What are the different dimensions on the basis of which an entrepreneurial firms are differentiated from traditionally managed firms?

Entrepreneurship is an approach to management that we define as the pursuit of opportunity without regard to resources currently controlled.

The description can be refined by examining six dimensions of business practice: strategic orientation; commitment to opportunity; commitment of resources; control of resources; management structure and reward philosophy. We shall define these dimensions by examining a range of behaviours.

At one extreme is the promoter, who feels confident of his or her ability to seize an opportunity, regardless of the resources under current control. At the opposite extreme is the trustee, who emphasises the efficient use of existing resources.

While the promoter and trustee define the ends of this spectrum, a range of managerial behaviour lies between these two points. We define (overlapping) portions of the spectrum as entrepreneurial and administrative behaviour. Thus, entrepreneurial management is not an extreme example, but rather a range of behaviour that consistently falls towards one end of the spectrum.

Strategic orientation

Strategic orientation describes the factors that drive the formulation of a companys strategy. A promoter is truly opportunity driven. He or she will say: I am going to be driven only by my perception of the opportunities that exist in my environment and I will not be constrained by the resources at hand. A trustee, on the other hand, tends to say: How do I use the resources that I control? Within these two poles the administrators approach recognises the need to look for opportunities but is still constrained by a trustee-like focus on resources.

An entrepreneurial orientation emphasises opportunity. This has led to one of the traditional definitions of the entrepreneur as opportunistic or more favourably creative and innovative. But the entrepreneur is not necessarily concerned with breaking new ground.

Opportunity can also be found in a new mix of old ideas or in the creative application of traditional approaches. Administrators tend to look for opportunities using existing resources.

The pressures that pull a company towards the entrepreneurial behaviour include:

Diminishing opportunity streams. Old opportunity streams have been largely played out. It is no longer possible to succeed merely by adding new options to old products.

Rapid changes in: technology creates new opportunities while making old ones obsolete; consumer economics changes ability and willingness to pay for new products and services; social values define new styles and standards; political roles affect competition through deregulation, product safety and new standards.

Pressures that make an organisation more administrative include:

The social contract. The responsibility to use and employ people, plant, technology and financial resources once they have been acquired.

Performance criteria. How many executives are fired for not pursuing an opportunity, compared with the number that are punished for not meeting return on investment targets or not maximising the use of in-place resources?

Planning systems and cycles. Opportunities do not arrive at the start of a planning cycle and last for the duration of a three or five-year plan.

Commitment to opportunity

As we move on to the second dimension it becomes clear that the definition of the entrepreneur as creative or innovative is not sufficient. There are innovative thinkers who never get anything done. It is, therefore, necessary to move beyond the identification of opportunity to its pursuit.

The promoter is willing to act in a very short time-frame and to chase an opportunity quickly. The duration of the commitment, not the ability to act, is all that is in doubt. Commitment for the trustee is time consuming and, once made, of long duration. Trustees move so slowly that it sometimes appears they are stationary once there, they seem frozen.

It is the willingness to get in and out quickly that has led to the entrepreneurs reputation as a gambler.

However, the simple act of taking a risk does not lead to success. More critical is knowledge of the territory they operate in. Because of familiarity with their chosen field they are able to recognise patterns as they develop and have the confidence to assume that missing

elements will take shape as they foresee. This early recognition enables them to get ahead

of others.

Pressures that pull a business towards this entrepreneurial end of the spectrum include:

Action orientation. Gives an organisation first claim to customers, employees and financial resources.

Short-decision windows. Due to the high costs of late entry, including lack of competitive costs and technology.

Risk management. Involves managing the organisations revenues so that they can be rapidly committed to or withdrawn from new projects.

Limited decision constituencies. Requires a smaller number of responsibilities and

permits greater flexibility.

Multiple decision constituencies. A greater number of responsibilities, necessitating a more complex, lengthier decision process.

Negotiation of strategy. Compromise in order to reach consensus and resultant evolutionary rather than revolutionary commitment.

Risk reduction. Study and analysis to reduce risk slows the decision-making process.

Management of fit. To assure the continuity and participation of existing players, only those projects that fit existing corporate resources are acceptable.

Commitment of resources

Another characteristic of good entrepreneurs is a multi-staged commitment of resources with a minimum commitment at each stage or decision point.

The issue for the entrepreneur is this: what resources are necessary to pursue a given opportunity? There is a constant tension between the amount of resources committed and the potential return. The entrepreneur attempts to maximise value creation by minimising the resource set and must, of course, accept more risk in the process.

On the other hand, the trustee side deals with this challenge by careful analysis and large-scale commitment of resources following the decision to act.

Entrepreneurial management requires that you learn to do a little more with a little less.

We thus have the traditional stereotype of the entrepreneur as tentative, uncommitted or temporarily dedicated an image of unreliability. In times of rapid change, however, this stepped, multi-staged commitment of resources is a definite advantage in responding to changes in competition, the market and

technology.

The process of committing resources is pushed towards the entrepreneurial domain by several factors:

Lack of predictable resource needs. Forces the entrepreneur to commit less up front so that he or she can take action later when needs are better defined.

Lack of long-term control. Requires that commitment matches exposure. If control over resources can be removed by environmental, political or technological forces, resource exposure should also be reduced.

Social needs. Multi-staged commitment of resources brings us closer to small is beautiful by allowing appropriate levels of resource intensity.

Need for proof. Until one step has shown to be successful, resources will not be forthcoming. The pressures within large corporations, however, are in the other direction towards resource intensity:

Personal risk reduction. Any individuals risk is reduced by having excess resources available.

Incentive compensation. Excess resources increase short-term returns and minimise the period of cash and profit drains.

Managerial turnover. Creates pressures for steady cash and profits gains, which encourage short-term, visible success.

Capital allocation systems. Generally designed for one-time decision making, these techniques assume that a single decision point is appropriate.

Formal planning systems.

A projects request for additional resources means that managers have to return to the morass of analysis and bureaucratic delays. Managers are inclined to avoid this by committing the maximum amount of resources up front.

Control of resources

Entrepreneurs learn to use other peoples resources well and to decide what resources are needed in-house. Good managers also learn that there are certain resources you should never own or employ. Very few real estate companies employ an architect.

The stereotype of the entrepreneur as exploitative derives from this dimension. The entrepreneur is adept at using the skills, talents and ideas of others. Viewed positively, this ability has become increasingly valuable in the changed business environment. And it need not be parasitic in the context of a mutually satisfying relationship. Pressures towards this entrepreneurial side come from:

Increased resource specialisation. An organisation may need a specialised resource, such as a hi-tech patent attorney or state-of-the-art circuit test equipment, but only for a short time. By using rather than owning, a company reduces its risk and fixed costs.

Risk of obsolescence Reduced by using rather than owning an expensive resource.

Increased flexibility. The cost of exercising the option to quit is reduced.

Administrative practices are the product of pressures in the other direction:

Power, status and financial rewards. Determined by the extent of resource ownership and control in many corporations.

Co-ordination. The speed of execution is increased because an executive has the right to request certain action without negotiation.

Efficiency. Enables an organisation to capture, at least in the short run, all the profits associated with an operation.

Inertia and cost of change. It is commonly believed that it is good management to isolate the technical core of production from external shocks. This requires buffer inventories and control of raw materials and distribution channels. Ownership also creates familiarity and an identifiable chain of command which becomes stabilised with time.

Industry structures. Encourage ownership to prevent being pre-empted by the

competition.

Management structure

The promoter wants knowledge of his or her progress via direct contact with all the principal actors. The trustee wants more formal relations, with specific rights and responsibilities assigned through the delegation of authority.

The decision to use and rent resources and not to own or employ them requires an informal information network. Only in systems where the relationship with resources is based on ownership or employment can resources be organised in a hierarchy. Informal networks arise when the critical success elements cannot be contained within the formal organisation.

Many people have attempted to distinguish between the entrepreneur and the administrator by suggesting that being a good entrepreneur precludes being a good manager. The entrepreneur is stereotyped as egocentric and idiosyncratic and thus unable to manage.

However, although the managerial task is substantially different from that of the entrepreneur, management skill is nonetheless essential. The variation lies in the choice of appropriate tools.

Most entrepreneurial management is a function of several pressures:

Need to co-ordinate key non-controlled resources. Results in need to communicate with, motivate, control and plan for resources outside the organisation.

Flexibility. Maximised with a flat and informal organisation.

Challenge to owners control. Classic questions about the rights of ownership as well as governmental, environmental, health and

safety restrictions undermine the legitimacy

of control.

Employees desire for independence. Creates an environment where employees are unwilling to accept hierarchical authority in place of authority based on competence and persuasion. At the other end of the spectrum, pressures pushing towards more administrative behaviour include:

Need for clearly defined authority and responsibility. To perform the increasingly complex planning, organising, co-ordinating, communicating and controlling required in business.

Organisational culture. Often demands that events be made routine.

Reward systems. Encourage and reward breadth and span of control.

Reward philosophy

Finally, entrepreneurial companies differ from administratively managed ones in their philosophy regarding reward and compensation. Entrepreneurial organisations are more explicitly focused on the creation and harvesting of value. In start-ups the financial backers of the organisation as well as the founders themselves have invested cash and want cash out.

As a corollary of this value-driven philosophy, entrepreneurial companies tend to base compensation on performance (where performance is closely related to value creation). Entrepreneurial companies are also more comfortable rewarding teams.

The more administratively managed companies are less often focused on maximising and distributing value. They are more often guided by the desire to protect their own positions and security. Compensation is often based on individual responsibility (assets or resources under control) and on performance relative to short-term profit targets. Reward in such organisations is often heavily oriented towards promotion to increased levels of responsibility.

The pressures that pull companies towards the promoter end of the spectrum include:

Individual expectations. Increasingly, individuals expect to be compensated in proportion to their contribution rather than merely as a function of their performance relative to an arbitrary peer group. In addition, individuals seemingly have higher levels of aspiration for personal wealth.

Stakeholder demands. Financial backers, employees, suppliers and even customers invest and demand to share in the value created.

Competition. Increased competition for talented people creates pressure for organisations to reward these individuals in proportion to their contributions.

On the other side a variety of pressures pull companies towards more trustee-like behaviour:

Societal norms. We still value loyalty to the organisation and find it difficult to openly discuss compensation.

Impacted information. It is often difficult to judge the value of an individuals contribution.

Demands of public shareholders. Most public shareholders are simply uncomfortable with compensation that is absolutely high, even if it is in proportion to contribution. n

It is the willingness to get in and out quickly that has led to the entrepreneurs reputation as a gambler

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