Entrepreneurial decisions
Jeffrey A. Martin and George P. Huber
That the term ‘‘entrepreneurial decision’’ is given a variety of meanings creates ambiguity in the research, scholarship, and communication necessary to advance understanding in the entrepreneurship field. To help reduce this obstacle to progress, we provide a definition of the term that fulfills three requirements: (1) it is sufficiently precise that it conveys clear meaning; (2) it is parsimonious; (3) it satisfies the range of definitions implied in the writings of most of those who practice or study in the entrepreneur ship field. First, we examine the matter of range. We then examine the two foremost attributes of any decision: the decision context and the decision maker’s motivation(s) for engaging in an entrepreneurial enterprise. From these efforts we distill a definition that meets the three requirements just noted.
Range of Primary Meanings
The adjective ‘‘entrepreneurial’’ in the term ‘‘entrepreneurial decision’’ is used almost exclusively to indicate either the nature of the decision itself (as are the adjectives in ‘‘strategic decision’’ or ‘‘risky decision’’) or the nature of the decision maker (as is the adjective in ‘‘presidential decision’’). In the first case, to make an entrepreneurial decision means to decide to initiate an entrepreneurial enterprise, an organization or unit that exploits a new product (broadly defined to include a good, service, process, and business model), or that enters a new market or environment with either a new or existing product. A frequently occurring decision of this type is to initiate a new enterprise within an existing organization. This can be a top down decision, where a high level initiator assigns the responsibility for organizing and managing the new enterprise to someone else, or it can be a bottom up decision, where an intrapreneur champions or promotes an idea, sells it to upper management, and then organizes and manages the resultant enterprise. In contrast is the decision, sometimes taken by venture capitalists, philanthropists, and other resource controllers, to initiate an entire ly new enterprise, one not associated with an existing organization, and to induce others to organize and manage it. Taking these two types of decisions together, and focusing on the nature of the decision as contrasted with the nature of the decision maker, it seems reasonable to define an entrepreneurial decision as ‘‘a decision to initi ate an entrepreneurial enterprise.’’
In the second case, where the adjective ‘‘entrepreneurial’’ is used to indicate the decision maker’s nature, it is important to be clear on what is meant by ‘‘entrepreneur.’’ The common denominators of the primary dictionary definitions of an entrepreneur describe a person who ‘‘organizes’’ and ‘‘manages’’ an ‘‘enterprise,’’ usually under conditions of ‘‘risk’’ and with considerable ‘‘initiative’’ (Random House Webster’s Unabridged Dictionary, 2001) (see entrepreneur). It seems important also not to define an entrepreneurial decision simply as a decision made by an entrepreneur. Entrepreneurs make many decisions. Is each and every one an entrepreneurial decision? Hardly! Which, then, are the entrepreneurial decisions? In keep ing with the above paragraph, it seems reason able to accept as a second definition of an entrepreneurial decision, ‘‘a person’s decision to personally initiate, organize, and manage an enterprise.’’
To provide a richer understanding of the term, let us turn now to examining the context of entrepreneurial decisions. It will be convenient and yet not unduly restrictive to focus on the decision of a person to personally initiate, organize, and manage an enterprise.
The Context of Entrepreneurial Decisions
Entrepreneurship involves novelty and newness, as well ‘‘organizing’’ and ‘‘risking’’ and ‘‘man aging’’ in an environment where the product is unfamiliar. Here, and henceforth, we mean for ‘‘novel’’ to be context determined; i.e., for a product or enterprise to be novel means only that it needs to be novel in the specific context or environment, rather than necessarily being novel to the world. In particular, when the nature of an enterprise is novel to a certain environment, it is a ‘‘novel enterprise,’’ even if the enterprise’s nature or product is not novel in another environment.
Risk and uncertainty are not unique to the decision contexts of entrepreneurs. Entrepreneurs – either as organizers of new enterprises or as managers of novel enterprises – have, however, a qualitatively different form of uncertainty with which to deal. That is, whereas the manager of an existing enterprise can draw on the enterprise’s recent past as one basis for making predictions about the enterprise’s near or intermediate term future, the manager of a new enterprise cannot. In this way, the decision contexts of decisions made by entrepreneurs are more uncertain, risky, and unknowable than are the decision contexts of managers of existing enterprises. The newness of the entrepreneur’s enterprise causes extrapolation to be unavailable for reducing uncertainty about the future and the novelty of the enterprise causes reasoning by analogy to be more problematic as a basis for reducing such uncertainty. For these two reasons, whatever the volatility of an enterprise’s environment, the contexts of entrepreneurial decisions are less predictable and therefore necessarily riskier than are the contexts of decisions made by managers of non entrepreneurial enterprises.
Unfortunately, the term ‘‘risk seeking’’ has been suggested as an attribute of entrepreneurs, as if it were a goal or motivation for engaging in entrepreneurial activity (Brockhaus, 1980). But as described above, risk is simply an outcome of engaging in entrepreneurship. This suggests that an observed association between the decision to engage in entrepreneurial ventures and the riskiness of an entrepreneurial decision con text is not necessarily an indication that risk seeking is an entrepreneurial attribute. That risk does not serve as an attraction for entrepreneurs is suggested by the research of Brockhaus (1980) and seems to be demonstrated by observing that entrepreneurs, like other managers, are diligent and creative in reducing, controlling, and distributing risk (see, for example, Rangan, 1994; Rivkin and Meier, 2000; Stevenson and Mossi, 1985).
If entrepreneurial decisions are inherently risky, and therefore subject the entrepreneur to 70 entrepreneurial decisions failure, why do people engage in entrepreneurial ventures?
Decision-Maker Motivations
In the United States, especially, the popular press portrays successful entrepreneurs as heroes. They take risks, they fight hard, and they often win. Published instances of successful entrepreneurship suggest both (1) that successful entrepreneurs obtain large amounts of personal wealth as a result of their venture and (2) that the possibility of a large increase in their personal wealth is their primary motivation for engaging in (i.e., initiating, organizing, and managing) the venture. Should we assume that a defining feature for the definition of an entrepreneurial decision is that it is a decision to organize and manage a venture for the purpose of increasing the decision maker’s wealth? Attending to stories in the popular press, we might assume that the answer is ‘‘yes.’’ But it may be that accumulating wealth is not as primary a motivation for engaging in an entrepreneurial venture as the frequency of its mention would suggest. Because there is little, if any, systematic research that documents these motivations, we infer the following motivations from the broader organizational science and strategic management literatures (and, more specifically, from the innovation and entrepreneurship literatures) and from histories and biographies of Lee Iacocca, John DeLorean, and Govindappa Venkataswamy (Fallon and Srodes, 1983; Had dad, 1985; Levin, 1995; Levin, 1983; Rangan, 1994; Rubin, 2001).
At least initially, entrepreneurs (and especially intrapreneurs) might have as motivations for initiating an enterprise:
- Facilitating the evolution of a novel product (broadly defined) with which they identify and that they feel has value for others.
- Contributing to the health of an organization with which they strongly identify and feel a high level of commitment.
- Acquiring a positive image in the eyes of valued peers or the organization’s high level executives.
- Acquiring the authority to manage the new unit or enterprise created to exploit the novel product.
- Increasing their financial well being.
The histories of DeLorean and Iacocca suggest that this last motivation is prone to surface when satiation is reached on the other four motivations, or when compensation becomes an important measure of the level of achievement on motivations (1), (2), or (3). It might also be, of course, that entrepreneurs have as their motivation simply the passion to engage in novel or challenging endeavors (as suggested by the remarks of serial entrepreneurs quoted in the New York Times, 2003).
Examining the careers of Lee Iacocca (before he was forced out as chief executive of Chrysler), John DeLorean (before his legal troubles sur faced), and Govindappa Venkataswamy has the potential to provide some insights about the nature and expression of entrepreneurial/intrapreneurial motivations. Well researched ana lyses (Abodaher, 1982; Levin, 1995) and his own autobiographical works (Iacocca, 1984, 1988) indicate that Lee Iacocca, the promoter of the Mustang and Cougar at Ford and the K cars and LeBaron convertible at Chrysler, was strongly motivated by (1) his commitment to products in which he believed, (2) his commitment to the firms for which he worked, (3) the need for recognition, and (4) the ambition to manage an enterprise. While satisfying these motivations was undoubtedly instrumental to his obtaining high levels of firm provided compensation, it appears that Iacocca valued these motivations themselves. For Ford and for Chrysler, Iacocca managed an enterprise, showed considerable initiative, and took risks – with innovative products and with his decision to accept the opportunity to head Chrysler, a failing company. Was the possibility of obtaining a large increase in his personal wealth Iacocca’s primary motivation for engaging in the ventures he chose? Relevant facts are that when he left Ford for Chrysler, Iacocca forfeited Ford’s $1 million a year incentive not to work for a competitor for two years after leaving Ford, and upon arriving at Chrysler he cut his salary to $1 a year. On the other hand, near the end of his career with Chrysler, as he was being eased out by Chrysler’s board, Iacocca exhibited a strong craving for financial compensation. It appears, however, that this apparent craving was prompted by the fact that his political enemy, Robert Lutz, was scheduled to receive a entrepreneurial decisions 71 larger pension than was he (Levin, 1995). It seems, then, that Iacocca’s attempt to increase his personal wealth might actually have been an attempt to maintain his image.
Next we consider John DeLorean, a would be intrapeneur and entrepreneur. DeLorean was well known as an outstanding engineer as well as an ambitious seeker of a favorable image. He attempted to satisfy both his creative needs and his status needs by seeking to manage an entrepreneurial enterprise. For example, he promoted the idea of his managing the manufacturing and marketing, through GM’s Pontiac Division, of a sports car having an innovative combination of features. But GM’s engineering policy group rebuffed his proposal. Later events moved DeLorean from a would be intrapreneur in this instance to become a would be entrepreneur promoting another sports car with unusual features, his dream car the DeLorean. Fallon and Srodes (1983) and Levin (1983) indicate that DeLorean’s attempts at intrapreneurship and entrepreneurship were motivated primarily by his commitment to the features of the cars he promoted, by his desire to manage the enterprises that would have produced and marketed the cars, and by his need for a favorable image, rather than by the desire to increase his personal wealth. Indeed, it seems that he began focusing primarily on attaining wealth when his career took a sharp downward trend (Haddad, 1985), although it is not clear which were the causal directions of the several forces at work near the end of his career.
Finally, we consider the entrepreneurial decision made by Dr. Govindappa Venkataswamy, a retired eye surgeon in India, to found the not for profit Aravind Eye Hospitals (Rangan, 1994). Dr. Venkataswamy was motivated to ad dress the problem of blindness among India’s poor by his expressed motivation to ‘‘serve humanity and God’’ (Rangan, 1994: 4). Upon his retirement as a head of Ophthalmology at a major hospital in 1976, he established a 12 bed eye hospital to provide quality eye care for those with little or no resources to pay. Using a variety of creative approaches that mirror those used in for profit businesses (Rangan, 1994), he ‘‘grew the business.’’ By 2001, Dr. Venkataswamy was managing five hospitals that performed more than 180,000 eye operations per year (Rubin, 2001).
To summarize, we offer the following observations: (1) An entrepreneurial decision can be defined either as ‘‘a decision to initiate an enterprise for someone else to organize and manage’’ or as ‘‘a person’s decision to initiate and person ally organize and manage an enterprise’’; (2) whatever the actual volatility of the enterprise’s environment, because the newness of the entrepreneur’s enterprise causes extrapolation to be unavailable for reducing uncertainty about the future and because the novelty of the enterprise makes reasoning by analogy more problematic, the contexts of decisions made by entrepreneurs are more uncertain and riskier than are the con texts of decisions made by managers of existing enterprises; and (3) the motivations to initiate, organize, or manage entrepreneurial enterprises vary across entrepreneurs and vary across time for specific entrepreneurs.
Bibliography
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