Chapter 5 Entrepreneurship, Innovation, and Sustainable Business

What Is Entrepreneurship?

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Entrepreneurship is to a large degree a mind-set, always striving to do new things in an innovative and better way. The meaning of entrepreneurship is derived from the French seventeenth-century term for someone who “undertakes” and more specifically someone who undertakes a specific project or activity. In the nineteenth century, the French economist Jean Baptiste Say refined the meaning of entrepreneurship to individuals who create value by shifting resources from lower- to higher-valued activities. The higher value activities can be activities that bring value to both individuals and society.

It is the twentieth-century thought on entrepreneurship from Joseph Schumpeter, an Austrian born and then Harvard University–based economist and sociologist, which has most influenced contemporary thinking about entrepreneurship. In Schumpeter’s view, entrepreneurs are innovators who drive the “creative destructionA description of the overall lifecycle of business in which technologies, goods, and services are constantly being replaced by new technologies, goods, and services with the result of making the economy stronger and society better off.” process, reforming or revolutionizing the pattern of production. In many respects, sustainable businesses are significantly changing, if not revolutionizing, the patterns of production and service delivery, transforming business practices in ways that benefit the environment and society.

Another helpful view of entrepreneurship is provided by the twenty-first-century management scholar Peter Drucker. Drucker suggests that entrepreneurs always search for change, respond to it, and exploit it as an opportunity. Entrepreneurs take risks in starting new activities and take on significant personal responsibility. Many sustainability entrepreneurs perceive opportunities emanating from increased public concern about the environment and climate disruption and are responding to this opportunity with profit-making ventures that address these concerns.

Putting these perspectives together, entrepreneurship can be viewed as

• recognizing change,
• pursuing opportunity,
• taking on risk and responsibility,
• innovating,
• making better (higher value) use of resources,
• creating new value that is meaningful to customers,
• doing it all over again and again.

And entrepreneurship is an attitude and drive to pursue opportunity and create something new and of value.

Entrepreneurial Opportunities

Many different conditions in society can create entrepreneurial opportunitiesOpportunity for new goods and services, which are present as the result of forces—such as changes in knowledge and understanding, the development of a new technology, shifting demographics, a political change, or changing attitudes and norms—that give rise to new preferences and concerns. for new goods and services. Opportunity conditions arise from a variety of sources. At a broad societal level, they are present as the result of forces—such as changes in knowledge and understanding, the development of a new technology, shifting demographics, political change, or changing attitudes and norms—that give rise to new preferences and concerns. These forces constantly open up new opportunities for entrepreneurs.

Related to sustainability concerns, certain demographic shifts and pollution challenges create opportunities. For example, with 50 percent of the world’s population, for the first time in history, now living in urban areas, city air quality improvement present opportunities for entrepreneurs.

Urban Congestion

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The entrepreneur must first recognize the opportunity and then innovate by proposing a business solution that provides an attractive alternative to customers. A solution is just the first step in the process, the entrepreneur must also investigate the economic value of and business proposition emanating from that opportunity. They must research the market to understand how their potential product or service provides value to a customer and whether the amount a customer is willing to pay, which reflects the value of the product or service to the customer, exceeds the costs to provide that value, product, or service to the customer. In this way, the entrepreneur is contributing to economic growth and society by providing customers with goods and services whose costs to provide are less than their value to consumers.

An entrepreneur can come up with a new approach that meets a customer’s need or want, but if not enough customers are willing or able to pay a price above the cost of that product or service, it will not be financially viable. Therefore the opportunity becomes a true business opportunity when it is of sufficient scale and value—that is, revenues will cover costs and promise to offer net revenue above operating costs after the initial startup investment expenditures are repaid.

Entrepreneurial Resources

Successful entrepreneurial efforts require the mobilization of a wide array of resources quickly and efficiently. All entrepreneurial ventures have to have resources such as capitalAn input to entrepreneurial activities and that in this context refers to financial resources or assets to support the business activity., talent and know-how (e.g., accounting and finance, operations, management, legal, and regulatory), equipment, and facilities. Breaking down a venture’s required resources offers a picture of the components required and when they are needed. Resource needs change over the growth stages of a venture; at each stage, the entrepreneur should be clear about the priority resources that enable moving to the next stage of venture development.

While management teams must be recruited relatively quickly, typically there are one or two individuals who initially drive the entrepreneurial process through hard work and determination to succeed. As the business grows, the business team becomes the key factor. The entrepreneur’s skills, education, and capabilities must be augmented and complemented by the competencies of other team members.

It is essential to have adequate financial resources when starting any new entrepreneurial activity; this is no different for sustainable business activity. Funding can come from a variety of sources including personal savings, credit lines of entrepreneurs, family members, friends, and other sources. Depending on the type of business, venture capital or other investors may be an option. Typically, a company might acquire investors if there are expectations for high growth in the industry. Clean technologyProducts or services that reduce energy consumption or environmental impact. Examples include renewable energy, green chemistry, and energy efficient transportation. is an industry sector that can potentially attract investors for this reason.

All the previously stated resources in the entrepreneurial process are important, but the single most important factor is the individual entrepreneur—that is, their ability to identify a market opportunity and develop a creative response to that opportunity with market potential, to get a product or service out, to sell to customers, to organize an organizational team, and to garner the confidence of potential investors. Entrepreneurs must have passion, drive, excitement, and unique capabilities to do what they do.

Entrepreneurship is not constrained to starting a private for-profit company. While the definition of entrepreneurship is commonly assumed to be individuals creating new for-profit enterprises and pursuing private benefit, entrepreneurship and entrepreneurial innovation can occur in a variety of settings including small or large companies, nonprofits, and government agencies. And entrepreneurship can be focused on a local, national, or global marketplace. The Simply Green case in this textbook is focused on a sustainability entrepreneur serving a local market. Chapter 13 "Case: Strategic Mission–Driven Sustainable Business: Stonyfield Yogurt" tells the story of Gary Hirshberg, the highly successful Stonyfield Yogurt entrepreneur competing in a global market with a sustainability mission. Entrepreneurship focused on bringing value to society is often referred to as social entrepreneurshipIndividuals who act as an agent of change for the society. They take innovative approaches to existing systems to develop sustainable solutions for the purpose of changing society for the better., while entrepreneurship focused on individual and private enhancement of value is simply called entrepreneurship.

Why Do Entrepreneurs Do It?

The only factor found to be associated consistently with becoming an entrepreneur is that one or both of your parents were entrepreneurs.Andrea Larson, Sustainability, Innovation, and Entrepreneurship (Irvington, NY: Flat World Knowledge, 2010). This suggests that if the entrepreneurial path is familiar to you, then you are more likely to follow that path yourself.

Beyond having the common trait of having parents who were entrepreneurs, there are many personal reasons why individuals decide to become entrepreneurs. Becoming an entrepreneur can be motivated by personal interests and values, the prospects of financial rewards, or lifestyle preferences. It is also sometimes driven by “necessity” when there is a paucity of other employment or income-earning opportunities.

The motivations for being an entrepreneur include the ability to pursue a passion or interest that is exciting and one feels deeply about. It can include the opportunity to create something new, enhance one’s personal reputation, and make an impact or a difference in customers’ and employees’ lives and in society in general. All of these are motivations for many sustainability entrepreneurs.

The motivation for becoming an entrepreneur can also be driven by a desire to be independent, to be your own boss, to make your own decisions, and to make your own schedule. This moves into the so-called lifestyle motivations for being an entrepreneur—to have a more flexible work schedule that allows time for other activities including more time for family and recreational and creative pursuits.

Intrapreneurship

While entrepreneurship is normally thought of as starting a new business, it applies to applying innovation to existing organizations. Often, this type of entrepreneurial activity is distinguished as intrapreneurship (meaning entrepreneurship from within). IntrapreneurshipApplying entrepreneurship in an existing organization. applies the entrepreneurial mindset characterized by innovation, risk taking, and flexibility to an established firm. The objective is to enhance the ability of an established firm to react to market opportunities in a timely and effective manner much like start-up ventures do. Large established companies like General Electric (GE) often encourage intrapreneurship to foster innovation and accelerate new product development, to take advantage of a new opportunity, or to assess feasibility of a new process or design.

Entrepreneurial Risk and the Importance of Resilience and Persistence

Being a successful entrepreneur is not easy and there is no guarantee of success. It requires broad competence across a range of functional areas—including finance, accounting, strategy, marketing, management and operations, and strong interpersonal skills. There are also significant risks and significant likelihood of failure. Part of being an entrepreneur is assessing and managing risk.

Also part of being an entrepreneur is being resilient and persistent. As an entrepreneur, there will always be challenges and difficult times and being able to endure through the tough times and being persistent in working to achieve success is critical for entrepreneurs. Remember that even Steve Jobs got removed from his position at Apple before he came back to transform the company with the introduction of innovative new products including the iPod, iPhone, and iPad.

More business start-ups fail before four years than make it to their fifth year according to the US Small Business Administration. The risks and failures can come from internal factors—such as limited access to funding, poor planning and decision making, or the idea just simply being a bad idea for a business. Failure can also be a result of external factors beyond the entrepreneur’s influence, such as weak economic conditions and changing public policies, that can have profound market implications. Also with entrepreneurship—and with ownership, independence, and decision-making authority—comes significant responsibility and the potential for high personal stress and possible burnout.

While this chapter highlights several entrepreneurial success stories, it is important to understand that not all ideas for businesses are good business opportunities. Potential customers have to perceive that the product has value to them (above its cost and better than the products or services provided by competitors) and have the means and desire to purchase it. Furthermore, the pricing options have to cover expenses, and funds have to be available to finance the start-up of the business before revenue from sales cover expenses. These various dimensions must be explored rigorously before a business is launched. While business plans can serve multiple purposes, the first and most important reason for writing a business plan is to test whether an idea is truly an economically promising market opportunity.

International Entrepreneurship

China is the “place to be” for many clean technology companies. China is the fastest-growing market for all products and services and also for wind and nuclear power. It is the leader in solar power modules. In addition, the nation has a commitment to expand in the development of electric vehicles and carbon capture from coal plants.

With markets for sustainability goods and services in China and in some other nations growing faster than in the United States, there are significant opportunities and incentives for international entrepreneurship. This can, however, be very challenging, particularly for small start-up ventures. To enter global markets requires knowledge of different laws and regulatory requirements and also of foreign exchange. It also requires knowledge of historical, economic, political, social, and cultural differences among nations.

In China, for example, contracts are more of a memorandum of understanding than a legal binding contract. Business arrangements are commonly built on the foundation of a relationship instead of the law. Chinese companies are used to a rapidly changing business environment. They expect their business partners to be flexible to deal with changing conditions as they occur. This can be a good match for the entrepreneurial mind-set but difficult for entrepreneurial ventures relying on relations and “changing on the ground” while they are physically located thousands of miles and many time zones away from the Chinese market. Also for sustainable business ventures introducing new technologies, China can be a particularly difficult environment for protecting intellectual property. This issue has kept many technology companies from doing business in China. There is a real possibility that Chinese competitors will copy a Western product and nullify the patent or other intellectual property that is protected by law in the home country. Some entrepreneurs might not take this as a barrier. An example is if a US software company operating in China actually tracked down the hackers that had been infiltrating their system and talked them into joining their team as security experts. This is an example of an entrepreneurial company turning a threat into an international market opportunity.

Most entrepreneurs, especially first-time and relatively inexperienced entrepreneurs, would benefit from first focusing on home markets before entering global markets. The challenges of entrepreneurship are hard enough without also trying to figure out entry into global markets. Yet the reality is that China’s and other nations’ high growth rates and large populations make it an important market for sustainable products and services. Before engaging in global markets, however, entrepreneurs must prepare and recognize how global markets vary and how they may require different strategies and practices. If done right, the Chinese and other global markets could be significant opportunities for entrepreneurs focused on sustainability.

Social Entrepreneurship

Many of the for-profit entrepreneurs engaged in sustainable businesses might be characterized as social entrepreneurs—enterprising individuals who apply business practices to addressing societal problems, such as pollution, poor nutrition, and poverty, and are interested in social change. Social changeProcess in which values, attitudes, and institutions of society are changed. involves social processes whereby the values, attitudes, or institutions of society, including businesses, become modified. It includes both the natural process and action programs initiated by members of society. Entrepreneurship can be a process that contributes to social change.

Many social entrepreneurs are engaged in nonprofit organizations. An example is Kiva (http://www.kiva.org/about), a nonprofit organization with a mission to connect people through lending to alleviate poverty. Leveraging the Internet and a worldwide network of microfinance institutions, Kiva lets individuals lend as little as $25 to help create opportunity around the world. Since Kiva was founded in 2005, it has engaged nearly six hundred thousand lenders worldwide providing more than $200 million in loans to microenterprises in sixty different countries.

Social entrepreneurs engaged in for-profit ventures are concerned with creating shared value—for their companies and also for society. Creating both private and societal value aligns well with the interests of the large percentage of consumers. Edelman (http://www.edelman.com), the public relations firm, has identified that 87 percent of Americans believe that companies should place at least as much value on societal interests as on business interests. And many thought leaders on entrepreneurship have recognized the potential of social enterprises. For example, Bo Fishback, vice president of entrepreneurship at the Kauffman Foundation in Kansas City believes that “it’s not all pie in the sky.…Many social entrepreneurs have shown they can accomplish their mission.…They can deliver a social good and report a positive cash flow.”Stacy Perman, “Making a Profit and a Difference,” Businessweek, April 3, 2009, http://www.businessweek.com/smallbiz/content/mar2009/sb20090330_541747.htm.

The concept of building a profitable business model in which doing good and contributing to social change is an intrinsic part of the business and not just a sideline has been gaining ground in recent years. Social entrepreneurs total more than thirty thousand and are growing in number, according to B Lab, a nonprofit organization that certifies these purpose-driven companies. Together, they represent some $40 billion in revenue.

Examples of Sustainability Entrepreneurs (from the Textbook Case Studies)

Case chapters in the textbook document sustainable businesses and how they addressed consumer concerns about ecological and social matters in new ways across different industries. An entrepreneur was the key driver in four of these cases. Simply Green, Green Mountain Coffee, Seventh Generation, and Stonyfield Yogurt have provided fuel, coffee, household products, and yogurt to customers, respectively, with product options that have lower carbon and environmental footprints and higher attention to social justice. We summarize one of the case examples and its founder entrepreneurs here.

Green Mountain Coffee Roasters (GMCR)

Source: Wikimedia, http://commons.wikimedia.org/wiki/File:Salvadorcoffeegrower.jpg.

Bob Stiller opened his first coffee shop in 1981 in Waterbury, Vermont, selling high-quality coffee. His concept was simple: sell only high-quality coffee to ordinary people every day. When demand for his coffee outstripped his small store, he started bagging his coffee and sold it to wholesalers, supermarkets, and through mail order. Then recognizing and experiencing the challenges brought on by fierce competition in the specialty coffee segment of the industry, Stiller became an early advocate that his business—and all businesses for that matter—could help make the world a better place by committing to sustainable business practices. Green Mountain Coffee Roasters (GMCR), under Stiller’s entrepreneurial leadership, saw an opportunity to create a competitive advantage by embedding sustainability in its products and practices. Stiller was passionate about this commitment and was convinced that this would lead to financial success. By adopting innovative sustainable business practices, GMCR met customer demand while having a positive impact on the environment and society. GMCR implemented a fair trade procurement model that improved the quality of life for the farmers in the coffee bean supply chain and their families. At the same time, fair trade helped GMCR monitor quality and lower costs. By lowering dependency on traders and other supply chain intermediates in procuring its coffee, the company lowered supply chain costs and was able to respond more quickly to customer preferences. The company’s entrepreneurial success is seen in Green Mountain’s stock price with $100 invested in company stock in September 2004 valued at $1,600 by March 2009. In 2009, the company was listed as number eleven on Fortune’s “100 Fastest Growing Companies” and number five in Forbes’s “Best Small Companies.” The company sales and net income for year-end 2009 were $803 million and $55.8 million, respectively.

Key Takeaways

• Addressing environmental and social concerns can create business opportunities that can benefit the economy and society.
• Successful sustainable businesses are focused on the creation of new products and services that address ecological and social concerns in new ways.
• Sustainability entrepreneurship can involve starting a new business or creating a new product or service in an existing business.
• Sustainable entrepreneurship can impact companies of all sizes, from the very small to the world’s largest.
• The entrepreneur is the key driver in sustainability efforts at both new and established companies.
• To be successful in sustainable business practices often requires entrepreneurship and innovation.
• Social entrepreneurship specifically utilizes a business as the vehicle to tackle a societal problem.
• Green Mountain, Stonyfield, and Oakhurst all provide examples of how entrepreneurship led to innovation in regards to sustainability at existing organizations.

Exercises

1. Generate a list of possible sustainable new business opportunities that you might be interested in undertaking. What innovations are critical to the success of each of the new business opportunities that you identified?
2. In the sidebar on Peter Drucker’s interpretation of entrepreneurship (from Section 5.1 "Overview of Entrepreneurship"), discuss how that view applies to sustainability entrepreneurship.
3. Search for a blog on social entrepreneurship. Write a paper reflecting on what you learn from the blog and answer the question, “Why do you think social entrepreneurs do what they do?”

Technological Innovation and Sustainable Business

Fundamental to many sustainable businesses, including Enertrac and SustainX, are so-called clean energy technologies or sometimes called clean tech. These include technologies that generate energy from renewable sources, store energy, conserve energy, monitor and regulate energy usage and the pollution it generates, and efficiently manage water and other natural resources.

Technological advancement relies on investment in research and development. This can range from relatively small investments for Enertrac and other sustainable businesses pursuing low-cost technology solutions to millions of dollars for companies like SustainX, which are pursuing more radical (so-called game-changing) inventions.

Public policy can play a role in encouraging the development and adoption of new technology, which serves to jump-start market development and demand and reduce start-up risks for sustainability entrepreneurs. Research and development tax credits can reduce the costs of innovation and new products and services, offering development for entrepreneurs. And public programs offering tax advantages and rebates to customers, such as the California Solar Initiative (http://www.gosolarcalifornia.ca.gov/csi/index.php), can lower the cost and increase the rate of customer adoption of new products and services.

Also important in the development of new technologies are the industry standards the government defines and regulates. Examples of public policy initiatives that have pushed forward technological innovations are energy efficiency standards for appliances and for buildings.

Innovation in turn can lower the barriers and costs of public policy standards on emissions and efficiency, and this can also be true for some policies to address social injustices (e.g., technologies that improve the productivity and output of workers and that can lower the costs of increasing the minimum wage). So from a systems perspective, there is feedback going in both directions between innovation and public policy.

The end users of clean energy technology are diverse. They include private households, businesses, public agencies, and utilities. End users can take advantage of public incentives and they can also influence the public discourse and policies concerning investment, standards, mandates, and incentives. Most importantly, the choices end users make influence decisions by green producers and sustainability entrepreneurs regarding new products and services. For example, as end users are becoming more conscious about the environmental impact of a product from production to discontinued use (from “cradle to cradle”), consumers are demanding cleaner production processes and recycling services for the end of the product’s life. And this provides an entrepreneurial opportunity.

Innovation and Social Networks

To compete in the sustainability arena, entrepreneurs must frequently go beyond what has worked in the past and seek new and different perspectives and connections. One important area of innovation is new associations, networks, and partners that can provide new resources and information and foster new ways of doing things. Facebook is an example of a social network that has been innovative in creating new connections and relationships on a global scale that otherwise would not have existed through applying existing technology.

People from the same circles tend to share the same pools of information and contacts. Research indicates that the longer the duration of these direct connections, the more similar the perspectives and resources. Under normal circumstances, this is fine. However, when entrepreneurs want to take action in an arena outside the familiar terrain—such as launching a new sustainable enterprise—it is likely that information from existing relationships will not be enough. Instead they must search outside of their traditional network of relationships.

For new entrepreneurs, it will be beneficial to seek information and resources from new relationships and contacts. These new relationships can be formed with a range of individuals and organizations—including academics, consultants, nonprofit research institutes, government research organizations, and nongovernmental organizations (NGOs). NGOs have often been business’s harshest critic on environmental and social issues. It is for this reason that businesses are increasingly forming relationships to these groups to engage them in thinking strategically about solutions and new venture opportunities. The most innovative ideas may well come from those quarters most critical of how business has traditionally been done. An example of this is McDonald’s benefitting from collaboration with the Environmental Defense Fund, which was one of the company’s harshest critics before their working together. In consultation with the Environmental Defense Fund, McDonald’s has reduced their use of materials in packaging, replacing polystyrene foam sandwich clamshells with paper wraps and lightweight recycled boxes, replacing bleached with unbleached paper carry-out bags, and making dozens of other packaging improvements behind the counter in McDonald’s restaurants and throughout the company’s supply chain.

Ronald BurtRonald S. Burt, Structural Holes: The Social Structure of Competition (Cambridge, MA: Harvard University Press, 1995). and other network theorists add useful and interesting constructs to the discussion of entrepreneurship, which is relevant to understanding the benefits of weak ties to sustainable businesses. Burt’s focus is on what he calls “structural holes.” Structural holesThe gaps between nonredundant contacts. are defined as the gaps between nonredundant contacts, stated more simply for our purposes here: it is individuals not connecting with resources that would be very helpful to them.

For sustainable business focused on producing green products or services, structural holes often take the form of engineers aspiring to start businesses based on new technologies they have conceived but that are not connected or don’t know how to get connected to well-qualified (1) marketing professionals (who can help them identify specific market opportunities) and (2) management professionals (who can help them effectively develop and implement business plans and to potential funders).

Burt suggests the value of processes at the “local” level, which help to fill structural holes for entrepreneurs. An example of what Burt suggests is the Green Launching Pad (GLP; http://greenlaunchingpad.org/about/overview) at the University of New Hampshire. The GLP works with aspiring entrepreneurs and connects the entrepreneurs with qualified marketing and management professionals and potential funders. The program works with entrepreneurs to accelerate the development of new sustainable businesses that will directly reduce energy use and carbon emissions while creating new jobs and economic opportunities in the state of New Hampshire. In a short time period, just more than one year (from May 2010 to June 2011), the GLP helped to launch eleven companies, including Enertrac and SustainX.

The GLP’s focus is on helping entrepreneurs enter new social networks that are critical to their success. The GLP helped Enertrac gain the support of state and federal government officials and helped the company to expand the markets they target and reach. The GLP is helping SustainX, which is dominated by highly skilled engineers, connect with market development expertise. Without GLP, both these companies would not have been able to establish these connections to new resources and to develop their businesses as fast and as effectively.