some cases, private firms are not only trying
to generate superior returns through incremental innovation, but are also lobbying governments
in order to create a more favorable environment for their activities.
The resource-based view strongly fits the approach taken by established firms. Over time, they
will secure heterogeneous resources in the industry that are not very mobile, and therefore,
cannot be easily transferred from one firm to the other. The differences in terms of resources
and how they are used will be the basis of their competitive advantage by making it difficult to
imitate.
Finally, for a competitive advantage to be sustainable, it has to be viable inside the organization.
This means that a specific organizational structure must be in place in order to enable the
strategy to succeed.
This strategic perspective is mostly irrelevant for startups which rely mostly on innovativeness
as their liability of newness prevents them from securing key resources in the industry. It is also
because it is necessary to improve or develop new markets in order to deal with the rapidly
changing and uncertain environment in which newly established businesses operate (Quaye,
2013).
The following chart establishes the differences between Red and Blue Ocean Strategies (Kim,
2004).
Red Ocean Strategy
Blue Ocean Strategy
Focus on current customers
Focus on non-customers
Compete in existing markets
Create new and uncontested market spaces
Beat the competition
Make the competition irrelevant
Exploit existing demand
Create and capture new demand
Make the value-cost trade-off
Break the value-cost trade-off
Align the whole strategic initiative in terms Align the whole strategic initiative in pursuit
of cost leadership or differentiation
of both differentiation and low cost
Figure 9: Highlight of the key differences between Blue and Red Ocean strategies
Startups are mostly based on innovation. They therefore do not have to rely on a trade-off
between cost leadership and differentiation.
Radical innovation is obviously rare and is costly to imitate most of the time (at least in the
short to mid-term) as innovative firms get a temporary monopoly from their innovation. Unless
it is a service, an innovation is also protected by a patent making it impossible to be duplicated
for a specific period.
Moreover, Kotler believes that startups are willing to have a “market-driving behavior” – where
a firm strives to “shape the structure, preferences and behaviors of all market stakeholders”
(Schindehutte, 2007).
21
However, radical innovations do take time before they generate returns. Rogers, in his theory
of the law of diffusion of innovation, suggests that it takes time for an innovation to even reach
the early majority (Rogers, 1995) . Rogers described his law of diffusion of innovation as an Sshaped curve containing five different groups:
• Innovators
• Early adopters
• Early majority
• Late majority
• Laggards
Simon Sinek went even further in his famous TED Talk15 where he explained the proportion in
terms of percentage that each group represents. He also referred to Malcolm Gladwell’s tipping
point – the point after which a movement gains a significant momentum usually triggered by
small factors or changes. It corresponds to the idea that at some point, and for no real specific
reason, an innovation is going to spread inside the market because the early majority started
adopting it.
The following graph presents his theory:
Figure 10: The law of diffusion of innovation
Source: Simon Barros, Coordinator at Hiive
15
https://www.youtube.com/watch?v=zU3fIEPfctQ
22
Furthermore, the strategic orientation and processes of established firms do not fit in with the
need for flexibility that startups have. Nor do they fit the psychological characteristics of
entrepreneurs, as we will see later.
In The Lean Startup16, Eric Ries claimed that the goal of a startup is to repeat the “build,
measure, learn” process to find a sustainable business model. This means that a startup’s
competitive advantage won’t come from its capacity to secure key resources from the industry.
It will instead rely on its capacity to rapidly develop a Minimum Viable Product (MVP) and
constantly listen to the feedback of early adopters to find the right approach and the right
product that fits the needs of the market.
Startups therefore tend to use a rather “incrementalist” approach as identified by Tidd (2005).
It is impossible to completely understand the complexity of the environment and foresee future
changes (Tidd, 2005). Since startups are evolving in a very dynamic and uncertain
environment, this approach makes total sense.
Now that we have taken an economic perspective on what differentiates startups from
established corporations, we will look at the final differentiating factor – the external
environment.
C) The external forces of the firms
1) Organizational ecology and Industry forces.
This section looks at specific frameworks to analyze the immediate environment of a
startup and an established corporation. Even though different approaches can be linked,
specific factors are tailored for startups and established corporations.
Evaluating the startup environment from an organizational ecology perspective:
Organizational ecology is a research term used to investigate the establishment of new
organizations (Hannan, 1989). It studies how the organization’s population evolves over time,
especially through the demographic processes of foundation, death, and growth.
The original concept of ecology comes from biology. According to Dr. Bergstrom17, some
environmental factors can strongly influence the firm’s success over time.
Several concepts are associated with organizational ecology to predict how the population of a
business is going to evolve over time. To describe the environment of a startup ecology, we
will focus on:
• Intra-population processes
• Inter-population processes
16
17
http://theleanstartup.com/
https://www.biology.washington.edu/people/profile/carl-bergstrom
23
Intra-population processes:
According to Aldrich (1990), intra population processes have the strongest impact on founding
rates.
Density dependent phenomenon are related to the early birth and death of firms. Research has
shown that when a lot of companies get started at the same time, it triggers the entry of even
more firms. This is because a high founding rate within a certain industry makes it attractive
for aspiring entrepreneurs.
It implies that new ventures are more likely to succeed because the possibility of favorable
outcomes motivates many new entrepreneurs. It also implies higher rates of organizing attempts
because more entrepreneurs saw future conditions as favorable and enough found success to
make it worthwhile. The latter was due to those who had to work harder in order to enter, and
were more likely to secure resources from gatekeepers and others who agreed that the future
indeed held favorable conditions.
When a lot of atomized entrants are in the market, it reduces the cost of accessing information
and makes the opportunity more attractive because the entrepreneur feels that s/he’s not the
only one seeing this. It therefore has a legitimizing effect (Aldrich, 1990). Gaining legitimacy
is especially important when there is a high degree of novelty involved.
This rapid entry of new firms in the industry, however, can also be responsible for “Boom and
Bust” cycles because there is only a finite amount of resources and a customer base for a given
market (Hannan, 1989). Density therefore affects the underlying drivers of the competition.
If a lot of firms enter at the same time, they might not be able to reach the Minimum Scale
Efficiency (the minimum production they need to achieve to cover their initial investment), and
therefore, be driven out of business because they are not able to cover their fixed costs.
When failures are high, founders will then fear the same fate because it seems that the given
industry has already reached its carrying capacity because the greater the number of
competitors, the lesser the potential gain. It might therefore be a signal that the opportunity is
not so attractive anymore.
These factors are responsible for “Boom and Bust” cycles. The boom corresponds to the high
birth of new firms whereas the bust is a natural consequence of the industry reaching its carrying
capacity.
Ruef (2004) identifies boom and bust cycles as the common result of entrepreneurial inertia –
when entrepreneurs delay starting a business because they feel it’s not the right time. When a
lot of players enter the market, they do not want to miss it and so get started without a good
plan in mind.
24
Boom and bust cycles can be found in many industries throughout history as shown in the
following graph:
Figure 11: Example of Boom and Bust Cycle in the Automotive industry18
Inter-population processes:
Inter-population processes can be defined as processes taking place between players from two
different, yet related, industries. To understand the following, we will take the example of the
industry A and industry B.
Aldrich (1990), identified six specific inter-population processes:
•
•
•
•
18
Full competition (-;-), when both players fight for the same resources and end up
neutralizing each other, which has a negative impact on both. The founding rates will
therefore affect both as the expected profit from the opportunity decreases.
Partial competition (-;0), when A is negatively affected by B while the activity of A
has no significant effect on B. In this case, while the founding rates stay the same for
B, they decrease for A.
Predatory competition (+;-), when A expands at the expense of B, making B a much
less attractive industry than A.
Neutrality (0;0), when neither affects the growth of each other.
http://fortune.com/2010/10/07/will-solar-in-2011-look-like-automobiles-in-1911/
25
•
•
Commensalism (+;0), when A benefits from the presence of B but B is not affected by
A. A typical example would be a fast food restaurant (A) in the vicinity of offices (B).
Symbiosis (+;+), when both benefits from each other’s presence as the two complement
each other. This is the ideal scenario which strongly favors founding rates.
A framework tailored to the mechanisms for established corporations: Porter’s five forces
The organizational ecology is only relevant for newly established businesses. If we talk about
key industry players or incumbents, we should focus on the key industry forces identified by
Porter (1980). Though useful to understand the competitive environment of a startup, it is most
likely that the startup will find itself in very unfavorable conditions at the beginning.
Due to their limited market scope and power, it is also unlikely that a startup will be able to
influence any of the market forces at first. Also, since startups pursue innovation and a Blue
Ocean Strategy, it is even likelier that their industry cannot, as yet, be defined.
Figure 12: Porter's 5 Forces (1980)
The framework identified by Porter comprises five dimensions:
1) The threat of new entrants
2) The bargaining power of suppliers
3) The bargaining power of buyers
4) The threat of substitutes
5) All of these elements influence the core of the model – known as the industry rivalry.
Before we dive into these concepts and identify how they are especially tailored for established
corporations, we need to define them first:
•
Threat of New Entrants: any attractive industry is subject to having potentially new
entrants. Established players try to protect themselves from new entrants by creating
entry barriers (capital requirement, economies of scale, minimum scale efficiency, and
brand power or product differentiation).
If a company is brave enough to enter an already crowded industry, the key players
might retaliate and slash their prices in a way that cannot be matched by the new entrant.
26
The problem related to new entrants in a specific industry (be it an established
corporation or a new startup) can be analyzed in terms of the strategic outcomes of a
game. Though not always true, incumbents will retaliate in industries where the fixed
costs are high and the marginal costs are low.
•
Threat of substitute: This relates to two different attributes:
o Price/Performance ratio: When a more expensive product or service is chosen
because it is more performance-effective. For example, aluminum is more
expensive than steel but provides better performance, especially in the
automotive industry.
o Innovation: When the substitute benefits from an improvement that enhances
customer satisfaction. For example, bullet trains are better than planes for short
distances and are great for reaching the city center much faster.
•
•
Bargaining power of buyers: Evaluating to what extent buyers can influence a given
industry. This is based on their concentration (the more concentrated they are, the higher
their bargaining power due to the higher volumes they buy), their switching cost (the
integrated cost of changing to an alternative), and their ability to integrate this as part of
their value chain.
Bargaining power of suppliers: This comes from the fact that they are concentrated
and supply very rare materials that firms cannot produce. This is especially so if they
can do backward integration.
For example, a software company developing a customer relationship management
system might be able to lock their customers into their system by limiting the transfer
possibility and designing a standard that won’t work with other alternatives.
•
Rivalry between competitors: A firm that offers similar products or services to the
same customer group and competes in the same industry. It is distinct from substitutes,
considered as alternatives, from other industries. Competition is intensified when
market positions are constantly being challenged.
The degree of rivalry increases when the competitors are all of equal size, when the
market is mature or declining, and when there are high fixed costs that make leaving the
industry expensive due to the high initial costs that will not be recovered. Competition
also tends to be higher when there is a lack of differentiation or very low switching costs
for the customer.
27
The following summarizes the differences between attractive and unattractive industries (from
an entrant’s perspective):
Unattractive Industry
High entry barriers
Powerful buyers
Powerful suppliers
Good product substitutes
Intense rivalry
Attractive Industry
Low entry barriers
Limited buyer power
Limited supplier power
Poor product substitutes
Moderate rivalry
Figure 13: Summary of key differences between an attractive and unattractive industry
Having covered Porter’s five forces, we can now understand why it fits established corporations
better. The better the understanding of an existing industry, the better one can decide whether
to enter or leave it – corresponding to the traditional Red Ocean perspective cited earlier.
28
2) The institutional environment for entrepreneurship and established business
The New Institutional Economics:
New Institutional Economics (NIE) was coined by Williamson in 1975 in his paper, “Markets
and Hierarchies: Analysis and Antitrust Implications, a Study in the Economics of Internal
Organization.”
According to (North, 1990), an institution is made up of two different parts:
•
•
Formal Institutions: These are all of the political and judicial systems that govern and
enforce all economic rules and written contracts.
Informal Institutions: These are all of a country’s social norms based on traditions and
customs. They are usually unwritten and tacitly understood, and those who violate them
are punished by social sanctions.
The following figure presents the scope of NIE.
Figure 14: New Institutional Economics scope overview
Source: Woywoode, M. (2014)
NIE focuses only on Level II and Level III, mainly known as the formal rule of the game
(economics of property rights) and the play of the game (transaction cost economics).
Even though NIE focuses specifically on Level II and Level III, both Level I and Level IV still
influence the institutional environment. Resource allocation and employment are considered to
be marginal conditions. Over time, however, these can influence governance through a process
29
of feedback. The changing governance will then have an impact on the institutional
environment, and in the end, will influence society by embedding new norms and traditions.
But this does not happen overnight, according to Williamson (1975). It usually takes about a
century for the social theory to change in a noticeable manner. The reverse is also true –
constraints from social theory (such as specific business traditions) will influence the
institutional environment, the governance of the firm, and in the end, the marginal conditions
(Williamson, 1975).
NIE can be applied to both startups and established corporations. By allocating the resources in
a different manner, key industry players and startups can influence the transaction cost of
economics in their favor through a feedback process.
A definition of institutional environment for startups:
The institutional environment involves the economic, political, and social rules. It will influence
the uncertainty and the transaction costs, (Smallbone, 2001) and therefore, the willingness of
individuals to engage in entrepreneurship (Shane, 2003).
When it comes to the specific factors which influence entrepreneurial activity, the findings are
as follows:
Figure 15: Summary on findings of external influence on startup success
Strong economic growth and societal wealth have positive effects on the success of
entrepreneurial ventures by increasing the demand for goods and services, and making it
possible to get bank loans. Furthermore, a wealthy society provides capital for entrepreneurs
who want to self-finance their venture and encourages positive attitudes towards
entrepreneurship.
30
Stable economic and monetary policies also encourage entrepreneurs. Steady economic
environments allow entrepreneurs to make more forward looking decisions. Currency stability
also plays a very big factor, especially for Born Global firms.
When capital (especially venture capital from business angels) is more available, it is easier for
entrepreneurs to obtain financing. Moreover, entrepreneurship will always be fostered by low
interest rates which induce a lower cost of capital.
Tax structures and rates also have a strong impact on the willingness of entrepreneurs to start
their own businesses. When marginal taxes are high, it reduces the perception of nascent
entrepreneurs about the profitability of entrepreneurship. According to empirical research, high
taxes also encourage shadowy economic activities (de Soto, 1989). High tax rates are therefore
detrimental to entrepreneurial activity.
Political freedom plays a very important role, as well. When entrepreneurs are subject to
arbitrary political decisions, they tend to have a lesser internal locus of control, and therefore,
are less inclined to start their own venture. A lack of political freedom also discourages the
exchange of information – which is key to innovation.
In his video, “Where good ideas come from,” Steven Johnson claims that great ideas are
“chunks of ideas” from different people gathered into one idea. So, the lack of information
exchange prevents great ideas from being discovered.
There is also the matter of the rule of law and property rights. Under the rule of law, formal
statutes and judicial agencies offer and deliver equal protection to citizens. If someone violates
the law, a credible system of effective punishment is meted out to them. So, the rule of law
means that the ¨rules of the game” are known before-hand. This gives entrepreneurs assurances
that their gains won’t be taken away from them arbitrarily.
And finally, there is the centralization of power. The more central a political environment is,
the less say people have on economic, social, and political activities. When centralization is
prevalent in an economy, it discourages nascent entrepreneurs from setting up their own
businesses as they do not have control over the course of events.
Such can be seen in China, whose centrist government results in a lower degree of
entrepreneurship. In fact, China stood in the 61st position when it comes to entrepreneurship
according to the Global Entrepreneurship Monitor in 201519.
When entrepreneurship is considered to be socially desirable, it fosters entrepreneurial activity.
An example of this lies in the differences between opportunity-driven entrepreneurial activities
(as compared to necessity-based entrepreneurship) in Anglo-Saxon countries as compared to
developing ones. In the United States, failure is an opportunity to learn. We are not quite there
yet in Europe, or even in developing countries where failure is not an option due to the lack of
state support.
19
https://www.forbes.com/sites/panosmourdoukoutas/2014/11/19/why-japan-and-china-cannot-compete-withamerica-in-entrepreneurship/#3f830d979cdf
31
Necessity-based entrepreneurship is when people become entrepreneurs because of the lack of
financial opportunities. Opportunity-driven entrepreneurship, on the other hand, is based on the
attractiveness of the opportunity.
According to the 2014 Global Entrepreneurship Monitor, nascent entrepreneurs in factor-driven
economies (focused on the extraction of raw materials) are going to be more necessity-driven
compared to nascent entrepreneurs in innovation driven-economies (mainly developed
countries).
Figure 16: Necessity vs Opportunity driven entrepreneurship
Entrepreneurial role models are also very important. Successful startup ecosystems (such as
Silicon Valley) provide a lot of entrepreneurial role models (Cooper Cary, 2015). They offer
mentorship by successful peers increasing the likelihood that new entrepreneurs will get started.
Some cafes in San Francisco provide venues where mentors and aspiring entrepreneurs meet,
such as the Coupa Café and the University Café, both in Palo Alto, California.
Cultural beliefs also play a role – such as the belief in serendipity. According to Cooper Cary
et al. (2015), there must be a culture of “paying it forward.” This means that there is strong trust
among the actors of an ecosystem, and therefore, a lively exchange of information without any
expectation of return. Zak and Knack (2001) agree, insisting that trust is very important in
ensuring economic performance.
The “anything is possible” belief is also very important. It’s about “thinking big” and believing
that anyone can make it to the top – the classical definition of the American Dream. It includes
a tolerance for the different and strange with a strong culture of experimentation.
As mentioned earlier, it’s also important to view failure as a positive because it presents an
opportunity to learn and improve.
32
One bit that is implicitly identified by this model but explicitly identified by Aldrich (1990) is
the importance of the spatial location. Indeed, good transportation infrastructure, a strong
education system, and the strong presence of public, private, or non-profit research institutes,
can also have a strong effect on founding rates.
A framework for established corporations: PESTEL
This is a strategic tool used to evaluate the environmental impact of a firm’s strategic
orientation. Though it includes most of the same factors that NIE considers, the PEST
framework better suits the needs of established corporations.
The following best summarizes what the PESTEL stands for:
Figure 17: Overview of the PEST Framework20
PESTEL is an acronym for:
•
•
20
Political: Political factors involve the government and the decisions it makes in terms
of trade, taxation, rules, and regulations. This political arena has a very strong impact
on the outcome of an investment (ROI, IRR). New reforms can turn an attractive
opportunity (a “Star” as identified by the BCG matrix) into a “dog” and is why
established businesses try to influence politics through lobbying. For example, new
regulations (such as higher taxation) might deter customers and make them look for
alternatives. This can turn a previously attractive and growing industry into a sluggish
and unattractive one.
Economic: Economic factors affect the decision making and daily operations of
businesses. For example, a strong foreign currency (such as the dollar) can strongly
influence the exporting activities of a firm. Moreover, it could also influence the cost of
raw materials, which established firms would like to have maximum control over.
Source: Studydroid.com
33
•
•
Social: Social factors cover population growth rate, age distribution, etc. It also
considers various social and cultural factors such as health consciousness, which
enables firms to evaluate the impact of a new product launch.
Technological: Technological factors determine entry barriers for new entrants and
influence outsourcing decisions. It is therefore critical for established corporations to be
aware of the technological environment and not miss any key changes – especially those
that might affect the business. Examples of this include VHS vs Betamax, traditional
cameras vs digital ones.
In network economics, the bandwagon effect (the number of users which tips growth or
starts a self-reinforcing process) can only be triggered by a substantial number of users,
and therefore, cannot be achieved by all (Shapiro, 1999). This is called the standards
war, and over time, losers must use the standards of their competitors.
•
•
Legal: Legal factors cover existing regulations. They affect the daily operations of the
business by introducing new standards and regulatory requirements based on the firm’s
size. For example, Germany has a strong rule regarding employee representation in the
board of directors – up to 50% for a public or private company having more than 2,000
employees.
Environmental: Environmental factors cover climate change and the growing
awareness among consumers for more sustainable products. This, too, has a major
impact on the way companies do business.
34
II)
A traditional perspective on strategic decision making
A) The profile of the CEO and top management vs Entrepreneur
1) Psychological attributes
Understanding the thought processes behind decision making among CEOs and
entrepreneurs is crucial. This section will therefore review some of the specific psychologic
attributes of both.
Before we explain the differences between how CEOs and entrepreneurs make decisions, it is
important to first note that both must take different things into account.
Entrepreneurs make decisions based on the discovery, evaluation, and exploitation of
opportunities(Shane, 2003). CEOs, on the other hand, make theirs on the basis of maximizing
their returns and satisfying various stakeholders. This distinction is important to make beforehand because CEOs and entrepreneurs share a lot of similar psychological characteristics,
otherwise.
According to Baumol, J., (1990), there are three different rationales for entrepreneurial decision
making, which are:
•
Productive
•
Unproductive
•
Destructive
We will only cover the first as being relevant to our analysis. In his introduction, Baumol states
that: “The basic hypothesis is that while the total supply of entrepreneurs varies among
societies, the productive contribution of the society's entrepreneurial activities varies much
more because of their allocation between productive activities such as innovation and largely
unproductive activities such as rent seeking or organized crime.” (Baumol, 1990). Therefore,
not all types of entrepreneurship are beneficial for society.
Productive entrepreneurship adds value to society by not solely focusing on the entrepreneur’s
personal gain, but rather, through achieving something great from which all society benefits.
The first framework can be looked at to determine the psychological characteristics of the
entrepreneur and how they differ (if at all) from those of C-level management as defined by
Shane (2003). Shane focused his research on the specific psychological characteristics that
influence the decision to exploit an opportunity.
They are split into three different categories:
• Personality and Motives
• Core Self-Evaluation
• Cognitive Properties
35
Figure 18: The 3 categories of psychological determinants21
Personality and Motives:
Extraversion is about sociability, initiative, and assertiveness. Researchers have found that
extraversion strongly influences the chances that a nascent entrepreneur will exploit an
opportunity. Extroverts know that they can rely on their persuasive skills, their ability to identify
non-verbal cues, and gather information faster than others (Bhide, 2000).
However, we can argue that extraversion is not a differentiating factor between entrepreneurs
and CEOs. Green, Jame and Lock (2014) suggest that CEOs are also very extraverted, which is
why they are in such a position in the first place (Bono J., 2004).
Indeed, extraversion is identified in the “Big Five” model from Myers and Briggs22 as one of
the key elements for leadership emergence. Leadership emergence is a process wherein a
member of a group will naturally take a leadership position because of the quality of his/her
interaction with followers.
Agreeableness is about friendliness, trust, ability, and cooperativeness, according to Barrick
and Mount (1991). Unfortunately, it’s detrimental for exploiting opportunities because the
desire for social conformity prevents nascent entrepreneurs from starting their own business.
Agreeableness is also not a differentiating factor between CEOs and entrepreneurs. In fact,
agreeableness is also detrimental for leadership emergence (Mc Crae and Costa, 1987), meaning
that CEOs would not have reached the top had they been very agreeable (Mccrae, 1987).
21
22
Source: Woywoode M. (2014)
https://fr.wikipedia.org/wiki/Myers_Briggs_Type_Indicator
36
However, according to the authors, agreeableness positively influences leadership
effectiveness. Indeed, leaders that are agreeable are more likely to develop better relationships
with their followers, and, therefore, lead more effectively. Also, in order to lead effectively,
they have to establish common ground among the various stakeholder’s (employees, suppliers,
customers, stockholders, etc.) demands.
The need for achievement is defined by Shane et al. (2003) as the strong desire to take on new
activities that involve personal responsibility. People driven by a need to achieve are much
more likely to exploit opportunities because creating a business involves combining resources
in a unique way that come with challenges (Harper, 1996). Those with a high need for
achievement tend to pursue a specific goal, regardless of the number of failures and setbacks
they encounter.
CEOs certainly tend to have a very high need for achievement. They usually graduated from
top business schools and worked harder than most to reach their position. So the need for
achievement is not enough to distinguish between CEOs and entrepreneurs.
Risk-taking measures how likely people are to engage in risky activities, and is a fundamental
part of entrepreneurship. The word “entrepreneur” was originally applied to farmers and
merchants who invested a certain amount of resources for an uncertain outcome.
A higher risk propensity is therefore associated with a stronger likelihood of starting a business.
In established corporations, risk-taking used to be viewed positively (Tucker, 2006). After the
2008 financial crisis, however, being risk-averse, or at least limiting the amount of risk taken,
is considered best (Power, 2009). There is no evidence to suggest, however, that risk-aversion
or minimizing risk is a distinguishing factor between CEOs and entrepreneurs.
(The approach toward risk by CEOs and entrepreneurs will be explained in greater detail when
we review their respective functions.)
There is also the desire for independence – working for one’s self instead of for others. The
stronger the desire for independence, the greater the likelihood of starting a business (Cromie,
1987).
This is a major factor in distinguishing entrepreneurs from CEOs. Though it can be argued that
CEOs can sometimes prioritize their own interests over that of their firms (Enron and Tyco
being cases in point) they generally exist to serve the interests of others and get very well
compensated for doing so.
Core self-evaluation:
This involves self-efficacy (the degree of confidence one has in achieving a specific task) and
the locus of control – the sense of control one has over their environment, or their capacity to
influence it (Rotter, 1969)23
23
http://psych.fullerton.edu/jmearns/rotter.htm
37
Entrepreneurs believe they can easily shape the environment around them (Perry, 1990). They
are different from others who believe that it’s impossible to influence their environment and
that all resources are finite and given.
When it comes to CEOs, the only data available focuses on small firms (Boone, 1996). Boone
acknowledges that CEOs can have both an internal and external locus of control – so this cannot
be seen as a meaningful differentiating factor that distinguishes them from entrepreneurs.
They also established that a CEO’s locus of control is a strong predictor of their firm’s
performance. Indeed, firms where the CEO has an internal locus of control were more likely to
survive than those where the CEO did not believe s/he could shape its environment.
Bandura (1997) defines self-efficacy as “the belief in one’s ability to perform a given task.”
Since entrepreneurs must make decisions in an uncertain environment and bear the risk of their
own venture, they should be confident enough in their own judgement and not in that of others
(Buckley, 1995).
Self-efficacy is also strong among CEOs as they must be confident enough with the
responsibilities they have. So this doesn’t differentiate them from entrepreneurs, either.
Cognitive properties:
These influence how people make decisions. Cognitive properties are less stable over time and
are dependent on their environment. Specifically, this part focuses on the use of heuristics in
the context of strategic decision-making. Heuristics are also called “mental shortcuts,” as they
reduce complex judgements into simple rules of thumb (Franzoi, 1996).
Hodgkinson et al. (1999) refers to heuristics as a way to simplify reality for decision making in
very dynamic and complex business environments.
The first cognitive property analyzed by the model is overconfidence – when a person
overestimates their problem solving abilities. This can be extremely dangerous because it fails
to consider the information available or the feedback from others (Bernardo, 2001).
Entrepreneurs do tend to be overconfident. For example, Gartner and Thomas (1989) surveyed
founders of computer software firms and found that they, on average, estimated their first year’s
sales as being 29% higher than the actual data. Cooper et al. (1988) also reported that about a
third of the entrepreneurs they surveyed were totally certain they would succeed. This
contradicts the statistics which show that four out of five businesses fail within the first five
years.
An example of this is Webvan – an online grocery shopping company founded back in 1999.
They overestimated the market share and invested in capital intensive resources (warehouses,
trucks, etc.) and went bankrupt in 2001 because the market was not there yet.
38
Another study found that entrepreneurs tend to be far more overly confident compared to toplevel managers (Busenitz and Barney, 1997). This could therefore be a differentiating
characteristic between CEOs and entrepreneurs.
Entrepreneurs tend to be overly optimistic about the impact of their ideas, tend to ignore
negative market information, and even resist meaningful statistical result hypotheses (Hills,
1994).
Some have found, however, that CEO hubris (Hayward & Hambrick, 1997; (Hiller, 2005) can
result in lower performance for a firm. Indeed, CEOs who are victims of hubris are likely to
miss their own forecasts for earnings (Hribar & Yang, 2006), pay higher premiums (Hayward
& Hambrick, 1997), and engage in more value-destroying mergers (Malmendier & Tate, 2006).
The illusion of control is yet another factor influencing CEO overconfidence. For example, in
a game of chance such as rolling the dice, people feel they can control the outcome of the next
roll (Langer, 1975). CEOs tend to think they have a high control over their environment
(justified by the firm’s size and its market power), and as a result, fail to anticipate market
uncertainties.
A good example of this is the acquisition of Autonomy (a British company focused on intelligent
search and data analysis) by Hewlett-Packard, back in August 2011. HP’s CEO at that time,
Léo Apotheker, pushed for a very unprofitable acquisition at almost double the price that
investors and analysts had valued it at.24
Representativeness is another failing associated with overconfidence. According to Shane
(2003), “representativeness is the willingness to generalize from small samples that do not
represent a population.”
Representativeness, in the absence of information, becomes the rule of thumb. It is a cognitive
bias that encourages aspiring entrepreneurs to exploit opportunities due to the innovativeness
of the idea – even when there is only scant historical data available (Busenitz and Barney, 1997).
Representativeness is usually reinforced by the hindsight bias, where someone believes that a
highly unpredictable event is rather easy to predict (Roese, 2012).
Many examples of CEO representativeness can be found in the business literature. JC Penney
under its former CEO, Ron Johnson, is among these. Johnson tried to introduce Apple’s retail
policy into JC Penney because it was very successful for Apple. What he failed to recognize,
however, was that the two companies had almost nothing in common, so what worked for Apple
wasn’t necessarily good for JC Penney.25
24
http://www.nytimes.com/2012/12/01/business/hps-autonomy-blunder-might-be-one-for-the-recordbooks.html?pagewanted=all&_r=0
25
https://hbr.org/2013/10/how-to-manage-biased-people
39
However, due to the tremendous number of stakeholders, control mechanisms, and resources
involved, it is extremely unlikely that CEOs will routinely base their decisions on non-statically
significant elements.
The last part of this model is also a cognitive bias and is commonly referred to as intuition. In
his book, “Thinking Fast and Slow,” Malcolm Gladwell26 defined it as the belief that something
holds true without having data to prove its veracity. Intuition is not to be confused with insight,
which corresponds to an unexpected solution to a problem (the “eureka” moment), nor with
instinct which is hardwired and involves automatic reflex reactions.
According to Allinson et al. (2000), intuition increases a person’s tendency to exploit
opportunities. In 1934, Schumpeter also suggested that entrepreneurs must have the capacity to
base their decision-making on intuition rather than on analyzing information.
Entrepreneurs often base their decisions on intuition and experience (Hills and Singh, 1998),
and put less emphasis on statistical facts compared to CEOs of established corporations.
CEOs are also prone to intuition. John Mihalasky, a professor at the New Jersey Institute of
Technology, found that CEOs with high intuition were likely to increase their business
performance over those with low intuition.27 So high and low intuition levels are not necessarily
a distinguishing factor between CEOs and entrepreneurs.
26
27
https://www.amazon.fr/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374533555
http://www.biznews.com/thought-leaders/2014/04/22/intuition-great-ceos-great-intuition-can-learn-gut-feel/
40
The following chart summarizes the findings for all the psychological characteristics identified by Shane (2003).
Characteristic
Extraversion
Agreeableness
Need for achievement
Risk-taking
Desire for independence
Locus of control
Core self-evaluation
Overconfidence
Representativeness
Intuition
Effect on the entrepreneurial
process
Positive
Negative on opportunity
recognition. Unknown on
exploitation.
Positive
Risk-loving is positive for
opportunity recognition and
negative for exploitation.
Strong
Positive if internal, negative if
external
Positive
Positive
on
opportunity
recognition,
unknown
on
exploitation
Positive
on
opportunity
recognition,
negative
on
opportunity exploitation
Positive on both opportunity
recognition and exploitation
Effect on the firm performance
(CEO perspective)
Positive
Negative on leadership
emergence, positive on firm
performance.
Positive
Risk-aversion has a positive
impact of firm performance.
Differentiating factor?
Weak
Positive if internal, negative if
external
Positive
Negative on firm performance
Yes
No
Negative on firm performance
Yes
Positive on firm performance
No
No
No
No
Yes
No
Yes
41
The second framework we will use to compare the decision-making processes between CEOs
and entrepreneurs is the one by Dew, R. et al., (2009). Rather than focusing solely on
psychological characteristics, this framework tries to compare specific elements of the decisionmaking process.
The first element identified by the authors is called “vision for the future”. CEOs are usually
very rational and tend to use a more predictive logic – using past, established models to foresee
what will happen in the future. However, as identified in some cases, CEOs are also prone to
intuition but will never base a decision solely on it.
“The classical view of decision-making suggests that the decision-maker passes through a
series of stages before a decision is reached.” (Vershinima, 2017). According to Hammond et
al., the first stage is related to defining the problem, then clarifying the objectives to find
solutions, and evaluating the impact of those solutions and their alternatives (Hammond et al.,
1999).
So if entrepreneurs follow Hammond’s process, have total control over their environment, and
can calculate risks in a very precise manner, they should be alright. This is obviously unrealistic.
Not only is total control over an environment impossible, it fails to consider all the irrational
impulses and wishes that drive decision making. This latter corresponds to what is referred as
the effectual logic – where entrepreneurs will define goals according to the resources they have
in their possession.
In that sense, intuition is more crucial for entrepreneurs which is defined as a “substantial
rationality or intuitive rationality” (Mannheim, 1935). This idea is also supported by
Sarasvathy’s research which found that when entrepreneurs evolve in a very uncertain
environment, they tend to rely on “unconventional logic” (Sarasvathy, 2001).
Therefore, the “vision for the future” can be considered as a differentiating factor between
entrepreneurs and CEOs.
The second component of the model is called “basis for making decisions.” CEOs of big
corporations base their decision making on strategic objectives following a more rational
approach. They already know their capabilities and resources, and can plan accordingly, thanks
to an analysis of market conditions.
Entrepreneurs, on the other hand, “create purpose.” They imagine a course of action based on
their supposed capabilities and their vision for the future.
The third dimension is related to the approach towards risk. CEOs are supposedly risk-averse,
are very rational, and will not risk implementing a new strategy or conducting new investments
if the expected Internal Rate of Return does not correspond to their expectations. And even
when a project is profitable, they might delay the start or even not conduct it all because they
do not want to affect the short-term situation of the firm (especially when it comes to quarterly
or yearly results).
42
CEOs and top management are mostly viewed as rational thinkers, according to Taylor’s (1911)
scientific management theory and Weber’s bureaucracy. Rationality is concerned with order
and calculations, and tries as much as possible to stick close to reality (Taylor T. , 1911).
CEOs can be considered as risk-averse because they always take the blame in case of failure.
Since their reputation (and job) is on the line, they tend to be overly cautious with predictions
and adopt a more conservative approach. CEOs and top management are also subject to tight
controls by corporate governance mechanisms, especially the board of directors who verify and
audit decisions. As we will see later, specific compensation frameworks are also put into place
in order to minimize risk-taking behavior.
This risk-aversion can also have some positive effects – it pushes CEOs to under promise and
over deliver to positively surprise a company’s investors and stockholders. It also encourages
predictive logic – meaning that CEOs will pursue opportunities that maximize outcomes.
This is not always the case, however. CEO hubris, defined as their over-exaggerated confidence
or pride, has also been identified as a cause of a firm’s failure. This overconfidence pushes
CEOs to overestimate their own-problem solving capabilities (Camerer, 1999) and
underestimate risky initiatives (Shane S. S., 2002)This causes them to make inefficient
decisions and exaggerate the potential of others – such as paying higher premiums for an
acquisition (Hayward, 1997)
There’s also their “attitude toward outsiders.” According to Porter’s 5 forces model, existing
businesses fight newcomers to maintain their profitability in a specific industry. They therefore
predict the outcome of the game and act accordingly.
Game theories and basic equilibrium are very prevalent when it comes to strategic decisions.
For example, a firm might evaluate the possibility of retaliating as an outcome of a game.
Entrepreneurs might have a more cooperative approach and look to build synergies with new
players.
Entrepreneurs tend to be risk-lovers and do not necessarily evaluate any of their decisions in
terms of rational outcomes. They tend, for example, to pursue other goals besides purely
financial ones. According to Storey & Greene (2010), risk-taking is natural to entrepreneurs
who base their decisions on how much they can afford to lose.
The last bit focuses on the attitude towards “unexpected contingencies.” CEOs evaluate the
likelihood of a negative event and put measures in place to prevent it – a form of risk
management based on predictive logic.
Entrepreneurs are more flexible. They see obstacles as opportunities to create something new
or to rethink their objectives. While CEOs see unexpected events as something to be avoided
at all costs, entrepreneurs rely on their creative spirit to find relevant solutions in order to
capitalize on unexpected situations.
43
It’s understood that those who set up companies possess more entrepreneurial qualities than
non-founders. These qualities include self-efficacy in creating innovation, entrepreneurial
competency and commitment, a need for achievement, a propensity for risk-taking, and a
tolerance for ambiguity (Eriksen, 2002).
Over-optimism is another quality. Entrepreneurs are also much better at spotting trends and
common patterns between seemingly unrelated events (Baron, 2006). Hayek defines this as
“entrepreneurial alertness” – a cognitive ability to spot new opportunities without having to
look for them. They can “connect the dots” faster than regular people, and have a “unique
preparedness to recognize opportunities” (Kirnzer 1979).
They do run the risk, however, of falling into the trap of representativeness, identified earlier in
the model by (Shane S. , 2003) – recognizing a pattern and assuming it is going to stay
consistent throughout the entire market. While representativeness increases the chances of
actually starting a company, it is not a guarantee that such a company will thrive.
When firms evolve in a very competitive environment, entrepreneurs tend to become much
more rational and base their decision-making processes on quantitative analyses.
Results affect decision-making and the strategies for coping with a given situation. A positive
effect encourages individuals to choose a “satisficing” strategy (Baron, 2008) while a negative
affect will trigger the usage of a “maximizing” strategy. The former focuses on quickly
choosing the first acceptable alternative while the latter is related to a granular examination of
all the alternatives.
Although the maximizing strategy leads to superior results (Iyengar, 2006), this approach is not
suitable for entrepreneurs and the dynamic environment in which they operate in. As the firm’s
survival is on the line, entrepreneurs must act in a timely manner – so they may not always be
able to review information they consider irrelevant or unimportant (Isen, 2001).
Amabile (1997) has demonstrated that intrinsic motivation is a crucial element for creative
behavior. Such intrinsic motivation can be characterized by being interested, excited, and
personally challenged by a work task – yet another key difference between entrepreneurs and
CEOs. While entrepreneurs look for a quick turnaround, CEOs must evaluate the impact of
their decision-making on all parties involved.
The following chart summarizes the points raised in this section:
Characteristic
Entrepreneur
Vision for the future
Effectual logic – Define goals
based on available resources
Basis for making decisions
“Create a purpose” based on
their vision
Risk propensity
Risk-lover – how much they
can afford to lose
Unexpected contingencies
Flexible – considered as an
opportunity to change
CEO
Predictive logic – use
models to predict
Rational approach – act
according to capabilities
Risk-averse (supposed) –
calculated risks
Preventive – put measures
in place to avoid them
Figure 19: Differences in decision-making between entrepreneurs and CEO
44
2) Decision-making differences between an Entrepreneur and a CEO Non-psychological
attributes
The study of the psychological attributes, as well as the factors influencing decision-making,
are not enough to establish a “clear cut” distinction between entrepreneurs and CEOs of
established corporations. As seen in the previous section, both share the same psychological
factors – though their dominant traits can be different.
There is therefore a need to explore the non-psychological characteristics of CEOs and
entrepreneurs in order to deepen our understanding of their decision-making processes. To do
so, this section will focus on four major ones:
• Education
• Career experience
• Employment
• Income
These attributes will later be used to calculate the utility function of entrepreneurs and CEOs.
Education fosters analytic ability and improves entrepreneurial judgment and skills. These
allow people to better assemble resources, bargain, lead, plan, make decisions, solve problems,
develop strategy, organize, and communicate (Shane S. , 2003). Education therefore increases
the perceived feasibility of becoming self-employed (Tonoyan, 2006). Nonetheless, highly
educated individuals are also more likely to be found in C-Level positions.
However, less educated people are also likely to become self-employed. Those from lower
socio-economic groups that have less access to educational opportunities are highly likely to
seek self-employment as an alternative to having a regular job (Arum, 2004). According to the
Global Entrepreneurship Monitor, this might also be due to necessity: there is no regular
available job on the market, therefore, individuals must create one for themselves.
Such lack of a formal business education, however, may also hinder the chance of a venture’s
success. According to Broom, Longenecker and Moore28, failure in small businesses is mostly
due to the “lack of managerial skill and depth; and personal lack and misuse of time”.
Formal business education is only one side of the equation. In fact, many successful
entrepreneurs such as Mark Zuckerberg, Bill Gates, and Steve Jobs are dropouts29.
Entrepreneurship involves developing a specific set of skills that cannot be easily taught.
28
29
https://www.amazon.com/Small-Business-Management-Halsey-Broom/dp/0538072636
http://fundersandfounders.com/entrepreneurs-who-dropped-out/
45
According to Laukkanen (2000), we need to make distinctions between:
• Education about entrepreneurship: especially as taught in business schools and
universities which focus on specific theories related to the entrepreneur, the creation of
the firm, and the entrepreneurial process.
• Education for entrepreneurship: which usually happens in specific programs of
business schools. These focus on stimulating and developing the tools and skill sets that
help to set up a business. According to Mason (2000), this type of education is
“proposed to develop the core skills and attributes necessary to roll out a new venture
and to identify pre-start-up needs.” (Mason, 2000).
CEOs of established corporations usually receive a slightly different education. They usually
start out as experts in a specific field inside the company and slowly broaden their competencies
in order to reach the top of management. Therefore, we can argue that education, both formal
and informal, are a differentiating factor between CEOs and entrepreneurs. While both the CEO
and the entrepreneur will have roughly the same knowledge in the end, the way they start out
and the pace at which they acquire such knowledge, strongly differs.
Career experience is also another non-psychological characteristic to consider. Through career
experience, individuals learn about different aspects of the business (finance, sales, logistics,
etc.), then start to develop their own expertise. General business experience helps both the
aspiring CEO (who has to oversee all the departments of a company) and the nascent
entrepreneur (who feels confident enough to get started).
As a consequence, general business experience is not enough to differentiate entrepreneurs from
CEOs. In some cases, especially those who engage in necessity entrepreneurship, the founder
might not have any formal career experience.
Career experience also develops functional experience which is critical for both the
entrepreneur and the CEO. Functional experience is related to the development of a specific
expertise in a given field of the business (usually considered as a department of the firm). CEOs
usually started their career in a specific department of a firm and climbed the ladder by not only
developing more functional expertise, but also by increasing their knowledge of the overall
business. For the entrepreneur, their functional expertise might be more related to a specific
competency they have and for which they are better than anyone else.
Industry experience is yet another factor. A strong knowledge of the industry helps both the
aspiring CEO and the nascent entrepreneur succeed in their endeavors because such leads to a
superior understanding of the demand structure and conditions in a specific market. And
because they have a better relationship with known customers and suppliers, they have an edge
over outsiders. Finally, long industry experience ensures expertise (both tacit and explicit) in
that respective field.
Industry experience helps aspiring CEOs because it provides them with greater legitimacy and
a better understanding of the business, overall.
46
Industry experience also increases the likelihood of becoming self-employed, as well as
improves the chances of the firm’s success. The end result is sometimes the creation of “spinoffs” – the creation of a new organization that has split off from an existing one.
Finally, career experience can also be related to previous startup experience, which is relevant
for aspiring entrepreneurs. Previous startup experience helps with:
• Gathering the “right information” and making effective decisions about developing and
financing new organizations (Gartner, 1990).
• Reducing the cost of acquiring this “right information” (Cooper, 1995).
• Benefiting from a previous network of suppliers and customers, especially in the case
of serial entrepreneurs (i.e. successful entrepreneurs who already sold a venture and are
repeating the process with another idea) (Campbell, 1992)
• Leveraging previous knowledge on product development in order to create a new idea
(Reuber, 1993) and a better understanding of how to set up a new organization (Brüderl,
1992).
We can therefore argue that startup experience aside, there are also no clear cut characteristics
that differentiate CEOs and entrepreneurs from a career experience perspective.
Income is another factor to consider. People who earn less are more likely to become
entrepreneurs. For example, Amit et al. (1995) found that before leaving their jobs, Canadians
between 16 and 69 (military excluded) earned, on average, $2,340 less than their employed
counterparts. Evans and Leighton (1989) also found that as salaries went up, people became
less willing to become self-employed.
So compensation levels strongly affect the expected utility function of entrepreneurs, and
therefore, can reduce the likelihood of nascent entrepreneurs starting their own businesses.
CEO salaries increase at a much faster rate than that of regular workers, as shown in the graph
below. Not only is the discrepancy extremely important, but so is the pace at which it grows.
Figure 29 : Pay Evolution between CEOs and regular workers30
30
https://eml.berkeley.edu/~saez/lecture_saez_chicago14.pdf
47
CEOs rely on a complex pay structure often designed to limit their risk-taking and overall align
their behavior with the company’s objectives to guarantee its success. They often have a very
comfortable base salary making them sure to get paid no matter what the performance of the
company is.
CEOs are also incentivized to work harder in order to reach the corporate objectives through
various mechanisms such as bonuses and stock options. Such usually ties the the CEO’s
compensation to the performance of the firm, making them less likely to take risks that affect
their personal wealth.
Entrepreneurs, on the other hand, cannot predict what their income will be. They usually agree
not to pay themselves for a specific period of time (depending on the capital intensity and the
breakeven point of the company) and to reinvest any cashflow in capabilities that will allow the
company to grow.
Therefore, income is certainly one of the biggest differentiating factors between entrepreneurs
and CEOs. While both have very stressful jobs, only one is pretty confident that they will at
least be rewarded for the effort they put in.
Finally, unemployment (only relevant for entrepreneurs) is yet another factor that pushes people
toward self-employment. Once unemployed, opportunity cost gets lower (more on this in the
utility function section). In a study of Finnish employment statistics, Risila and Tervo (2002)
found that unemployment increases the probability of founding a business. As unemployment
progresses, individuals become more willing to start their own businesses.
CEOs hold a comfortable position within a company, and though extremely stressful, they are
secure in their jobs. Unless they commit a very big mistake, they can usually find another job
quite easily, given the extended reach of their network and the broad set of their skills.
The following chart summarizes the points raised in this section:
Characteristic
Education
Entrepreneur
Education for entrepreneurship,
sometimes learned informally
and very quickly
Career Experience
Can be very limited, with
limited general business
experience, functional expertise,
or startup experience. However,
the more career experience, the
higher the chance of success
Unemployment
Can be unemployed as
unemployment increases the risk
of starting their business (though
not the success rate)
Flexible – considered as an
opportunity to change
Income
CEO
Likely to have a strong
formal business education
and education about
entrepreneurship
Rarely limited, usually with
strong general business
experience and industry
knowledge. Started with a
functional expertise that was
slowly leveraged to develop
more skills.
Holding a comfortable
position inside a company
and is likely to find another
one.
Usually well rewarded, even
with poor performance
Figure 20: Key non-psychological factor differences between CEO and Entrepreneurs
48
B) A utility function perspective on strategic decision making
In this section, we will discuss the final element that will enable us to establish a clear
profile of the entrepreneur and the CEO based on their utility function.
In “Who is the Entrepreneur is the Wrong Question,” Gartner (1989) focuses on finding new
ways of defining entrepreneurs and entrepreneurship, as previous definitions failed to make a
clear distinction between entrepreneurs, small business owners and CEOs of established
corporations.
As mentioned earlier, psychological and non-psychological characteristics are not enough. The
clear distinction between entrepreneurs and CEOs of established corporations is related to the
type of decisions they must make as well as the influencing factors of such decision making.
Regarding the former, Gartner (1989) believed that the decisions of the entrepreneur are related
to discovering, evaluating, and seizing opportunities. Those of a CEO, on the other hand, are to
meet normative and financial expectations from their environment which strongly influences
how they get rewarded.
In this section, we will establish different utility functions for the entrepreneur and the CEO
based on the type of decisions they have to make, the variables influencing their utility, as well
as the importance of external factors on their utility function.
1) The utility function of the entrepreneur
This model is related to the transition from employment to self-employment (or nascent
entrepreneur stage), as well as the factors that influence how they seize these opportunities.
According to Stevenson and Jarillo (1990), there are three main components of the
entrepreneurial model that will be influenced by the entrepreneur’s utility:
• How entrepreneurs act (mainly what decisions they will make)
• What is the outcome of their activity
• Why people choose to act as entrepreneurs (i.e. what drives them?)
Many researchers have argued that individuals choose career paths that maximize their maximal
utility or emotional satisfaction. Whether an entrepreneur starts a business or not is based on
the estimated cost of following other alternatives.
This traditional model was developed by Savage (1954) and is called the Subjective Expected
Utility model (SEU). It corresponds to a very traditional economic perspective where
individuals are rational and will pursue opportunities only if starting a business maximizes their
SEU.
SEU considers various factors such as the expected earnings (with the corresponding
probability of achieving them), the psychological costs of running a business (with the
corresponding probability and the expected financial cost of it), and even the opportunity cost
of not starting a business (such as the secure payment of an employed position).
49
The SEU model evaluates the idea of becoming an entrepreneur based on the following
mathematical formula:
Figure 21: SEU function31
To start a business, SEUse (self-employment) must be greater than SEUpe (paid employment).
The calculation of both is based on the perceived outcomes and the probabilities of achieving
them. This theory is supported by Einsenhauer (1995) who argues that the utility is also derived
from the working conditions of the employment versus self-employment alternatives.
The following chart gives us an overview of how this calculation could look like:
Figure 22: An example of the Subjective Utility Function32
According to Holmes and Schmitz (1990), the transition to a self-employed stage also depends
on the perceived entrepreneurial ability (hereby defined as the capacity to recognize new
opportunities and tackle them the right way) and the perceived managerial ability (i.e. the
competency to maintain the profitability of the operations) (Holmes, 1990).
Another option to consider is the aspiring entrepreneur’s utility function before their transition
to a self-employed stage in terms of indifference curves. If employed, they have to consider
how much effort (E) they must exert for an expected profit (P).
31
32
Source: Woywoode M., 2014
Source: Woywoode M., 2014
50
However, by transitioning to a self-employed stage with a certain amount of effort, E*, the
individual will increase their expected profit to P*. This expected profit P* is highly dependent
on the individual’s entrepreneurial and managerial ability.
Therefore, a highly capable individual will be able to generate a higher profit P*H while the less
capable one will generate a profit of P*L. The effort offered by the entrepreneur, regardless of
their abilities, is likely to be much higher than the effort they put into being employed.
Indeed, Hofer (1976) and Schein (1987) found that entrepreneurs usually work longer hours
and put their new venture ahead of anything else, including their personal and family life.
These two models, however, still fail to consider the variety of psychological factors that
influence the decision to become an entrepreneur. Meaning if we follow this rational approach,
no one will ever start a business if they are at a perceived disutility.
There is therefore a need for a more comprehensive model – one that not only explains why a
person pursues entrepreneurship, but also why they might persist despite being at a stage of
subjective perceived disutility. According to Bird and Jellinek (1988), entrepreneurs seem to
enjoy working long hours even when there is no promise of an extraordinary financial gain.
Douglas and Sheperd (1999) suggest the need to distinguish between the disutility of the work
effort and the utility that can be derived from specific working conditions – such as social
interaction, the joy of witnessing a technical or market success, or the perks of the job.
Baumol, (1990) suggests that people become entrepreneurs if their utility (in terms of power,
personal wealth, and prestige) is maximized by doing so. While personal wealth can be easily
measured using the first model, the perception of power and prestige is much harder to quantify.
The decision to become an entrepreneur is sometimes due to irrational impulses. Besides the
desire to change the status quo, some feel that they do not “fit” into the current system, or are
unhappy with a system where seniority, not achievement, is rewarded33. Such people want to
help their local economy or support a broader cause that could fuel a revolution within a specific
industry (Uber, AirBnB, and Apple being cases in point).
An entrepreneur’s utility function can also be related to their willingness to satisfy normative
and financial expectations from specific actors such as business angels and the triple F (Friends,
Family, and Fools). Though not verified empirically, it can be argued that entrepreneurs
experience disutility from failing or deceiving those who invested in their venture.
They might also be influenced by an early form of Corporate Social Responsibility, or by some
form of ethics, especially if they are willing to engage in productive entrepreneurship.
It is therefore possible to upgrade Savage’s initial model by integrating all the factors that
influence self-employment as described in this section.
33
https://www.boundless.com/business/textbooks/boundless-business-textbook/introduction-to-business1/introduction-to-entrepreneurship-25/the-goals-of-entrepreneurs-144-1306/
51
Self-Employment
Factors
Expected earnings (or Profit)
Psychological costs
Opportunity cost
Irrational impulses
Financial and normative expectations
Influenced by
Entrepreneurial and managerial ability
Effort level
Opportunity size
Tolerance for risk
Desire for independence
Expected level of stress
Reward for pursuing alternatives
Prestige and fame
Expected level of power
Willingness to challenge the establishment
Have an impact on the local community and
economy
Business angels
Friends, family, and fools
Society
Figure 23: Summary of the different cost of self-employment
52
2) The utility function of the CEO
The utility function of a CEO follows a slightly different construct than an entrepreneur’s. As
mentioned previously, CEOs are usually risk-averse (barring those with hubris). Most
importantly, however, they are also loss-averse. Loss-aversion is the fear of reducing one’s
personal wealth – especially if they failed to perform according to expectations.
CEOs are generally rational actors who look to satisfy personal economic objectives, but can
also pursue non-rational ones, such as power and fame.
There are also those, like Steve Jobs, who want their personal wealth tied up with the financial
success of their firm. It’s why Jobs used to have a US$1 salary yet also owned a significant
portion of Apple’s shares.
Their utility function is usually based on a specific amount of effort that leads to a specific
outcome. The effort level is conditioned by the outcome, which is usually rewarded by a wage
pair (WL;WH).
The various ways they are compensated is not relevant to this paper, but it is important to note
that there are compensation elements that occur no matter the performance – such as the base
salary. Some are based on the attainment of specific corporate objectives (such as bonuses),
while others depend on the market expectations or feedback regarding the CEO’s actions (such
as stock options).
This wage pair is usually established by the board of directors of the company. Their decisions
are based on the corporate objectives, the financial expectations of stockholders, and the
normative expectations from all shareholders (including public opinion).
But while it can be argued that a CEO plays a critical role in their firm’s performance (Bertrand
and Schoar 2003, Bennedsen et al. 2007, Kaplan et al. 2012), it is very difficult to measure the
surplus of performance they generate or the actual amount of effort they put in (Albuquerque,
2013).
From that perspective, the utility function of a CEO is a rather simple because they are mostly
subject to rational calculations. While entrepreneurs may work hard even without financial
rewards, CEOs try to find the maximum amount of effort that maximizes their personal wealth.
Depending on the reward structure and control mechanisms, a CEO might choose to exert a low
level of effort and still get highly rewarded for it. This explains the need to introduce other
factors which influence their utility function:
• The control of the board of directors and the likelihood of getting caught acting against
the firm’s best interests
• The power of the stockholder as external influencers
• Corporate Social Responsibility and public opinion
53
C) The traditional strategic orientation derived from a top management perspective
This section will explain the strategic decisions an established firm is likely to make based
on its characteristics as well as its CEO’s psychological profile and utility function.
By definition, strategic decision making is the process in which top managers identify
organizational problems and find solutions for them (Bartol, 1994). Strategic planning is one
of the managerial functions identified by Henri Fayol’s definition34.
Based on a firm’s characteristics, as well as the profile of its CEO, it is likely that decisionmaking follows a rational model (March and Simon, 1958). Indeed, established firms tend to
have specific processes in place based on previous experiences and because they have to answer
to a variety of stakeholders.
Rational decisions, or the attempt to make them, are perhaps the most crucial element that will
enable us to establish a clear distinction between decisions made by startups and those by
established corporations.
Rational decisions have the following characteristics:
•
•
•
•
•
They are aimed at achieving a specific goal, such as financial (profit, Return on
Investment, Return on Assets) and market ones (market shares, market penetration,
etc.).
They are explicit, meaning that a clear established process is laid down in order to tackle
the given issue.
They are fully informed in that they rely on statistically significant historical and actual
data in order to establish forecasts.
They are intentionally consistent and logical – also known as programmed decisions.
Programmed decisions are characterized by the fact that they are structured and recur
with some frequency.
They establish a clear causal relationship between the actions taken and the outcome
usually observed at the end of the financial period.
According to this model, actors base their decisions on known objectives (satisfying financial
expectations from shareholders, gaining market shares, etc.) that are usually defined (but
tweaked, if necessary) for a mid to long term period. CEOs are usually tied to specific goals
that come from both external and internal stakeholders, and must find the right way to tackle
them effectively.
34
https://www.toolshero.com/management/five-functions-of-management/
54
According to Hasmi et al. (2007), “strategic decision makings are those that determine the
overall direction of an enterprise and its ultimate viability in light of the predictable, the
unpredictable, and the unknowable changes that may occur in its most important surrounding
environments.” Therefore, strategic decision-making shapes the true goals of the enterprise
(Mintzberg & Quian, 1991).
Certo (2003) suggests that the a CEO’s decision making process strongly influences a firm’s
outcomes. Provan (1989) insists that they must therefore be competent, reasonably intelligent,
and articulate, and therefore use a sophisticated process for decision-making to justify any
decisions to the board of directors or the company stockholders.
This is achieved through the following steps:
•
•
Clearly formulating objectives by listening to all the different stakeholders (especially
the board of directors and the stockholders) in order to establish realistic objectives.
This enables them to elaborate the scope of the objective and know what type of
resources they have to gather.
Establishes relevant Key Performance Indicators (KPIs) beforehand to measure the
effectiveness of the strategy.
Porter (1992)35 suggests, however, that financial indicators are not enough to measure
performance management indicators. Strategic tools, such as the balanced scorecard
therefore integrates all the strategic dimensions together (Kaplan, 2003).
The balanced scorecard is therefore widely used as it embraces all the components of a
company’s long-term vision with its strategic focus area (usually customers) and
operational objectives such as continuous improvement through internal business
processes, learning, and growth.
Figure 24: Overview of the balanced scorecard36
35
36
https://hbr.org/1992/09/capital-disadvantage-americas-failing-capital-investment-system
Source: balancedscorecard.org
55
•
Describes, understands, and analyzes the environment through various strategic tools
such as Porter’s five forces and the BCG Matrix, or by conducting a SWOT analysis. A
SWOT analysis is a very common strategic tool that examines internal and external
factors that may influence the ability of the firm to achieve its target goal.
Figure 25: SWOT Overview37
According to “environmental determinism,” Structured Decision Making (SDM)
processes are adaptations to external opportunities and threats, and a manager’s role is
to facilitate this adaptation (Lieberson and O’Connor, 1972; Hannan and Freeman,
1977).
•
•
Determines the course of action in light of the analysis through Segmenting, Targeting
and Positioning processes (STP), operational recommendations, and short-term to midterm goals.
Carries out the decided course of action (4Ps or 7Ps for Product, Price, Place, Promotion,
Physical evidence, People, and Process), and from an operational perspective.
Using the approach of the balanced scorecard, we will now dive into the four components of
the strategic decision-making identified by Kaplan and Norton (1993):
• Customers (or marketing in general)
• Financial
• Internal business processes
• Learning and growth
Customers being integrated as one of the pillars of strategic planning means that established
firms have usually what is referred to as a market orientation. According to Darroch et al.
(2004), “market orientation is a type of organizational culture [...] that is intensely customercentric in focus, directing organizational decision making to meet explicit and latent customer
needs at a profit.”
37
https://www.smartsheet.com/14-free-swot-analysis-templates
56
This profit is derived by superior performance on the company’s part arising from the
capitalization of competitive advantages. According to Morrish C. (2011), firms must be
strategic to sustain their competitive advantage.
Firms can achieve a market orientation by having strong marketing processes in place, which
is why marketing is gaining a stronger foothold in the strategic operations of the company. In
order to understand this, let’s have a look at how marketing has been changing over the last five
to six decades.
The American Marketing Association has been responsible for the definition of marketing since
1948. The original definition of marketing, adopted by the National Association of Marketing
Teachers, is “the performance of business activities that direct the flow of goods and services
from producers to consumers."38. So, according to the original definition, marketing is supposed
to be a support activity of the sales process rather than a function of its own – a definition that
held for over 50 years.
It was then revised, especially under the influence of Dr. Robert Lusch (a former AMA
chairman). In the mid 1980’s the new definition stated that marketing is “the process of
planning and executing the conception, pricing, promotion, and distribution of ideas, goods,
and services to create exchanges that satisfy individual and organizational objectives."39
The current definition of marketing defines the scope of the marketing activities as “the activity,
set of institutions, and processes for creating, communicating, delivering, and exchanging
offerings that have value for customers, clients, partners, and society at large.” Dr. Marshall
(another former head of the AMA) suggests that “What we have is more strategic. Now it says
marketing is really something that makes the organization run."
The four components of marketing concepts are:
•
Customer orientation. According to Kotler (1987), “The main task of the organization
is to determine the perceptions, needs, and wants of target markets and to satisfy them
through the design, communication, pricing, and delivery of appropriate and
competitively viable offerings.”
Customer orientation is achieved when the culture of the company is strongly focused
on satisfying the needs of customers. Thus, organizational structure and leadership are
key components for achieving customer orientation.
In this sense, leadership styles will also vary between startups and established
corporations. While CEOs are likely to use a transactional form of leadership, company
founders are likely to use a transformational one (Bass, 1985).
38
http://www.brown.edu/Departments/Engineering/Courses/En9/spring/Population%20Services%20Marketing%2
0and%20Budget%20Overview%20handout.rev2pdf.pdf
39
https://archive.ama.org/Archive/AboutAMA/Pages/AMA%20Publications/AMA%20Journals/Journal%20of%20
Public%20Policy%20Marketing/TOCS/summary%20fall%2007/MarketingsEvolvingjppmfall07.aspx
57
Due to the company structure, the specific rewarding processes put in place and the
impossibility of a CEO to have individual consideration for each employee, it is likely
that they will rely on a transactional type of leadership.
According to Bass (1985), transactional leadership is defined through:
o Contingent reward: which rewards the efforts of followers by a specific
scheme which all agreed to beforehand (such as salary and bonuses)
o Management by exception: which involves positive feedback and negative
criticism, and can either be active (treat the problem before it occurs) or passive
(take corrective actions once the problem arises)
•
Customer satisfaction. A customer will be satisfied if the product or service is of
superior value than the competitors’. It’s about setting the right expectations and
fulfilling them. According to the consulting firm McKinsey, customer satisfaction is
also about keeping the same degree of performance no matter how many times the
product or service is delivered.
They have therefore labeled their three Cs of customer satisfaction as: Consistency,
Consistency, and Consistency40. This can be achieved by developing strong internal
processes (yet another element of the balanced scorecard) and via a Total Quality
Management (TQM) system.
•
Coordinated or integrated marketing. This is about unifying all the marketing
communication tools (advertising, public relations, social media, etc.) and techniques
toward a specific objective (Belch, G. E., & Belch, M. A. (2004)). Its sole focus is to
deliver a unified and consistent message across all the marketing channels including
online communication.
Integrated marketing understands that both offline and online communication tools
create dynamic synergies and drive results better. The focus has changed because
customers benefit from a more individualized and personalized marketing process
through online interactive platforms.
Not that traditional media (TV and printed newspapers) should be ignored. They can
still be a vital part of marketing communication depending on the budget and the
objectives of the firm.
•
Focus on profitability. All actions taken by the firm must drive a positive financial
result because profitability will always be the core of any business activity. This is
therefore tied up to the financial component identified by the balanced scorecard model
(Kaplan and Norton, 2002).
40
http://www.mckinsey.com/industries/retail/our-insights/the-three-cs-of-customer-satisfaction-consistencyconsistency-consistency
58
Market orientation can therefore be defined as the willingness of a firm to develop a superior
understanding of the customer’s needs and capitalize on an integrated organizational structure
for sole goal of satisfying the customer in a profitable way (Piercy, 1995).
59
III)
A systematic review on the impact of Entrepreneurial
Marketing in developing corporations
A) Definitions
This section will focus on establishing what key decisions entrepreneurs make in the
startup stage.
According to Miles & Snow (1978), the basic “entrepreneurial problem” is addressing the most
critical question from a strategic standpoint – "What business to enter?”
According to Reynolds (2002), the conventional decision making approach is not even relevant
for SMEs and startups. Since this method is too strategic and too inflexible for a developing
company, there was a need to develop a common approach that would encompass the needed
flexibility of a startup while relying on some theoretical background.
Thanks to the Schollhammer and Kurilof model (1979), we now know that startups and
established corporations differentiate themselves in terms of strategic orientation on five
specific characteristics:
•
Scope of operations: startups begin within a niche market by handcrafting their
products toward first customers. According to Brian Chesky (cofounder of AirBnB), the
most critical piece of advice that Paul Graham (founder of the Y combinatory) gave him
was to get out and talk to his first customers. Doing so allowed AirBnB to work in a
very complicated industry and successfully switch to a global scope because they built,
measured, and learned from their early adopters (approach by Eric Ries, 2013)
Though listening to customers is a cornerstone of market orientation for established
firms, startups do not have a developed final product or service yet, and therefore, can
easily tweak it based on the market’s feedback.
•
Scale of operations: when getting started, it is unlikely that new market entrants will
become market leaders over time. It’s more likely that their market share will be
relatively small within a given industry. This means that they haven’t developed the
processes to support a scaling phase.
Because the scale of their operations is rather small, startups have not yet gathered
sufficient historical data for their decision making processes. Neither have they yet
implemented fixed organizational processes.
•
Ownership: startups tend to be owned (at least at first) by a very limited number of
people who make decisions for the company. They do not have to answer to many
stakeholders as compared to established corporations.
60
From a strategic point of view, it means that the founder has more power when it comes
to strategic decision making (which will be explored in our first hypothesis) because
they do not have to reach specific financial or market penetration goals.
•
•
Independence: by not being part of a complex enterprise, smaller firms are much more
flexible and have a bigger room for maneuvering – even though they may be tied to
financial institutions like Business Angels.
Management style: owners of startups usually know all their employees by name
because of their small size and tend to adopt their own managerial approach. From a
leadership perspective, it means that founders tend to have a transformational leadership
style.
Transformational leadership is associated with four characteristics (Bass, 1985):
1) Idealized influence charisma is when leaders are seen to have high moral and ethical
standards, as well as a vision and a sense of mission.
2) Inspirational motivation is about using symbols and establishing team spirit to
foster the development of ambitious goals.
3) Intellectual stimulation is related to the stimulation of creativity and challenging
beliefs – even those of the leader.
4) Individual consideration is about creating a supportive climate where the founder
can coach and delegate in order to help his followers grow.
As a consequence, these differences support the idea that the traditional market orientation of
firms is not suitable for startups. There is a need for empirical research to identify a new
decision-making system, one more tailored to the innovativeness and structure of startups and
the psychological profile of their founders.
Traditionally, the strategic decision making approach was boiled down to the 4Ps at a more
tactical level (Kotler, 2001). However, it can be argued that the 4Ps miss “the fundamental point
of marketing” – mainly with adaptiveness, flexibility, and responsiveness. Since
entrepreneurship is the “parent of innovation” (Meyers, 1986), it is critical for entrepreneurial
ventures to be flexible and innovative, and not rely on processes set in stone
This is supported by the American Marketing Association which states that the 4Ps fails to
consider all the key elements of entrepreneurship such as innovativeness, risk-taking, or
proactiveness (Morris et al., 2002).
These three elements were later identified as pillars of the Entrepreneurial Orientation (EO).
Entrepreneurial orientation refers to the processes, practices, and decision-making styles of
organizations that act entrepreneurially (Lumpkin, 1996).
61
Five factors can be considered actors in establishing the EO degree of a firm:
• Autonomy
• Competitive aggressiveness
• Innovativeness
• Proactiveness
• Risk taking
Autonomy refers to the ability of anyone within the company to develop new ideas without
having to go through the corporate and bureaucratic processes that are typical of established
firms. It corresponds to the idea of “Ever tried. Ever failed. No matter. Try Again. Fail again.
Fail better” (Samuel Becket)41.
Competitive aggressiveness is about intensely and directly challenging the competition. Given
that newly established businesses operate in a very uncertain and competitive environment,
competitive aggressiveness is required (Le Roux & Bengesi (2014). Peterson and Berger take
this a step further by arguing that newly established startups are created in a hostile
environment.
Overemphasis on competitive aggressiveness should be avoided, however, as too much can
reduce a firm’s performance and does not correspond to Blue Ocean thinking.
Innovativeness is the willingness to develop new ideas, experiment, and going through more
creative processes. It therefore departs from traditional established practices and technologies
(Lumpkin and Dess, 1996). Although it can still vary in terms of “radicalness” (Hage, 1980), it
represents the willingness to venture beyond the traditional perspective.
Proactiveness, from an entrepreneurial point of view, is the willingness to anticipate the future
needs of the market, and therefore, to capitalize on a first mover advantage. The importance of
the first-mover advantage, according to Lieberman and Montgomery (1988), is the best strategy
for capitalizing on a market opportunity.
Proactiveness is therefore the opposite of passiveness – the inability to react to any market
opportunity. Nor is it to be confused with reactiveness – when the firm reacts to the market by
following an existing opportunity that another has already exploited first.
According to Ventakamaran (1989), proactiveness is about seeking new opportunities which
may or may not be related to an existing line of operations, introducing new products and brands
ahead of competition, and strategically eliminating operations that are in the mature or declining
stages of its life cycle. Proactive firms are therefore likely to be new market entrants rather than
followers. This isn’t always the most efficient business strategy, however, because second
entrants can be as pioneering and as innovating as the first (Miller and Camp, 1985).
Startups and entrepreneurial firms must therefore be willing to commit a large of amount of
resources to emergent opportunities, which explains the risk-taking component of the model
(Miller and Friesen, 1978).
41
https://www.brainyquote.com/quotes/quotes/s/samuelbeck121335.html
62
According to Buzza J. (2009), "Entrepreneurship is the process of creating something different
with value by devoting the necessary time and effort, assuming the accompanying financial,
psychic, and social risks, and receiving the resulting monetary rewards and personal
satisfaction."
As a consequence, those that display a high level of innovativeness, risk-taking, and
proactiveness should therefore be considered entrepreneurial (Lumpkin and Dess, 1996).
Morris and Paul (1987) take it a step further, claiming that “the propensity of a company's top
management to take calculated risks, to be innovative, and to demonstrate proactiveness" are
key for a firm to be entrepreneurial.
Therefore, the American Marketing Association defined entrepreneurial marketing as “an
organizational function and a set of processes for creating, communicating, and delivering
value to customers, and for managing customer relationships in ways that benefit the
organization and its stakeholders.”42
Entrepreneurial Marketing (EM) is both customer and entrepreneur-centric – unlike traditional
marketing. It will therefore be influenced by the entrepreneur’s personal characteristics,
aspirations, and values. As such, it can only be understood by integrating entrepreneurship into
the marketing process (Hultman, 1999).
The following figure represents what EM consists of:
Figure 26: Overview of Entrepreneurial Marketing43
According to a study from Northern Ireland (Carson, D., 1985) on small business marketing,
EM can be linked with the four evolutionary stages of marketing:
42
https://archive.ama.org/archive/AboutAMA/Documents/American%20Marketing%20Association%20Releases%
20New%20Definition%20for%20Marketing.pdf
43
Adapted from Gilmore A., 2011
63
•
•
Initial marketing activity during the firm’s entrance into a specific industry. They do
not have any formal process in place nor a customer base. The selling activity at this
stage is rather limited due to the lack of resources and the core focus is on the product’s
quality. Marketing is therefore performed in a “very primitive fashion” (Carson, 1985).
The most commonly used promotional tool will therefore be word-of-mouth.
Reactive selling is when the company starts scaling up and starts implementing some
marketing components in its operation. It cannot rely solely on its network and must
find new ways of communicating their products and services.
The unifying process begins, but at a very limited stage. Prospects approach the firm,
while selling and marketing activities are limited to answering queries. Now that the
firm is attracting attention, established players might retaliate or enter this specific
industry. As a result, the initial targeted niche could be close to saturation.
•
•
The “DIY” marketing approach is when the founder realizes the importance of
marketing and starts implementing “a series of spasmodic and disjointed initiatives”
(Carson, D., 1985). If they come from a more production oriented background, they will
fail to realize that the lack of a marketing initiative structure might do more harm than
good.
Integrated Proactive marketing is the last stage and refers to the transition toward
more established processes which turn the firm from a startup into an established
corporation. Many fail in this critical step due to the lack of marketing expertise. This
also happens during the highly turbulent stage of the growth phase. As everything occurs
at once, it might be tempting for the startup to rely on their DIY and ad hoc noncoordinated plans.
The following summarizes these four stages (Carson, D. 1985):
Figure 27: The four stages of marketing (Carson, D., 1985)
64
Some might implement a more formal marketing process at the start. This approach is a doubleedged sword because it fails to consider the customer’s feedback and might contradict the
founder’s aspirations. On the other hand, it means that the culture and the decision making
process within younger firms is driven by a positive attitude towards risk and innovation, and
is committed to discovering, evaluating, and exploiting new opportunities.
B) H1: The younger the firm, the more power the founder has on decision making
This section will attempt to verify our first hypothesis – that founders have more decisionmaking power than the CEOs of established corporations.
Startup founders usually start out by completely owning their business. They therefore have
more room to maneuver compared to CEOs who work for the firm’s actual owners and are
known as the agent of the principal.
Founders therefore set up a business to be their own boss. “One of the most remarkable
characteristics of entrepreneurship is that it provides individuals with the freedom to pursue
their own goals, dreams, and desires in new firm creation” (Fauchard E., 2009).
They must also shape the way their organization is built (Kimberly 1979). Kelly L., et al. (2000)
argued that “from a strategic management perspective, the founder is likely to be particularly
influential on manager mindsets, motives, values, goals, and attitudes that are central to the
organization” – thus creating an organizational culture.
Schein H. (1983) defines this culture as “the pattern of basic assumptions which a given group
has invented, discovered, or developed in learning to cope with its problems of external
adaptation and Internal Integration, which have worked well enough to be considered valid,
and, therefore, to be taught to new members as the correct way to perceive, think, and feel in
relation to those problems.”
Founders must do this from scratch, shaping their creation in the way they wish. The entire
startup culture must therefore be considered as a whole44 – a broad term that encompasses the
different variations that exists among different startups.
44
https://www.wired.com/insights/2013/09/how-do-you-define-startup-culture/
65
The founder takes the role of “an animator and a culture creator” (Schein E., 1995). According
to Schein (1995), such culture creation appears in three distinctive ways:
“1) The entrepreneur only hires and keeps subordinates who think and feel like he or
she does;
2) The entrepreneur indoctrinates and socializes subordinates to his or her way of
thinking and feeling;
3) The entrepreneur's own behavior is a role model that encourages subordinates to
identify with him or her and thereby internalize the beliefs, values, and assumptions.”
Founders not only shape the organizational culture, however. They also become culture
maintainers with their impact, even when they are no longer in the company.
For example, the words associated with Apple are still “simple, elegant and innovative.” This
is because that slogan and the values it instills were those that Steve Jobs instilled in the
company’s culture45.
Entrepreneurs are the visionaries and the founders of the firm, those who transmit the vision
and aspirational purposes of the company. They therefore influence and capture the “hearts and
minds”46 of those within the organization as well as those who are impacted by that
organization.
Smaller firms and startups generally have fewer decision to make than large firms. This gives
their founders stronger power, allowing them to work more towards business growth instead of
focusing only on generating positive cash flow and returns to please external stakeholders
(Runyan, 2008).
The founder’s decision making power also has a lot to do with their skill sets. They can therefore
be called “generalists” (Carson and Gilmore, 2000) because they must deal with a variety of
issues. By acquiring a broader perspective on all sides of the business, they gain more decisionmaking power. According to the entrepreneurial press, entrepreneurs are the Jack of all trades
but masters of none.
In thinking of the strategies and decision making processes of emerging businesses, we often
think of or emphasize the strong leader who takes all the risky and decisive actions (Mintzberg,
1973). This idea is taken further by Hart’s “command mode” and by Bourgeois and Brodwin's
(1984) “commander model” – both of which consider entrepreneurship as the outcome of a
vision and a strong leadership. According to Miller (1983), the more entrepreneurial the firm
is, the more autonomous the leader.
45
46
https://www.fastcompany.com/1792485/steve-jobs-apple-and-importance-company-culture
https://www.entrepreneur.com/article/238883
66
The need to develop expertise in a newly established business is compensated by the founder’s
ability to become their own expert. According to Mitchell et al. (2000) and Baron and Ensley
(2006), entrepreneurs, especially experienced ones, acquire useful cognitive frameworks and
scripts that enable them to become their own experts over time.
By focusing on pragmatic techniques for problem solving, they differentiate themselves from
established corporations that are mostly focused on achieving a “high co-ordination of control
of specialists” (Carson, 1985).
Entrepreneurs are also likely to hire experts, or at least people who have a greater degree of
expertise than they do. Entrepreneurs must “have the skill and confidence to employ people
who are better than them” (Pech, 2008).
When it comes to the power of the founder on decision making, it does not necessarily mean
that the founder will make all of the decisions themselves. They are likely to share leadership
in order to survive the growth phase.
Shared leadership (Pearce, 2002)is a dynamic and interactive influencing process in which the
objective is to lead one another to achieve a specific goal. In this scenario, influence can be
through peer or lateral influence, as well as through backward or downward influence.
Shared leadership therefore becomes a property of the whole system rather than an initiative
from the leader. Leadership therefore becomes a by-product of the relationship and connections
among team members.
Another leadership trend, especially in tech startups, is called Agile Leadership. It is derived
from the Agile software development manifesto which states that:
We are uncovering better ways of developing
software by doing it and helping others do it.
Through this work we have come to value:
Individuals and interactions over processes and tools
Working software over comprehensive documentation
Customer collaboration over contract negotiation
Responding to change over following a plan
That is, while there is value in the items on
the right, we value the items on the left more.
Agile leadership is therefore all about self-organizing teams, continuous improvement, and
flexible responses. It fosters autonomy and empowerment, as well as motivation of team
members by giving them the chance to be involved in different projects and helping each other
out in many ways. In this case, the self-motivated team is driven by the founder’s vision and
want to help the business according to the “roots” of the company.
Due to the shorter time frame involved in decision-making, entrepreneurs are also more likely
to make tactical decisions as they go, and therefore, might rely solely on their expertise or gut
feeling to make specific decisions.
67
Let us now look at how their activities (like marketing, sales, and finance) will look like.
Chaston (1997) defined four alternative marketing styles based on two levels of entrepreneurial
activity – conservative vs entrepreneurial:
•
•
•
•
Conservative-transactional: standard goods/services at competitive prices with little
interest in building close relationships with suppliers.
Conservative-relationship: standard goods/services at a competitive price, but willing
to work with suppliers to optimize quality.
Entrepreneurial-transactional: innovative products/services without forming close
relationships with suppliers.
Entrepreneurial-relationship: participating in markets where customers work in
partnership with suppliers to develop innovative new products and services.
We can therefore argue that the most successful startups have an entrepreneurial-relationship
type of activity. If the founder is likely to remain the final decision maker for any important
strategic orientation of the firm, it does not mean that the decisions they make are solely based
on their impressions or through analysis. Their network also plays a critical role in their
startup’s success.
When it comes to the financial management of the firm, the founder (or the founding team) also
plays a crucial role. In its early stage, startups mostly focus on survival by relying on bootstrap
and managing the burn rate until it reaches the growth phase and breaks even.
Even when founders rely on external finances, information opacity (Klein at. al. 1978;
Williamson, 1975) prevents business angels, venture capitalists (VC), and banks from having
an accurate idea of what their financial situation is. Founders therefore have much more power
than CEOs when it comes to financial management because there is no control mechanism
limiting them, or there is a lack of enforced disclosure.
This difference means little, however, in cases where VCs demand heavy monitoring of the
startup’s balance sheet. According to a study by Gorman and Sahlman (1989), some VCs visit
a firm they invest in an average of 19 times a year.
When it comes to sales, startup founders are usually the main sales workforce in the initial
stage. They therefore play a primary role in the sales process as they can decide the level of
discount and commitment for the product or service they are selling. From this perspective,
entrepreneurs have more power on sales due to their dealings with those who know and trust
them.
68
The following summarizes the points raised in this section
Criteria
Strategic planning
Company culture
Scope of decisionmaking
Marketing
Finance
Sales
Description
Hypothesis validation?
Smaller set of stakeholders which
YES
gives greater power to the founder.
Founders are animators and the
YES
creator of the organizational culture
Develop their own expertise and
make more tactical decisions than
YES
strategic ones
Entrepreneurial-relationship, based
on the scope of the founder’s
YES
network
More power due to information
opacity,
but
some
control
YES/NO
mechanisms
Likely to be the ones generating
sales and developing contract
YES
structure
Figure 28: Decision-making characteristics in startups
As a company ages, however, they tend to put more formal processes in place and move away
from their traditional roots. And as they start raising capital, the management team (initially
made up of the founders) is slowly replaced by more experienced managers to ensure the firm’s
long term success.
C) H2: The younger the firm, the less structured their business processes are
This hypothesis has already been partly verified in the previous section. Since most decisions
are made by the founder and/or the founding team, there is no need to develop a specific
business process.
In contrast to established corporations that need to get the approval of a specific set of decision
makers (usually following a tier level approval), founders can directly make decisions they
deem relevant for their company’s future.
This differs from the complete strategic planning of established corporations (identified earlier
as the activity of planning ahead and actively structuring the situation) that use critical points
or opportunistic approaches (Hacker, 1986).
Opportunistic strategy is about having some type of formal plan in mind, though deviation is
allowed when a new opportunity arises (Hayes-Roth, 1979). Critical point is yet another
decision making process common in startups (Zempel, 1994).
Critical point is about tackling the most important issues first (usually the most unclear and for
which no prior planning was possible), and from there, plan the next steps.
69
Strategies
Complete
planning
Critical Point
Opportunistic
Orientation
to Goal
Long-term
Situational
Proactiveness
planning Responsivenes
Planning &
action overlap
High
High
Low
High
Low
High
Low
Middle
Low
Middle
High
High
Low
Middle
No planning
Figure 29: Differentiation in strategies, adapted from Frese, M. (2000)
Based on the above chart adapted from Frese M. (2000), it can be argued that established
corporations are likely to follow a complete planning strategy, while startups are usually
focused on critical point or opportunistic strategies (or a combination of both).
The orientation to goal is about defining a specific set of objectives before-hand through longterm strategic planning for established corporations or through the founder’s vision for the
startup. The lack thereof is synonymous with a lack of clear direction, as in the case of
opportunistic strategy.
Long-term planning is usually aligned with the goal. While established corporations can afford
to plan on a more long-term basis (as they are financially stable and are dominant industry
players), startups will usually plan on a more mid-term to short-term basis depending on the
urgency of the situation.
Established corporations are likely to be elephants (Birch, 1981), meaning that they are very
slow to move in cases where there is a sudden change of situation; whereas startups are gazelles,
meaning that they are usually able to adapt more quickly.
This is due to the factors that make up the first hypothesis: because founders have a lot of power
over their ventures, they ca made decisions quickly.
This also verifies the second hypothesis: because of the flexibility of their business processes
(or the general lack of them), startup founders can move more quickly and effectively if needed.
Proactiveness is one of the dimensions of Entrepreneurial Orientation. Therefore, we can argue
that the critical point strategy is more suited for a startup because the more proactive the firm
is, the more entrepreneurial it is. In such a case, however, proactivenes does not constitute a
differentiating factor between startups and established corporations.
Finally, when it comes to the planning and action overlap, it is likely that due to the lack of
business processes and the lack clearly defined tasks in startups, some actions might overlap.
This is especially so in cases where startups go for an opportunistic strategy.
Since established corporations tend to be bureaucratic, it is rather unlikely that specific actions
will overlap as functions are clearly defined.
70
In order to explain why the younger the firm the less structured their business processes are, it
is important to look at the business processes that take place in startups compared to those in
established corporations.
One of the key business processes identified earlier is strategic marketing. According to
Strokes, since EM puts a strong emphasis on the personality of the entrepreneur and on
innovation, it differs from the classical marketing concept. This is because classic marketing or
administrative marketing requires an assessment of the market before developing a product or
going for an opportunity.
Not everyone agrees with this theory. A decade ago, entrepreneurs took a more casual approach
by first identifying a market need, gauging the market size, then raising capital accordingly. It’s
now understood that entrepreneurs start out with an idea then use the resources at their disposal
to reach the market for it (Sarasvathy, 2001).
Strokes (2000) calls this “an intuitive market feel.” An entrepreneur senses an opportunity and
evaluates it as they begin the process of building the product. Rather than having a top down
approach (segmentation, targeting, and positioning) used by existing firms, startups have a
bottom-up approach.
This is done by “serving the needs of a few customers and then expanding the base gradually
[and using] trial and error in the marketplace, being in contact with customers to learn their
preferences, looking for customers with the same profiles so they can expand their base”
(Stokes, 2000).
But entrepreneurs can also be victims of the “bag mentality” – one of the biggest causes of
entrepreneurial failures. Scared that their innovation will be stolen, some prefer not to collect
feedback until the product is ready. This is wrong because it fails to consider the needs of the
market and verify the entrepreneur’s gamble once a big investment has been made on the
product or service.
Entrepreneurs are generally experts in a field other than marketing (Carson et al., 1995; Stokes,
2000; Zontanos and Anderson, 2004). It’s therefore likely that their decision making will be
haphazard, simplistic, and sometimes, simply an answer to a competitor (Carson and Cromie,
1989).
So rather than have a formalized plan, startups tend to improvise as they go along (Zahra et al.,
2006) and engage in ad hoc behaviors (i.e. specific behaviors tailored to the situation) (Covin
and Slevin, 1990). Such improvisation is an attempt to adjust to customer preferences by
innovating the product or the service to the market demand.
EMs must therefore link creativity to innovation in order to foster both formal and informal
strategic changes. The “construct of EM is not simply the nexus between the sets of marketing
and entrepreneurial processes that has emerged as the conventional conceptualization of EM
[...] but fully includes all aspects of AM (administrative marketing) and entrepreneurship.”
(Morrish, Miles et al., 2010)
71
This is another reason why EMs are not a good fit for the traditional 4Ps model. It is much too
formal for entrepreneurs who prefer direct interaction with their prospects – either through
personal selling and/or relationship marketing activities. EM decisions are therefore shorter
term and more immediate (Carson, 1993).
New technologies allow entrepreneurs to sustain this effort in a cost-effective way. Online
marketing allows entrepreneurs to advertise their product, collect feedback faster, and answer
questions with very limited financial investment (Gilmore et al., 2007).
When the firm is young, and due to their limited resources, they tend to use innovative
marketing approaches to make themselves known through “guerilla marketing, radical
marketing, expeditionary marketing, disruptive marketing, and others.” (Morris, Schindehutte
et al., 2002, p. 1)
It is faster and easier to target a niche or small customer base – mainly innovators and early
adopters, according to the law of diffusion of innovation. Successful entrepreneurs use their
depth of knowledge and understanding to specialize and attract small segments of the market
(Gilmore et al., 1999; Carson and Gilmore, 2000b). From that point on, a firm can tailor their
technology to the market’s needs.
Not that they don’t apply any form of marketing concepts, at all. EMs often use flexible
emergent strategies that are improved over time through a trial-and-error process. They may
not know the vocabulary and concepts but they are keenly aware of the value of the results of
good marketing (Morrish et al., 2010).
As the business matures, it becomes critical to use more formal business processes to survive
the competition and new market entrants. Kotler (2003, pp. 4-5) suggests that, “Most companies
are started by individuals who live by their wits. They visualize an opportunity and knock on
every door to gain attention.”
Entrepreneurs are extremely pro-active whereas established firms are more reactive. Startups
drive the change while established businesses try to cope. Kotler argues that as firms mature,
they reach a second stage called “formalized marketing.”
This is why the 4Ps are becoming more tailored to entrepreneurial activity. They don’t just
focus on integrating marketing concepts, they also offer a holistic approach to how the
entrepreneur must manage their business.
Be it Perseverance, Passion, People, and Process or any variation, thereof, all 4Ps integrate both
concepts of marketing and entrepreneurship. They also offer a much broader vision – allowing
the entrepreneur to be more flexible.
In his book, “Thinking Fast and Slow,”47 Daniel Kahneman explores the differences between
what he calls “system 1” decisions and “system 2” decisions. System 1 is intuition – the instant
answer given by the brain to a specific question. It is quick and very effective when it comes to
urgent situations, and bases its process on previous experiences or rules of thumb.
47
https://www.amazon.fr/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374533555
72
Due to the speed involved, however, the answer may be wrong. So system 2 critically analyzes
a situation by using an active process of focusing. It is therefore much slower.
Because of the urgency that entrepreneurs always face - depending on the nature of their
activity, their burn rate might be high and they can therefore be driven out extremely fast. For
that reason, decisions cannot always be based on statistical facts when speed is involved, forcing
them to rely on system 1. Based on that, they can then resort to analysis and evaluation as they
move forward.
Such can also be risky, however. This eagerness to beat the competition using “rule of thumbs”
results in a negative correlation between innovation and hostility Kreiser et al. (2002).
According to Zahra and Bogner (2010), “intense hostility in these markets might make
aggressive gambling of new ventures’ limited financial resources by offering radically
innovative products a poor strategic choice.”
Such confirms that the younger the firm, the less structured their business processes are.
The final hypothesis to be discussed relates to the power of the network and the personal brand.
D) H3: network and a strong personal brand are key for EM to succeed
This section defines an entrepreneurial network and what role it plays in a startup’s
success. It will then focus on personal branding and how a strong personal brand can
amplify the network’s power.
What is a network?
A network is made up of nodes and connections (Davern, 2005) from a social science
perspective. Nodes are actors within the network, whereas connections symbolize the links
between them.
Actors can have different backgrounds with a lot of different functions:
•
•
Gatekeepers: in sociology and marketing, they are specific persons within the
network that regulate and control access to it.
Connectors: the bridge between other actors within the network. Connectors are
the ones who enable actors to fill “structural holes,” giving them access to greater
information and control benefit (Burt R. S., 1992)
73
This figure represents the concepts
of a structural hole.
2 and 3 are part of the same
network, but are not direct
connections. 1 will therefore act as
a broker and bridge a structural
hole between 2 and 3, thus
benefiting from their new
relationship.
•
Regular actors make up most the network. They do not have any specific function other
than interacting with other members of the network. This does not mean that all actors
are the same, however, or that they have exactly the same information.
Networks are extremely powerful and fundamental in the study of entrepreneurship. In
“Handbook of Research on Global Competitive Advantage through Innovation and
Entrepreneurship,” Luis M. Carmo Farinha claims that, “networks and networking are
fundamental to how the entrepreneur does business and the intrinsic value of an entrepreneur’s
business lies in its networks.”
Other researchers agree. According to Singh (2000), the bigger their social network is, the
greater the likelihood of their firm’s success. Entrepreneurs should not be seen as isolated and
atomized actors, but rather as individuals evolving in a social context and acting according to
it (Brüderl, 1995).
Entrepreneurship is therefore embedded within a social context and facilitated or constrained
by the position the entrepreneur has within the social network (Aldrich, 1986). It also
corresponds to the social theory which claims that individuals do not exist in isolation, so
building mutual trust and understanding is key to enabling the exchange of resources (Coleman,
1988).
The network also plays a very big role in finding potential customers and acts as a hedge against
information asymmetry. A strong network enables the firm to protect itself from the liability of
newness and contributes to establishing legitimacy which helps the business grow (Zimmerman
and Zeitz, 2002). Legitimacy may be defined as the process of establishing relationships with
players in the market (Rao et al., 2008).
This is yet another reason why networks are so much more important for startups compared to
established corporations. Established corporations are known in the industry through their
74
specific brand image, and as a consequence, rely on the power of their brand rather than the
power of their network.
Entrepreneurial networks can even include competitors in a cooperative relationship. This is
traditionally the type of relationship seen in startup ecosystems, such as Silicon Valley, where
entrepreneurs meet to exchange information with a “paying it forward” perspective.
The power of networks is so important that it explains why nascent entrepreneurs tend to set up
their business in an industry where they have previous work experience (Stuart and Sorenson
2005). Not only they can rely on their previous knowledge, but they can also reach out to their
network and gather disparate knowledge in advance.
Networks allow entrepreneurs to achieve three major tasks (Adler and Kwon 2002):
•
•
•
Access to financial capital: Entrepreneurs tend to provide unreliable or over-optimistic
information, while venture capitalists or business angels can make false promises. Both
can therefore learn about the integrity and reliability of the other through their own
network.
Recruiting skilled labor: Startups face the problem of hiring highly skilled individuals
who are most likely already employed in secure and well-paid jobs. A strong and
cohesive network allows entrepreneurs to identify the right candidates and recruit them
more easily. And since those employees come from the same network, maintaining their
reputation ensures that they have a personal stake in the firm’s success.
Accessing tacit knowledge: Tacit knowledge is hard to communicate, formalize, and
store (Nonaka, 1995). It is usually embedded within social actors and can be transferred
only through the process of social interaction (codification). This process of social
exchange mostly happens when cohesive social relations exist and strong ties reduce
the magnitude of transmission errors.
Firms that can mobilize and use this tacit knowledge will gain a significant competitive
advantage over others. A network that is rich in structural holes is extremely useful in
developing innovative solutions (Rowley, 2000). So networks can also give
entrepreneurs access to resources that are generally inaccessible (Ahuja, 2000). Baron
(2007) agrees by claiming that an entrepreneurs’ social skills and network are a great
help in acquiring the resources they need to make decisions.
Other characteristics of an entrepreneurial network include (Slotte-Kock and Coviello, 2010):
•
Degree of formality: is the ratio between formal business contacts and informal
contacts. Formal business contacts are those the entrepreneur will have with customers,
business partners, etc., while informal ones include friends and family. There is also the
75
concept of strong and weak ties. From an entrepreneurial perspective, weak ties (people
who know someone by their reputation or previous achievements) are extremely
important.
•
•
•
Diversity: is related to the differences in background and occupations of the network.
The higher the diversity, the easier it becomes for the entrepreneur to get access to a
broader set of information. This is why entrepreneurs should avoid interacting only with
those who share their same beliefs and come from the same background. This especially
important when entrepreneurs try to target an unfamiliar market.
Flexibility: is related to the speed at which new contacts are made or broken – or how
fast they can enter and exit a network. Too much flexibility can be bad if the
entrepreneur depends on frequent feedback to develop their offering. But it can also be
good – especially if actors come and go. This allows entrepreneurs to get access to new
information without having to expand to other social networks.
Density: is a measure of how well the entrepreneur is connected to a network. A very
dense network means that entrepreneurs can reach out to other actors more easily
because they usually have first degree connections also known as strong ties (family,
friends, regular business partners, etc.).
And finally, networks allow entrepreneurs to influence EM by transitioning from a limited
marketing scope to a more sophisticated one (Gilmore, Carson et al., 2006). As established
corporations have already transitioned to this phase and leverage the resources they want, it is
likely that their industry power will play a much bigger role than their network power.
Another consideration is personal brand – the moderating factor between network power and
business opportunities. An entrepreneur’s success depends on “being known” and “knowing
who,” which acts as a hedge against the liability of newness and uncertainty.
Personal branding is a relatively new concept. Previous literature used to focus on selfimprovement as a key to success, while personal branding is based on “explicit self-packaging.”
(Lair J. et al., 2005)
When someone has accomplished something that becomes well-known, it attracts others who
spread the word. This provides entrepreneurs with a free and trusted marketing communications
tool that reduces information asymmetry and helps legitimize their business.
The ever increasing number of messages in corporate communication requests increases
innovative communication strategies if newly founded businesses want to stand out (Blythe,
2000, Ries & Trout, 1981). And personal branding can play a strong role in it.
To develop a good personal brand, however, entrepreneurs must be authentic and consistent
about their values. It also takes time and is the result of hard work and dedication. The best
definition of a personal brand is how others perceive the person, product, or organization that
makes it stand apart from the rest.
76
According to Walumbwa (2008), being true to your values is about authentic leadership. He
called this relational transparency – when workers share and maintain their leader’s core
motives. There is a downside to this, however. Any deviation from such values will be noticed
and have a negative impact on a business’ network and profit margins.
So, though it’s important to tailor a personal brand to a specific target group, it’s equally
important to remain sincere. This can only be accomplished if the company truly believes in its
core values. This is where trust comes in. Trust is fostered by the strength of a personal brand
as well as the endorsement of key players within the network.
Personal branding comes down to an entrepreneur’s ability to do something better than anyone
else. Overall, a personal brand helps entrepreneurs cope with the liability of newness, foreigness
(especially in the case of Born Global), and smallness.
We can therefore argue that the network plays an important role in the entrepreneurial process
and that a strong personal brand is a positive moderator of the relationship between the network
and its power.
77
Conclusion and limitations.
Entrepreneurs and CEOs have to make decisions on a daily basis that affect the company’s
survival. However, the types of decisions they make and the processes involved strongly differ.
Because while established corporations try to reap benefits through their proven business model
in given industries, startups and their founders look to disrupt them.
To what extent these are different and how their profiles differ is not adequately covered in
business literature, hence the need for further study into the matter.
Though the fundamental differences between a startup and an established corporation are easy
to define, the same doesn’t apply to CEOs and entrepreneurs.
While startups are a “temporary structure designed to find a repeatable and scalable model,”48
established corporations have already found the fundamental structure by which they generate
revenue. They therefore simply strive to maximize their competitive position and advantages –
objectives that affect every component of their organizational structure and orientation.
A startup, meanwhile, looks for radical innovation in order to differentiate itself from the
competition. They are therefore likely to have a more flexible structure in order to enhance their
processes in order to tackle the external uncertainties they evolve in.
Despite these differences, CEOs and Entrepreneurs share some common psychological
characteristics. So the decisions they make and how they make them are what distinguishes
them. To test this, three hypotheses were made.
First, the younger the firm, the more power the founder has on decision making. This has to do
with their need to find their business model and manage the burn rate compared to CEOs who
must answer to a wide array of stakeholders.
Second, the younger the firm, the less structured their business processes are. This has a lot to
do with the speed at which entrepreneurs have to make their decisions. Because they evolve in
a very uncertain environment, they need to make decisions quickly to ensure their business’
survival.
Finally, network and the founder’s personality are critical components for the business to
succeed by highlighting the potential impact they can have on securing key resources and
customers.
Further research is therefore needed to explore this topic.
48
https://steveblank.com/2010/01/25/whats-a-startup-first-principles/
78
Further research:
Given this observation, one clear opportunity for future research is a more complex
conceptualization of decision-making, the implementation of the decision as well as the
environmental effects.
By studying CEOs and entrepreneurs on a daily basis and monitoring all their decisions and
how effective these are on the business success. As identified earlier, when and how does the
shift in mindset between a founder of a startup and a CEO of an established corporation happen?
Is it a gradual, slow and changing process and does it happen in a very harsh way when specific
milestones are hit?
A third area for further research would be to look more at decision implementation. While we
have clearly established that the decision-making processes are clearly different, we had to draw
a line and could not focus our research on how these decisions are implemented and how it
affects business success.
Overall, we can argue that this research paper is drawing a basis of the understanding, while
further research would be needed to unveil a clear model and how all of the characteristics we
covered play a role.
79
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Table of illustrations
Figure 1: Entrepreneurship Stages Representation (GEM, 2014) .............................................. 5
Figure 2: Firm Stages ................................................................................................................. 9
Figure 3: Summary of the key differences between startups and established corporations ..... 13
Figure 4: Steps in the innovation process ................................................................................. 14
Figure 5: Innovation characteristics over time ......................................................................... 16
Figure 6: Innovation dimensions .............................................................................................. 17
Figure 7: Difference between Schumpeterian and Kiznerian opportunities ............................ 18
Figure 8: The value chain identified by Porter (1985) ............................................................. 20
Figure 9: Highlight of the key differences between Blue and Red Ocean strategies ............... 21
Figure 10: The law of diffusion of innovation ......................................................................... 22
Figure 11: Example of Boom and Bust Cycle in the Automotive industry ............................. 25
Figure 12: Porter's 5 Forces (1980) .......................................................................................... 26
Figure 13: Summary of key differences between an attractive and unattractive industry ....... 28
Figure 14: New Institutional Economics scope overview ........................................................ 29
Figure 15: Summary on findings of external influence on startup success .............................. 30
Figure 16: Necessity vs Opportunity driven entrepreneurship ................................................. 32
Figure 17: Overview of the PEST Framework ......................................................................... 33
Figure 18: The 3 categories of psychological determinants ..................................................... 36
Figure 19: Differences in decision-making between entrepreneurs and CEO ......................... 44
Figure 20: Key non-psychological factor differences between CEO and Entrepreneurs......... 48
Figure 21: SEU function .......................................................................................................... 50
Figure 22: An example of the Subjective Utility Function ...................................................... 50
Figure 23: Summary of the different cost of self-employment ................................................ 52
Figure 24: Overview of the balanced scorecard ....................................................................... 55
Figure 25: SWOT Overview .................................................................................................... 56
Figure 26: Overview of Entrepreneurial Marketing ................................................................. 63
Figure 27: The four stages of marketing (Carson, D., 1985) ................................................... 64
Figure 28: Decision-making characteristics in startups ........................................................... 69
Figure 29: Differentiation in strategies, adapted from Frese, M. (2000) ................................. 70
85