Description
In this brief data in regard to developing a framework for assisting entrepreneurs.
Developing a framework for assisting entrepreneurs:
A case study of the Michigan State University Product Center for Agriculture and
Natural Resources
Adam Lovgren, Michigan State University
Christopher H. Peterson, Michigan State University
Brent Ross, Michigan State University
Contact at: [email protected]
(517)898-5100
Selected Paper prepared for presentation at the Agricultural & Applied Economics
Association’s
2011 AAEA & NAREA Joint Annual Meeting, Pittsburgh, Pennsylvania, July 24-26, 2011
Copyright 2011 by [Lovgren, Peterson and Ross]. All rights reserved. Readers may make
verbatim copies of this document for non-commercial purposes by any means, provided that this
Copyright notice appears on all such copies.
Background
Since the early 1980s there has been a great deal of publically financed and supported
Entrepreneurial Assistance Programs (EAPs) targeted at helping entrepreneurs start new ventures. In
particular, the majority of the literature on this topic has looked at the Small Business Development
Centers (SBDC) that are in operation in many states. In general, they have found that the clients of the
various EAPs that have been surveyed have overwhelmingly responded positively about the value of
such programs. However, on a scientific level, it has been much more difficult to determine whether,
despite this high level of client satisfaction, if the EAPs in question have been at all responsible in
increasing in the success and survival of the clients’ new ventures more than would otherwise be
expected. Furthermore, there are few research studies on the mechanisms through which these EAPs
can help entrepreneurs in context of the more general entrepreneurial process. In this regard, this
paper will focus on a case study of one particular EAP, the Michigan State University Product Center, in
order to evaluate the empirically induced model of assistance it has developed in terms of both the
needs of the entrepreneurs receiving assistance and the broader theoretical framework of the
entrepreneurial process.
Entrepreneurial Process Framework
To begin with, a framework for understanding the entrepreneurial process must be developed.
Shane and Venkataraman have defined the field of entrepreneurship as “the scholarly examination of
how, by whom, and with what effects opportunities to create future goods and services are discovered,
evaluated, and exploited,” (Venkataraman, 1997; Shane and Venkataraman, 2000). In this framework,
the process begins when there is a perception of a situation in which resources can be combined in a
new manner that has the potential to bring surplus over costs, or profits. Alert individuals then discover
these opportunities and must evaluate whether or not they wish to become entrepreneurs in order to
attempt to exploit that opportunity. Finally, the entrepreneur must acquire resources, develop
strategies and design organizations to successfully exploit that opportunity through the successful
creation and management of a new venture (Shane, 2003).
Entrepreneurial opportunities occur in those situations in which it is possible to sell new goods
and services at a higher rate than their cost of production (Casson, 1982). Discovery of this opportunity
occurs when an entrepreneur believes that she has unique or asymmetrical knowledge that a certain set
of resources are not being put to their best use (Shane and Venkataraman, 2000). This opportunity does
not have to necessarily turn out to be profitable, so should not be thought of as a Ricardian or
Schumpeterian rent, but does require the creation of a new means-end framework instead of optimizing
within a current framework (Shane, 2003). Additionally, technological, political, social, regulatory and
other types of change are continually adding and updating the potential use of available resources, and
hence forcing economies to operate in constant state of disequilibrium while simultaneously creating
the need for new information in market participants’ decision-making processes (Schumpeter, 1934).
Also, the continual change in buyer preferences and needs further exacerbates this disequilibrium by
changing the price (demand) people are willing to pay for different products and services. Moreover,
due to our imperfect knowledge of the future, the market value of the information, in terms of the new
venture’s probable future profitability, has a large degree of Knightian uncertainty to it. This allows
profits to be had through the contracting of the means of production at a certain rate now to be used to
create a product sold in a future market at a value that exceeds the appropriate economic rents paid for
each factor (Knight, 1921). Also, this information is not evenly distributed due to the specialization of
information in society (Hayek, 1945), and therefore not all market participants are in possession of all
the relevant information at the same time with only a subset of the population able to discover a given
opportunity (Kirzner, 1973). This leads people to make decisions on the basis of other things besides
information alone, such as hunches, intuition, heuristics and even inaccurate information causing their
decisions to be incorrect some of the time. These incorrect decisions lead to “errors” of shortages,
surpluses or misallocated resources (Shane and Venkataraman, 2000.) These factors then combine to
create the possibility of an entrepreneurial opportunity, the discovery of which occurs when an
individual perceives he is able to utilize his unique information set to determine that a particular set of
resources could be recombined in a novel way to obtain greater returns than those resources’ current
underlying economic rents.
Discovering an entrepreneurial opportunity, however, does not a new venture make. A would-
be entrepreneur must also decide to exploit that opportunity. Given, the Knightian uncertain nature of
this opportunity, the decision to exploit this opportunity cannot be made through the neo-classical
constrained optimization process in response to a given set of alternatives (Baumol, 1993). Instead,
citing the work of Kirzner and Schumpeter, Shane and Venkataraman describe this decision in the more
familiar economic grounds of an expected utility calculation:
The exploitation of an entrepreneurial opportunity requires the entrepreneur to believe
that the expected value of the entrepreneurial profit will be large enough to
compensate for the opportunity cost of other alternatives (including the loss of leisure),
the lack of liquidity of the investment of time and money, and a premium for bearing
uncertainty (Kirzner, 1973; Schumpeter, 1934; from Shane and Venkataraman, 2000).
In essence, once an individual feels she has discovered an opportunity to make entrepreneurial
profits, she must then use her current information set and risk-preferences to evaluate whether she
wishes to commit the time and resources required to attempt to exploit such an opportunity. Given that
less than 50% of new businesses survive for more than five years (Cooper, Woo and Dunkelberg, 1988),
it was first hypothesized that entrepreneurs must have a high propensity for riskor place a higher utility
on the use of new ventures to satisfy their need for achievement (McCelland, 1964) over their profit
capabilities. However, further research has found little evidence for an “entrepreneurial profile” that
such hypotheses would suggest is inherent in those willing to take such long odds. Some more recent
studies have found that entrepreneurs simply perceive less risk as being involved (Simon, Aquino, and
Houghton, 1999) or are more subject to cognitive biases that cause an individual to overestimate the
expected utility of a new venture(Baron, 2004). These cognitive biases include such theories as: prospect
theory (Baron, 2004), an optimistic bias (Shepperd et al., 1996), the planning fallacy (Buehler et al.,
1994) affect infusion (e.g., Forgas, 1995) overconfidence, the illusion of control, and the belief in the law
of small numbers (Simon, Aquino and Houghton, 1999).
In fact, it may be that due to the low odds of successfully discovering and exploiting an
entrepreneurial opportunity, a certain amount of cognitive bias is necessary to prevent the
entrepreneur from either never attempting to launch the venture or giving up too early during the initial
development stages that are likely to have low or negative returns (Baron, 2004; Simon et al, 1999). This
might explain why some have found these biases to be quite common among entrepreneurs (Busenitz
and Barney, 1997). However, some have suggested that, though a certain amount of cognitive bias is
helpful, successful entrepreneurs are better able than the unsuccessful ones to provide a
counterbalance to these biases in order to hold them in check (Baron, 2004; Simon et al., 1999). This is
because, though these biases help individuals when making complex and uncertain decisions (Schwenk,
1984), they may result in those entrepreneurs making decisions that are not well thought or appropriate
to the problem at hand (Barnes, 1984).
Once the decision has been made to exploit the opportunity, the entrepreneur must execute
the opportunity by gathering appropriate resources, developing business strategy and designing an
organizational structure. The literature of the effect of cognitive biases suggests that the more that the
entrepreneur can build and engage “safety nets” that provide checks on whether a cognitive bias is
leading them down a potentially negative path, the more successful they will be at exploiting an
entrepreneurial opportunity (Simon et al, 1999). However, in order to successfully exploit an
opportunity, an individual must not only overcome whatever cognitive biases they have, but also be able
to successfully acquire and utilize the appropriate resources in the actual business operations. The set
of skills required to do this, however, are often quite different than those required in order to discover
an opportunity and make the decision to exploit it. This may provide insight into why so many new
ventures fail.
In summary, the general framework of the entrepreneurial process, as established by Shane and
Venkataraman, can be pictured as depicted below in figure 1.
Figure 1: A model of the entrepreneurial process as put forth by Shane.
The entrepreneurial process involves the identification and evaluation of opportunity; the
decision whether or not to exploit it; the efforts to obtain resources; the process for organizing
those resources into a new combination; and the development of a strategy for the new
venture. These different activities are all influenced by individual-, industry-, and institutional-
level factors (Shane, 2003)
Individual Attributes
• Psychological Factors
• Demographic Factors
Entrepreneurial
Opportunities
Discovery
Opportunity
Exploitation
Execution
• Resource
Assembly
• Organizational
Design
• Strategy
Environment
• Industry
• Macro-Environment
Entrepreneurial Assistance Program (EAP) background
This leads us now to consider how an EAP can assist entrepreneurs through this process. In the
early 1980s to the mid-1990s there was a prominent strand of research that measured the impact of
EAPs in terms of comparing EAP clients to non-EAP clients on performance measures such as increase in
sales, employments and profits (Robinson, 1982, Chrisman, Nelson, Hoy and Robinson 1983, and
Chrisman, Hoy and Robinson 1987). In general, these studies found that EAP-clients outperformed their
non-EAP counterparts. However, these studies often compare the performance of a small number of
EAP clients (usually under 100) from high performing EAPs to state averages of entrepreneurship. In
addition, there does not appear to be any accounting for the selection bias that is inherent in the EAP
process in terms of counselors discouraging entrepreneurs to continue with the new venture process if
their ideas are perceived to be untenable. Previous work has provided some evidence that clients of
entrepreneurial assistance programs have been overall more successful in launching new ventures than
what is found in the general entrepreneur population at large (Chrisman, 1998; Chrisman, McMullan
2000; McMullan, Chrisman, Vesper, 2001.). However, the literature has left unanswered whether the
observed increased success rate is a direct effect of the assistance provided, or if it is due to the self-
selection that occurs through the counseling process. This literature suggests that entrepreneurs who
are less committed, have untenable ideas, or have a variety of other issues that would impede their
overall chance of success, tend to get “weeded out” in the first stage of the counseling process.
Whereas, as shown by Shane, entrepreneurs who are better at discovering entrepreneurial
opportunities, will have a larger set of opportunities to choose from and, assuming they choose what
they perceive as the best opportunity, will therefore be more likely to succeed (Shane, 2003).
Conversely, those with ideas that counselors have already seen fail, or who do not fully appreciate the
amount of work, risk and cost involved in starting a new venture, might be dissuaded from continuing
on. It is logical to suggest that had members of this group continued on to launch their new venture,
their overall probability of success would be lower than the general population of entrepreneurs. In any
case, the population that does continue on through the process is one that can be expected to have a
higher probability of success, with or without assistance, than the general entrepreneur population.
While this could perhaps be considered an additional benefit provided by the EAP, as fewer
resources may be wasted on failed ventures, the existence of this potential selection-bias makes
empirical evaluation of the effect of the EAP problematic if not dealt with. That is to say, if one observes
EAP clients as having a higher overall success rate on average, can we attribute this to the influence of
the EAP or simply to the selection bias? Evidence of growth or job creation without comparisons to a
control sample matched on the basis of age, sector, ownership and geography, and with adjustments for
selection bias does not provide a convincing case for economic impact (Storey, 2000). To make
adjustments for selection bias, however, one must have good information on the factors that the
determine performance and the factors that predict selection (Bartik, 2004.). In addition, “selection-bias
corrections in some cases rest on statistical assumptions that may be difficult to test.” However, though
Bartik and Storey both suggest using something similar to the Heckman two stage estimation of Cragg’s
double hurdle model (Bartik, 2004; Wren and Storey, 2002) it is unclear if that is truly the best approach
to overcome this problem. The double-hurdle model predicts participation in the first stage then uses
the inverse-mills ratio obtained to account for selection bias in the second stage to overcome selection-
bias in the regression of interest (Heckman, 1979). The Heckman model involves adjusting for a large
number of unobserved values that enter the data set as zeroes. This would be very difficult to model
unless one has sufficient data on those who get “weeded out”. Moreover, other researchers have well
documented the difficulty in obtaining accurate objective measures such as sales or profits from small
business entrepreneurs (Sapienza, Smith and Gannon, 1988) as well as their unlikeliness to respond to
lengthy surveys (Sampsell, 1984; Elstrott, 1987) making direct comparison of primary performance data
such as gross annual sales of EAP clients to non-EAP clients problematic. In addition, a certain
percentage of those entrepreneurs who continue on in the EAP process, who in fact have discovered a
potential entrepreneurial opportunity, might not have decided to exploit the opportunity without the
encouragement of the counselors or the access to the EAP’s network of resources. So not only are those
with untenable ideas being “weeded out” but those with tenable ideas who were apprehensive about
exploiting those ideas are being “planted in.” Finally, as will be discussed in more detail later, given that
EAPs often provide a lot of “basic” business knowledge and information, those with extensive business
experience may be less likely to find the EAP useful enough to continue through the EAP process.
Business experience is often a key indicator of success, especially when it comes to evaluating and
executing the opportunity, and so this effect would act in direct opposition to the supposed selection-
bias effect by positively predicting venture success but negatively predicting participation in the EAP.
Other studies have focused on the subjective assessment of client satisfaction as a measure of
the benefit of an EAP (Ibrahim and Goodwin, 1986; Solomon, 1983; Nahavandi 1988) and have found
that EAP clients have, on average, rated EAPs positively. However, one study found no correlation
between client satisfaction levels and the previously indicated performance indicators (McMullan,
Chrisman and Vesper, 2001). Instead, they concluded satisfaction came more from the personal
experience the client had with the counselor. In fact, in a meta-analysis of 51 published papers (1987-
1992) related to measuring entrepreneurial performance, Murphy, Trailer and Hill (1996) found no less
than eight different performance dimensions used by researchers. Most of these relied on primary data,
and no study contained more than five of the eight measures, while most focused on only one or two.
These dimensions, in order of highest to lowest frequency of use were: Efficiency, Growth, Profit, Size,
Liquidity, Success/Failure, Market Share, and Leverage. Murphy, Trailer and Hill then used Compact
Disclosure data from 1993 on 19 performance variables from 803 firms to conduct an exploratory factor
analysis (EFA) and found nine distinct factors that explained over 70% of the variance in performance
measures, with no single factor explaining more than 14% of the total variance. From here, they
conducted a confirmatory factor analysis (CFA) and found that less than half of the intercorrelations of
performance measures were significant and more than 25% of the significant correlations were
negative. Indicating a clear lack of a single performance construct validity (Murphy, Trailer, Hill, 1996).
More recently, Yusuf (2010) assessed EAPs on the three dimensions of participation, satisfaction
and entrepreneurs’ subjective assessments of overall effectiveness. In regard to the last measure, Yusuf
found that EAP programs were effective at meeting the nascent entrepreneur’s support need only
25.8% of the time. However, despite this lack of effectiveness, still found that 96% of the surveyed
clients found the assistance at least somewhat valuable, with 50% finding it extremely valuable. Yusuf
also found, on average, that the nascent entrepreneur valued the assistance at around $2,245 (Yusuf,
2010).
Instead of focusing our attention on side by side comparisons of EAP client’s performance and
satisfaction measures to that of a control group, perhaps it is better to try to look more closely at how
the assistance provided aids in the overall entrepreneurial process laid out by Shane and Venkataraman
(2000). In this regard, we can see that the participation variable endogeneity is due more to a problem
of omitted unobserved variables, such as the ability to properly discover and exploit entrepreneurial
opportunities. In fact, given the Shane framework, depending on whether an individual has actually
discovered a true entrepreneurial opportunity and/or has the ability to properly exploit it, it is
impossible to determine a priori what outcome might be considered a success. For example, those who
are pursuing “false leads” or who have overestimated their ability and desire to carry the venture
through to fruition, success might be for the EAP counselor to convince the client to do something else.
Conversely, those individuals who econometrically might have high success indicators, might never have
even attempted the venture with the encouragement of the EAP counselors or the access to key
resources and partners that the EAP provides. By removing this “self-selection” effect from evaluation of
the impact of the EAP, one is removing one of the key components of the benefit provided.
Finally, what is considered successful assistance will also depend on the goals and type of
entrepreneur receiving the assistance. In particular, not all entrepreneurs seeking assistance are what
one might consider “innovative entrepreneurs” or those who are in pursuit of achieving Schumpeterian
entrepreneurial profits associated with the creative destruction of market equilibriums (Schumpeter,
1934, Shane 2003). Instead, there is a large subset of entrepreneurs that we might call “lifestyle
entrepreneurs” who are simply interested in working for themselves, doing something they love and
achieving enough of a net surplus from their venture to sufficiently support themselves (e.g. Morrison et
al, 1999). This distinction is quite important because it changes the framework necessary for the
evaluation of the discovery and exploitation of an opportunity. In the case of the innovative
entrepreneur, for it to be a true opportunity, as defined above, it must be possible for the entrepreneur
to find a new combination of resources that provide greater returns than their associated economic
rents. This includes, of course, the opportunity cost of the entrepreneur’s time and labor. By contrast,
for the lifestyle entrepreneur, the expected returns only need to be greater than a minimum threshold
reservation utility required by the entrepreneur to support themselves. In essence, for this group they
are not seeking to generate any more profits than would be an adequate return to their own labor,
including an appropriate risk premium. In fact, if one considers the opportunity cost of their time in the
profit calculation, they may in fact be incurring negative economic profits. In some cases, this loss is
offset by the value they place on independence and internal control over their venture. Nonetheless,
this is not to say that they should not be engaged in the starting of a new venture. Simply that they are
not the vectors of growth in an economy typically associated with entrepreneurship, as they could be
viewed as simply contributing towards the market equilibrium by combining resources and extracting
appropriate rents in the process, but not adding any additional wealth to the system. In essence, for the
lifestyle entrepreneur, the decision to start a new venture can be viewed as a utility maximizing vertical
coordination strategy. This leads to a different metric as to evaluate the effect of the assistance
provided by an EAP for the lifestyle entrepreneurs versus the innovative entrepreneurs. For this subset
of entrepreneurs, the underlying opportunity only need to be able to overcome a minimum reservation
utility, that may or may not in fact provide greater than economic returns to utilized resources.
Research Question:
Taking the above discussion into account, it is clear that in order to evaluate the net effect that
an EAP has on its clients and the economy, one cannot simply compare the performance measures of
EAP clients versus a control group and consider the task completed. Instead, a framework that
encompasses the entrepreneurial process and the role of an EAP within it must first be developed in
order to then determine the appropriate measures of impact. Therefore, the main question this paper
will attempt to answer is:
Does the entrepreneurial process framework proposed by Shane (2003) encompass the role that
Entrepreneurial Assistance Programs have in determining the success and survival of new ventures?
The Entrepreneurial Process: The Case of the Michigan State University Product Center
An instrumental case study of the Michigan State University Product Center will be used to
explore the research question posed above. Through an analysis of this case, we look to examine the
entrepreneurial process as realized by clients of this EAP and compare this process to the framework
developed by Shane (2003).
The Product Center was created by a memorandum of understanding among the MSU College of
Agriculture and Natural Resources (CANR), Michigan State University Extension (MSUE), and the
Michigan Agricultural Experiment Station (MAES). The initial 5-year term of the Product Center began
on March 1, 2003, but is currently still in operation as of today. The original mission was, “To be a
catalyst for the creation of profitable futures for businesses and industries engaged in Michigan’s
agriculture, food and natural resources systems.” This was then expanded into a three part framework
that emphasized the Product Center’s role as a business and technical assistance program, a market
research institution and an entrepreneurial education provider (Product Center Strategic Plan, 2007).
However, over time, it became clear that the entrepreneurial education component was not highly
valued by the entrepreneurs themselves, and this component was dropped in order to focus more
heavily on the other two.
The Product Center’s central offices are housed on the campus of Michigan State University,
but its innovation counselor network is dispersed throughout the entire state of Michigan operating
through MSU’s extension network. This structure allows clients to have their first contact with an
innovation counselor’s in their local extension offices, with more advanced services offered on campus.
The Product Center’s team consists of a core group of self-directed staff members involved in all
or most of the organization’s processes, a small executive group comprised of the Product Center
director and the two associate directors, who take actions and make commitments on behalf of the
organization, and two operating subgroups: a research subgroup – composed of university faculty and
students who engage in interdisciplinary research aimed at identifying and supporting actual and
potential clients needs; and a venture development subgroup – who work with the actual and potential
business clients, as well as the internal and external partners, to provide the analysis and services the
clients require. In addition, the Product Center has a vast network of affiliates who support the
organization in its operations and an information cadre of persons, including previous clients, partners
and stakeholders, who have a strong interest in the operations but are not currently actively involved.
(For an overview of the Product Center’s Networks, Customers and Desired Outcomes, see Appendix:
figure 1)
In September of 2008 a customer satisfaction and client demographic question survey was sent
out via e-mail and regular mail to all clients who received service from the Product Center in the year of
2007. Of the approximately 500 clients who received the survey, 65 responded giving a response rate of
around 13%. This Respondent’s ages ranged from 36 to 78 years old, with an average age of 51. The vast
majority of this group were between the ages of 45-60. The most three most common business types
selected by the respondents to describe their current business operation were: food processor (32%),
followed by grower/producer (28%) and then retailer (16%). Many respondents indicated that they had
owned their own business prior to coming to the product center (59%), while even more had at least
some management experience (78%). The majority of respondents have been working on their business
idea for more than two years (70%), with only slightly over half having already launched their new
venture (53%). Most respondents came to the product center either wanting to expand their current
business (40%), to start a new business (34%), or simply to get information (30%). Most are food
processors, growers, or retailers with annual sales revenue of less than $100,000 a year. Most have no
employees other than themselves, but those who do employ others hire on average four people. The
amount of investment required also appears to be split between requiring less than $40,000 to
somewhere in the range of $100,000 to $500,000.
Product Center’s Framework for New Venture Creation
Based on its eight years of operations and experience with over 880 different clients, the
Product Center has developed its own framework for new venture creation. This framework is set up as
follows: First, given a particular policy, industry and market environment, an individual or group of
individuals will have an innovative idea about a potential entrepreneurial opportunity. Then they feel
there is a potential market opportunity and a suitable entrepreneur (usually but not always themselves)
able to bring the idea to market, then this combination of the idea, entrepreneur and market
opportunity defines a venture concept. Note that this is different from the Shane (2003) framework
which posits that the opportunity is exogenous to the entrepreneur. To review, Shane describes his
framework as follows:
The entrepreneurial process begins with the perception of the existence of
opportunities, or situations in which resources can be recombined at a potential profit.
Alert individuals, called entrepreneurs, discover these opportunities, and develop ideas
for how to pursue them, including the development of a product or service that will be
provided to customers. (Shane, 2003)
In contrast, the experience of the Product Center has shown that the process often begins first with the
development of the product or service (innovative idea), and not the perception of the exogenous
market opportunity. In other words, entrepreneurs through their actions create entrepreneurial
opportunities
i
. Once this idea has been developed, the individual then scans then environment for a
market opportunity that an entrepreneur with the appropriate set of skills and knowledge can exploit.
This is not to say that there are not times when an enterprising individual discovers an entrepreneurial
opportunity that she then decides to exploit leading to the execution and launch of a new venture per
the Shane model, but rather this is not the only way in which new ventures are formed. Instead, the
Product Center framework suggests that any of the three elements (innovative idea, market opportunity
or an enterprising individual) can initiate the process. All three roles, however, must be present for a
successful venture concept to be created.
This venture concept may or may not have been influenced by Product Center programming
related to market opportunities, but once formed is the typical impetus for the client to seek assistance
from the innovation counselor. The counselor can then first assist the client in the decision on whether
to seriously consider turning the venture concept into an actual venture. The innovation counselor
assists in this decision by providing resources and information on the venture concept’s potential based
on the explicit knowledge generating by the Product Center on general market information, processes,
organizations and sweat equity related to the venture concept, in addition to the counselor’s own tacit
knowledge based on her own experiences and that of other clients. These resources then help the client
determine whether to “start-up” and pursue the venture concept, or whether to “return to the drawing
board” by rejecting or refining the concept as appropriate. Note that “start-up” here is to be
distinguished from “Launch” as the latter involves starting the actual sale of the product, whereas the
former should be viewed as the start of gathering the appropriate resources necessary for launch. In
terms of the framework established by Shane and Venkatraman above, this stage could be viewed as
verifying the validity of the perceived entrepreneurial opportunity.
After this “start-up” has occurred, the next step in Product Center’s framework is the “test of
potential.” This test involves a more in-depth analysis using resources such as the specific market
processes, organizational structure, and equity involved in order to prove the existence of the potential
conjectured in the previous stage. This information, in addition to the explicit knowledge provided by
the Product Center relevant to the venture and the tacit knowledge of the counselor, then allows the
entrepreneur to make a better informed decision on whether to take the steps necessary to exploit the
perceived entrepreneurial opportunity. In this way, the EAP can help to overcome some of the problems
associated with the cognitive bias issues often involved in this decision by acting as the “safety net” or
counterbalance to keep such biases in check. If the decision is made, the entrepreneur will then create
an initial “prospectus” to seek resources and the venture can be considered formed. This stage would be
consistent with the Shane and Venkatraman decision to exploit the entrepreneurial opportunity.
Finally, once the venture is formed, but before it is launched, there is a final test of feasibility.
At this stage, the Product Center assists the entrepreneur in proving the feasibility of the venture and
preparing for implementation by providing the information on the resources necessary for launch as
well as assisting the entrepreneur in accessing those resources. These resources are again provided in
the form of explicit Product Center documents, the tacit knowledge of the counselors and specialized
service staff, but also includes utilization of the broader network of internal and external partners, such
as different service oriented departments on campus (e.g. packaging, legal counseling), as well as
leveraging the relationships built by the Product Center with lenders, distributors, producers, co-packers
and retailers. At this point, the entrepreneur must make the final decision as to whether or not to
execute his plan and launch the venture, consistent with the Shane and Venkatraman execution stage. A
successful launch can then be considered a new venture, its success and survival to be determined on
the validity of the underlying opportunity, the quality and access to the appropriate resources for
operation and the ability of the entrepreneur to manage the operation.
From this discussion, it appears that the method by which the Product Center, as a
representative EAP, assists entrepreneurs in the promoting the success and survival of new ventures is
through providing the appropriate information and resources necessary to make more effective
decisions at each stage of the entrepreneurial process framework (see figure 2 below).
Figure 2: Empirically induced new venture framework from the Product Center
Empirical Support
Previous work has supported this claim by finding that clients often report the most valuable service
they received from the Product Center was the ability to use the innovation counselor as a “sounding
board” or “reality check” to test their innovative ideas. This work also found that many clients reported
that lenders were more willing to give them a loan after having gone through the Product Center
process and that Product Center clients were significantly more likely to report higher satisfaction with
the efficiency of their operations than non-Product Center clients in similar industries (Lovgren, 2010).
In addition to this, from the 2008 Customer Demographic and Satisfaction Survey, a five point
Likert scale was also used to measure satisfaction levels (with 1 indicating low satisfaction, and 5
indicating high satisfaction) of the clients. The results was an average overall satisfaction level of 3.76
out of 5, indicating that the majority of the clients were at least moderately satisfied with the services
provided, but regression results on the ability to follow up on requests (from the 34 who responded to
this question) indicated that those respondents who have been working on their idea for a longer
period of time, have not yet launched, had higher household incomes but less management experience,
were significantly more likely to give positive satisfaction ratings.
Discussion
While the admittedly small sample size must caution against drawing any strong conclusions
from this data, this case study of the MSU Product Center does provide support for the hypothesis that
EAPs assist entrepreneurs by helping to supplement the entrepreneur’s knowledge and access to
resources in order to make more effective entrepreneurial decisions. It is logical to assume that those
with less management experience might have less information on how to successful execute a new
venture. The same holds true for those who have spent a lot of time on an idea but have not yet
launched their product, as this might indicate there is some critical obstacle preventing the launch that
they do not have the appropriate knowledge or resources to overcome.
In addition, the bi-modal distribution of investment required and the resulting size of the firm
(based on number of employees) gives support that Product Center services both lifestyle and
innovative entrepreneurs, with the former likely composing the majority of the small investment, no-
employees group and the latter comprising more of the larger investment and employer group.
However, further research with a larger sample size will need to explore these ideas in greater detail to
increase the validity of theseconclusions.
In summary, the empirically induced framework developed by the Product Center in
determining how to best assist entrepreneurs is well encompassed by most, but not all of the Shane
(2003) entrepreneurial process framework. In particular, the role of the EAP to provide appropriate
resources and information to help entrepreneurs make effective decisions at the critical stages of
evaluating an entrepreneurial opportunity, determining whether to exploit and how to properly execute
that opportunity fit very well with the framework developed by Shane. However, that the Shane
framework suggests that an enterprising individual discovers exogenous opportunities and does not
influence the opportunity itself seems insufficient to adequately explain the observed entrepreneurial
behavior of Product Center clients. While the discovery model holds in some cases, it appears much
more common for an individual’s innovative idea to drive the process of attempting to create an
entrepreneurial opportunity prior to any attempt at discovery. Furthermore, it is evident that in some
cases an entrepreneur without an idea or market opportunity will initiate the process of searching for
the other two as well. In any case, only once the three elements combine is a venture concept created
and the rest of the process proceeds.
As a result of this analysis, our research suggests two potential avenues for future research on
the entrepreneurial process. First, we argue that a significant role of an EAP is to provide a check to the
entrepreneur’s perception of the value and certainty of their identified opportunity. This check, in the
long run, not only provides a signal to the marketplace about the viability of this opportunity but it also
limits the waste of productive resources. Whether this finding is supported in other EAPs is an
important policy question. Furthermore, it terms of the entrepreneurial opportunity, the experience of
the MSU Product Center suggests that entrepreneurs themselves may be a source of entrepreneurial
opportunities in addition to those that may exist in the marketplace and have just yet to be exploited.
This distinction is an important one and one that should be explored further. In particular, is there a
role for EAPs in supporting the creation of entrepreneurial opportunities and what are the performance
differences that result from these two types of entrepreneurial opportunities?
Appendix:
Figure 1: Overview of Product Center Networks & Outcomes
Product Center
Networks & Outcomes
COMPONENT
NETWORKS
VENTURE
DEVELOPMENT
NETWORKS
•Provider Networks
•Service Networks
MARKET &
INNOVATION
RESEARCH
NETWORKS
ENTRENEURIAL
& COMMUNITY
DEVELPMENT
NETWORKS
MSU
PRODUCT CENTER
PROGRAMS
•Venture Development
•Market & Innovation Research
(Knowledge Development)
•Entrepreneurial & Community
Development
GOVERNANCE
•Dean and Directors
•Department of Ag Economics
•Executive Advisory Council
(with participation from customers,
internal & external providers, and
sponsors.
Desired
Outcomes:
ECONOMIC
OPPORTUNITIES
•New businesses
•New products
•More successful
existing businesses
•Reduced likelihood
of losses from
inappropriate
business/product
decisions
•Better access to
existing resources
•More educated
pool of
entrepreneurs and
managers
•Creation of
entrepreneurial
communities
Customers
(Ag, Food &
Natural Resources)
•Entrepreneurs
•Existing Firms
•Producer
Organizations
•Commodity Groups
•Communities
•Government
Agencies
•MSU Faculty & Units
•Economic
Development Groups
•Local Food Systems
•Other economic
entities
COOPERATORS
•EXTERNAL PARTNERS
•INTERNAL PARTNERS
•INNOVATION COUNSELORS
& EDUCATORS
•SPONSORS
PROGRAM
DELIVERY
NETWORK
Table 1: Probit regression on Product Center’s ‘s Satisfaction with Counselor’s ability (timeliness) to
follow up on requests (1 – satisfied, 0 – not satisfied)
Probit regression Number of obs = 34
Wald chi2(9) = 22.90
Log pseudolikelihood = -13.78996 Prob > chi2 = 0.0064
------------------------------------------------------------------------------
| Robust
IC_timely | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
Age | -.0056038 .0108074 -0.52 0.604 -.0267861 .0155784
Educ | .0055805 .1621518 0.03 0.973 -.3122311 .3233922
Income | .3445888 .1457563 2.36 0.018 .0589118 .6302658
East | .229203 .6003882 0.38 0.703 -.9475362 1.405942
exper | -.2740341 .1241749 -2.21 0.027 -.5174124 -.0306559
investment | 2.41e-06 3.58e-06 0.67 0.502 -4.61e-06 9.42e-06
hh | -.4808163 .5278117 -0.91 0.362 -1.515308 .5536757
time_idea | .3473457 .2103713 1.65 0.099 -.0649745 .7596658
launched | -1.078434 .6126891 -1.76 0.078 -2.279282 .1224147
------------------------------------------------------------------------------
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i
Note that this depiction is consistent with the view expressed by Schumpeter (1934).
doc_383902718.pdf
In this brief data in regard to developing a framework for assisting entrepreneurs.
Developing a framework for assisting entrepreneurs:
A case study of the Michigan State University Product Center for Agriculture and
Natural Resources
Adam Lovgren, Michigan State University
Christopher H. Peterson, Michigan State University
Brent Ross, Michigan State University
Contact at: [email protected]
(517)898-5100
Selected Paper prepared for presentation at the Agricultural & Applied Economics
Association’s
2011 AAEA & NAREA Joint Annual Meeting, Pittsburgh, Pennsylvania, July 24-26, 2011
Copyright 2011 by [Lovgren, Peterson and Ross]. All rights reserved. Readers may make
verbatim copies of this document for non-commercial purposes by any means, provided that this
Copyright notice appears on all such copies.
Background
Since the early 1980s there has been a great deal of publically financed and supported
Entrepreneurial Assistance Programs (EAPs) targeted at helping entrepreneurs start new ventures. In
particular, the majority of the literature on this topic has looked at the Small Business Development
Centers (SBDC) that are in operation in many states. In general, they have found that the clients of the
various EAPs that have been surveyed have overwhelmingly responded positively about the value of
such programs. However, on a scientific level, it has been much more difficult to determine whether,
despite this high level of client satisfaction, if the EAPs in question have been at all responsible in
increasing in the success and survival of the clients’ new ventures more than would otherwise be
expected. Furthermore, there are few research studies on the mechanisms through which these EAPs
can help entrepreneurs in context of the more general entrepreneurial process. In this regard, this
paper will focus on a case study of one particular EAP, the Michigan State University Product Center, in
order to evaluate the empirically induced model of assistance it has developed in terms of both the
needs of the entrepreneurs receiving assistance and the broader theoretical framework of the
entrepreneurial process.
Entrepreneurial Process Framework
To begin with, a framework for understanding the entrepreneurial process must be developed.
Shane and Venkataraman have defined the field of entrepreneurship as “the scholarly examination of
how, by whom, and with what effects opportunities to create future goods and services are discovered,
evaluated, and exploited,” (Venkataraman, 1997; Shane and Venkataraman, 2000). In this framework,
the process begins when there is a perception of a situation in which resources can be combined in a
new manner that has the potential to bring surplus over costs, or profits. Alert individuals then discover
these opportunities and must evaluate whether or not they wish to become entrepreneurs in order to
attempt to exploit that opportunity. Finally, the entrepreneur must acquire resources, develop
strategies and design organizations to successfully exploit that opportunity through the successful
creation and management of a new venture (Shane, 2003).
Entrepreneurial opportunities occur in those situations in which it is possible to sell new goods
and services at a higher rate than their cost of production (Casson, 1982). Discovery of this opportunity
occurs when an entrepreneur believes that she has unique or asymmetrical knowledge that a certain set
of resources are not being put to their best use (Shane and Venkataraman, 2000). This opportunity does
not have to necessarily turn out to be profitable, so should not be thought of as a Ricardian or
Schumpeterian rent, but does require the creation of a new means-end framework instead of optimizing
within a current framework (Shane, 2003). Additionally, technological, political, social, regulatory and
other types of change are continually adding and updating the potential use of available resources, and
hence forcing economies to operate in constant state of disequilibrium while simultaneously creating
the need for new information in market participants’ decision-making processes (Schumpeter, 1934).
Also, the continual change in buyer preferences and needs further exacerbates this disequilibrium by
changing the price (demand) people are willing to pay for different products and services. Moreover,
due to our imperfect knowledge of the future, the market value of the information, in terms of the new
venture’s probable future profitability, has a large degree of Knightian uncertainty to it. This allows
profits to be had through the contracting of the means of production at a certain rate now to be used to
create a product sold in a future market at a value that exceeds the appropriate economic rents paid for
each factor (Knight, 1921). Also, this information is not evenly distributed due to the specialization of
information in society (Hayek, 1945), and therefore not all market participants are in possession of all
the relevant information at the same time with only a subset of the population able to discover a given
opportunity (Kirzner, 1973). This leads people to make decisions on the basis of other things besides
information alone, such as hunches, intuition, heuristics and even inaccurate information causing their
decisions to be incorrect some of the time. These incorrect decisions lead to “errors” of shortages,
surpluses or misallocated resources (Shane and Venkataraman, 2000.) These factors then combine to
create the possibility of an entrepreneurial opportunity, the discovery of which occurs when an
individual perceives he is able to utilize his unique information set to determine that a particular set of
resources could be recombined in a novel way to obtain greater returns than those resources’ current
underlying economic rents.
Discovering an entrepreneurial opportunity, however, does not a new venture make. A would-
be entrepreneur must also decide to exploit that opportunity. Given, the Knightian uncertain nature of
this opportunity, the decision to exploit this opportunity cannot be made through the neo-classical
constrained optimization process in response to a given set of alternatives (Baumol, 1993). Instead,
citing the work of Kirzner and Schumpeter, Shane and Venkataraman describe this decision in the more
familiar economic grounds of an expected utility calculation:
The exploitation of an entrepreneurial opportunity requires the entrepreneur to believe
that the expected value of the entrepreneurial profit will be large enough to
compensate for the opportunity cost of other alternatives (including the loss of leisure),
the lack of liquidity of the investment of time and money, and a premium for bearing
uncertainty (Kirzner, 1973; Schumpeter, 1934; from Shane and Venkataraman, 2000).
In essence, once an individual feels she has discovered an opportunity to make entrepreneurial
profits, she must then use her current information set and risk-preferences to evaluate whether she
wishes to commit the time and resources required to attempt to exploit such an opportunity. Given that
less than 50% of new businesses survive for more than five years (Cooper, Woo and Dunkelberg, 1988),
it was first hypothesized that entrepreneurs must have a high propensity for riskor place a higher utility
on the use of new ventures to satisfy their need for achievement (McCelland, 1964) over their profit
capabilities. However, further research has found little evidence for an “entrepreneurial profile” that
such hypotheses would suggest is inherent in those willing to take such long odds. Some more recent
studies have found that entrepreneurs simply perceive less risk as being involved (Simon, Aquino, and
Houghton, 1999) or are more subject to cognitive biases that cause an individual to overestimate the
expected utility of a new venture(Baron, 2004). These cognitive biases include such theories as: prospect
theory (Baron, 2004), an optimistic bias (Shepperd et al., 1996), the planning fallacy (Buehler et al.,
1994) affect infusion (e.g., Forgas, 1995) overconfidence, the illusion of control, and the belief in the law
of small numbers (Simon, Aquino and Houghton, 1999).
In fact, it may be that due to the low odds of successfully discovering and exploiting an
entrepreneurial opportunity, a certain amount of cognitive bias is necessary to prevent the
entrepreneur from either never attempting to launch the venture or giving up too early during the initial
development stages that are likely to have low or negative returns (Baron, 2004; Simon et al, 1999). This
might explain why some have found these biases to be quite common among entrepreneurs (Busenitz
and Barney, 1997). However, some have suggested that, though a certain amount of cognitive bias is
helpful, successful entrepreneurs are better able than the unsuccessful ones to provide a
counterbalance to these biases in order to hold them in check (Baron, 2004; Simon et al., 1999). This is
because, though these biases help individuals when making complex and uncertain decisions (Schwenk,
1984), they may result in those entrepreneurs making decisions that are not well thought or appropriate
to the problem at hand (Barnes, 1984).
Once the decision has been made to exploit the opportunity, the entrepreneur must execute
the opportunity by gathering appropriate resources, developing business strategy and designing an
organizational structure. The literature of the effect of cognitive biases suggests that the more that the
entrepreneur can build and engage “safety nets” that provide checks on whether a cognitive bias is
leading them down a potentially negative path, the more successful they will be at exploiting an
entrepreneurial opportunity (Simon et al, 1999). However, in order to successfully exploit an
opportunity, an individual must not only overcome whatever cognitive biases they have, but also be able
to successfully acquire and utilize the appropriate resources in the actual business operations. The set
of skills required to do this, however, are often quite different than those required in order to discover
an opportunity and make the decision to exploit it. This may provide insight into why so many new
ventures fail.
In summary, the general framework of the entrepreneurial process, as established by Shane and
Venkataraman, can be pictured as depicted below in figure 1.
Figure 1: A model of the entrepreneurial process as put forth by Shane.
The entrepreneurial process involves the identification and evaluation of opportunity; the
decision whether or not to exploit it; the efforts to obtain resources; the process for organizing
those resources into a new combination; and the development of a strategy for the new
venture. These different activities are all influenced by individual-, industry-, and institutional-
level factors (Shane, 2003)
Individual Attributes
• Psychological Factors
• Demographic Factors
Entrepreneurial
Opportunities
Discovery
Opportunity
Exploitation
Execution
• Resource
Assembly
• Organizational
Design
• Strategy
Environment
• Industry
• Macro-Environment
Entrepreneurial Assistance Program (EAP) background
This leads us now to consider how an EAP can assist entrepreneurs through this process. In the
early 1980s to the mid-1990s there was a prominent strand of research that measured the impact of
EAPs in terms of comparing EAP clients to non-EAP clients on performance measures such as increase in
sales, employments and profits (Robinson, 1982, Chrisman, Nelson, Hoy and Robinson 1983, and
Chrisman, Hoy and Robinson 1987). In general, these studies found that EAP-clients outperformed their
non-EAP counterparts. However, these studies often compare the performance of a small number of
EAP clients (usually under 100) from high performing EAPs to state averages of entrepreneurship. In
addition, there does not appear to be any accounting for the selection bias that is inherent in the EAP
process in terms of counselors discouraging entrepreneurs to continue with the new venture process if
their ideas are perceived to be untenable. Previous work has provided some evidence that clients of
entrepreneurial assistance programs have been overall more successful in launching new ventures than
what is found in the general entrepreneur population at large (Chrisman, 1998; Chrisman, McMullan
2000; McMullan, Chrisman, Vesper, 2001.). However, the literature has left unanswered whether the
observed increased success rate is a direct effect of the assistance provided, or if it is due to the self-
selection that occurs through the counseling process. This literature suggests that entrepreneurs who
are less committed, have untenable ideas, or have a variety of other issues that would impede their
overall chance of success, tend to get “weeded out” in the first stage of the counseling process.
Whereas, as shown by Shane, entrepreneurs who are better at discovering entrepreneurial
opportunities, will have a larger set of opportunities to choose from and, assuming they choose what
they perceive as the best opportunity, will therefore be more likely to succeed (Shane, 2003).
Conversely, those with ideas that counselors have already seen fail, or who do not fully appreciate the
amount of work, risk and cost involved in starting a new venture, might be dissuaded from continuing
on. It is logical to suggest that had members of this group continued on to launch their new venture,
their overall probability of success would be lower than the general population of entrepreneurs. In any
case, the population that does continue on through the process is one that can be expected to have a
higher probability of success, with or without assistance, than the general entrepreneur population.
While this could perhaps be considered an additional benefit provided by the EAP, as fewer
resources may be wasted on failed ventures, the existence of this potential selection-bias makes
empirical evaluation of the effect of the EAP problematic if not dealt with. That is to say, if one observes
EAP clients as having a higher overall success rate on average, can we attribute this to the influence of
the EAP or simply to the selection bias? Evidence of growth or job creation without comparisons to a
control sample matched on the basis of age, sector, ownership and geography, and with adjustments for
selection bias does not provide a convincing case for economic impact (Storey, 2000). To make
adjustments for selection bias, however, one must have good information on the factors that the
determine performance and the factors that predict selection (Bartik, 2004.). In addition, “selection-bias
corrections in some cases rest on statistical assumptions that may be difficult to test.” However, though
Bartik and Storey both suggest using something similar to the Heckman two stage estimation of Cragg’s
double hurdle model (Bartik, 2004; Wren and Storey, 2002) it is unclear if that is truly the best approach
to overcome this problem. The double-hurdle model predicts participation in the first stage then uses
the inverse-mills ratio obtained to account for selection bias in the second stage to overcome selection-
bias in the regression of interest (Heckman, 1979). The Heckman model involves adjusting for a large
number of unobserved values that enter the data set as zeroes. This would be very difficult to model
unless one has sufficient data on those who get “weeded out”. Moreover, other researchers have well
documented the difficulty in obtaining accurate objective measures such as sales or profits from small
business entrepreneurs (Sapienza, Smith and Gannon, 1988) as well as their unlikeliness to respond to
lengthy surveys (Sampsell, 1984; Elstrott, 1987) making direct comparison of primary performance data
such as gross annual sales of EAP clients to non-EAP clients problematic. In addition, a certain
percentage of those entrepreneurs who continue on in the EAP process, who in fact have discovered a
potential entrepreneurial opportunity, might not have decided to exploit the opportunity without the
encouragement of the counselors or the access to the EAP’s network of resources. So not only are those
with untenable ideas being “weeded out” but those with tenable ideas who were apprehensive about
exploiting those ideas are being “planted in.” Finally, as will be discussed in more detail later, given that
EAPs often provide a lot of “basic” business knowledge and information, those with extensive business
experience may be less likely to find the EAP useful enough to continue through the EAP process.
Business experience is often a key indicator of success, especially when it comes to evaluating and
executing the opportunity, and so this effect would act in direct opposition to the supposed selection-
bias effect by positively predicting venture success but negatively predicting participation in the EAP.
Other studies have focused on the subjective assessment of client satisfaction as a measure of
the benefit of an EAP (Ibrahim and Goodwin, 1986; Solomon, 1983; Nahavandi 1988) and have found
that EAP clients have, on average, rated EAPs positively. However, one study found no correlation
between client satisfaction levels and the previously indicated performance indicators (McMullan,
Chrisman and Vesper, 2001). Instead, they concluded satisfaction came more from the personal
experience the client had with the counselor. In fact, in a meta-analysis of 51 published papers (1987-
1992) related to measuring entrepreneurial performance, Murphy, Trailer and Hill (1996) found no less
than eight different performance dimensions used by researchers. Most of these relied on primary data,
and no study contained more than five of the eight measures, while most focused on only one or two.
These dimensions, in order of highest to lowest frequency of use were: Efficiency, Growth, Profit, Size,
Liquidity, Success/Failure, Market Share, and Leverage. Murphy, Trailer and Hill then used Compact
Disclosure data from 1993 on 19 performance variables from 803 firms to conduct an exploratory factor
analysis (EFA) and found nine distinct factors that explained over 70% of the variance in performance
measures, with no single factor explaining more than 14% of the total variance. From here, they
conducted a confirmatory factor analysis (CFA) and found that less than half of the intercorrelations of
performance measures were significant and more than 25% of the significant correlations were
negative. Indicating a clear lack of a single performance construct validity (Murphy, Trailer, Hill, 1996).
More recently, Yusuf (2010) assessed EAPs on the three dimensions of participation, satisfaction
and entrepreneurs’ subjective assessments of overall effectiveness. In regard to the last measure, Yusuf
found that EAP programs were effective at meeting the nascent entrepreneur’s support need only
25.8% of the time. However, despite this lack of effectiveness, still found that 96% of the surveyed
clients found the assistance at least somewhat valuable, with 50% finding it extremely valuable. Yusuf
also found, on average, that the nascent entrepreneur valued the assistance at around $2,245 (Yusuf,
2010).
Instead of focusing our attention on side by side comparisons of EAP client’s performance and
satisfaction measures to that of a control group, perhaps it is better to try to look more closely at how
the assistance provided aids in the overall entrepreneurial process laid out by Shane and Venkataraman
(2000). In this regard, we can see that the participation variable endogeneity is due more to a problem
of omitted unobserved variables, such as the ability to properly discover and exploit entrepreneurial
opportunities. In fact, given the Shane framework, depending on whether an individual has actually
discovered a true entrepreneurial opportunity and/or has the ability to properly exploit it, it is
impossible to determine a priori what outcome might be considered a success. For example, those who
are pursuing “false leads” or who have overestimated their ability and desire to carry the venture
through to fruition, success might be for the EAP counselor to convince the client to do something else.
Conversely, those individuals who econometrically might have high success indicators, might never have
even attempted the venture with the encouragement of the EAP counselors or the access to key
resources and partners that the EAP provides. By removing this “self-selection” effect from evaluation of
the impact of the EAP, one is removing one of the key components of the benefit provided.
Finally, what is considered successful assistance will also depend on the goals and type of
entrepreneur receiving the assistance. In particular, not all entrepreneurs seeking assistance are what
one might consider “innovative entrepreneurs” or those who are in pursuit of achieving Schumpeterian
entrepreneurial profits associated with the creative destruction of market equilibriums (Schumpeter,
1934, Shane 2003). Instead, there is a large subset of entrepreneurs that we might call “lifestyle
entrepreneurs” who are simply interested in working for themselves, doing something they love and
achieving enough of a net surplus from their venture to sufficiently support themselves (e.g. Morrison et
al, 1999). This distinction is quite important because it changes the framework necessary for the
evaluation of the discovery and exploitation of an opportunity. In the case of the innovative
entrepreneur, for it to be a true opportunity, as defined above, it must be possible for the entrepreneur
to find a new combination of resources that provide greater returns than their associated economic
rents. This includes, of course, the opportunity cost of the entrepreneur’s time and labor. By contrast,
for the lifestyle entrepreneur, the expected returns only need to be greater than a minimum threshold
reservation utility required by the entrepreneur to support themselves. In essence, for this group they
are not seeking to generate any more profits than would be an adequate return to their own labor,
including an appropriate risk premium. In fact, if one considers the opportunity cost of their time in the
profit calculation, they may in fact be incurring negative economic profits. In some cases, this loss is
offset by the value they place on independence and internal control over their venture. Nonetheless,
this is not to say that they should not be engaged in the starting of a new venture. Simply that they are
not the vectors of growth in an economy typically associated with entrepreneurship, as they could be
viewed as simply contributing towards the market equilibrium by combining resources and extracting
appropriate rents in the process, but not adding any additional wealth to the system. In essence, for the
lifestyle entrepreneur, the decision to start a new venture can be viewed as a utility maximizing vertical
coordination strategy. This leads to a different metric as to evaluate the effect of the assistance
provided by an EAP for the lifestyle entrepreneurs versus the innovative entrepreneurs. For this subset
of entrepreneurs, the underlying opportunity only need to be able to overcome a minimum reservation
utility, that may or may not in fact provide greater than economic returns to utilized resources.
Research Question:
Taking the above discussion into account, it is clear that in order to evaluate the net effect that
an EAP has on its clients and the economy, one cannot simply compare the performance measures of
EAP clients versus a control group and consider the task completed. Instead, a framework that
encompasses the entrepreneurial process and the role of an EAP within it must first be developed in
order to then determine the appropriate measures of impact. Therefore, the main question this paper
will attempt to answer is:
Does the entrepreneurial process framework proposed by Shane (2003) encompass the role that
Entrepreneurial Assistance Programs have in determining the success and survival of new ventures?
The Entrepreneurial Process: The Case of the Michigan State University Product Center
An instrumental case study of the Michigan State University Product Center will be used to
explore the research question posed above. Through an analysis of this case, we look to examine the
entrepreneurial process as realized by clients of this EAP and compare this process to the framework
developed by Shane (2003).
The Product Center was created by a memorandum of understanding among the MSU College of
Agriculture and Natural Resources (CANR), Michigan State University Extension (MSUE), and the
Michigan Agricultural Experiment Station (MAES). The initial 5-year term of the Product Center began
on March 1, 2003, but is currently still in operation as of today. The original mission was, “To be a
catalyst for the creation of profitable futures for businesses and industries engaged in Michigan’s
agriculture, food and natural resources systems.” This was then expanded into a three part framework
that emphasized the Product Center’s role as a business and technical assistance program, a market
research institution and an entrepreneurial education provider (Product Center Strategic Plan, 2007).
However, over time, it became clear that the entrepreneurial education component was not highly
valued by the entrepreneurs themselves, and this component was dropped in order to focus more
heavily on the other two.
The Product Center’s central offices are housed on the campus of Michigan State University,
but its innovation counselor network is dispersed throughout the entire state of Michigan operating
through MSU’s extension network. This structure allows clients to have their first contact with an
innovation counselor’s in their local extension offices, with more advanced services offered on campus.
The Product Center’s team consists of a core group of self-directed staff members involved in all
or most of the organization’s processes, a small executive group comprised of the Product Center
director and the two associate directors, who take actions and make commitments on behalf of the
organization, and two operating subgroups: a research subgroup – composed of university faculty and
students who engage in interdisciplinary research aimed at identifying and supporting actual and
potential clients needs; and a venture development subgroup – who work with the actual and potential
business clients, as well as the internal and external partners, to provide the analysis and services the
clients require. In addition, the Product Center has a vast network of affiliates who support the
organization in its operations and an information cadre of persons, including previous clients, partners
and stakeholders, who have a strong interest in the operations but are not currently actively involved.
(For an overview of the Product Center’s Networks, Customers and Desired Outcomes, see Appendix:
figure 1)
In September of 2008 a customer satisfaction and client demographic question survey was sent
out via e-mail and regular mail to all clients who received service from the Product Center in the year of
2007. Of the approximately 500 clients who received the survey, 65 responded giving a response rate of
around 13%. This Respondent’s ages ranged from 36 to 78 years old, with an average age of 51. The vast
majority of this group were between the ages of 45-60. The most three most common business types
selected by the respondents to describe their current business operation were: food processor (32%),
followed by grower/producer (28%) and then retailer (16%). Many respondents indicated that they had
owned their own business prior to coming to the product center (59%), while even more had at least
some management experience (78%). The majority of respondents have been working on their business
idea for more than two years (70%), with only slightly over half having already launched their new
venture (53%). Most respondents came to the product center either wanting to expand their current
business (40%), to start a new business (34%), or simply to get information (30%). Most are food
processors, growers, or retailers with annual sales revenue of less than $100,000 a year. Most have no
employees other than themselves, but those who do employ others hire on average four people. The
amount of investment required also appears to be split between requiring less than $40,000 to
somewhere in the range of $100,000 to $500,000.
Product Center’s Framework for New Venture Creation
Based on its eight years of operations and experience with over 880 different clients, the
Product Center has developed its own framework for new venture creation. This framework is set up as
follows: First, given a particular policy, industry and market environment, an individual or group of
individuals will have an innovative idea about a potential entrepreneurial opportunity. Then they feel
there is a potential market opportunity and a suitable entrepreneur (usually but not always themselves)
able to bring the idea to market, then this combination of the idea, entrepreneur and market
opportunity defines a venture concept. Note that this is different from the Shane (2003) framework
which posits that the opportunity is exogenous to the entrepreneur. To review, Shane describes his
framework as follows:
The entrepreneurial process begins with the perception of the existence of
opportunities, or situations in which resources can be recombined at a potential profit.
Alert individuals, called entrepreneurs, discover these opportunities, and develop ideas
for how to pursue them, including the development of a product or service that will be
provided to customers. (Shane, 2003)
In contrast, the experience of the Product Center has shown that the process often begins first with the
development of the product or service (innovative idea), and not the perception of the exogenous
market opportunity. In other words, entrepreneurs through their actions create entrepreneurial
opportunities
i
. Once this idea has been developed, the individual then scans then environment for a
market opportunity that an entrepreneur with the appropriate set of skills and knowledge can exploit.
This is not to say that there are not times when an enterprising individual discovers an entrepreneurial
opportunity that she then decides to exploit leading to the execution and launch of a new venture per
the Shane model, but rather this is not the only way in which new ventures are formed. Instead, the
Product Center framework suggests that any of the three elements (innovative idea, market opportunity
or an enterprising individual) can initiate the process. All three roles, however, must be present for a
successful venture concept to be created.
This venture concept may or may not have been influenced by Product Center programming
related to market opportunities, but once formed is the typical impetus for the client to seek assistance
from the innovation counselor. The counselor can then first assist the client in the decision on whether
to seriously consider turning the venture concept into an actual venture. The innovation counselor
assists in this decision by providing resources and information on the venture concept’s potential based
on the explicit knowledge generating by the Product Center on general market information, processes,
organizations and sweat equity related to the venture concept, in addition to the counselor’s own tacit
knowledge based on her own experiences and that of other clients. These resources then help the client
determine whether to “start-up” and pursue the venture concept, or whether to “return to the drawing
board” by rejecting or refining the concept as appropriate. Note that “start-up” here is to be
distinguished from “Launch” as the latter involves starting the actual sale of the product, whereas the
former should be viewed as the start of gathering the appropriate resources necessary for launch. In
terms of the framework established by Shane and Venkatraman above, this stage could be viewed as
verifying the validity of the perceived entrepreneurial opportunity.
After this “start-up” has occurred, the next step in Product Center’s framework is the “test of
potential.” This test involves a more in-depth analysis using resources such as the specific market
processes, organizational structure, and equity involved in order to prove the existence of the potential
conjectured in the previous stage. This information, in addition to the explicit knowledge provided by
the Product Center relevant to the venture and the tacit knowledge of the counselor, then allows the
entrepreneur to make a better informed decision on whether to take the steps necessary to exploit the
perceived entrepreneurial opportunity. In this way, the EAP can help to overcome some of the problems
associated with the cognitive bias issues often involved in this decision by acting as the “safety net” or
counterbalance to keep such biases in check. If the decision is made, the entrepreneur will then create
an initial “prospectus” to seek resources and the venture can be considered formed. This stage would be
consistent with the Shane and Venkatraman decision to exploit the entrepreneurial opportunity.
Finally, once the venture is formed, but before it is launched, there is a final test of feasibility.
At this stage, the Product Center assists the entrepreneur in proving the feasibility of the venture and
preparing for implementation by providing the information on the resources necessary for launch as
well as assisting the entrepreneur in accessing those resources. These resources are again provided in
the form of explicit Product Center documents, the tacit knowledge of the counselors and specialized
service staff, but also includes utilization of the broader network of internal and external partners, such
as different service oriented departments on campus (e.g. packaging, legal counseling), as well as
leveraging the relationships built by the Product Center with lenders, distributors, producers, co-packers
and retailers. At this point, the entrepreneur must make the final decision as to whether or not to
execute his plan and launch the venture, consistent with the Shane and Venkatraman execution stage. A
successful launch can then be considered a new venture, its success and survival to be determined on
the validity of the underlying opportunity, the quality and access to the appropriate resources for
operation and the ability of the entrepreneur to manage the operation.
From this discussion, it appears that the method by which the Product Center, as a
representative EAP, assists entrepreneurs in the promoting the success and survival of new ventures is
through providing the appropriate information and resources necessary to make more effective
decisions at each stage of the entrepreneurial process framework (see figure 2 below).
Figure 2: Empirically induced new venture framework from the Product Center
Empirical Support
Previous work has supported this claim by finding that clients often report the most valuable service
they received from the Product Center was the ability to use the innovation counselor as a “sounding
board” or “reality check” to test their innovative ideas. This work also found that many clients reported
that lenders were more willing to give them a loan after having gone through the Product Center
process and that Product Center clients were significantly more likely to report higher satisfaction with
the efficiency of their operations than non-Product Center clients in similar industries (Lovgren, 2010).
In addition to this, from the 2008 Customer Demographic and Satisfaction Survey, a five point
Likert scale was also used to measure satisfaction levels (with 1 indicating low satisfaction, and 5
indicating high satisfaction) of the clients. The results was an average overall satisfaction level of 3.76
out of 5, indicating that the majority of the clients were at least moderately satisfied with the services
provided, but regression results on the ability to follow up on requests (from the 34 who responded to
this question) indicated that those respondents who have been working on their idea for a longer
period of time, have not yet launched, had higher household incomes but less management experience,
were significantly more likely to give positive satisfaction ratings.
Discussion
While the admittedly small sample size must caution against drawing any strong conclusions
from this data, this case study of the MSU Product Center does provide support for the hypothesis that
EAPs assist entrepreneurs by helping to supplement the entrepreneur’s knowledge and access to
resources in order to make more effective entrepreneurial decisions. It is logical to assume that those
with less management experience might have less information on how to successful execute a new
venture. The same holds true for those who have spent a lot of time on an idea but have not yet
launched their product, as this might indicate there is some critical obstacle preventing the launch that
they do not have the appropriate knowledge or resources to overcome.
In addition, the bi-modal distribution of investment required and the resulting size of the firm
(based on number of employees) gives support that Product Center services both lifestyle and
innovative entrepreneurs, with the former likely composing the majority of the small investment, no-
employees group and the latter comprising more of the larger investment and employer group.
However, further research with a larger sample size will need to explore these ideas in greater detail to
increase the validity of theseconclusions.
In summary, the empirically induced framework developed by the Product Center in
determining how to best assist entrepreneurs is well encompassed by most, but not all of the Shane
(2003) entrepreneurial process framework. In particular, the role of the EAP to provide appropriate
resources and information to help entrepreneurs make effective decisions at the critical stages of
evaluating an entrepreneurial opportunity, determining whether to exploit and how to properly execute
that opportunity fit very well with the framework developed by Shane. However, that the Shane
framework suggests that an enterprising individual discovers exogenous opportunities and does not
influence the opportunity itself seems insufficient to adequately explain the observed entrepreneurial
behavior of Product Center clients. While the discovery model holds in some cases, it appears much
more common for an individual’s innovative idea to drive the process of attempting to create an
entrepreneurial opportunity prior to any attempt at discovery. Furthermore, it is evident that in some
cases an entrepreneur without an idea or market opportunity will initiate the process of searching for
the other two as well. In any case, only once the three elements combine is a venture concept created
and the rest of the process proceeds.
As a result of this analysis, our research suggests two potential avenues for future research on
the entrepreneurial process. First, we argue that a significant role of an EAP is to provide a check to the
entrepreneur’s perception of the value and certainty of their identified opportunity. This check, in the
long run, not only provides a signal to the marketplace about the viability of this opportunity but it also
limits the waste of productive resources. Whether this finding is supported in other EAPs is an
important policy question. Furthermore, it terms of the entrepreneurial opportunity, the experience of
the MSU Product Center suggests that entrepreneurs themselves may be a source of entrepreneurial
opportunities in addition to those that may exist in the marketplace and have just yet to be exploited.
This distinction is an important one and one that should be explored further. In particular, is there a
role for EAPs in supporting the creation of entrepreneurial opportunities and what are the performance
differences that result from these two types of entrepreneurial opportunities?
Appendix:
Figure 1: Overview of Product Center Networks & Outcomes
Product Center
Networks & Outcomes
COMPONENT
NETWORKS
VENTURE
DEVELOPMENT
NETWORKS
•Provider Networks
•Service Networks
MARKET &
INNOVATION
RESEARCH
NETWORKS
ENTRENEURIAL
& COMMUNITY
DEVELPMENT
NETWORKS
MSU
PRODUCT CENTER
PROGRAMS
•Venture Development
•Market & Innovation Research
(Knowledge Development)
•Entrepreneurial & Community
Development
GOVERNANCE
•Dean and Directors
•Department of Ag Economics
•Executive Advisory Council
(with participation from customers,
internal & external providers, and
sponsors.
Desired
Outcomes:
ECONOMIC
OPPORTUNITIES
•New businesses
•New products
•More successful
existing businesses
•Reduced likelihood
of losses from
inappropriate
business/product
decisions
•Better access to
existing resources
•More educated
pool of
entrepreneurs and
managers
•Creation of
entrepreneurial
communities
Customers
(Ag, Food &
Natural Resources)
•Entrepreneurs
•Existing Firms
•Producer
Organizations
•Commodity Groups
•Communities
•Government
Agencies
•MSU Faculty & Units
•Economic
Development Groups
•Local Food Systems
•Other economic
entities
COOPERATORS
•EXTERNAL PARTNERS
•INTERNAL PARTNERS
•INNOVATION COUNSELORS
& EDUCATORS
•SPONSORS
PROGRAM
DELIVERY
NETWORK
Table 1: Probit regression on Product Center’s ‘s Satisfaction with Counselor’s ability (timeliness) to
follow up on requests (1 – satisfied, 0 – not satisfied)
Probit regression Number of obs = 34
Wald chi2(9) = 22.90
Log pseudolikelihood = -13.78996 Prob > chi2 = 0.0064
------------------------------------------------------------------------------
| Robust
IC_timely | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
Age | -.0056038 .0108074 -0.52 0.604 -.0267861 .0155784
Educ | .0055805 .1621518 0.03 0.973 -.3122311 .3233922
Income | .3445888 .1457563 2.36 0.018 .0589118 .6302658
East | .229203 .6003882 0.38 0.703 -.9475362 1.405942
exper | -.2740341 .1241749 -2.21 0.027 -.5174124 -.0306559
investment | 2.41e-06 3.58e-06 0.67 0.502 -4.61e-06 9.42e-06
hh | -.4808163 .5278117 -0.91 0.362 -1.515308 .5536757
time_idea | .3473457 .2103713 1.65 0.099 -.0649745 .7596658
launched | -1.078434 .6126891 -1.76 0.078 -2.279282 .1224147
------------------------------------------------------------------------------
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