The 30 Day MBA (39 page)

So maintaining an acceptable rather than full employment is the realistic purpose of economic policy and governments have a number of factors and figures to keep tabs on to achieve that goal:

• Cyclical unemployment: This is the rate of unemployment attributable to a stage in the economic cycle. Typically, during a downturn unemployment will be higher than the normal target rate and lower in the upswing.
  
• Seasonal unemployment: This occurs at certain times in the year; for example, in winter, construction and casual farm workers are more likely to be laid off.
  
• Frictional unemployment: This is the result of an economy or geographic area within an economy moving from one type of productive activity to another. The shift from employment in coal and steel mining to other forms of employment, usually in the service sector, is one such shift that Western economies have experienced.
  
• Structural unemployment: This is caused by workers not having the skills and businesses not having the technology to meet new demands being made on an economy.
  
• Vacancy rate: This measures the number of unfilled jobs at any one time. A high level of unemployment can be partially offset against lots of vacancies, as people take time to move from one job to another, particularly if that requires moving home.
  

One further measure a government can take to influence unemployment is to import labour, either through immigration or by accepting seasonal workers from overseas.

The exchange rate

The rate at which different currencies are traded is their exchange rate, with a high rate being viewed as a sign of economic virility. So-called strong rates of exchange mean that citizens and businesses find foreign goods and services relatively cheap. Unfortunately, it also means that foreigners find their goods and services expensive and will buy less and seek new suppliers in countries with more favourable exchange rates.

Most countries have their own currency, but not all governments pursue the same exchange rate policies and each such policy involves different costs and risks:

• Managed and ‘not fully convertible' is when the government exercises political and economic control over the exchange rate and the amount of its currency that can be moved in or out of the country. China and India are among many countries that fall into this category. Such constraints can mean that a currency drops sharply in value periodically as the government of the day tries to hold back international pressures.
  
• Pegged: For the majority of countries which have been anxiously seeking ways to promote economic stability and their own prosperity, the most favourable way has been to peg the local currency to a major convertible currency, such as the euro or US dollar. This means that while the local currency may move up and down against all other world currencies, it will remain or at least attempt to remain stable against the one it is pegged against. In total, 22 states and territories have a national currency that is directly pegged to the euro, including 14 West African countries, 3 French Pacific territories, 2 African island countries and 3 Balkan countries.
  
• Dollarized: This is a slight misnomer as the term is used to describe a country that abandons its own currency and adopts the exclusive use of the US dollar or another major international currency, such as the euro. The euro, for example, is the official currency in 15 states and territories outside the European Union. In such cases the country in question takes on the risks and costs associated with the ‘host' currency. Many of the economies opting for this approach already informally use the foreign currency in private and public transactions.
  
• Floating and ‘fully convertible': These currencies fluctuate as the country in question succeeds or fails. Russia, for example, lifted currency controls in July 2006 as a sign of economic confidence, making the rouble fully convertible. Now it is more attractive to invest in Russia, while Russian businesses can freely, without worry, without any special permit or burden, participate in investments overseas. Barely eight years earlier the country defaulted on its massive domestic debt, devalued its currency and wiped out Russians' savings. Russia's macroeconomic situation had to become stable to allow this to happen, which has been achieved on the back of large gold reserves, a balanced budget and foreign investment that exceeded capital outflows largely on the basis of oil and gas exploration activity.
  

Balance of payments

The balance of payments is the difference between all payments coming into a country and those going out. A surplus of payments coming in over those going out is said to be favourable and the opposite is unfavourable. The
balance of payments is divided into two accounts: the current account, such as payments for imports, exports, services and transfers of money; and capital account payments for physical and financial assets.

The balance of trade, which is itself a major part of the overall balance of payments, is the difference between the value of goods and services exported out of a country and those imported into the country. When imports exceed exports a country's GDP is reduced by that amount (see GDP earlier in this chapter). Imports and exports are themselves influenced by a country's competitive position, which can be eroded by too high an inflation rate, for example, or by having too strong a currency, which encourages overseas purchases of goods and services, including holidays.

The broken window fallacy

In the broken window fallacy advanced by French economist Frederic Bastiat (1801–50), the argument that economies can be kick started by almost any expenditure was exposed as plain wrong.

Bastiat's example starts with a man's son breaking a pane of glass that he in turn will have to pay to replace. Onlookers considering the situation come to the conclusion that far from being a vandal the boy has actually done the community a service. His father will have to pay a glazier to replace the broken pane, who will then in turn have money to spend in the local economy. In fact, without this type of business glaziers would be in trouble and all the businesses, restaurants, garages, bookkeeping services and the like will get a shot in the arm from this additional spending too. The smashed window will go on providing money and employment in ever-widening circles.

On closer inspection this argument is shown as nonsense; breaking the window reduces the father's disposable income who in turn will now be unable to spend the exact same sum of money as the glazier will be getting. In fact by destroying something that has already been bought and is still in satisfactory working order the economy is worse off than before. Had the window not been broken the money in question could have been spent on valuable new assets.

In economic terms just spending money won't necessarily kick start the economy unless it is invested in productive assets.

8

Entrepreneurship

• Entrepreneur vs intrapreneur
  
• Social entrepreneurs
  
• Creative destruction, the spur
  
• Why we need entrepreneurs
  
• Money for business plans
  

E
ntrepreneurship is the newest discipline in the business school armoury and in many schools the subject is still not taught. In some it is a topic within economics, which is considered appropriate as J B Say, a French economist in circa 1800, first coined the term entrepreneur, using it to describe ‘Someone who shifts resources out of an area of lower and into an area of higher productivity and greater yield'. The most common practice is to reduce the subject to a basic ‘start your own business' project culminating in a business plan presentation, with a handful of MBAs going the whole hog and launching a venture.

There is rather more to the subject than just starting a business, though that in itself is a worthy outcome. Governments are fixated with entrepreneurship, secondary schools are teaching it, 1 in 15 people in work runs a business and over half the world work for and report directly to an entrepreneur.

The Global Entrepreneurship Monitor (GEM) 2011 Global Report, its latest, reports an upsurge in entrepreneurship around the world, after a slight hiccup between 2008 and 2010 when the shock of the banking crisis was at its worst. There are now some 400 million entrepreneurs operating in the 54 countries surveyed by GEM (
www.gemconsortium.org/
).

Why entrepreneurship matters

You might be surprised at the number of people and organizations that appear keen to give entrepreneurs a helping hand.
Dragons' Den
panellists,
bankers and government ministers all seem eager to lend a helping hand. None of these would-be helpers is particularly altruistic. The primary reasons why entrepreneurs are essential are as follows.

Job creation

Governments need a constant injection of new businesses as they create most of the new jobs in any economy; a fact uncovered by David Birch, a researcher at MIT (Massachusetts Institute of Technology) back in 1979 (
The Job Generation Process
, MIT), and corroborated by dozens of other studies since then. Also, of course, you will pay tax on your profits and become an unpaid tax collector for VAT or Sales Tax on behalf of government agencies.

Innovation

New businesses are also the main source of innovations, with around 60 per cent of all commercially viable inventions being born in new businesses. By way of illustration one US study (Analysis of Small Business Innovation in Green Technologies) published in October 2011 concluded that ‘of the 1,279 US firms that were granted 15 or more US patents in the five-year period 2005–2009, some 42 percent are small firms with 500 or fewer employees'. The study went on to conclude: ‘When we compare the small innovative firms in the database with their larger counterparts, we find that small firms outperform large firms on average in every case. Patents of small firms are cited 79 per cent more by recent patents than is typical for patents of the same age and patent classification, while patents of large innovative firms are cited just slightly above average. We also found that the small firms in the study outperformed large firms in patent generality, originality, and patent growth' (
www.sba.gov/sites/default/files/rs389tot.pdf
).

Creative destruction and the innovative spur

Creative destruction is a term attributed to Joseph Schumpeter. Born in 1883, he became the youngest professor in the Austrian empire at 26 and finance minister at 36, only to be dismissed after presiding over a period of hyperinflation. A brief spell as president of a small Viennese bank was followed, after its failure, by a return to academia, first in Bonn and then in 1932 at Harvard. He is remembered for two books in particular:
Theory of Economic Development
(1911), where he first outlined his thoughts on entrepreneurship, and
Capitalism, Socialism, and Democracy
(1942), where he detailed how the entrepreneurial process worked and why it mattered. His view was that the fundamental impulse that sets and keeps the capitalist engine in motion comes from ‘the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial
organization that capitalist enterprise creates'. He pointed out that entrepreneurs innovate and develop new products, services or ways of doing business, and in the process destroy those organizations that can't adapt or have been effectively made redundant. According to the US Department of Commerce statistics new small businesses produce 13 times more patents per employee than large established firms. Schumpeter believed that capitalism has to create short-term losers alongside its short- and long-term winners in order for the economy to grow and prosper: ‘Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist… propulsion. The atmosphere of industrial revolutions… is the only one in which capitalism can survive.' He went rather further than this by arguing that the more countries tried to mitigate the possibilities of business failing, the worse their economic performance would be. Picking up the pieces through social insurance is fine; propping up failing businesses or declining business sectors is not.

Who makes a good entrepreneur?

There are absolutely no reliable characteristics that predispose people to become entrepreneurs. Despite diligent research, Durham University's General Enterprise Tendency (GET) Test, with 12 questions measuring need for achievement, 12 to assess internal locus of control, 12 to determine creativity, 12 to gauge calculated risk taking and 6 to measure need for autonomy, has failed to gain recognition. Peter Drucker, the international business guru, probably got it right with this description: ‘Some are eccentrics, others painfully correct conformists; some are fat and some are lean; some are worriers, some relaxed; some drink quite heavily, others are total abstainers; some are men of great charm and warmth, some have no more personality than a frozen mackerel.' Entrepreneurs do have one distinguishing characteristic in common, however. They put independence and doing their own thing above everything, including getting rich. That doesn't mean they don't want to succeed; it's just that success is not all about money. Research carried out by Simfonec, a science research centre based at Cass Business School (
www.cass.city.ac.uk
), found that 20 per cent of entrepreneurs in their sample (250 entrepreneurs and 250 managers) were dyslexic, whereas managers reflected the UK national dyslexia incidence level of 4 per cent. While it is perhaps comforting to know that dyslexia, or even not completing schooling or university because of it, is no bar to entrepreneurship; it is not something you can do much about.

Age matters

Research by the Global Entrepreneurship Monitor (
www.gemconsortium.org
) and the UK Office for National Statistics (
www.statistics.gov.uk
) reveals a number of interesting facts about small business starters. First, people aged
between 25 and 34 are more likely than those in other age groups to be planning to start a business. In the UK one in ten of this age group fits this description. Surprisingly the over 54s are slightly more likely (3.7 per cent) than the under 24s (3.3 per cent) to be entrepreneurially inclined.

Woman power

Entrepreneurial activity rates for developed countries indicate that men are around twice as likely to be entrepreneurially active as women. But that average conceals some wide differences. In the United States women are almost as likely as men to be business starters, while in Japan barely a seventh of businesses have women at the helm. Women in Europe currently own less than a third of small businesses, but women start about 35 per cent of new businesses in the UK. Businesses started by women tend to be concentrated in the labour-intensive retail industries, where management skills are particularly valuable.

No need for education?

A popular myth states that undereducated self-made men dominate the field of entrepreneurship. Furniture company IKEA was founded by Ingvar Kampra when he was just 17, having cut his teeth on selling matches to his nearby neighbours at the age of 5. If Sir Richard Branson (Virgin) dropped out of full-time education at 16, and Lord Sugar (Amstrad), Sir Philip Green (BHS and Arcadia) and Bill Gates can give higher education a miss, education can't be that vital.

Research however, shows that the more educated the population, the more entrepreneurship takes place. Educated individuals are more likely to identify gaps in the market or understand new technologies. After all Stelios Haji-Iannou, founder of easyJet has six degrees to his name, albeit four are honorary. Tony Wheeler, who together with his wife Maureen founded Lonely Planet Publications, has degrees from Warwick University and the London Business School. Jeff Bezos (Amazon) is an alumnus of Princeton and Google's founders Sergey Brin and Larry Page graduated from Stanford.

Would you make a good entrepreneur?

All too often, everyone believes themselves to be the right sort of person to set up a business. Unfortunately, the capacity for self-deception is enormous. When a random sample of male adults were asked recently to rank themselves on leadership ability, 70 per cent rated themselves in the top 25 per cent; only 2 per cent felt they were below average as leaders. In an area in which self-deception ought to be difficult, 60 per cent said they were well above average in athletic ability and only 6 per cent said they were below.

A common mistake made in assessing entrepreneurial talent is to assume that success in big business management will automatically guarantee success in a small business.

Rate yourself against the characteristics shown in
Table 8.1
and see how you stack up as a potential business starter. A score of over 30 suggests you have what it takes and less than 20 should be treated as a warning signal. Get a couple of people who know you well to rate you too, so you get an unbiased opinion.

TABLE
8.1
  
Business starter attribute check

You can find out more about whether or not entrepreneurship would be right for you by taking one or more of the many online entrepreneurial IQ-type tests. For example:

• Entrepreneur's short quiz (
  www.entrepreneur.com/greatminds/quiz/index.html
  );
  
• Community Futures, a Canadian small business help website, has a 50-question online test to help you rate your entrepreneurial abilities as well as a checklist of desirable traits. See
  www.communityfutures.com/cms/resources/business-planning/self-assessment.
  

Entrepreneurial categories

Entrepreneurs are usually associated with successful businesses such as those run by Alan Sugar, Richard Branson, Bill Gates or Roman Abramovich. There are, however, several different types of entrepreneurial ventures, not all associated either with making money or with charismatic leadership. The following are the main subsidiary categories of entrepreneurial organization.

Social entrepreneurs

A social entrepreneur is concerned primarily with achieving sustainable social change, though in many respects the strategies they employ to achieve those goals are similar to those used by other entrepreneurs. The idea of social business is fast becoming mainstream. There is an annual Queen's Award for Industry for Sustainable Development, an ACCA Award for the Best Social Accounts and a School for Social Entrepreneurs (
www.sse.org.uk
) which helps would-be social entrepreneurs to get started. The Schwab Foundation (
www.schwabfound.org
) covers much the same ground in the United States. Columbia Business School's MBA programme has an elective course on Social Entrepreneurship as part of its Research Initiative on Social Entrepreneurship (
www.riseproject.org/cbsprofiles.html
). Students complete projects where they shadow leading social entrepreneurs and social investors for a semester and details of all their case studies are published on their website. Stanford Graduate School of Business (
www.gsb.stanford.edu/exed/epse
) with its Executive Program in Social Entrepreneurship and Harvard's Strategic Perspectives in Non-profit Management (
www.exed.hbs.edu/programs/spnm
) take the subject to the heart of mainstream business education.

According to government statistics, around 55,000 businesses trade with a social or environmental purpose across the UK. They contribute almost £27 billion to the national economy and substantially benefit their local communities by creating employment opportunities, providing ethical products and services, and reinvesting surpluses into society. The primary motivation for social entrepreneurs is to build an ethical venture that is of benefit to the wider community. As one social entrepreneur put it, ‘I am trying to build a little part of the world in which I would like to live.' Money is important, but getting rich is not.

Oneworld Health (
www.oneworldhealth.org
), established by Victoria Hale, a social entrepreneur and pharmacologist based in San Francisco, is as different from mainstream drug companies as it is possible to be. It has as its vision to ‘serve as a positive agent for change by saving lives, improving health, and fulfilling the promise of medicine for those most in need' and for its values ‘Integrity, Courage, Collaboration'. Oneworld assembles experienced and dedicated teams of pharmaceutical scientists; identifies the
most promising drugs and vaccine candidates; and develops them into safe, effective and affordable medicines. It partners with companies, non-profit hospitals and organizations in the developing world to conduct medical research on new cures. Then it manufactures and distributes newly approved therapies such as those that tackle malaria, the cause of 300–500 million acute illnesses and over one million deaths annually.