Understanding Enterprise

Entrepreneurship and Small Business, fourth edition

by Simon Bridge and Ken O'Neill

Case study: chapter 4

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This case study examines entrepreneurs and their motivations through the lens of Trait Theory. While reading, students are encouraged to look at the traits displayed by each of the partners of the proposed new enterprise and discuss whether each member of the team could be described as an entrepreneur accordingly.

John, Owen and Chris are three lifelong friends who have just graduated from university with first class honours in computer programming, web design and graphic design respectively. During their final year of studies the three had decided that rather than being snapped up by one of the major software companies, they would start out on their own. It was during this final year that the entrepreneurs decided, as taught, to put together a business plan in order to develop a strategy and timeline for growing the business as well as helping them to secure finances from banks and potential investors. In order to do this the partners decided to discuss a number of areas that they saw as important starting points including: the potential market, funding the business, marketing and how decisions would be made.

It was Chris who decided to start looking at the size of the potential market and suggested that as the business was offering a service with global appeal, they should seek to target multiple geographical markets from the very beginning. He recognised the cost associated with this and that they would have to borrow heavily in order to achieve this ambitious target although in the long-term stressed that the rewards outweighed the risks. John listened in disbelief. He could not understand how his potential business partner could suggests such a risky strategy for an enterprise that had not only no trading history, but would be run by three students with no significant experience working in the industry. Rather than target a global market, he was convinced that the business should offer its services for free to customers for the initial start-up phase, target a small percentage of the Edinburgh market and then grow this market share in year three. Chris was dismayed by John's lack of ambition and so was Owen who thought that both his friends were off the mark. Owen believed that they would be better focusing initially on establishing themselves on a Scotland-wide basis before attempting to penetrate the UK and then Europe. He argued that gradually growing the business at this rate would give them a solid base for targeting the USA and Asia, although Chris believed that the time-line was too slow and would make it easier for potential market entrants to replicate their strategy and eat into their market share. He had based his suggestion in part on the findings of his final year dissertation that examined, in depth, the software development industry in Scotland. John, on the other hand, worried they would spread themselves too thinly and so the three friends agreed to cease the discussion for the day and look at the target market once they had resolved the issues of funding, marketing and control.

The next day the budding entrepreneurs met to discuss how the business was to be financed. John produced a set of spreadsheets on his laptop that showed how, by targeting the local Edinburgh market initially, the business would be able to stay debt-free using equipment that they already had and would be able to finance the growth of the enterprise using the modest profits the business would make year-on-year topped up by capital injections from each partner from the wages generated by their part-time jobs. This confused both Owen and Chris who had no intention of keeping on part-time work as they believed that that business would require their undivided attention as well as external funding to upgrade their existing equipment to keep them up-to-date with that of other industry participants. Owen intended to have each partner inject £5,000 of his own funds into the business initially and then secure a £15,000 bank loan at the end of the third trading quarter when it was envisaged that the enterprise would be able to show the bank reasonable trading figures as well as a number of future orders on their books. Chris pointed out that if his friends were serious about going into business then they should aim high or not bother. In order to finance his ambitious plans he believed that each partner was going to need to take out significantly large, secured, personal loans while also raising over £250,000 from private investors mainly comprised of family. John had to sit down and was beginning to question his undoubtedly talented friends understanding of the financial side of business. The friends left slightly more disheartened than the day before.

When it came to discussing the marketing campaign for the proposed business it was agreed that due to his creative flair, Chris should take the lead. He believed that the trio should invest a lot of time in designing processes for actively identifying opportunities in the market and that registering with government and private tendering websites would allow them to target project work as well as jobs for one-off customers. There was little disagreement from Owen although John thought the cost involved in registering with such services was slightly extravagant and that over time the market would reward the quality of the service they provide by repeat custom.

Feeling slightly better about their conversation regarding the marketing campaign the trio met to talk about the practical implications of decision-making and control when there was not unanimous agreement. John was fairly casual and was happy for either a vote or for the other two to decide between them. He was more concerned with autonomy when it can to the day-to-day tasks of his programming and while he was happy to offer his opinions, he had no real interest in strategy. Chris and Owen on the other hand were not so agreeable. After the previous three days of hearing exactly what the thoughts and motivations of each other were, neither man fully trusted the other to make the right decisions. This combined with the fact that John seemed relatively unconcerned with overall strategic decisions meant that they both realised that they were going to need to revaluate the viability of the entire partnership. In a fast-moving industry, decisions need to be made quickly and while diversity of opinion is healthy and vital to most business success, too much can lead to an enterprise responding slowly to opportunities presented in the marketplace. Reluctantly all three men walked away agreeing that perhaps the timing was not right and while one of them secured a job with a well respected multinational, the other two turned their attention to starting their own businesses without each other.

Suggested solution

Achievement motivation

  • John: appears to have an aversion to risk which could also be linked with his motivation to achieve. Unlike the other two, he seems rather content at accomplishing very achievable goals which would not normally be seen in someone who would be described as having entrepreneurial flair.
  • Chris: clearly outlines his ambitious plans for the enterprise and although seen as overly optimistic by the other two, he stresses that the rewards outweigh the risks. Chris clearly has big plans for the enterprise and while there is not enough information regarding the viability of his plans, he would seem to be someone motivated by achieving lofty targets.
  • Owen: According to McClelland an individual with a high need for achievement, 'is more self confident, enjoys taking carefully calculated risks, researches his environment actively, and is very much interested in concrete measures of how well he is doing.' While not on as grand a scale as Chris, Owen has still set the enterprise an ambitious enough task of establishing themselves nation-wide which is not to be overlooked. He has also based his plan on research that he carried out on the industry environment in which the business was to operate.

Risk taking propensity

  • John: Drucker argues that successful entrepreneurs 'try to define the risks they have to take and to minimise them as much as possible.' It is clear that Owen has taken this to an extreme. There is of course a strong argument for growing the firm incrementally. However at the pace that Owen is suggesting, competition that enters the market after the trio could potentially overtake them in a matter of months. Caution is admirable - however a complete aversion to risk is definitely not in the make-up of an entrepreneur.
  • Chris: It is true that entrepreneurs need to tolerate risk -however that is not to say that they are high risk-takers. At first glance his suggested target market could perhaps be described as ambitious but there is also a hint of naive recklessness. There would be a real risk of the young entrepreneurs over-stretching themselves, particularly because none of them has any experience of running a business and borrowing so heavily in the first year of trading could backfire. However as Chell et al points out, there are problems in defining risky behaviour. Risk-assessment takes place in context and behaviour that appears risky to outsiders may not be perceived as risky by those who are fully cognisant of a situation. It may be the case that Chris knows the market well and is making an informed choice.
  • Owen: In terms of risk-taking propensity, Owen is clearly the middle road between both John and Chris. He would prefer to grow the business at a steady pace rather than taking the risk of over-stretching that he believes Chris actions could potentially lead them to do. This is demonstrated in his attitude to financing the business. That is not to say that he has the optimum appetite for risk however. With the limited information provided in the case study, he would certainly seem to be a moderate risk-taker which is a characteristic attributed to entrepreneurs by a significant amount of research.

Locus of control

  • Chris: The fact that Chris is eager to take proactive steps towards making the business happen, suggests he is in convinced of the fact that he can be in control of events. He believed that the trio should invest a lot of time in designing processes for actively identifying opportunities in the market and that registering with government and private tendering websites would allow them to target project work as well as jobs for one-off customers.
  • John: We can see that John has a much more pacifistic approach. He thought the cost involved in registering with such services was slightly extravagant and that over time the market would reward the quality of the service they provided by repeat custom.

Need for autonomy

  • John: While John wants autonomy in terms of being allowed to get along with his own work, he is happy to conform to the norms set by his two partners. This makes it slightly debatable as to whether he is displaying an attitude that would be common to many entrepreneurs. Despite wanting to work for his own business, he intends keeping on a part-time job while the business is in the start-up phase. Being apprehensive about leaving his job is only natural - however it does not display the classical trait of an entrepreneur.