The purpose of this essay is to describe the entrepreneurial process and how this process can be applied within small to medium enterprises (SMEs). The stages involved within an entrepreneurial process will be explained and a definition given of what is meant by small to medium enterprises.
A number of writers have researched the significant role of an entrepreneur in economic development. Bearing in mind the French origin of the word, which can be translated as 'one who takes between', it is not surprising that leading French writers, Cantillon and Say, recognised the important role of the entrepreneur within the economy.
For the purposes of this essay, the entrepreneurial process is taken from Bolton & Thompson (2004), Entrepreneurs, Talent, Temperament, Technique. However it must be pointed out that there are a number of others, for example the Timmons Model of Entrepreneurship which describes the entrepreneur as the 'key ingredient' in the process.
Similarly, central to the Bolton & Thompson entrepreneurial process is the individual, the entrepreneur. A dictionary definition of the word 'entrepreneur' is 'the owner or manager of a business enterprise who, by risk and initiative, attempts to make profits' (Collins). However it is more difficult to find a clear definition of 'entrepreneurial' and 'entrepreneurship'.
Bolton and Thompson define an entrepreneur as
a person who habitually creates and innovates to build something of
recognised value around perceived opportunities.
The output of an entrepreneur's actions need not result in something of commercial value, which creates financial reward, but can include social capital which involves the creation of ethical solutions to society's social problems. An example of this is Florence Nightingale who, in the mid 1850s, transformed nursing practices and today is recognised as the founder of modern nursing. Aesthetic or artistic entrepreneurs will champion new projects in the arts, fashion or music.
Entrepreneurs are motivated to make a difference and achieve this by creating something that did not exist before through innovative methods. Innovation is a key element of the process. It is about doing things differently, breaking away from established patterns or breaking the mould of how things are done. The entrepreneur, not necessarily the inventor of a solution to a problem, spots an opportunity and exploits it, overcoming any obstacles by sourcing the required resources and using their networking skills. Entrepreneurs will show determination to achieve their goal and will very often have a personal stake in the proposed enterprise.
The entrepreneurial process is broken down into a number of action factors, and these are described as follows.
Using the Bolton and Thompson model, the first stage in the entrepreneurial process is the motivation to make a difference. Entrepreneurs initiate change, disturbing the existing status quo. An example of this is Direct Line who radically changed the long established method of selling home and car insurance by cutting out the middle man, the insurance broker, and selling directly to the public. The person behind the concept was Peter Wood who maximised the use of information technology.
The second action factors are creativity and innovation which are central and key elements in the process. 'Creativity is having the idea, and innovation is having its application' (Bridge, O'Neill and Cromie p40). Entrepreneurs are constantly being creative and innovative, looking a new ways of doing things and putting the ideas into practice.
The 20th century economist, Joseph Schumpeter, was firmly of the view that innovation is central to the entrepreneurial process. As outlined in Deakins and Freel Entrepreneurship and Small Firms, Schumpeter identified five principal sources of innovation
The introduction of a new good (or a significant improvement in the quality of an existing good)
The introduction of a new method of production (ie an innovation in processes)
The opening of a new market (in particular an export market in a new territory)
The 'conquest of a new source of supply of raw materials or half-manufactured goods'
The creation of a new type of industrial organisation (ie an administrative innovation)
At the heart of these is the entrepreneur who is responsible for the actions bringing about the change.
This leads to opportunities. Entrepreneurs spot opportunities that may not be obvious to other people and exploit these. The distinguished economist Israel Kirzner identified an entrepreneur as someone who is able to take advantage of opportunities that others may miss and convert these into profits.
Resources are essential to exploit opportunities and entrepreneurs will show determination and perseverance to acquire what is necessary. Through networking, they will know where to find the required resources and who will assist them to achieve their goal. A successful entrepreneur knows how to put together a good team and have key personnel in the right place.
A characteristic of an entrepreneur is their determination to resolve problems when faced with adversity, turning these into opportunities.
Whilst it may appear that they are risk takers, they do so in the belief that the risk is manageable and within their control. Research has shown that entrepreneurs have a high internal locus of control ie they believe that they control their own destiny.
Entrepreneurs put the customer first, gauging how well a sale has gone and what will encourage the customer to return. Equally if a sale has gone badly they will want to know the reasons why in order that this may be avoided in the future.
Having successfully followed the various stages of the entrepreneurial process, something of recognised value will be produced which can be either financial, social or aesthetic.
The starting point of a business is the idea, either through a new invention or improving an existing product or service by innovative thinking. So how can this opportunity be used within SME's to create something of recognised value? At this point it is important to understand the definition of an SME.
One of the most influential reports on SMEs, which is still widely quoted today, is the 1971United Kingdom (UK) Committee of Inquiry on Small Firms, chaired by Sir John Bolton, more commonly known as the Bolton Report. One of the outcomes of the report was a classification of SMEs. Organisations employing up to nine people were categorised as micro enterprises, between ten and 49 were defined as small and those employing 50 to 249 as medium enterprises. It viewed an SME as being managed and controlled by its owner or part owners and not having an organised managerial structure.
Another key piece of research was published in 1979, the Birch Report which looked into employment in the United States. Birch was of the opinion that small firms created over 80% of new jobs.
The advantages of SMEs are their resilience, flexibility and reactive speed to market changes. Through innovative methods they are able to provide what the customer wants, and do it more quickly than larger organisations.
Having made the decision to start up an enterprise, an entrepreneur will seek the resources to assist in this process. Examples of these are the Government backed intervention agencies such as Business Gateway which will provide start up help and advice. This can be in the form of developing a business plan, researching and development of the idea and identifying finance options.
A recognised business plan is important to persuade potential sponsors to invest in the proposed enterprise. Intervention agencies are aware of the latest government initiatives to support small businesses, for example tax exemptions, and are able to offer practical advice and support.
For a new enterprise to survive, adequate planning of the business strategy is essential.
It has been recognised that age is no barrier in entrepreneurship and support and advice for people between the age of 18 and 25 who are thinking of setting up in business is available through the Prince's Scottish Youth Business Trust.
Female entrepreneurship is also being encouraged through the strategy Women into Business, at Business Gateway. Further support for women is available online at scottishbusinesswomen.com
The growing importance of small firms in world economies is fully acknowledged. The Organisation for Economic Corporation and Development (OECD), which brings together 30 of the world's leading democratic nations, states in its document OECD SME and Entrepreneurship Outlook (2005)
'SMEs and entrepreneurship are now recognised world-wide to be a key source of dynamism, innovation and flexibility in advanced industrialised countries, as well as in emerging and developing economies. They are responsible for most net job creation in OECD countries and make important contributions to innovation, productivity and economic growth' (p16)
Recent statistics obtained from the Department for Business Innovation & Skills support the importance of SMEs to the UK economy. A press release dated 14th October 2009 confirmed that at the start of 2008, there were 4.8 million private sector enterprises in the UK of which SMEs accounted for 99.9% of these. In addition SMEs provided 59.4% of employment and 50.1% turnover.
In conclusion, there are many stages involved in the entrepreneurial process. The starting point is the initial idea which identifies a gap in a market or a new and innovative way of doing things differently. The entrepreneur seizes the opportunity to exploit this, using networking skills to acquire the necessary resources to overcome any obstacles, whilst showing determination and managing the risk. The customer is put first. The aim of the entrepreneur is to build something of recognised value.
To assist in the process, assistance can be sought from intervention agencies who will give advice and support. The Government fully recognises the importance of SMEs to the economy through job creation and provide incentives to encourage the start up of new businesses. However enterprising people are essential to start small businesses and this means developing an enterprising culture where people are encouraged to use their skills and abilities to maximise their full potential.