Article published in Business Day’s Real Business of South Africa
by Prof. Herrington – University of Cape Town
Entrepreneurship is a long, difficult word. And like the word, the reality of the concept involves many differing viewpoints and definitions. The word, entrepreneur, comes from the French language and dates back to the 1700s. It’s a strange word, difficult enough to pronounce, let alone spell. Yet nowadays it’s a household word used by millions throughout the world.
However, ask 10 different people their understanding of the word, and you are likely to get 10 different answers. Some people think of it as a mad scientist working in his garage trying to invent something that is totally new to the world in the hope that he may well be able to commercialise it and make money from it. Others think of the housewife working in the kitchen who develops a superb sauce recipe. She gives this to her friends who think that it is fantastic. More friends ask for it and soon she thinks that if it is so good she could sell it.
Then a company is formed and a new growth venture starts up. Such an example is Ina Paarman in SA or Sara Lee in the US.
Whatever the definition, the process is undoubtedly critical to the well-being and economic development of a country. Jean-Baptiste Say, a French economist of the 1800s, said that an entrepreneur shifts economic resources out of an area of low productivity into an area of higher productivity and greater yield. The Oxford dictionary definition describes the entrepreneur as one who organises, manages and assumes the risk of a business enterprise.
In SA, large corporations are changing. They are undergoing what they call restructuring, downsizing, and reorganisation. The net effect is that large corporations are not contributing to the growth of employment in the country. It is up to the small businesses, and it is these businesses that should be encouraged to start and grow.
Modernisation is having its effect. E-commerce has had a pronounced effect on what is happening in the business environment. If one sits back and thinks about what profound developments have taken place, especially in communication, there are probably four major changes that have revolutionised communication worldwide, and these changes have taken place in the past 50 to 60 years.
The introduction of the cell-phone, the personal computer, television and jet travel has revolutionised the way in which we communicate. It has made the world much smaller as communication is now almost instantaneous and the latest news can be relayed live around the world. No more does the business person or government official have to wait days to find out what is going on. All this has tremendous advantages, but it also has brought its own inherent problems. Daily pressures have become enormous, time is of vital importance, globalisation has caused increased competition, and many other factors influence our day-to-day lives.
Nonetheless, whatever one may say, the importance of entrepreneurship within business, within governments, among nongovernment organisations in any country is crucial. It is definitely the chief agent of change that operates within the economic system. The most successful companies are those that engage in more entrepreneurial activity and innovation than others.
The need in SA for entrepreneurship is certainly greatest when companies face diminishing opportunity streams as well as rapid changes in technology, consumer needs, social values and political roles. Those organisations which stop innovating and do not practice entrepreneurship do not grow they often decline rapidly and eventually disappear.
If one looks at Fortune 500 companies, and compares those that were listed 20 years ago against those listed today, less than 25% are still operating. Multinational organisations have learnt this lesson the hard way. Pan Am was one of the largest airlines in the world about 10 years ago and no longer exists. Swissair ceased trading and there are numerous other examples of airlines that have followed the same sad demise. There are many reasons for this, but one may well be the innovation brought about by South West Airlines in the US.
They were the forerunners of low-cost air travel, an innovation which has been copied by numerous companies throughout the world including our own, 1time and the more recent Mango. It will be interesting to see how the airline market develops over the next 10 years. The world is complicated, especially for modern companies.
Considerable turbulence is taking place, in which rapid changes occur within the economic, social, financial, regulatory, labour, and technology areas. The complexity of change is enormous and only those companies that are flexible, adaptable, aggressive and innovative are likely to sustain their competitive advantage.
Danny Miller, a renowned entrepreneur and writer, states that an entrepreneurial firm is one that engages in product-market innovation, undertakes somewhat risky ventures, and is first to come up with proactive innovations, beating competitors to the punch.
A non-entrepreneurial firm is one that innovates very little, is high-risk averse and imitates the moves of competitors instead of leading the way. On the other hand, George Bernard-Shaw says the reasonable man (or woman) adapts themselves to the world. The unreasonable person persists in adapting the world to themselves. Therefore, all progress depends on unreasonable men (and women). Michael Morris of Syracuse University in the US talks about two different types of entrepreneurship: frequency and degree.
The degree of entrepreneurship within an organisation relates to how big the innovation is, how risky it is to the organisation, and how often it is done. Many organisations innovate occasionally, but this level of entrepreneurship is so significant and has such an influence on the company, that it can sustain itself for many years into the future.
An example of this is the development of the A380 by Aerospace. It is a major innovation which could well have a profound effect on the industry, but if unsuccessful will certainly dramatically influence the well-being of the company. Mining companies fall into this category as mining exploration is a very costly affair and requires huge amounts of capital and long periods before economic payback is achieved. Anglo-Gold Ashanti is in the process of sinking new shafts a venture which requires considerable capital outlay and may not produce the returns required.
Naturally, considerable research has gone into the process to minimise the risk, but it is nonetheless risky. With frequency of entrepreneurship, it is important to measure how often and how many times an organisation introduces new products, processes or systems. This would apply particularly to those organisations that are involved in the manufacture of fast moving consumer goods. These companies introduce a number of new products each year.
Although the money required is considerable for a small business, it is nonetheless less risky, but necessary if the company is to keep ahead of its competitors. Companies can do both types of entrepreneurship and depending upon the levels in each category, will determine the intensity.
All progressive companies need to consider this and they do this via various means which can include traditional research and development, involving ad-hoc venture teams that are formed in an organisation to develop and complete a particular project.
Herrington is the director of the University of Cape Town Centre for Innovation and Entrepreneurship at the UCT Graduate School of Business, and one of the authors for the South African Global Entrepreneurship Monitor. This article appeared in Business Day’s Real Business in April.