We have an interesting paper that deals with the topic of entrepreneurial leadership. I am of the belief that entrepreneurship will be a much larger component in each and every individuals makeup. People's careers used to span their working life at a single firm. Careers now span the working life of an individual within one industry. In the very near future, we may see careers span multiple companies as well as multiple industries.
To achieve this level of dynamic working environment, an individual will be relying far more heavily on their entrepreneurial skills. What does that mean, and what exactly are entrepreneurial skills and entrepreneurial leadership. This paper offers the opportunity to better define these difficult to quantify and qualify terms. These entrepreneurial definitions are also key attributes of making this software development project successful.
This web-log has never reviewed any of Professor Peter Klein's work. I have however subscribed to the Organizations and Markets (their Feed ) web-log of Peter Klein and Nicholas Foss' for over two years and as such have either highlighted individual posts through the Google reader interface, or commented on them briefly through Professor Langlois' writings.
It was through Organizations and Markets that Professor Langlois was introduced as a guest blogger. Professor Langlois had just received the Schumpeter prize and was writing as a guest. He now frequently writes as a regular contributor to Organizations and Markets and his research was a foundation on which the Draft Specification was built.
The topic of Entrepreneurship has become more and more a part of the mainstay of the business environment. This has particularly been the case since the 2000 .com crash. The entrepreneur has since become enabled through the Information and Communication Technologies. Technologies that are real in comparison to what was hoisted as innovative in the pre-2000 era. So lets find out what we can learn in order to assist the understanding of the users and developers about these somewhat vague terms.
Professor Klein sets the stage of how critical the entrepreneur has become.
"Entrepreneurship is one of the fastest-growing fields within economics, management, finance and even law. Surprisingly, however, while the entrepreneur is fundamentally an economic agent -- the "driving force of the market," in Mises's (1949, p. 249) phrase -- modern theories of economic organization and strategy maintain an ambivalent relationship with entrepreneurship." p. 1
I would be at a loss to further define the role of the entrepreneur importance in this software development project. I have selected the name of this project based on Professor Paul Romer's new growth theory that involves People, Ideas & Things. Whereas "Things" is replaced with the software "Objects" that we use to capture the oil and gas business understanding in the software. Professor Klein also discusses some of the difficulty in defining what an entrepreneur is.
"It is widely recognized that entrepreneurship is somehow important, but there is little consensus about how the entrepreneurial role should be modeled and incorporated in economics and strategy. Indeed, the most important works in the economic literature on entrepreneurship -- Schumpeter's account of innovation, Knight's theory of project, and Kirzner's analysis of entrepreneurial discovery -- are views as interesting, but idiosyncratic insights that do not easily generalize to other contexts and problems. p. 1
Why this is important. I think every business user has been faced with the near impossible task of making changes in the reports and analysis of their systems and data. Many are forced to use the interfaces that are provided by an SAP or Oracle application. Interfaces that the users could improve upon with some minor data, processing or alternative changes. However, knowing the difficulty in making these changes has silenced any and all initiative in the corporate world.
Asking for change will require too much effort and political skill to make the changes worthwhile. It is through the users ability to discuss their information processing requirements in this project, and subsequently see and incrementally improve upon the software applications that they use. This is what People, Ideas & Objects is providing, a place where users and developers can work together to make the oil and gas worker more enabled, innovative and entrepreneurial.
Making the working environment more user friendly may have been a goal prior to the web. Now users demand higher quality applications that they can make changes to. This is an important concept and Professor Klein states the reason why.
More recently, the Austrian economist Israel Kirzner has popularized the notion of entrepreneurship as discovery, or alertness to profit opportunities. p. 2
If change is the constant, and we are to enable the entrepreneurial spirit of the individuals that work in the industry; to discover, be alert and to most importantly implement profit opportunities. These are the primary motivating factors of these individuals. Why would they need to file a change request, fill out the forms, estimate the costs, seek budget approval, and have the signing by four authorized individuals to benefit the company? These changes need to be able to be implemented in a more efficient manner through the natural interaction of the users and the developers.
Innovation has at its core certain trial and error elements. Approving the bureaucratic change request that ultimately leads to an error will ensure that user is never authorized again. However, what we have learned about the innovative oil and gas producer is that failure is the critical part of learning. An error should not mean that the individual has no credibility for future changes. It should mean exactly the opposite. Who therefore should be the one to make the decision on what changes the users want? Particularly if the individuals compensation is at stake.
Opportunities are essentially subjective phenomena (Foss, Klein, Kor, and Mahoney, 2008). As such, opportunities are neither “discovered” nor “created” (Alvarez and Barney, 2007), but imagined. They exist, in other words, only in the minds of decision-makers. p. 2
Recall in the "Secrets of Successful Execution" blog post, "Execution is the result of thousands of decisions made every day by employees acting according to the information they have and their own self interest." And...
By contrast, the classic contributions to the economic theory of entrepreneurship from Schumpeter, Knight, Mises, Kirzner, and others model entrepreneurship as a function, activity, or process, not an employment category or market structure. The entrepreneurial function has been characterized in various ways: judgment (Cantillon, 1755; Knight, 1921; Casson, 1982; Langlois and Cosgel, 1993; Foss and Klein, 2005), innovation (Schumpeter, 1911), adaptation (Schultz, 1975, 1982), alertness (Kirzner, 1973, 1979, 1992), and coordination (Witt 1998a, 1998b, 2003). p. 4
I would think that attempting to source these qualities from the
management of a firm would be futile.
By focusing too narrowly on self-employment and start-up companies, the contemporary literature may be understating the role of entrepreneurship in the economy and in business organization. p. 4
It bears asking, is the entrepreneur the prototypical employee of the future? Klein now focuses on the profit motive of the entrepreneur in their optimal situation. Suggesting that the competitive and profit motive are the reasons that workers in the oil and gas industry will be motivated to make these changes. If the user has a vested interest in their own profits as a result of their actions, does that also imply that the producers interests are well taken care of by the user?
Judgment is distinct from boldness, innovation, alertness, and leadership. Judgment must be exercised in mundane circumstances, for ongoing operations as well as new ventures. Alertness is the ability to react to existing opportunities while judgment refers to beliefs about new opportunities. Those who specialize in judgmental decision making may be dynamic, charismatic leaders, but they need not possess these traits. In short, in this view, decision making under un-certainty is entrepreneurial, whether it involves imagination, creativity, leadership, and related factors or not. pp. 5 - 6
and
Mises’s point is that a socialist economy may assign individuals to be workers, managers, technicians, inventors, and the like, but it cannot, by definition, have entrepreneurs, because there are no money profits and losses. Entrepreneurship, and not labor or management or technological expertise, is the crucial element of the market economy. As Mises puts it: directors of socialist enterprises may be allowed to “play market,” to make capital investment decisions as if they were allocating scarce capital across activities in an economizing way, but entrepreneurs cannot be asked to “play speculation and investment” (Mises,1949, p. 705). Without entrepreneurship, a complex, dynamic economy cannot allocate resources to their highest valued use. p. 7
Entrepreneurship as opportunity identification.
Is it in the best interests of the oil and gas firm and industry to permit the individual to be more entrepreneurial? And lets be candid, they will as a result of this freedom be better able to earn much higher wages and profits then they would qualify for in today's organization. Although the costs of employment may be higher for firms within the industry, the ability of the industry to move further and faster is the net result. And with prices for energy commanding ever larger revenues, this sharing of the value is of the best interest to all concerned.
The most important exception is the literature in management and organization theory on opportunity discovery or opportunity identification, or what Shane (2003) calls the “individual–opportunity nexus.” p. 7
and
Shane and Venkataraman (2000, p. 220) define entrepreneurial opportunities as “those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production.” p. 8
Klein seeks to parse what an entrepreneur is in terms of a classification based on type. Defining a "Discovery" and "Creation" approach. A mix of these two classifications of entrepreneurs would work hand in hand in developing new sources of value for the oil and gas producer.
Entrepreneurship research may be able to realize higher marginal returns by focusing on entrepreneurial action, rather than its presumed antecedents. Alvarez and Barney (2007) argue that entrepreneurial objectives, characteristics, and decision-making differ systematically depending on whether opportunities are modeled as discovered or created. In the “discovery approach,” for example, entrepreneurial actions are responses to exogenous shocks, while in the “creation approach,” such actions are endogenous. Discovery entrepreneurs focus on predicting systematic risks, formulating complete and stable strategies, and procuring capital from external sources. Creation entrepreneurs, by contrast, appreciate iterative, inductive, incremental decision making, are comfortable with emergent and flexible strategies, and tend to rely on internal finance. pp. 11 - 12
As with sharing in the profits of their entrepreneurial actions, losses that are incurred in the discovery and innovation process would be shared as well. This also provides the entrepreneur with the knowledge that risk is inherent in their actions and they should be mindful of the consequences.
Likewise, realized entrepreneurial losses do not fit naturally within a creation framework. Alvarez and Barney (2007) emphasize that “creation entrepreneurs” do take into account potential losses, the “acceptable losses” described by Sarasvathy (2001). “[A]n entrepreneur engages in entrepreneurial actions when the total losses that can be created by such activities are not too large” (Alvarez and Barney, 2007, p. 19). However, when those losses are realized, it seems more straightforward to think in terms of mistaken beliefs about the future—expected prices and sales revenues that did not, in fact, materialize—then the “disappearance” of an opportunity that was previously created. Entrepreneurs do not, in other words, “create” the future, they “imagine” it, and their imagination can be wrong as often as it is right. p. 13
Opportunities as a black box.
Here is where Professor Klein gets into the topic of why a firm needs to compensate the entrepreneur for these actions. Why can't the people employed by the firm determine these opportunities as a nine to five salary based job? Klein identifies the key characteristic that is necessary to make the entrepreneur, and not the salaried employee, motivated. These characteristics are also necessary characteristics in the future oil and gas industry. An industry that has unlimited potential when the resources of the industry are released to earn profits in their chosen field. And I am not talking about just the engineers and earth scientists, all those are critical, but also the people that are involved in the business of the producer and are able to optimize the profit seeking potential through other professions such as Accounting and Administration.
Although some researchers argue that the subjective or socially constructed nature of opportunity makes it impossible to separate opportunity from the individual, others contend that opportunity is as an objective construct visible to or created by the knowledgeable or attuned entrepreneur. Either way, a set of weakly held assumptions about the nature and sources of opportunity appear to dominate much of the discussion in the literature. pp. 13 - 14
and
Do we need a precise definition of opportunities to move forward? Can one do entrepreneurship research without specifying what, exactly, entrepreneurial opportunities “are”? Can we treat opportunities as a “black box,” much as other concepts in management such as culture, leadership, routines, capabilities, and the like are treated (Abell, Felin, and Foss, 2007)? p. 14
and
The creation approach treats opportunities as the result of entrepreneurial action. Opportunities do not exist objectively, ex ante, but are created, ex nihilo, as entrepreneurs act based on their subjective beliefs. “Creation opportunities are social constructions that do not exist independent of entrepreneur’s perceptions” (Alvarez and Barney, 2007, p. 15). In this sense, the creation approach sounds like the imagination approach described here. Still, like the discovery approach, the creation approach makes the opportunity the unit of analysis. How entrepreneurs create opportunities, and how they subsequently seek to exploit those opportunities, is the focus of the research program. pp. 14 - 15
and
An alternative way to frame a subjectivist approach to entrepreneurship, emphasizing uncertainty and the passage of time, is to drop the concept of “opportunity” altogether. If opportunities are inherently subjective, and we treat them as a black box, then the unit of analysis should not be opportunities, but rather some action—in Knightian terms, the assembly of resources in the present in anticipation of (uncertain) receipts in the future. p. 15
For the purposes of this post I think we risk losing the reader and the substantial value that Professor Klien has developed here. With a clear definition of the entrepreneur in the innovative oil and gas producer we can see how the dynamic nature of the industry can develop. What this display's in rather stark terms is the role of management. The management is substantially diminished in the innovative oil and gas producer firm. Although not completely eliminated, the roles of management, and particularly those skills that emulate much of the Soviet era "central planner" are eliminated.
Through the little piggies analysis of Encana, Petro-Canada, Nexen and CNRL. We see the capabilities of the current management is unable to understand;
- The business that they are in, selling production forward at substantially discounted prices.
- Unable to attain the speed in which they approach the business, announcing declining production levels.
- The level of innovativeness that is lacking. More of the same (particularly stock option compensation) offered as the solution.
Eliminating the level of management "planning" and their associated high costs are what the investor should seek to achieve through the development of this software.
Foss, Foss, Klein, and Klein (2007) show how this approach provides new insights into the emergence, boundaries, and internal organization of the firm. Firms exist not only to economize on transaction costs, but also as a means for the exercise of entrepreneurial judgment, and as a low-cost mechanism for entrepreneurs to experiment with various combination's of heterogeneous capital goods. Changes in firm boundaries can likewise be understood as the result of processes of entrepreneurial experimentation. And internal organization can be interpreted as the means by which the entrepreneur delegates particular decision rights to subordinates who exercise a form of “derived” judgment on his behalf (Foss, Foss, and Klein, 2007). pp. 19 - 20
It is critical to recall the key competitive advantage of the innovative oil and gas producer is their land base, physical infrastructure and capabilities in finding, developing and producing oil and gas. The entrepreneurial services necessary for the producer to achieve the maximum profit in this business are very broad and I suggest must be based on the markets (or JOC's) offerings. Klien also notes.
Here, as in Coase (1937), the employment relationship is central to the theory of the firm. The entrepreneur’s primary task is to coordinate the human resources that make up the firm. Foss, Foss, Klein, and Klein (2007), by contrast, focus on alienable assets, as in Knight (1921). They define the firm as the entrepreneur plus the alienable resources the entrepreneur owns and thus controls. Each approach has strengths and weaknesses. The cognitive approach explains the dynamics among team members but not necessarily their contractual relationships. Must the charismatic leader necessarily own physical capital, or can he be an employee or independent contractor? Formulating a business plan, communicating a corporate culture, and the like are clearly important dimensions of business leadership. But are they attributes of the successful manager or the successful entrepreneur? pp. 20 - 21
Of course there is always an alternative to what is discussed in this blog. That is to do nothing. If however, you feel that the time for these changes is now, join me here. If you know of like minded people, send them the URL to this blog and most importantly, click on the PayPal button to donate.
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