Entrepreneurship – the real engine of capitalism In the Utopia vs. Reality essay we showed why capitalism, despite its drawbacks, is the only sytem that has led to economic prosperity over the last two hundred years. In this essay, we want to shed light on the real engine of capitalism, which is not big business, surely not the government, but rather is entrepreneurship. Over the last three economic recoveries, companies comprising 20 or fewer employees created 3.6 million new jobs, while at the same time, companies of 500 employees or more eliminated more than 500,000 positions, according to the U.S. Census Bureau. – Harris Bank publication, May 2010. The Engine In almost every country, the biggest employer by far is the government. It is almost axiomatic, that the bigger the role of the government in the economy, the less productive is that economy. One does not have to go far. Start with the post office; do you generally come out with a smile on your face and gratitude in you heart that the post office exists? Why do you turn to FedEx when you really want to make sure that something gets there on time? Still feeling a bit skeptical? Try communing with the IRS or try to get your passport renewed quickly. Some people believe that it is big business that really powers the economy and is thus the engine of capitalism. It is true that big business does employ many people, but it really is the guardian of the status quo. Their belief in free markets is strong when it is in theory or when it applies to the other person, but it never extends to themselves. Yes, of course, there are big companies that grow the economy and are innovative – take Google or Apple today. But size invariably leads to a hardening of the arteries and the diminution of creativity and innovation. Look no further that Microsoft: What innovative thing have they created in the last decade? How much true innovation comes from the Fortune 500 companies? Not much; they buy the innovators when the opportunity presents itself.
What is Entrepreneurship? Perhaps this is the question to first address? The standard definition of an entrepreneur is a person who starts or runs a business and takes a fair bit of risk while doing so. The hero in our culture is the one who tells his boss to go the darker corners of the universe and sets off with a dream, mortgages his house, climbs mountains and jumps off cliffs just to get the adrenalin going. When in doubt it is best to turn to the sage, Peter Drucker, and in this case his book “Entrepreneurship and Innovation” specifically. He believes entrepreneurship is a practice, not a science or an art. Entrepreneurs use innovation as their key means to create value. “It is the act that endows resources with a new capacity to create wealth.” He further adds that entrepreneurs are a small minority of businessman, because most businesses do not add any new value. Think about it: hamburgers had been sold for a few millennia, but it was Ray Kroch, the entrepreneur, who brought new value to the offering by bringing a standardization of product, production, and service that endowed the same resources – meat, potatoes, and the likes, with considerable wealth generating capacity. One of my students, Sharon Kuo, came up with this defintion: The word “Entrepreneurship” comes from the old French root of entreprendre, which means “to undertake”. From the etymology of the term, entrepreneurship is an action that is self-motivated and self-starting. The bulk of the action and responsibility of the action lie upon the individual starting and implementing the action. Entrepreneurship is a way of life, an attitude, that focuses on creating value through solving problems. Businesses search for marginal
improvement, entreprenuers search for change to create significant value.
Where to find such ideas? Actually, they are all around us. Look at the problems, think of ways to solve them and you are already off on the entrepreneurial pursuit. In her book “My Big Idea”, Rachel Bridge discusses the properties that a good idea must have. The most important is that the idea must solve a problem. It is not how cool an idea sounds, but how the idea helps consumers. Ideas should be simple, practical, and easily scalable. For an entreprenuer, it’s also important to know what the market size for the idea is. If the market size is zero, chances are the idea doesn’t solve a problem. When generating an idea for a product/business, it’s key to communicate with the customers from the very beginning. Find out what their problems are, how much they’re willing to pay for your solution, and how you could change your idea to provide more value to them. And when looking for ideas, the best place to start is in your own life. Find something that could be added or improved that would help you. When innovating, you want to build something that you want to use. Guy Kawasaki in “Reality Check” describes how to preform the art of innovation. Of prime importance is to make meaning with your innovation. Again, innovation should solve a problem. It’s important to not attempt to please everyone with a product. Pleasing everyone means that no one will be as happy. Also when users find new uses for your product, go along with it. It doesn’t matter that they aren’t doing what you envisioned them doing with the product, because ultimately they will decide what the product is for, not you. A brand belongs to the customer, not the company.
Most importantly, don’t listen to the people who tell you that your innovation can’t and shouldn’t be done. As he says. “Don’t let the bozos win.” Then there is the master himself: Drucker and his seven sources of innovation, which are especially useful for companies looking to grow. All seven sources are based on one thing: change. When something changes in the world, there’s opportunity to innovate. Change means that the old way of doing something is no longer applicable, and that there’s an opening to create the new way. Another thing to watch for is the unexpected. When there’s a discrepancy between reality and what people assume is happening, there’s opportunity. The most common category of innovation is the bright idea, but unfortunately even when it is a good idea, it takes a long time to be developed. Michaelangelo was the most profilic creator of the last two milliniea, but his best ideas took 1500 years to come to frution. So, do not wait for the bright idea to appear from above, look around, and move.
Entrepreneurship as Dissent, Destruction, and Revolution? Two hundred years ago, Say said that entreprenuership is a declaration of dissent from the status quo. The entreprenuer upsets and disorganizes when the current organization is failing to provide full value. Joseph Schumpeter thought in terms of “creative destruction.” Equilibrium and even optimization promotes stagnation, disequilibrium from entreprenuership makes the economy sizzle. The last word, fittingly, belongs to Drucker: “They (Entrepreneurs) achieve what Jefferson hoped to achieve through revolution in every generation, and they do so without bloodshed, civil war, or concentration camps, without economic catastrophe, but with purpose, with direction, and under control.”