Entrepreneurship In Contexts Of Business Management Commerce Essay

Entrepreneurship In Contexts Of Business Management Commerce Essay The business world can be seen as a complex system of individuals and business organisations that, in a free market economy such as South Africa, involves the activity of transforming scarce resources into products and services in order to meet the needs of society (Du Toit, Erasmus Strydom, 2007:4). Business organisations therefore solve the fundamental economic problem of how to ensure the highest possible satisfaction of needs with scarce resources (Cronje, Du Toit Motlatla, 2001:23). In order to understand how the business organisation satisfies the needs of society in a free market economy, it is important to understand the driving force behind the business organisation, namely the entrepreneur (Du Toit et al., 2007:37). The entrepreneur is at the heart of a free market economy and establishes business organisations and in doing so creates jobs and wealth (Cronje et al., 2001:3). Entrepreneurs and new business creation is fundamental to the growth of the South African economy and to the future socio-political stability of the country (Von Broembsen, Wood Herrington, 2005:5). Due to low economic growth, high unemployment and an unsatisfactory level of poverty in South Africa, entrepreneurship becomes a critical solution (Rwigema Venter, 2004:27). As mentioned in Chapter 1, one of the most important groups of entrepreneurs within the economy with considerable potential to contribute to economic growth, economic development and employment generation are business women (Blumberg Kenan, 2008; Ahl, 2006; Negash, 2006; Blumberg, 2005; Republic of South Africa, 2005; Baker, Aldrich Liou, 1997). Therefore, this study focuses on the strategic entrepreneurial behaviour of business women in South Africa. An improved understanding of entrepreneurial behaviour and decision-making would enable business management students to better understand how business organisations function in todays competitive environment. In this chapter the concept of business management is addressed. The chapter starts by introducing the subject of economics, followed by an overview of business management as a discipline. This section leads to a discussion of the relationship between economics and business management. Then follows a section which elaborates on entrepreneurship and strategic management as well as a section how these two fields overlap. Special attention is given to entrepreneurship and strategic management in an attempt to clarify the position of this study in a business management context. The position of the study within the field of economics and business management is illustrated in Figure 2.1. Figure 2.1: The position of the study within the field of economics and business management 2.2 ECONOMICS Economics has been defined in various ways in its more than 200 year history (Arnold, 2004:3). It is therefore useful to review a number of definitions of what economics entails. Alfred Marshall (1824-1924) broadly defined economics as the study of mankind in the ordinary business of life; it is the study of wealth and of man. Lionel Robbins (1898-1984) definition focussed on alternative outputs that can be achieved with scarce resources. He defined economics as the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Similarly, Milton Friedman (1912-2006) said that economics is the science of how a particular society solves its economic problems. He then argues that an economic problem exists whenever scarce means are used to satisfy alternative ends (Arnold, 2004:3). It seems from the above definitions that economics is the study of how society manages its scarce resources (Mankiw, 2004:4). More comprehensively, economic s is the study of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants (Arnold, 2004:3). The condition, under which wants are greater than the limited resources available to satisfy those wants, is called scarcity (Arnold, 2004:3). This endeavour to achieve the highest possible satisfaction of needs with scarce resources is known as the fundamental economic principle (Smit, Cronje, Brevis Vrba, 2007:20) and every economic system is subject to it (Cronje et al., 2001:23). That being so, it follows that any component of an economic system, including a business organisation, is also subject to the economic principle (Nieman Bennett, 2006:6; Cronje et al., 2001:23). In order to create wealth and satisfy wants, as implied in the definitions, resources are utilised (Nickels, McHugh McHugh, 2008:9). Resources are divided into four broad categories, called factors of production. These factors of production are: land, labour, capital, and entrepreneurship (Arnold, 2004:5). Land includes all natural resources, such as minerals, forests, water and unimproved land. Labour, on the other hand, consists of the physical and mental talents people contribute to the production process. Capital consists of produced goods that can be used as inputs for further production. Entrepreneurship, the focus of this study, refers to the particular talent that some individuals have for organising the resources of land, labour, and capital to produce goods, seek new business opportunities, and develop new ways of doing things (Arnold, 2004:5). It furthermore refers to the initiative of putting together a range of production factors in various combinations in diverse busin esses to satisfy the numerous needs of consumers (Nieman Bennett 2006:6). The field of economics is traditionally divided into two broad subfields, namely, microeconomics and macroeconomics (Mankiw, 2004:4). On the one hand, microeconomics deals with human behaviour and choices as they relate to relatively small units and studies interactions through individual markets, given scarcity and government regulation (Arnold, 2004:27). In other words, microeconomics is the study of how households and firms make decisions and how they interact in specific markets. On the other hand, macroeconomics deals with human behaviour and choices as they relate to highly aggregate markets or to the entire economy (Arnold, 2004:4). Macroeconomics is thus the study of economy-wide phenomena (Mankiw, 2004:27). The present study is related to microeconomics as it deals with individuals i.e. business women and how they make decisions to allocate scarce resources. Neoclassical economists are interested in decision-making, especially the costs and incentives associated with economic choices (Hicks, 1937). The decision-making process plays an important role in any business organisation and is of importance for problem-solving, the development of business plans, and goal-directed behaviour (Gray, 2001). In macroeconomics, a neoclassical synthesis was developed in the early 1950s, based on an integration of Keyness ideas and the ideas of earlier economists (Blanchard, 2006:576). These theories had a fundamental impact on the modern understanding of firms and their relation to the environment. In economics theories are useful for explaining and predicting economic behaviour. Theories are developed to explain observed phenomena in terms of a set of basic rules and assumptions (Pindyck Rubinfeld, 2005:5). The theory of the firm consists of a number of economic theories which describe the nature of the firm, company, or corporation, including its existence, its behaviour, and its relationship with the market (Coase, 1937), which impact business management scholars understanding of the field. The theory of the firm is based on a simple assumption namely that firms try to maximise their profits (Pindyck Rubinfeld, 2005:5). The theory of the firm furthermore provides an explanation of how a firm makes cost-minimising production decisions and how its cost varies with output (Pindyck Rubinfeld, 2005:188). In simplified terms, the theory of the firm attempts to answer questions regarding the existence of firms, the boundaries of firms, the organisation of firms and questions con cerning heterogeneity of firm actions and performances (Coase, 1937). To summarise, the field of economics focuses on how society manages its scarce resources, also called factors of production, to satisfy the needs of society. In order to understand how entrepreneurship, as one of the factors of production, influences wealth creation in the economy, one has to appreciate the role of business management which is concerned with the management aspects of the factors of production. 2.3 BUSINESS MANAGEMENT AS A DISCIPLINE The origins of traditional management can be traced back to the need for efficiency and effectiveness (Weymes, 2004:340). The endeavour to achieve the highest possible satisfaction of needs with scarce resources is known as the fundamental economic principle (Smit et al., 2007:20). Within economic and management sciences, traditional business management is subject to this principle, and the managements task is thus is to decide how an organisation can achieve the highest possible output with the least possible input (Smit et al., 2007:20; Scheepers, 2009:7). More specifically, it entails an examination of the factors, methods and principles that enable a business to function as productively as possible in order to maximise its profits (Nieman, 2005:39). In short, the individual business enterprise should focus on realising the economic principle (Scheepers, 2009:7). The study of business management depends on comprehensive and ongoing research and the examination of management problems, the testing of approaches and principles as well as experimentation with methods and techniques. Business management is thus an applied science that studies how business organisations can best be directed towards realising their objectives given their limited resources (Du Toit et al., 2007:27). Klekamp (1968:54) defines business management as achieving organisational goals through people. It is useful to consider this time-worn definition through the perspective of three fundamental schools of management. These schools are: the traditional school of management; the behavioural school of management and the quantitative school of management. It appears that the traditional school sees the achievement of organisational goals as a process. It further suggests that the process is universal i.e. the distinguishing characteristic of a manager is the mastery of her discipline and the application of her art rather that the environment in which it is practiced. The behavioural school, on the other hand, focuses on the achievement of goals, as the process does, but dwells to a large extent upon why people act as they do when under the influence of the management process and in the company of people grouped together for the accomplishment of organisational goals. Alternatively, the quantitative school proposes that the achievement of goals depends to a large extent on the quality of the decisions made in the practice of the management science (Klekamp, 1968:54). Although, business management has been defined by a number of authors, fundamental to most definitions is the idea that management is a social process of planning, coordination, control, and motivation (Pettinger, 2002; Hodgetts, 1981:114). One can infer that business management therefore involves satisfying needs with a limited amount of resources through planning, coordination, control, and motivation of these resources (Ward, 2008:19). The many definitions offered in the literature on management demonstrate the wide differences of opinion among writers and experts about the tasks and activities of management. Figure 2.2 illustrates the four fundamental tasks that are singled out as the most important activities of the management process. These are: planning, organising, leading and control (Du Toit et al., 2007:129). Figure 2.2: The four fundamental management tasks represented as a process SOURCE: Adapted from Du Toit et al., 2007:130 The following brief description of the fundamental management tasks clarifies the concept of management and the management process. The first fundamental task of management, namely planning, determines the mission and goals of the organisation, including the way goals are to be reached in the long-term, and the resources needed for this task (Du Toit et al., 2007:130). Strategic management is an integral part of planning and is the process of developing a vision, mission and long-term objectives for the organisation as a whole. According to Nieman and Bennett (2002:14), organisations succeed if their strategies are appropriate for the circumstances they face, and feasible in respect of their resources, skills and capabilities. Strategic management is discussed in more depth in Section 2.6. The second fundamental task in the management process is organising. This task refers to the development of a framework or organisational structure to indicate how people, equipment and materials should be employed to reach the predetermined goals (Du Toit et al., 2007:130). Leading, the third fundamental task, entails directing the human resources of the business and motivating them (Du Toit et al., 2007:130) in order to get them to perform in such a way that the organisational objectives can be achieved (Nieman Bennett, 2006:99). The final fundamental task, namely control, implies that managers should constantly establish whether the business is on a proper course towards the accomplishment of its goals (Du Toit et al., 2007:131) as well as structuring the activities of the organisation to facilitate the attainment of its objectives (Nieman Bennett, 2006:93). The fundamental task of business management is, however, not only to plan, organise, lead, and to control but to study those factors, principles and methods that will lead a business organisation, as a component of the prevailing economic system, to reach its objectives against the background of limited resources (Du Toit et al., 2007:28) within the microeconomic field of study. In the following section the relationship between economics and business management is discussed. Particular attention is paid to the discussion of a business organisation as a component of the economic system, specifically how, as a need-satisfying institution in the free market economy, it provides for the needs of the community (Cronje et al., 2001:32). 2.4 RELATIONSHIP BETWEEN ECONOMICS AND BUSINESS MANAGEMENT On the one hand, economics, as a social science, studies how humans and society exercise choices concerning different ways of utilising their scarce resources in order to satisfy unlimited needs. On the other hand, business management as an applied science is concerned with the study of those institutions in a particular economic system which satisfy the needs of a community. Economics examines the entire economic system, while business management limits its studies to one component of the economic system, namely the individual organisation (Cronje et al., 2001:23). Business management is thus closely linked with microeconomics and the theory of the firm as the purpose of business management is to hold an organisation to the economic principle (Cronje et al., 2001:23). Business management, as a field of study, is concerned with the management aspects of the inputs, the conversion process, and the outputs (Nieman Bennett, 2006:6). More specifically, it entails an examination of the factors, methods and principles that enable a business to function as productively as possible in order to maximise profits (Nieman Bennett, 2002:4). In order to recognise how the business organisation satisfies the needs of society in a free market economy, such as South Africa, one has to understand one of the driving forces behind the business organisation, namely the entrepreneur (Du Toit et al., 2007:37). 2.5 ENTREPRENEURSHIP Economic development can be directly attributed to the level of entrepreneurial activity in a country (Bird, 1989; Schumpeter, 1934) as entrepreneurial businesses are responsible for growth and job creation in the economy (Nieman, Hough Nieuwenhuizen, 2003:3). Entrepreneurship is the process that causes change in the economic system through innovations of individuals who respond to opportunities in the market. Entrepreneurs are challenging existing assumptions as well as conventional rules of business and are creating value in novel and creative ways for themselves and society (Morris, Kuratko Covin, 2008:3). It is therefore important to study entrepreneurship in an increasingly globalised world where survival often depends on people who are driven by opportunity and who seek to achieve their goals in a sustainable way (Rwigema Venter, 2004:9). Although the term entrepreneurship has been in use for over 200 years, considerable disagreement remains over its meaning. Although the disagreement seems greatest if definitions of entrepreneurship between disciplines are compared, a consensus is found if definitions produced by specialists in the same field, are compared (Nieman et al., 2003:9). Economists, for example, tend to agree that entrepreneurs are associated with innovation and are seen as the driving forces of development (Filion, 1998). The behaviourists, on the other hand, try to understand the entrepreneur as a person and ascribe to the characteristics of mainly the flexible interpretative models. The behavioural approach places emphasis on explaining how decisions are taken within the firm. However, any theory of entrepreneurship must be flexible and multidimensional to reflect its multidisciplinary roots (Nieman et al., 2003:9; Filion, 1998). While multiple definitions of entrepreneurship could be found in the literature (Sharma Chrisman, 1999; Venkataraman, 1997; Schumpeter, 1983; Kirzner, 1973), no single definition has been accepted by the whole entrepreneurship field (Scheepers, 2007:25). For the purposes of the present study entrepreneurship can be defined as the process of creating value by bringing together a unique combination of resources to exploit an opportunity (Barringer Ireland, 2006:5; Stevenson, Roberts Grousback, 1989). Since this definition implies that: (1) entrepreneurship may vary in terms of the extent and number of times it occurs; (2) entrepreneurship occurs in various contexts for example start-ups and corporate firms; (3) it is a process that can be managed; and (4) it creates value and it is opportunity-driven (Scheepers, 2009). Firstly, regarding the implication that entrepreneurship may vary in terms of the extent and number of times it occurs, it is useful to examine the concept of entrepreneurial intensity (EI). The term of EI was pioneered by Morris and Sexton (1996), who view EI as a function of the degree and frequency of entrepreneurship (Morris, 1998:42). Frequency of entrepreneurship refers to the number of times an enterprise acts entrepreneurially. In other words, the number of entrepreneurial events that takes place within a company over a given period of time (Morris et al., 2008:69; Morris, 1998:42). The degree of entrepreneurship could be assessed against the background of three dimensions: innovativeness, risk-taking, and proactiveness (Erasmus Scheepers, 2008; Morris, 1998:37). Innovativeness, the first dimension of the degree of entrepreneurship, refers to the ability to generate ideas that will culminate in the production of new products, services and technologies. Risk-taking, the second dimension, involves the determination and courage to make resources available for projects that have uncertain outcomes. Attempts are made to manage these risks by researching a market, recruiting and employing skilled staff among other strategies. Proactiveness, the third dimension, indicates top managements stance towards opportunities, encouragement of initiative, competitive aggressiveness and confidence in pursuing enhanced competitiveness (Morris, 1998:18, 41-43). The concept of EI is illustrated in Figure 2.3. The two-dimensional matrix, referred to as the entrepreneurial grid, shows the frequency of entrepreneurial events on the vertical axis, and the degree to which these events are innovative, risk-taking and proactive on the horizontal axis (Morris et al., 2008:69). EI must become a key activity ratio that is monitored on an ongoing basis within organisations. Assessment at the level of the organisation can be used for various purposes: to benchmark and track levels of entrepreneurship; establish norms and draw industry comparisons; establish entrepreneurship goals; develop strategies; and assess relationships between EI and organisation performance variables over time (Morris et al., 2008:78). Figure 2.3: The entrepreneurial grid SOURCE: Morris et al., 2008:70 Secondly, as implied in the definition of Stevenson et al. (1989) entrepreneurship in reality can occur in various organisational contexts (Morris et al., 2008:11). These organisational contexts may range from establishing a new enterprise, growing an existing small business, or innovation within large organisations (Scheepers, 2009:27). In other words, entrepreneurship can also be used to describe entrepreneurial actions within a firm. In this instance, an entrepreneurial firm creates wealth by concentrating on being innovative, proactive, and risk-taking (Ireland, Hitt, Camp Sexton, 2001:51). Corporate entrepreneurship is a term used to describe entrepreneurial behaviour inside existing organisations (Morris et al., 2008:11). Within these different contexts the definition above still applies, since the process and required inputs are similar, even if the outputs differ (Scheepers, 2009), therefore the female entrepreneurial behaviour examined in this study is still regarded as ent repreneurship, even though it may occur in two contexts, namely within a corporate context or in an independent venture. Thirdly, as stipulated in the definition, entrepreneurship can be viewed as a process. Therefore even though entrepreneurship and innovation are inherently unpredictable, chaotic and create ambiguity; entrepreneurship is a process, and as such it can be managed. Entrepreneurial events are characterised by different stages, such as opportunity identification, business concept definition, assessment of the resource requirements, acquisition of the needed resources, and then the management and harvesting of the business (Morris Kuratko, 2002). Finally, the ability to act entrepreneurially is linked to the perception of opportunity. The pursuit of opportunities also emphasises that those opportunities, which create the greatest value, could be exploited. It is important to note that entrepreneurship differs from management. There are important differences between the entrepreneurial and managerial functions, as well as the expertise and competence with regard to each (Nieman et al., 2003:13). Management is a social process of planning, coordination, control, and motivation (Ward, 2008:19). Management thus involves getting things done through other people and is, in a sense, a transformation process, where human, technical, and conceptual skills are used to transform inputs into outputs (Morris et al., 2008:12). Entrepreneurship, on the other hand, is the process of creating value by bringing together a unique combination of resources to exploit an opportunity (Barringer Ireland, 2006:5; Stevenson, Roberts Grousback, 1989). Entrepreneurs envision the future, recognise emerging patterns, identify untapped opportunities, and create innovations to exploit those opportunities (Morris et al., 2008:12). Figure 2.4 contrasts the primary roles of the manager with those of the entrepreneur. The figure shows that managers are charged with the efficient and effective utilisation of the resources under their control. They tend to be focussed on optimising current operations. Entrepreneurs, alternatively, demonstrate creative capabilities in obtaining resources, overcoming obstacles, and persisting in implementing new ideas that represent change (Morris et al., 2008:12). Figure 2.4: Comparing and combining key roles of managers and entrepreneurs THE ENTREPRENEURIAL MANAGER SOURCE: Adapted from Morris et al., 2008:13 One of the general approaches to management methods with the purpose of creating a sustainable competitive advantage is that of strategic management (Cronje et al., 2001:24). According to Nieman and Bennett (2002:14), strategy is fundamentally about a fit between the organisations resources and the markets targeted by it, as well as the ability to sustain fit over time and in changing circumstances and to create and maintain a competitive advantage within a given market. Therefore, the nature and characteristics of strategic management is discussed in the following section. 2.6 STRATEGIC MANAGEMENT Several schools of thought with different opinions about the nature and scope of strategy can be distinguished from the literature (French, 2009:13). There is also a lack of a universally accepted definition of strategic management. However, central to most definitions is the notion that strategic management is the process through which managers formulate, implement, and monitor action plans to optimise the achievement of key goals (Rwigema Venter, 2004:195). Barney and Arikan (2001:140) define strategic management as a firms theory of how it can gain superior performance in the markets within which it operates. Venkataraman and Sarasvathy (2001:651) define the subject of strategic management as having to do with the methods used to create value and the ensuing struggle to capture a significant share of that value. Hough, Thompson, Strickland and Gamble (2008:4) propose that strategy consists of the competitive moves and business approaches that managers employ in order to grow the firm, attract and please customers, compete successfully, conduct operations, and achieve the targeted levels of organisational performance. For the purpose of the present study strategic management is defined as a process that deals with the long-term entrepreneurial work of the organisation, with organisational renewal and growth, and more particularly, with developing and utilising strategy, which is a guide to the organisations operations (Lyles, 1990:363). Strategic management has gained prominence in recent years as organisations compete in volatile environments (Rwigema Venter, 2004:197). The dynamic environment in which organisations operate poses ongoing management and leadership challenges, marked by complexity, uncertainty, and ambiguity (Rwigema Venter, 2004:93). Traditional business models are often no longer applicable and some managers are abandoning conventional approaches to strategy as they search for new ways to achieve a competitive advantage in a turbulent environment. Strategic management paradigms have shifted from essentially static to more dynamic worldviews (Scheepers, 2007:46). To summarise, in todays fast-paced competitive environment, firms face the need to be increasingly nimble and adaptive (Ireland Webb, 2007:49). Ireland et al. (2001:53) state that successfully integrating entrepreneurial and strategic actions improves a firms ability to grow and create wealth. The following section elaborates on the relationship between entrepreneurship and strategic management and on how these two fields overlap. 2.7 RELATIONSHIP BETWEEN STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP While the fields of strategic management and entrepreneurship have developed largely independently of each other, they both focus on how firms adapt to environmental change and exploit opportunities created by uncertainties and discontinuities in the creation of wealth (Hitt, Ireland, Camp Sexton, 2001:480; Venkataraman Sarasvathy, 2001:480). Creating wealth is at the heart of both entrepreneurship and strategic management. Figure 2.5 illustrates how firms create wealth by using entrepreneurial actions and strategic actions within different domains. Figure 2.5: Creating wealth through entrepreneurial and strategic actions SOURCE: Ireland et al., 2001:51 As illustrated in Figure 2.5, firms can create wealth by using entrepreneurial actions and strategic actions within different domains. These domains are vital in the process of creating sustainable income streams by developing and exploiting competitive advantages. (Ireland et al., 2001:51). Strategic management and entrepreneurship overlaps in terms of their interest in venture creation, novel strategies, growth and performance of organisations (Scheepers, 2007:46). Entrepreneurship involves identifying and exploiting entrepreneurial opportunities. However, to create the most value entrepreneurial firms also need to act strategically. An integration of entrepreneurial and strategic thinking is therefore necessary (Hitt et al., 2001:479). In the previous section entrepreneurship was defined as the process of creating value by bringing together a unique combination of resources in order to exploit an opportunity (Barringer Ireland, 2006:5; Stevenson et al., 1989). As such, entrepreneurial actions, on the one hand, entail creating new resources or combining existing resources in new ways to develop and commercialise new products, move into new markets, and/ or service new customers (Hitt et al., 2001:480). On the other hand, strategic management entails the set of commitments, decisions, and actions designed and executed to produce a competitive advantage and earn above-average returns (Hitt et al., 2001:480). Strategic management thus provides the context for entrepreneurial actions (Ireland, Hitt, Camp Sexton, 2001). Entrepreneurship is about creation; strategic management is about how advantage is established and maintained from what is created (Venkataraman Sarasvathy, 2001). Entrepreneurship is concerned with how the opportunity to create value in society is discovered and acted upon by some individuals. Strategic management is concerned with the methods used to create this value and the ensuing struggle to capture a significant share of that value by individuals and firms (Venkataraman Sarasvathy, 2001:650-651). Strategic Management has to do with the achievement of ends obtaining market share, profit and sustained competitive advantage. Then again, entrepreneurship has to do with the achievement of beginnings creating markets, firms and products (Venkataraman Sarasvathy, 2001:651). Thus, entrepreneurial and strategic perspectives should be integrated to examine entrepreneurial behaviour. For the purpose of the present study this approach is called strategic entrepreneurial behaviour (SEB). SEB is entrepreneurial action and behaviour with a strategic perspective. It is the integration of entrepreneurial (i.e. opportunity-seeking behaviour) and strategic (i.e. advantage-seeking behaviour) perspectives in developing and taking actions to create wealth (Hitt et al., 2001:480-481). 2.8 CHAPTER SUMMARY This chapter attempts to provide perspective on the position of this study within the broad field of economics and business management. It defines the concept of business management as satisfying consumer needs with a limited amount of resources, through the planning, coordination, control, and motivation of these resources. Based on this definition of business management, the chapter provides an explanation of how business management stems from economics. Economics is defined as the allocation of scarce resources in order to fulfil the unlimited needs of society. This section leads to a discussion of the relationship between economics and business management. The main link between economics and business management is that the one studies the economic system as a whole, while the other studies a single component of that system.