ENTREPRENEURSHIP SUCCESS
INTO THE NEXT CENTURY

A Call for the Rise of a New Class of Entrepreneur

One consequence of the so-called information age, is that perfect information--once only a necessary (but operationally impractical) assumption of neoclassical economics--is approachable in many more sectors in major world economies. As a result of this advance, and a global movement toward free trade, world-wide competition is an ever-expanding reality. Global competition, in combination with virtually perfect information in many sectors, means a more "perfect" market.

But a perfect market does not mean economic security. What we are seeing in the 1990's is a paradox. For the players in the economic game, perfect markets turn out to create economic insecurity. Imperfect markets are the ones that yield a greater measure of economic security. Here's why.

In a perfect market, the forces of supply and demand drive an economy toward maximum efficiency. Where there is too much demand, prices rise, thus attracting new players into the economic game. Where there is excess supply, prices fall, until a sufficient number of new buyers enter the market to eliminate the condition of over-supply. A perfect market thus drives an economy toward equilibrium--the equality of supply and demand.

Unfortunately, where there is maximum efficiency, there is no profit. In fact, it is only through market imperfections that profit opportunities occur. Market imperfections may be succinctly described as:

1. Demand without supply, and
2. Supply without demand.

That is, where prices rise because of too much demand but new players cannot get into the game to provide the extra supply needed, the existing players can make a profit (buy low--sell high). Or, where prices are falling because of excess supply, but new demand is discovered or created, a profit opportunity is also available to the discoverer/creator (also, buy low--sell high). More on this as it applies to entrepreneurship later.

Unfortunately for individual economic job security, the ascendence of free markets is eliminating many of the market imperfections that for years have provided predictable profits and jobs. For example, in the two decades immediately following World War II, both the German and the Japanese economies were in ruins. Consequently, the market imperfection (demand without supply) provided an unparalleled opportunity for the robust and unscathed economy of the United States and Canada to profitably and securely (but less efficiently) provide goods and services to these and other world markets--without much competition.

Today, the game has changed. With a more efficient market, economic players must respond with ever faster reaction times to shifts in the supply-demand calculus. Hire and fire decisions are made within a much narrower time window. Individuals who have depended upon large organizations for a job, are finding that "downsizing" and "right-sizing" mean less security for them.

What, then, is needed?

With a more efficient market, comes the need for more efficient recognition and utilization of market imperfections, since market imperfections mean economic opportunity. The capacity to discover opportunity is the hallmark of the entrepreneur. What is needed is more entrepreneurial discovery.

It seems clear that only through more entrepreneurship--where a new class individuals can become skilled at recognizing and responding profitably to the opportunities available in a more perfect market--will individual economic security (albeit on a different foundation) be experienced on the scale that existed in the two decades following World War II. These new entrepreneurs must understand both the ground rules and nuances of creating and growing business ventures in order for security in a more-perfect-market to be possible. What, specifically, must be done to foster the rise and success of this group of new entrepreneurs? We need (1) the right kind of market imperfections, and (2) we need a change in our way of thinking.

The Right Kind of Market Imperfections

The first step is a deeper understanding of the nature of market imperfections. Fortunately, not all market imperfections are created equal. Some market imperfections, despite their preventing equilibrium, operate to continually add value to an economic system. Others do not. And from a practitioner and public policy standpoint, it makes sense to encourage the one, while eliminating the other.

Productive market imperfections - The first type of market imperfection is the one which is brought about by entrepreneurial discovery. By providing incentives to players in the economic game to enter the market and to play, these imperfections add to the efficiency of the economic system. And society, recognizing that the value created is worth preserving the benefits of that imperfection (profit opportunity that in turn provides security and stability), provides a means to isolate that entrepreneurial discovery from market pressure--for a time. The isolating mechanisms that society provides as an incentive for discovery are known as patents, and copyrights (although there are several others [see Rumelt, 1987]). Patents and copyrights are designed to prevent competitors from eroding the benefits of entrepreneurial discovery during a protected period of time. As noted previously, these types of imperfections are to be encouraged because they provide rewards for entrepreneurial discovery. An in-depth discussion of the various types of market imperfection, and how they may be used to add to the success of a venture is undertaken in the New Venture Template^TM Topic Review Notes (Question 9-Imitators).

Unproductive market imperfections - The second type of market imperfection does little to add value to the economic system. This type of imperfection creates conditions of demand without supply or supply without demand through the use of power. Here, players in the economic game use their economic assets to influence the rules of the game, i.e. they influence governments (Etzioni, 1988) to create and sustain market imperfections that give profit to these powerful players whether or not they add the value of discovery to the system.

In modern society, governments (especially the U.S. government) intend to act to preserve the integrity of the market system by removing the unproductive market imperfections that restrain trade. Such actions as the enactment and enforcement of anti-trust laws are examples of laws that are geared to level the playing field. Thus, under these laws, such actions as the fixing of prices to restrict competition are illegal, and carry stiff penalties (treble damages, jail time etc.). So initially, society does grant power to governments to make and enforce rules that keep the game fair, and governments act in response to this charge.

However, given the nature of the free enterprise economic system (where only the fit survive), there is tremendous incentive for players in the game to go outside the game. With assets earned in the game, players attempt to influence the rules in their favor; to subvert or co-opt the rule-making power of government in order to gain competitive advantage. For example, it is in the interest of players in the free enterprise game to induce governments to simulate the profit-generating effects of entrepreneurial discovery, and to obtain from them goods and services at below-market costs (e.g. subsidized or guaranteed loans, access to facilities or knowledge, etc.). In so doing, governments can create a market imperfection that is virtually invisible to the market, and therefore not susceptible to market pressures for efficiency. This is a version of the "buy low--sell high" result of market imperfections in general. However, it is a version that does not require value-adding entrepreneurial insight. Hence the need for the elimination of this and other unproductive market imperfections similar to it.

A Change in Our Way of Thinking

First, we must change the destructive perception that entrepreneurs are born and not made.

• In the past four decades, many felt that entrepreneurial success depended upon "grit" in the face of the massive market advantages of giant corporations. A perception arose that successful entrepreneurship was based upon the possession of a unique set of personality traits. This perception is a hold-over from the age where it was very tough to start a new business because of the entrenched competition from big business operating on the "bubble" of a post World War II market imperfection. But circumstances have changed. As explained earlier, big business today has huge problems with swift response to competition as compared to many smaller, more efficient firms. Big business is likely to be less rather than more able to survive in a more-perfect market. In a more-perfect market, with the right skills and type of organization, it should be easier to start a business - not harder.
• The "born not made" perception of entrepreneurs is also a result of many pop-psych studies that have purported to show that entrepreneurs have unique personality traits: No traits--no entrepreneur. In fact, these studies are often contradictory, and offer no clear evidence that a mystical set of success traits determines entrepreneurial effectiveness. Accordingly, would-be entrepreneurs are erroneously dissuaded from venturing by believing the misinformation that entrepreneurs are born and not made.

It must become the commonly accepted belief that successful venturing is possible for anyone who has the specialized training, the will power, and an entrepreneurial discovery. Though some may find it easier to venture due to some measure of natural ability, none with the previously noted prerequisites should, through ignorance, be preemptively precluded from venturing. The need for this specialized training gives rise to the second initiative required.

Second, we must provide a conceptual foundation for effective entrepreneurship that is based upon success enhancement through failure prevention.

• Training individuals to succeed by preventing unproductive failure, is a substantial departure from the prevailing approach. Today, much effort is being expended to identify the list of success factors for new ventures. Whether intended or not, the search for this list implies that there is a complete recipe for venture success. But, the success recipe approach has limitations. Our approach which seeks to enhance venture success through systematically eliminating the causes of failure (see Preface-Venture Success Through Failure Prevention) has greater promise. Specifically, our approach promises, through training, to reduce unproductive new venture failure - the probability that a venture will be "selected for" in the "survival of the fittest" ecology of the free enterprise system.

As described in the Preface, failure in a new venture can occur in one of three areas: (1) Failure in the venture--not correctly "building the business," (2) Failure in the venturer--not preparing the entrepreneur correctly, and (3) Failure in the social context--failing to properly consider and include venture stakeholders.

Success enhancement through failure prevention involves understanding the necessary conditions that must be present in ventures, venturers, and with stakeholders to avoid failure. Furthermore, it requires that these conditions be met BEFORE the venture proceeds; and finally, it trusts the rest to luck and the good sense and skill of the venturer and his/her stakeholders.

In the material presented here, we'll take a look at six inadequacies in the venture itself that can lead to new-venture formation failure. They follow a logical order, beginning with the venture idea (entrepreneurial discovery) and progressing through the critical hurdles that a venture must clear to remain viable. They are:

1. Innovation failure.
2. Failure to create Value.
3. Failure to Persist Over Time.
4. Failure to maintain Economic Scarcity.
5. Failure to prevent the Appropriation of Created Value.
6. Failure to maintain Flexibility in the face of uncertainty and ambiguity.

This list points to six key questions that must be asked about each venture:

1. Is it Innovative?
2. Is it Valuable?
3. Is it Persistent Over Time?
4. Is it Scarce?
5. Is it Non-appropriable?
6. Is it Flexible?

In the material that follows, each of these questions is considered in depth. Each main question is supported by two or three sub-questions that further define the requirements to be met. For ease of reference, this set of six questions, with sub-questions, is referred to throughout as The NEW VENTURE TEMPLATE^TM. Remember that the underlying logic of this approach dictates: If the answer is not yes (even to the sub-questions)--DON'T GO ON until the question is resolved. (Note: The "it" in the questions refers to the entrepreneurial discovery that forms the basis for the venture.)

The order in which the questions are posed and answered permits the venturer to draw conclusions about the venture that are quite apart from getting all the way through the list. For example, should questions 1 and 2 be answered yes, it is possible to predict a profitable venture--but one that may not last: a fad, so to speak. Also, questions 1-3, as a group, answer the master-question: Is this a Business? Questions 4-6 answer the master-question: Can you Keep It?

In the material that follows, the reader will observe that the "don't go on" logic is really a building logic, which parallels the building of the venture. Beginning with the idea itself, and then following immediately with marketing considerations, is the way that ventures are actually built in practice. Once the idea and its market are soundly situated, then the venturer should proceed to consider the competitive (or strategic) position of the product/service upon which the venture is based. Hence, the final three questions deal primarily with the issues related to competitive strategy - of keeping the business once it has been established in the market.