Entrepreneurs' Skills and Traits in Small Business Organizations - Literature review Example

Enterpreneurs’ Skills and Traits in Small Business Organizations by Student’s Name A Literature Review on Enterpreneurs’ Skills and Traits in Small Business Organizations This chapter reviews literature on concepts of (1) entrepreneurship, (2) entrepreneurs, (3) classification of entrepreneurs, (4) entrepreneurs’ traits, (5) entrepreneurs’ skills, (6) difference between entrepreneurs and managers, and (7) success of small business organizations and entrepreneurs’ skills and traits. In reviewing the concepts, the chapter aims at providing answers to the following questions. (1) What is entrepreneurship? (2) Who are entrepreneurs? (3) How can entrepreneurs be classified? (4) What are traits of entrepreneurs? (5) What are skills of entrepreneurs? (6) How do entrepreneurs differ from traditional managers? (7) Why does success of small business organizations depend on entrepreneurs? (8) What are relationship between entrepreneurs’ skills and traits and small business performance? (9) Where does the gap lie in the knowledge body of entrepreneurship? What is entrepreneurship? At the outset, the concept of entrepreneurship should be clear. There is no single definition of entrepreneurship which is universally accepted because the meaning and conceptualization of entrepreneurship evolved throughout the history. However, Steven (1992) points out that some researchers such as Barreto (1989), Brandt (1986), Kent (1984) treat entrepreneurship as a recent phenomenon. Therefore, to define what entrepreneurship means, it is essential to explore historical evolution of conceptualization and meanings. The origin of entrepreneurship can be traced back to ancient and medieval periods. This historical evolution of entrepreneurship is explained in two its conceptual developments and re-conceptualization of what it means for something to be “entrepreneurial” in three periods, namely (1) prehistoric bases (before 1760), (2) economic bases (from 1780s to 1980s), and (3) multidisciplinary bases (from 1980s to present) (Murphy, Lilao, and Welsch, 2006). In the prehistoric period, entrepreneurship requires experiential or skill-based knowledge to remedy inefficiencies and offer solutions, products, and services. It became a way to make a living. It should be noted that only a fraction of populace, which belongs to religious orders or craft guilds, usually engages in entrepreneurial activity (Weber, 1930, Hebert & Link, 1988; Baumol, 1991; Murphy, Lilao, and Welsch, 2006). In the economic bases, two main theories—classical and neo-classical theories drove the meaning and conceptualization of entrepreneurship. Classical theory emphasizes free trade, specialization, and competition. Entrepreneurship requires (1) discovering a competitive market place; (2) searching risks of obtaining materials, training a workforce, or finding a market; and (3) finding arbitrage opportunities in currency differentials (Smith, 1766; Murphy, Lilao, and Welsch, 2006). Neo-classical theory which conceptualizes commercial activity with more subjective views of interaction among people not objects, views entrepreneurship as a transformation of resources into unforeseen products (Menger, 1871; Schumpeter, 1934; Murphy, Lilao, and Welsch, 2006). Following the neoclassical theory, Austrian market process views that entrepreneurship requires tangible resources and knowledge to make correction decision (Kirzner, 1973; Murphy, Lilao, and Welsch, 2006). In multidisciplinary bases, not only sociological and marketing factors, but also psychological characteristics were conceptualized in the entrepreneurship. Discounting the change in environment, this conceptualization was moved to contemporary framework which views entrepreneurship including entrepreneurial discovery at all levels of a social system. Not only within perspectives, but also across perspectives are in need to conceptualize new research paradigm. Statistical methods require normal and meaningful aggregation of data which are not possible due to idiosyncratic and unreliable nature of data. In the opportunity construct, internal and external factors affect entrepreneurial discovery. Network provides access to knowledge and information. Knowledge is also seen as facilitating discoveries (Figure 1) (Murphy, Lilao, and Welsch, 2006). Entrepreneurship can be understood in three fundamental aspects, namely (1) role, (2) function, and (3) historical perspective (Steven, 1992). First, the role refers to the purpose of entrepreneurship. Entrepreneurship aims at engaging in the movement of resources from low areas to higher areas of production and increase. Second, the function of innovation is essential in entrepreneurship. No matter organization is new, small business or using high-tech process, it does not make an entrepreneurial venture. Only the market’s responds to the organization’s products makes entrepreneurship. In all historical periods, which can be classified as the Hunter/Gatherer Age, the Agricultural Age, the Mercantile Age, the Industrial Age, and the Service Age fill a need. In each age, entrepreneurship is found as identifying need and creating something in order to fill the need. The need began with tools, moved to irrigation, to trading, to machinery, and finally at the start of the service age, to artificial intelligence. Eventually the economy will move into another period of innovation and on to a new age (Steven, 1992). Figure 1. An Evolution of Entrepreneurial Thought Source: Murphy, Liao, & Welsch (2006) Who are entrepreneurs? The term entrepreneur was originated in France in the sixteenth century. It was used for those who managed military and exploration expeditions (Ellis, 1975). In the early work of McClelland (1961), the entrepreneurs are described as “primarily motivated by an overwhelming need for achievement and strong use to build”. Later, they are regarded as tough and pragmatic people driven by needs of independence and achievement with willingly to submit to authority (Collins and Moore, 1970). More often cited definition of entrepreneurs is defined by a well-known economist, Schumpeter (1934 & 1965). He defines entrepreneur as “an innovator and a catalyst of change who continuously does things that have not been done before and do not fit established societal patterns”. In addition, the entrepreneur is also defined as “an individual who is instrumental to the conception of the idea of an enterprise and its implementation (Kets de Vries, 1996, p. 856) and is a puzzling figure to large segments of the population in many societies” (Kets de Vries, 1980, p. 43). Begley and Boyd (1987) propose a simple definition of entrepreneurs. They define as “entrepreneur is a person who has founded his or her own enterprise. Their definition tries to capture entrepreneurship and venture creation as synonymous. How can entrepreneurs be classified? Early classification of entrepreneurs is done by Cole (1959). He classifies entrepreneurs in four types as follows: (1) the innovator; (2) the calculating inventor; (3) the over-optimistic promoter, and (4) the organization builder. Later, Fulton (1987) distinguishes two types of entrepreneurs. The first type is called political entrepreneur who use political influences to obtain profits from government related businesses such as government contracts, government-granted monopoly business, subsidies, etc. The other type is called market entrepreneurs who operate their business start-ups by themselves without seeking political favor from the government. Kao (1991) describes two types of entrepreneurs. They are (1) the creative entrepreneur who is commercially innovative in his or her business, and (2) the conventional entrepreneur who wants to own and develop his or her own business but with a conventional product. Dyer (1992) describes three categories of entrepreneurs namely, (1) the technical entrepreneur who loves inventing and developing new products; (2) the organization builder who starts a business because he or she likes to build organizations, and; (3) the deal maker who enjoys negotiating a new agreement or arrangement. What are traits of entrepreneurs? Many authors assumed that entrepreneurs have distinct personality traits which can be predictors for the success of venture (e.g. Aldridge, 1997; Bonnett & Furnham, 1991; Brandstaetter, 1997; Cooper & Gascon, 1992; and Malach-Pines, Sadeh, Dvir, and Yafe-Yanai, 2002). The traits studies can be traced back to as early as 1970s. Hornaday and Boud (1971) study personal traits which can predict the entrepreneurial success. Their nine personal traits include need for (1) achievement, (2) autonomy, (3) aggression, (4) support, (5) conformity, (6) recognition, (7) independence, (8) benevolence, and (9) leadership. In a study with sixty entrepreneurs, they find that needs for recognition is rated lowest whereas need for achievement scores highest in the results of self-evaluated questionnaires. Timmons, Smollen and Dingel (1985) attempt to differentiate successful entrepreneurs from unsuccessful ones. Their method of differentiation is to search personal traits of those successful and unsuccessful entrepreneurs. Successful entrepreneurs’ personal traits include (1) total commitment, determination and perseverance, (2) drive to achieve and grow, (3) opportunity and goal orientation, (4) taking initiative and personal responsibility, (5) persistent problem solving, (6) realism and a sense of humor, (7) seeking and using feedback, (8) internal locus of control, (9) calculated risk-taking and risk-seeking, (10) low need for status and power, and (11) integrity and reliability. Brockhaus and Horwitz (1986) comprise personal characteristics of entrepreneurs under three categories, namely (1) psychological characteristics including need for achievement, locus of control, risk-taking propensity, problem-solving style and innovativeness, and values, (2) effects of previous experience which include dissatisfaction with previous work experience, and role models, and (3) personal characteristics including education and women and minority entrepreneurs. Malach-Pines, Sadeh, Dvir, and Yafe-Yanai (2002) list a set of traits of successful entrepreneurs in their extensive literature review from various authors (e.g. Frese, Chyell & Klandt, 2000; Brandstaetter, 1997; Aldridge, 1997; Plant, 1996; Bonnett & Furnham, 1991; Cooper & Gascon, 1992; Holler, Host, & Kristensen, 1992; Fraboni & Saltstone, 1990; Nicholson, 1988; Solomon & Winslow, 1988; Winslow & Solomon, 1987, 1989; Kets de Vries, 1976, 1977, 1980, 1996; Lynn, 1969). The traits most authors often citied in their literature review are (1) high achievement motivation; and need for (2) control; (3) internal locus of control; (4) autonomy; (5) distrust; (6) distrust; (7) independence; (8) assertiveness; (9) self-confidence; (11) initiative; (12) optimism; (13) imagination; (14) imagination; (15) persistence in problem solving and single mindedness; (16) leadership; (17) decisiveness; (18) competitiveness; and (19) a desire for applause; (20) risk taking. Among most often cited traits, Malach-Pines, Sadeh, Dvir, and Yafe-Yanai (2002) derive a list of 14 traits in their study. They are (1) loves challenges; (2) needs control; (3) shows commitment; (4) shows initiative; (5) independent; (6) involved; (7) a dreamer; (8) loves to manage; (9) risk taker; (10) energetic; (11) confident; (12) optimistic; (13) creative; and (14) realistic. Kao (1991) make comments regarding traits approach which was often applied to studies on successful entrepreneurs. His comments include (1) traits approach lacks of specificity, (2) refers largely to men, and (3) being not applicable to all cultures. Timmons, Smollen, and Dingee (1985) point out that these traits of successful entrepreneurs must be at optimal mixture. For example, extreme self-sufficiency trait will lead founder not to delegate authority to others and may pose difficulties for long-term success. Table 1. Summary of Studies on Entrepreneurial Traits Hornaday & Aboud (1971) Timmons et al. (1985) Brockhaus & Horwitz (1986) Malach-Pines et al. (2002) Baum & Locke (2004) Achievement Total commitment, Psychological Loves challenges Passion Autonomy determination and perseverance -need for achievement Needs control Tenacity Aggression Drive to achieve and grow -locus of control Shows commitment Support Opportunity and goal orientation -risk-taking propensity Shows initiative Conformity Taking initiative and -problem-solving style and Independent Recognition personal responsibility innovativeness Involved Independence Persistent problem solving -values A dreamer Benevolence Realism and a sense of humor Experience Loves to manage Leadership Seeking and using feedback -dissatisfaction with pervious Risk taker Internal locus of control work experience Energetic Calculated risk-taking -role models Confident and risk-seeking Personal characteristics Optimistic Low need for status and power -education Creative Integrity and reliability -women and minority Realistic Baum and Locke (2004) suggest two new traits—(1) passion, and (2) tenacity, to the studies of personal traits as predictors for success of ventures. These two traits seemed most promising in terms of leadership and entrepreneurship theoretical support (Locke, 2000; Yukl, 1989; Baum & Locke, 2004). Passion is measured in terms of the emotions of love, attachment, and longing. However passion needs to be witnessed over time in the long hours worked during venture start-up and growth phases. Tenacity, or perseverance, is a trait that involves sustaining goal-directed action and energy even when faced with obstacles. This trait is identified consistently as an archetypical entrepreneurship trait because the business start-up process involves confrontation of formidable barriers to market entry (Baum & Locke, 2004). What are skills of entrepreneurs? Schumpeter (1934) and Drucker (1966) argue that while not all managers are entrepreneurs, but all entrepreneurs are managers. Entrepreneurial skills refer to the ability to discover opportunities for profitable reallocation of resources to new endeavors (Herron and Robinson, 1993). Managerial skills into three categories: (1) technical skills, (2) human skills, and (3) conceptual skills. Technical skills refer to knowledge and proficiency in a specific kind of activity; human skill is the ability to interface effectively with others; conceptual skills concern the ability to envision the enterprise as an integrated, open system (Katz, 1974). Later, Katz’s skills are further divided down into finer classification by Szilagyi & Schweiger (1984). They see the area of technical skills as divided into three sub-classifications: functional technical skills, business skills, and industry skills. Functional technical skills connote knowledge and proficiency concerning products, services, and processes; business skills refer to understanding and competence in dealing with organizational questions; and industry skills involve understanding and proficiency in maneuvering within an industry. Human skill is also divided into tow sub-categories: leadership skills and networking skills. Leadership skills denote proficiency in positively affecting behavior of others whereas networking skill involves the ability to create and effectively use human networks in obtaining information. Conceptual skill is sub-divided into executive and entrepreneurial skills. Entrepreneurial skills refer to the ability to discover opportunities for profitable reallocation of resources to new endeavors, while executive skills refer to proficiency and knowledge in planning and executing these reallocations. Herron and Robinson (1993) include seven skills, namely (1) product, (2) business, (3) industry, (4) leadership, (5) networking, (6) executive, and (7) entrepreneurial which are used by entrepreneurs in pursuit of successful performance. In fact, their seven skills are adopted from the skills proposed by Szilagyi & Schweiger (1984). New resource skill, which is the ability to acquire and systematize the operating resources needed to start and grow an organization (Baum and Locke, 2004). Entrepreneur’s new resource skill involves finding capital and human resources and setting up new operations and new systems. Successful entrepreneur’s is required to know how to search for and acquire financial and human resources, even while confronting new markets, resource shortages, and extreme uncertainty (Bhide, 2000; Stevenson, 1985; Smith & Smith, 2000; Baum and Locke, 2004). However, Baum & Locke (2004) differentiate new resource skill and organizational skill. Organizational skill involves oral presentation, use of power, diagnosis, and decision making in mainly in managing established resources in established settings, whereas new resource skill relates to resources that are new to the organization. Smith & Smith (2000) suggest that new resource skill is predictors of new venture success. Founders often experience limited growth due failure to employ individuals who are skilled with resources (Timmons, 2000). Ideational skill is suggested by Ames and Runco (2005). They argue that entrepreneurship takes many forms leading to innovation, and thus to something new. The innovation may be a new business, or a new product or service, with a new business developed to support that product or service. Therefore, ideational skill measured in terms of the generation of ideas is essential. Table 2. Summary of Studies on Entrepreneurial Skills Katz (1974) Szilagyi & Schweiger (1984) Herron & Robinson (1993) Baum & Locke (2004) Ames & Runco (2005) Technical skills Technical skills -Functional technical skills -Business skills -Industry skills Product Business Industry New resource skills - ability to acquire and systematize the operating resources need to start and grow an organization. Ideational skills -ability to generate new ideas Human skills Human skills -leadership skills -networking skills Leadership Networking Conceptual skills Administrative skills - executive skills -entrepreneurial skills Executive Entrepreneurial The ideational skill is sub-divided into two, (1) ideational fluency, and (2) ideational originality. Ideational fluency is based on productivity which is operationally defined in terms of the number of ideas given, whereas ideational originality represents an individual’s capacity to generate ideas that are unique. How do entrepreneurs differ from traditional managers? Not all managers are entrepreneurs whereas all entrepreneurs can be regarded as managers. The reason is that all entrepreneurs are believed to perform tasks of those managers (Schumpeter, 1934 and Drucker, 1966). It is important to differentiate entrepreneurs from managers in terms of traits and skills they possess. In the study of Malach-Pines et al. (2002), the fourteen traits of successful entrepreneurs are compared with those of non-traditional managers. They found that eight out of fourteen traits are significantly different between these two groups. Successful entrepreneurs rated themselves as (1) loving challenge more; (2) greater risk takers; (3) showing more initiatives; (4) being more independent; (5) more realistic, (6) more creative; (7) more optimistic; and (8) being greater dreamers than managers. One important trait which has received attention among researchers is taking risk. There is still argument on the topic of taking risk or risk propensity differences between successful entrepreneurs and traditional managers. In a psychometric meta- analysis study conducted by Stewart and Roth (2001) find that the risk propensity of entrepreneurs is greater than that of manager. There are also differences between entrepreneurs whose primary goal is venture growth versus those whose focus on producing family income. However, later referring to their study, Miner and Raju (2004) add new 14 studies which excluded in the study of Stweart and Roth (2001) and find different results. Their findings reveal that entrepreneurs and those with a growth orientation are more risk avoidant. However, there are some similar traits between successful entrepreneurs and managers. The traits include (1) commitment; (2) involvement; (3) energetic; (4) confidence; (5) need for control; and (6) love of management. In the skills studies, both successful entrepreneurs and managers required three essentials skills, namely (1) technical, (2) human, and (3) conceptual skills (Katz, 1974; Szilagyi & Schweiger, 1984). However, additional two new skills were found important for successful entrepreneurs. The first skill is named as a new resource skill, ability to acquire new resources for a start-up business (Baum & Locke, 2004). The other skill, namely ideational skill is highlighted by Ames & Runco (2005). Successful entrepreneurs require ideational skill to generate new ideas which will lead them to search and identify new business opportunities and success of new business. Why does success of small business organizations depend on entrepreneurs? It is the fact that entrepreneurship promotes job creation and it is responsible for most of the jobs in many developed countries around the world (Hildebrando, 2003; Kirchhoff, 1991; Ripsas 1998; Harper, 1991). It is generally agreed that the small and entrepreneurial businesses in the economy generate a number of benefits and their related advantages which are clearly seen in the global, national, societal, organizational, and individual levels (Drucker, 1985; Brock and Evans, 1989; Acs, 1992; Julien, 1998; Henry, 2000). However, more than 50% of new ventures terminate within 5 years (Aldrich, 1999; Baum and Locke, 2004). The success of those small businesses does not come by itself. Their success totally depends on entrepreneurs who take a lead in entrepreneurship endeavors. Entrepreneurial activity for the conversion of technological and organizational innovation into new and more efficient products and services is very important for success of small business (Schumpeter, 1934). What are relationships between entrepreneurs’ skills and traits and small business performance? Many researchers used personal traits, organizational factors, and environmental factors as causes of new venture success. In the studies from 1961 to 1990, the personal traits are found having weak effects on venture success (Aldrich & Wiedenmayer, 1993; Baum and Locke, 2004). These findings make surprises to entrepreneurs who themselves pointed their personal characteristics as dominant reasons for success (Sexton, 2001; Smith & Smith, 2000; Baum and Locke, 2004). Later, not only entrepreneurs’ personal characteristics as predictors of success by moving beyond the past focus on traits to study competencies, motivation, cognition, and behavior (Baron, 1998; Baum, Locke, & Smith, 2001; Busenitz & Barney, 1997; Mitchell, Smith, Seawright, & Moorse, 2000); Baum and Locke, 2004). Where does the gap lie in the knowledge body of entrepreneurship? Generally speaking, there are two main lines of research related to entrepreneurship; within economics (which has a vision focused in the broad socio-economic environment and policies targeted toward more entrepreneurship generation), and within management (which sees entrepreneurship connected to the performance of the firm) (Audretsch and Thurik, 2006). There is a need to refine traits which were previously conceptualized and studied empirically. Carsrud and Krueger (1995) suggest that need for achievement (McClelland, 1965), risk-taking propensity (Brockhaus, 1980), and internal locus of control (Sexton & Bowman, 1986) are wrong traits for empirical study. Still the role of risk taking behavior in entrepreneurship is still unsolved and it is upheld (Stewart and Roth, 2001; Miner & Raju, 2004). The findings in the studies of skills of successful entrepreneurs are still inconclusive and weak for generalization. Many authors suggest that future studies should include more sample and different group of successful entrepreneurs. The direct impacts of skills on success of ventures are also weak and complex. Therefore, new conceptual frameworks which capture not only the skills, but also traits, and other contingency variables should be further developed and tested empirically. Read More