The Relevance of Entrepreneurship in Strategic Management - Assignment Example

The Relevance of Entrepreneurship in Strategic Management 1. INTRODUCTION The word ‘Entrepreneur’ owes its origin to the French word “Entreprendre” which has the meaning ‘To undertake’. An entrepreneur is one who organizes, manages and assumes the risk of a business or enterprise (QuickMBA).Though an entrepreneur is often equated with a small business owner, there are subtle differences between the activities of the two in relation to such factors as the amount and speed of wealth creation and the extent of risk or innovation involved, both being higher in a typical entrepreneurship compared to a small business. Thus the concept of entrepreneurship is a wide-ranging one encompassing on one end, that of an entrepreneur, who is typically a person of high technical aptitude and innovative skills of an extreme rare type to that of one, at the other end of the spectrum, who wants to be his own boss. 2. THE SUBJECT 2.1 The Concept of Entrepreneurship Karami,A(2007, p.17) cites Stevenson to define entrepreneurship as the pursuit of opportunity beyond the tangible resources in the possession of the person concerned. The successful entrepreneur is the one who identifies the right opportunity and acts quickly to capitalize on it. According to Kuratko,D.F (2007, p4) an entrepreneurship is characterized by the manner in which activities are undertaken therein, which are quite different from the normal business routine, so much so that the phenomenon comes under the wider aspect of leadership. He further cites Robert C Ronstadst to state that entrepreneurship is the dynamic process whereby individuals who assume major risks in terms of equity, time, career commitment or provisioning of some service or product create incremental wealth (Kuratko,D.F. 2007 p.5) 2.2 Strategy The term strategy is originated from the Greek word strategos which means a general in the military. A modern definition of strategy is “The art and science of developing and using political, economic, psychological and military forces as necessary during peace and war to afford the maximum support to policies, in order to increase the probabilities and favorable consequences of victory and to lessen the chances of defeat”( Karami,A. 2007, 3) . Though originally of a military context, the term strategy has been used in totally different contexts involving social and management sciences as conceptualizations for addressing the general directional and management policy needs of a business enterprise which are different from the daily performance needs of a routine nature. Karami,A.(2007, 3) gives an early definition of strategy in management as “ the determination of basic long-term goals and objectives of an enterprise, and the adaption of courses of action and the allocation of resources for carrying out those goals”. Karami(2007, 3) cites Hofer and Schendel to give a more recent definition of strategy as “the fundamental pattern of present and planned resource deployments and environmental interactions that, indicates how the organization will achieve its objectives”. Karami (2007, 4) argues that strategy can be considered as a plan, a pattern, a position or a perspective. Strategy is a plan because it is made well in advance of the expected sequence of actions and because it is made consciously with a purpose. It is specifically a pattern in a stream of actions. As a position, strategy helps to place the enterprise in an external environment and concrete location. Strategy as a perspective is a concept shared by the members of an organization through their intentions and actions. Strategy covers the full scope of activities of the organization and matches these activities to its environment and resource capabilities( Karami,A. 2007, 4). Chaffe (1985, 89-98) has classified strategy into three models, namely, Linear, Adaptive and Interpretive, the distinguishing features of which are as tabulated below:- VARIABLE LINEAR STRATEGY ADAPTIVE STRATEGY INTREPRETIVE STRATEGY SAMPLE DEFINITION “Determination of basic long-term goals of an enterprise and an adaption of courses of action and the allocation of resources necessary for carrying out these goals’ (Chandler, 1962, p.13) Strategy is fundamental pattern of present and planned resources deployments and environmental interactions, that indicates how the organization will achieve its objectives (Hofer and Schendel, 1978, p.25) Orienting metaphors constructed for the purpose of conceptualizing and guiding individual attitudes of organizational participants. (Chaffee,1985, p.94) NATURE OF STRATEGY Decisions, actions, plans integrated Achieving a “match” Multifaceted Metaphor Interpretive FOCUS FOR STRATEGY Means, ends Means Participants and potential participants in the organization AIM OF STRATEGY Goal achievement Co-alignment with the environment Legitimacy STRATEGIC BEHAVIOR Change markets, products Change style, marketing, quality Develop symbols, improve interactions and relationships Table 1: The Three Models of Strategy, adapted from Chaffee (1985 pp.89-98) 2.3 Strategic Management Karami (2007, pp.15-16) defines Strategic Management as the art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objectives. According to him, Strategic Management process is constituted of the following three stages: awareness, strategy formulation and strategy implementation. Awareness: the internal strengths, weaknesses, opportunities and threats are analysed by using techniques such as the SWOT analysis Strategy Formulation: deciding upon the business mission, including long-term and short-term goals and prioritizing them in order of importance are done during strategy formulation. Strategy Implementation: this is the most important stage of the Strategic Management process and is centered upon creating the optimum circumstances within an organization so as to enable the execution of the pre-formulated strategies. This requires the creation of an organizational structure that can support the strategy and motivating the personnel concerned to adopt the new strategy. Managerial skills, leadership qualities, discipline, commitment and sacrificial spirit are some of the qualities that come into focus during this stage. Evaluation: This is the final step in Strategy Management whereby performance is measured and assessed against the strategy objectives According to Karami,A.(2007, 1)The academia and industry have, of late, started to concentrate on research in the field of strategy formulation and implementation in small and medium-sized enterprises(SME)s. 2.4 The Relevance of Entrepreneurship in Strategic Management As already stated, entrepreneurship focuses on the faculty of recognizing the correct opportunity. Entrepreneurship deals with gaining control over resources by committing to the right opportunity. The entrepreneur has to commit resources step-by-step including those lying under the hierarchical control of others and has to manage the network of resources and hierarchy so as to continually generate new information and success (Karami 2007, p.17). According to Kuratko(2007, p3), ‘Entrepreneurs are individuals who recognize opportunities where others see chaos or confusion’. Strategic management as a subject has developed from both teaching and research activities in the field of business administration (Karami 2007, p.9).Strategic management evolved out of the attempts to study corporate strategy of those firms which eventually emerged successful while other firms with similar business approaches seemingly failed. Gradually a concept emerged that organizational strategy decided the performance of the organization and hence that managers in an organization should sit down and deliberately plan strategies to enable their organizations to become successful. This resulted in the idea of strategic planning, from which arose strategic management, with its focus on the implementation of strategy (Karami 2007, pp.11-13). Karami(2007, p.16) states that in big firms, the various stages of strategic management such as environmental analysis, strategy formulation, strategy implementation and evaluation are carried out by different managerial units such as the corporate, SBU(Strategic Business Unit) and functional levels. Strategic management, as a concept and practice is found to be associated more with large business-houses and corporate firms than with entrepreneurial firms. Many writers believe that strategic management is neither suitable nor financially a viable option for entrepreneurial firms with their typically meager resources and managerial set-up and that there is no correlation between strategic planning and performance of these firms.(Karami,A. 2007 p.20) 2.5 Strategy Formulation in Entrepreneurial Firms Some writers argue that environment is the foundation of strategy in entrepreneurial firms while others hold the view that resources of the organization are the basis for its strategies. Whatever be the apparent differences between these two approaches, the fact is that both these schools of thought aim to optimize the performance of the firm by improving its position relative to other competing firms in the same environment. (Karami, A. 2007 p.31).The optimum strategy is arrived at by strategy planning, which is a linear model of decision making comprised of two the steps of strategy formulation and strategy implementation. The planning is carried out with the help of tools such as Portfolio analysis, market-attractiveness business position matrix, Porter’s model of industrial attractiveness and the product life-cycle theory. Planning brings down uncertainty, enables alternative choices and helps satisfy investors concerns. It was confirmed in a survey conducted on 257 high-tech entrepreneurial firms that strategic planning has become a tool for ensuring long-term growth (Karami, A. 2007 p.32). On the other hand, some writers opine that planning has lost its significance in small entrepreneurial firms due to lack of time and financial resources. Moreover, in the present times, innovation, flexibility and responsiveness to perishable opportunities are the main factors required for success. The ability to think and act strategically is more important than any formal planning or strategy. Hence most writers agree that strategic planning in entrepreneurial firms is quite different from that in large corporate business firms. It has been reported that successful entrepreneurial firms had adapted niche strategy, emphasizing the development of new products or markets, competed on the basis of innovation, high value added products and product differentiation to conquer the market(Karami, A. 2007 p.33). According to Kuratko,D.F.(2007,p419) although most entrepreneurs do strategic planning, they tend to do it in an informal and unsystematic way. He (Kuratko,D.F.2007, pp.8-10) argues that at least six distinct entrepreneurial schools of thought have emerged, three each in a Macro and Micro view, as shown at Fig-1 below: Fig-1 Entrepreneurial Schools of Thought cited from Kuratko,D.F(2007,p.9) The Macro view of entrepreneurship presents a broad array of factors including external processes beyond the control of the individual entrepreneur, displaying an external locus of control point of view. Of these, the environmental school of thought discusses external factors that decide the way the potential entrepreneur should lead his life. The focus of the financial/capital school of thought is the search for growth capital. The displacement school of thought argues that a frustrated “displaced” individual, being prevented from doing his normal activities, will be forced to undertake an entrepreneurial pursuit due to that individual’s own motivation to succeed. The Micro view of entrepreneurship, on the other hand, discusses those factors specific to entrepreneurship from an internal locus of control point of view. The outcome of each major influence is controlled, directed or adjusted by the entrepreneur who has the ability to do so. Out of these, the entrepreneurial school of thought seeks to study the personalities of successful entrepreneurs to discover their common characteristics such as technical knowledge, innovative spirit and determination, which, can be emulated by others to achieve success. 2.6 The Implementation of Strategy 2.6.1 The Venture Opportunity School of Thought The Venture Opportunity school of thought of entrepreneurship deals with the development of a venture from the opportunity point of view. This school advocates the strategic philosophy of developing the right idea at the right time for the right market niche as crucial to any entrepreneurial success. The contribution of this school of thought of entrepreneurship to implementation of strategy is derived from the corridor principle wherein several new pathways, opportunities and possibilities appear in front of the entrepreneur to lead him in several directions at any given point of time. The entrepreneur should develop the ability to recognize and assess each of these opportunities as and when they arise and execute the optimum implementation at the right time without delay. The entrepreneur ascribing to this school of thought believes in the maxim “Luck is what happens when preparation meets opportunity”. The entrepreneur, by proper planning, enhances his ability to recognize opportunities and to implement strategies by prior preparation in interdisciplinary business segments. 2.6.2 The Strategic Formulation School of Thought This school of thought of entrepreneurship focuses on the successful planning process for successful development of an enterprise. The whole process of strategic formulation is viewed as a leveraging of unique elements. Effective venture formulations can be developed by identifying unique markets, unique people, unique products and unique resources and later combining them together to construct the required formulations. This school of entrepreneurship emphasizes the implementation of strategy through a strategic, interdisciplinary approach of managerial actions with the following unique elements and their corresponding strategies: Unique Markets: Through Mountain Gap Strategies Unique People: Through Great Chef Strategies Unique Products: Through Better widget Strategies Unique Resources: Through Water-Well Strategies According to Kuratko(2007, p.419), any expanding entrepreneurial venture with increasing number of employees and up swinging market operations will invariably have to commence formal strategic planning to prevent itself from getting adversely affected by emerging complexities. A rapidly growing entrepreneurship will have to face increasing uncertainties and competition and a formal strategic planning is very much essential to deal with these challenges and also to assess the adequacy of technical and business knowledge of the entrepreneur so as to help him charter his future course of action and to maximize growth. Kuratko (2007, pp.419-420) identifies the following 5 steps as constituting the process of Strategic Planning in any entrepreneurship, of which the implementation of strategy is the third step:- 1) Examine the internal and external environments of the organization (strength, weakness, opportunities, threat) 2) Formulate the venture’s long-range and short-range strategies (mission, objectives, strategies, policies) 3) Implement the strategic plan (programs, budgets, procedures) 4) Evaluate the performance of the strategy 5) Get feedback and take follow-up action, if required. The SWOT analysis covers not only external factors but also the internal factors that can affect the implementation of strategy. Kuratko (2007, p.421) has identified the following five reasons for the absence of strategic planning in some entrepreneurial firms:- a) Time scarcity to fit planning into daily schedule b) Absence of knowledge of planning process c) Absence of skill/technical expertise for undertaking planning d) Absence of trust and confidence-level from disclosing their plans to other members of the planning team e) Perceived high-cost of planning exercise of which the entrepreneurs are apprehensive. 2.7 How Entrepreneurship Contributes to Implementation of strategy 2.7.1 Implementation of Strategy in Theory The study of Entrepreneurship has offered the following contributions to implementation of strategy in theory:- 1) The advantage of strategic positioning wherein they discover unique positions which were overlooked by other competitors. Entrepreneurs capitalize on change, defending a defensible position, leveraging resources to dominate a market and pursuing opportunities to develop new markets where none existed before (Kuratko 2007, p.424). 2) A measurement of risk and innovation through the Entrepreneurial Strategy Matrix shown below, from which an apt strategy can be chosen is another contribution. High Innovation-Low Risk High Innovation-High Risk Low Innovation-Low Risk Low innovation-High Risk The appropriate strategies for the matrix are as follows:- Move Quickly; Protect innovation; Lock-in investment and operating costs. Reduce risk by lowering investment and operating costs; Maintain innovation; Outsource high-investment operations; Joint venture operations Defend present position; Accept limited payback; Accept limited growth potential Increase innovation; develop a competitive advantage; Reduce risk; Minimize investment; Reduce financing costs An appropriate strategy can be chosen from the matrix above for implementation, by reducing the risk and increasing the innovation. (Kuratko,D.F. 2007 pp.-425-426) 3) Need for developing an entrepreneurial mind-set as shown Table-2 below is another contribution (Kuratko,D.F. 2007 pp.-429):- (CAPABILITY POSSIBLE) Entrepreneur (CAPABILITY POSSIBLE) Satisfied manager (CAPABILITY BLOCKED) Frustrated Manager (CAPABILITY BLOCKED) Classic bureaucrat Table-2: The Entrepreneurial Mind-set The differences between the Managerial mind-set and entrepreneurial mind-set are listed at Table-3 below, adapted from Kuratko,D.F.(2007,p.429): MANAGERIAL ENTREPRENEURIAL MIND-SET MIND-SET Decision-making traits Past precedence is the most important. Decisions quantified A new idea or an insight from a unique experience provides the best approximation to the future Values Rigorous quantitative analyses are highly valued New real-world experiences from practical point of view are more valuable Beliefs Analysis of the right data resolves chaos and uncertainty Decision based on a single pivotal incident or isolated incidents Approach to problems Financial overture to any problem. Analyses resolve problems. Problems are a harbinger to emerging changes and opportunities Table-3 Comparison of Managerial and Entrepreneurial Mind-set 4) Identifying Fatal Visions in Implementation of Strategy A study of Entrepreneurial firms has identified the following five fatal mistakes they tend to make very often during implementation of strategy, in spite of taking precautions (Kuratko 2007, p.422):- a) Mistakenly assuming the attractiveness of a industry. The maxim “All that glitters is not gold” is very much applicable in assessing the attractiveness of industrial venture. b) Imitating the strategy of competitors, which though easy to execute does not offer any winning position to compete. c) Establishing a too competitive position, which cannot be sustained by small companies having no real practical experience d) Making compromises with strategy for the sake of growth, which unless balanced with the competitive strategy can prove to be disastrous in the long run. e) Not keeping employees well-informed about the strategy by explicit means. 5) Identification of the strategic management model followed by the new entrepreneurial firms consisting of the following 8 steps, of which implementation of strategy is the last but one step (Karami,A. 2007, p40). a) Development of the basic business idea b) Scanning and assessing the external environment to locate opportunities, threats, resources and market potential c) Scanning and assessing the internal factors of personal assets, areas of expertise, abilities and experience d) Analyzing the strategic factors using SWOT analysis e) Deciding whether to go ahead or not to go ahead with the venture f) Generating a business plan to convert the idea into a reality g) Implementation of the strategy using action plans and procedure. h) Evaluating the implemented business plan by comparing actual performance against projected performance and follow-up on feedback. 6) The presence of multiple stages of scanning by searching for information in both formal and informal manner by resorting to a combination of irregular, intermittent and continuous scanning during strategic management process (Karami,A. 2007, p41). 7) The existence of a correlation between environmental scanning and profit-making capability and achieving of alignment between strategy and environment (Karami,A. 2007, p43). 8) The correlation between higher organizational performance and existence of an appropriate mission statement which articulates and communicates the vision of the organization to its employees (Karami,A. 2007, p45). 9) The importance of a strategy which spells out short-term goals and measurable objectives, the achievement of which signify the successful implementation of strategy(Karami,A. 2007, p46) 10) The need for a three-pronged strategy consisting of corporate strategy, business strategy and functional strategy(Karami,A. 2007, p46). 11) The need for moving into related products or product groups rather than unrelated discrete businesses at the time of diversification(Karami,A. 2007, p47). 12) Strategy of developing a market niche by differentiating a business from its competitors in a narrowly defined market segment(Karami,A. 2007, p48). 13) The need for export, licensing and marketing strategies 14) Creating distribution agencies, own production facilities abroad during internationalization process(Karami,A. 2007, p48).. 15) Creation of joint ventures as ownership strategy (Karami,A. 2007, p48). 16) Diversification as the basis for growth in entrepreneurial SMEs (Karami,A. 2007, p47). 2.7.2 Implementation of Strategy in Practice In practical terms, entrepreneurs show the way to build and maintain a flexible adaptive organization which inspires its employees to be innovative, on the look-out for change and opportunities by adopting practices such as listed below in day-to-day business transaction (Kuratko, D.F. 2007,pp.430-432). :- 1) Sharing the entrepreneur’s vision through direct forms of communication, meetings or seminars 2) Increasing the perception of opportunity by careful demarcation of duties and responsibilities in hierarchy 3) Institutionalizing change as an organizational objective by making resources available and removing departmental barriers 4) Instilling the desire to be innovative by nurturing innovation at all levels by creating an environment that allows failure, allowing flexible operations and by developing organizational teams for innovative techniques. 2.8 Some examples Kuratko(2007,p cites at least five case studies to support his finding from entrepreneurship studies that strategic planning is a must for success. Firstly, he cites a study of 70,000 failed firms which identifies the absence of strategic planning as the cause of their failure. The same author cites another investigation which demonstrates that organizations which undertook strategic planning performed way ahead of their counterparts which did not resort to strategic planning. In his third cited case involving 220 small firms, the importance of selecting an appropriate strategy is confirmed. The fourth study focuses on the dynamic effects of strategies on company performance in the software industry which establishes the fact that differentiation strategies enhance the performance of companies. The fifth study investigating the correlation between strategic planning sophistication and company performance covering 253 small entrepreneurial firms finds that at least 88% of organizations with some or other forms of written strategy implementation plans performed well above the industry average. This contrasted with less than 40% of firms without any written strategy plans performing above the industry average. Karami,A.(2007,p.48) cites Bagchi-Sen and Kuechler to correlate strategic planning and functional diversification in entrepreneurial SMEs and argues that these firms face considerable difficulty in overcoming barriers in accessing clients requiring non-traditional services and clients involved in international businesses. It was found that the performance of proactive functionally diversified international oriented firms was better than that of reactive, functionally concentrated local market-oriented companies. 3. CONCLUSION The entrepreneur is an innovator who converts opportunities into marketable ideas. Though the USA and the world at large is in the midst of an Entrepreneurial Revolution, the knowledge and information from current research available in the field of entrepreneurship is still scanty and in a very much inaccessible state. There is a need to take resort to a number of emerging theories to effectively interpret the contribution of entrepreneurship to implementation of strategy in theory and practice. Further research on case-studies may be necessary to give credence to the various theories of strategy implementation through entrepreneurship. 4. REFERENCES: Chandler,A. 1962 Strategy and Structure MIT Press Cambridge Chaffe,E.E. 1985 Three Models of Strategy, Academy of Management Review,10(1), 89-98 Hofer,C.W. and Schendel, D. 1978 Strategy Formulation: Analytical Concept West Publishing Company New York. Karami,A. 2007 Strategy formulation in Entrepreneurial firms Ashgate Publishing Limited, Hampshire, England. Kuratko,D.F 2007.Entrepreneurship:Theory,Process,Practice 8Edition South-Western Cengage Learning OH45040 USA QuickMBA A definition of Entrepreneurship and the Entrepreneur 9Dec 2010 online internet available at http://www.quickmba.com/entre/definition/ Read More