Entrepreneurship and Business Planning

This article looks at the multifaceted relationships between entrepreneurship and business planning, and it considers the causes and effects of entrepreneurship in new and preexisting businesses. As a strategic management tool, business planning is seen as one of the activities undertaken in the entrepreneurial process. Types of plans and aspects of business planning are also discussed, along with several contradictory schools of thought on the factors that determine entrepreneurship, the outcomes of planning, and information analysis.

Keywords Business Planning; Control Systems; Corporate Venturing; Entrepreneurial Behavior; Entrepreneurship; Environmental Scanning; Locus of Planning; Planning Flexibility; Planning Horizon

Entrepreneurship > Entrepreneurship & Business Planning

Overview

Business ventures fuel the economic growth and prosperity of nations and regions (Yusuf, 2002), and entrepreneurship has long been considered significant in encouraging such socioeconomic growth and development. Entrepreneurial ventures provide job opportunities, offer consumer goods and services, and increase general prosperity and competitiveness.

There is no universally accepted definition of the term "entrepreneurship." Entrepreneurship is a derivative of the term "entrepreneur," which historically referred to a businessperson, business owner, or owner-manager. In a narrow sense, entrepreneurship can be referred to as the creation of new enterprises, but over the years, the scope of this concept has expanded beyond basic new-venture creation (also known as corporate venturing or the setting-up of intra-firm 'venture capital' processes).

The expanded scope of entrepreneurship is two-pronged: on the one hand, it refers to the growth-oriented and employment-generating creation of new ventures; on the other hand, it includes small businesses and micro-enterprises that provide self-employment, even if they do not foster employment growth. Naturally, entrepreneurship is fostered by entrepreneurial behavior, or behavior that fosters growth through innovative ideas, products, services, markets, and technologies (Stevenson & Jarillo, 1990).

Entrepreneurship can be stimulated by certain favorable environmental conditions that may promote or prevent success by the nature of the climate they engender. Such favorable environmental conditions include family and support systems, financial resources, local community, and government agencies. Additionally, “larger societal factors such as cultural, economic, political and social forces can combine to create threats or opportunities in the environments where entrepreneurs operate” (Lee & Peterson, 2000).

Entrepreneurship can also be viewed at three levels: the macro level, individual level, and firm level. In macro terms, the word "entrepreneurship" is synonymous with the advancement of an economy (Schumpeter, 1934) and the disruption of market equilibrium. Entrepreneurial activity in itself leads to the promotion of competition and innovation, and by doing so, it contributes to economic growth and development. It is not surprising, therefore, that entrepreneurship has rapidly become a dynamic field of study and research.

Entrepreneurs are creative, innovative, and opportunistic. At the individual level, entrepreneurship has been attributed to individuals with certain internal psychological traits, sociological background characteristics, and behaviors. Psychologically, it is believed that entrepreneurs are believed to have a propensity toward risk-taking, high achievement, and an internal concentration of control. Sociological characteristics associated with entrepreneurs include being a first child, being an immigrant, and having early role models. Some writers, on the other hand, prefer to define entrepreneurship by what an entrepreneur does, not by who he or she is. For instance, a successful entrepreneur may be seen as one who most likely experiments with promising new technologies, seizes opportunities, or in other ways demonstrates initiative or decision making competence (Lee & Peterson, 2000).

Entrepreneurship is widely recognized as a process which involves businesses of all sizes, be they new or preexisting, owner-managed, family-run, or corporations. At the firm level, three variables have been identified as underlying a firm's ability to behave in an entrepreneurial manner. These are opportunity recognition, organizational flexibility, and the firm's ability to measure, encourage and reward innovative and risk-taking behavior (Barringer & Bluedorn, 1999). The success of a firm in its entrepreneurial ventures depends on the commitment of top management in taking the firm through the entrepreneurial process, which consists of opportunity identification, definition of business concept, assessment of resources requirements, acquisition of resources, and management and harvesting of the venture. Thereafter, whether the firm can increase its entrepreneurial commitment is mainly up to the compatibility of its management practices with its entrepreneurial ambitions (Lee & Peterson, 2000).

Corporate entrepreneurship is motivated by the need to transform, create or grow a business, create wealth, or change the status quo in response to factors such as intensified competition, corporate downsizing, corporate delayering, and technological progress. Through its two sub-processes, discovery and exploitation, corporate entrepreneurship refers to the process by which an organization pioneers, innovates, and takes risks for growth and development. Corporate entrepreneurship is made manifest in the form of corporate venturing, strategic renewal, and spin-offs for ideas generated within organizations (Hayton, George & Zahra, 2002).

There are three types of corporate entrepreneurship. The first is the creation of new businesses within a preexisting organization, also known as 'corporate venturing' or 'intrapreneurship,' and the second is the activity associated with the transformation or renewal of preexisting organizations, which involves the creation of new wealth through a combination of resources. The third is where the enterprise changes the 'rules of competition' for its industry.

Entrepreneurial firms are growth-oriented, proactive, innovative, creative, and flexible. They are pioneers and risk-takers, and they encourage their employees to be imaginative. Successful entrepreneurship will lead to the creation of value, through several means, including:

• The renewal of the organization itself
• The renewal of markets
• Changes in the pattern of resource deployment
• The creation of new capabilities to add new possibilities for positioning in markets
• The breaking of new ground
• The remixing of old ideas to make seemingly new applications

Entrepreneurship levels differ from one geographic location to another due to variations in environmental conditions and, in particular, economic, political/legal, and social conditions. The main factors affecting entrepreneurship in a particular locality are:

• Entrepreneurship policy
• Social systems and institutions
• Economic growth
• Industry conditions
• Industrial infrastructure
• Population dynamics
• The cultural landscape

Entrepreneurial research has discovered, for instance, that countries whose populations are excessively skewed toward old or young individuals are likely to experience low levels of entrepreneurial activity. Furthermore, a culture's entrepreneurial orientation — the way that culture is inclined toward entrepreneurship in the areas of autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness — combined with key economic, political/legal, and social forces, will impact the degree of entrepreneurship experienced, and ultimately will impact the global competitiveness of a nation or nations (Lee & Peterson, 2000).

Within nations also, institutional patterns such as access to research and educational institutions, access to sources of financing, and the availability of educated labor, help to determine the manner in which an innovation — and hence entrepreneurship — emerges within a country. It is believed that differences in national institutions may bring about different levels of entrepreneurial activity across countries. Entrepreneurial activity is more likely to thrive when appropriate infrastructure is in place to enhance competition and problem-solving activities between a country's entrepreneurs (Busenitz et al, 2000).

Cultural values will determine how much a society believes entrepreneurial behaviors such as risk taking, proactiveness, and independent thinking are desirable. “Cultures that value and reward such behavior promote a propensity to develop and introduce radical innovation, whereas cultures that reinforce conformity, group interests, and control over the future are not likely to manifest risk-taking and entrepreneurial behavior” (Hayton, George & Zahra, 2002).

Entrepreneurs are expected to allocate sufficient resources and implement a workable strategy capable of overcoming competitive and hostile adversaries. Planning, as a critical component of strategic management practice, is a major aspect of the entrepreneurial process, since planning has the potential to influence the degree of entrepreneurship taking place within an organization.

Applications

The amount of business planning carried out within organizations ranges from no planning at all to the development of comprehensive and detailed long-term plans. There are four types of plans, ranging from the simplest to the most complex. These are: unstructured plans, intuitive plans, structured operational plans, and structured strategic plans. Both the planning process (the creation, analysis, and implementation of strategy) and the planning content (the strategic choices, plans, and actions) are beneficial to entrepreneurs and entrepreneurial organizations.

Strategic plans focus on a firm's method of obtaining sustained competitive advantage, and a firm's strategic management practices must be tailored to support its organizational objectives and context. Therefore, the planning processes and practices will differ among industries. For instance, when planning, manufacturing organizations tend to identify their performance objectives and organizational expertise based on cost variables, quality, complexity, and available resources. Marketing organizations, on the other hand, frequently use SWOT analyses to identify competitive advantage through either market segmentation or identification of an effective marketing mix (Honig, 2004). Likewise, planning processes and their effects differ between small and large businesses.

Key aspects of the business planning process include environmental scanning, locus of planning (employee involvement), planning flexibility, planning horizon (planning time-frame), and control attributes. Environmental scanning refers to the managerial activity of learning about events and trends in an organization's environment (Hambrick, 1981). By its very nature, the entrepreneurial process requires a high level of environmental scanning. Scanning may reveal new opportunities, but it may also unearth environmental uncertainty. Fortunately, scanning may help managers cope with the uncertainty, but only if they realize that uncertainty can only be reduced, not eliminated (Barringer & Bluedorn, 1999).

There are three types of uncertainty — state, effect, and response uncertainty. State uncertainty refers to the inability to understand or predict the state of the environment due to a lack of information or a lack of understanding of the interrelationships among environmental elements. Effect uncertainty refers to uncertainty over the consequences of environmental changes for the organization, and response uncertainty implies that decision-makers do not know the response options, or they do not know the likely consequences of pursuing a particular option.

According to Barringer & Bluedorn (1999), locus of planning “refers to the depth of employee involvement in a firm's strategic planning activities. Organizations can be described as having either a shallow or a deep locus of planning. A deep locus of planning refers to a high level of employee involvement in the planning process, where employees from virtually all hierarchical levels within the firm” are included. On the other hand, a shallow locus of planning denotes a fairly exclusive planning process, usually involving only the top managers of a firm.

It is believed that a deep locus of planning facilitates a high level of corporate entrepreneurship intensity, since a high level of employee involvement in planning brings the frontline staff, those who are 'closest to the customer,' into the planning process. The involvement of non-managerial staff may allow a firm to see — and seize — opportunities which it otherwise could have missed. Hence, a deep locus of planning may facilitate opportunity recognition, which is vital in the entrepreneurial process (Schumpeter, 1936). A deep locus of planning also facilitates the entrepreneurial process by maximizing the diversity of viewpoints that a firm might consider in formulating its strategic plan.

A strong relationship has been discovered between planning flexibility and corporate entrepreneurship activity (Barringer & Bluedorn, 1999). Plans must be flexible: they should be easily changed as and when environmental opportunities or threats emerge. Unfortunately, some organizational decision-makers hesitate to deviate from their plans, fearing that their deviations will be interpreted as flaws in the initial planning process. A flexible planning system will allow a firm to adjust its strategic plans quickly to pursue opportunities and keep up with environmental change.

A firm's planning time-frame is known as its planning horizon, which is the length of the future time period that decision-makers consider in planning. The planning horizon of individual firms varies from less than one year to more than fifteen years. To facilitate successful entrepreneurship, planning horizons should be long enough to permit planning for expected changes in strategy, and yet be short enough for a firm to have reasonably detailed plans.

An entrepreneurial firm “faces the dual challenge of remaining responsive to current environmental trends, which suggests the adoption of a short-term planning horizon, while at the same time remaining visionary, which suggests the adoption of a longer-term perspective” (Barringer & Bluedorn, 1999):

“A relatively 'short' average planning horizon of less than five years may be most advantageous, as entrepreneurial firms typically compete in turbulent environments that are characterized by short product and service life cycles. The main concern of an entrepreneurial firm is product and service innovation, which typically must be accomplished in the short term rather than the long term to maintain a sustainable competitive advantage. A short planning horizon, coupled with intensive environmental scanning and a high degree of organizational and planning flexibility, should provide an entrepreneurial firm with the capacity to quickly recognize environmental change and develop appropriate product and service innovations” (Barringer & Bluedorn, 1999).

Entrepreneurial firms must have systems in place to ensure that their business strategies meet predetermined goals and objectives. Such systems are known as control systems. Strategic controls base performance on strategically relevant criteria like customer satisfaction, new patent registrations, meeting deadlines, and the achievement of quality control standards. Conversely, financial controls base performance on objective financial criteria such as net income, return on equity, and return on sales. The control systems of entrepreneurial firms — particularly their strategic and financial controls — must stimulate innovation, proactiveness, and risk-taking (Barringer & Bluedorn, 1999).

Viewpoints

As is the case in many fields of study, there are several contradictions in entrepreneurship theory and practice. For instance, scholars disagree on the very factors that determine entrepreneurship. While some believe that entrepreneurship is determined by the level of importance strategy making commands in a firm, others cite the personality traits of the leader, believing that entrepreneurship involves individuals with unique personality characteristics and abilities. Still others refer to the role played by the structure of the organization.

In response to this theoretical ambiguity, some researchers have conjectured that in small firms whose power is concentrated at the top, entrepreneurship would be determined by the characteristics of the leader. In larger firms, whose goal is smooth and efficient operation through the use of formal controls and plans, it appears that entrepreneurship would be facilitated by explicit and well-integrated product-market strategies. In firms that strive to be adaptive to their environments and emphasize expertise-based power and open communications, entrepreneurship may be a function of environment and structure (Miller, 1983).

Though many educational programs in entrepreneurship place much emphasis on business planning, there appears to be little evidence that planning — even pre-startup planning — leads to success. In fact, one often hears of notable cases where new businesses proved very successful despite the fact that pre-startup planning was limited. Business planning is often believed to interfere with the efforts of firm founders to undertake more valuable actions to develop their fledgling enterprises.

Empirical studies testing theoretical relationships between strategic planning and outcomes for preexisting businesses tend to be inconclusive, with some research pointing to the usefulness of long-term planning in organizations and other research failing to identify positive outcomes. Some of such studies have been faulted for methodological weaknesses. Some researchers found that outcomes differed across industry sectors, and others have shown that the effect of strategic planning on outcomes is conditional on the relative stability of the industrial environment under study.

It is therefore suggested that in entrepreneurship, entrepreneurs should avoid focusing their efforts on the production and evaluation of systematic detailed plans, developing instead the necessary skills to reevaluate, adapt, and revise their activities in a resourceful manner, to suit new environmental contingencies. Outcomes are often impossible to predict and represent decisions that are impossible to anticipate (Honig, 2004).

While information gathering and analysis is crucial for the development and maintenance of successful innovation strategies in entrepreneurial firms, too much information — known as information overload — is detrimental to planning. In the form of a vicious cycle, it is often the case that the more information one collects, the more likely one is to receive conflicting pieces of information. In a quest to make sense of conflicting information, one then searches for more information, and eventually the law of diminishing returns sets in. Also detrimental is the overanalysis of a small amount of well-researched, comparable options.

To support a de-emphasis on planning, it has been observed that much of what entrepreneurs actually do is the product of tacit knowledge, also referred to as knowledge-by-doing, which is most often acquired through learning by experience. In general, entrepreneurial firms may thrive best if they have an experimental focus that makes use of environmental feedback.

Terms & Concepts

Control Systems: Systems that ensure that an organization's strategies meet predetermined goals and objectives. Control systems include those that are both financial and strategic in nature.

Corporate Venturing: The creation of new businesses within preexisting organizations. Corporate venturing is also known as intrapreneurship.

Entrepreneur: A creative, innovative, and opportunistic business owner or owner-manager who carries out new business permutations in a quest for growth through innovation.

Entrepreneurial Behavior: The quest for growth through innovation, be this technological or purely managerial.

Entrepreneurship: In macro terms, this term is synonymous with the advancement of an economy, and in a micro sense, it refers to the process by which an individual or organization pioneers, innovates, and takes risks for growth and development.

Environmental Scanning: The managerial activity of monitoring events and trends in an organization's environment.

Financial Controls: Systems which base a firm's performance on objective financial criteria such as net income, return on equity, and return on sales (Barringer & Bluedorn, 1999).

Locus of Planning: The depth of employee involvement in a firm's strategic planning activities (Barringer & Bluedorn, 1999).

Planning Flexibility: The ease with which a firm can change its strategic plan in response to environmental change (Barringer & Bluedorn, 1999).

Planning Horizon: The length of the future time period that a firm's decision-makers consider in planning (Barringer & Bluedorn, 1999).

Strategic Controls: Systems that base a firm's performance on strategically relevant criteria such as customer satisfaction, new patent registrations, meeting deadlines, and the achievement of quality control standards (Barringer & Bluedorn, 1999).

Strategic Plans: Organizational plans that focus on a firm's method of obtaining sustained competitive advantage.

SWOT Analysis: A method for determining the strengths, weaknesses, opportunities, and threats of an organization in order to define the ways in which a firm can accomplish its goals and which obstacles it must overcome or minimize.

Tacit Knowledge: Knowledge gained through experience.

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Suggested Reading

Baker, W. H., Addams, H. L., & Davis, B. Business Planning in Successful Small Firms. Long Range Planning, 26, 82–88. Retrieved February 13, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9296883&site=ehost-live

Chwolka, A., & Raith, M. G. (2012). The value of business planning before start-up — A decision-theoretical perspective. Journal of Business Venturing, 27, 385–399. Retrieved November 19, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=71908003

Hechavarria, D., Renko, M., & Matthews, C. (2012). The nascent entrepreneurship hub: Goals, entrepreneurial self-efficacy and start-up outcomes. Small Business Economics, 39, 685–701. Retrieved November 19, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=79629062

Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press.

Schumpeter, J. A. (1934). The Theory of Economic Development. Cambridge: Harvard University Press.