Factors controlling mind of an entrepreneur.....

Kingfisher Airlines, now defunct, was pioneer in personalised services to the airline passengers in India. They saw market share gaining from over 6%+ in Jan 2006 to 27.2% in Feb 2009. Of course, the merger with Air Deccan in June 2008 helped to rapidly gain market share. Why did passengers rally behind Kingfisher? Why did they abandon it at a later date?

Established in 2003, Kingfisher was flying passengers to majority of the airports across India. I travelled Kingfisher initially as the flight timings suited my business requirements. It was pretty impressive the way the service team managed the long queues. The passengers were not so unhappy. Other airlines were better in managing queues in front of check in counters. 

The travel by me for initial few flights was without the frequent flyer card in Kingfisher. A trip to my friend's place changed my perception. Kingfisher used to send a packet to everybody who signs up for their frequent flyer program. The packet used to be a very well rapped with bright red colour and the letter inside looked like a note to a King with two sticks with threads handing and the letter running from one stick to the other containing the note by the chairman. It further contained bag tags, frequent flyer card and few other stuff I can't remember. My friend shared his experiences and elaborated as to he was treated once he got down from taxi by the Kingfisher ground service team carrying his baggages and so on. He was excited when the beautiful Air hostess called him by name and offered his favourite cool drink(????)Suddenly, Kingfisher in my mind became aspirational. I jumped to apply for myself for the program. As the days passed by, some of our business associates started demanding travel by Kingfisher only and used to share their frequent flyer numbers for various programs arranged by us. The influence of others and their experiences mattered a lot in the decision making in all the cases.

Pedro M. Gardete's from Stanford University has undertaken research and wrote "Understanding Social Effects in the In-Flight Marketplace: Characterisation and Managerial Implications". The paper has interesting insights as to influences on a customer to make a purchase in the light of improving ancillary revenues for an airline. The study and focus is on purchase pattern of passengers and the influence of peers.

When Kingfisher License was suspended in 2012, my mind shifted to the entrepreneur and his thought process. When I chatted with people who were close enough to Kingfisher, everybody had a view and majority of the discussion was about the individual promoter. They liberally commented on his lifestyle, his expensive habits, arrogance and not to forget how lack of character can bring a person and organisation down. 

I will take a pause here on Kingfisher. My point is elsewhere.

Though I have seen many companies suffering from the culture set by the promoter, Kingfisher was more glaring. What makes companies go down just by following the culture set by an individual? Who controls the mind of entrepreneurs who has their peculiar way of setting culture.

In early 90's and later in that decade, I have seen many industries boom through the capital market especially from Hyderabad. Prawn Culture, Sheep farming, Granites business, Stock market operations, NBFCs, Pharma, IT.....all used to come in groups. All the promoters had their origin around 100km radius from each other. Some had similar project reports and some CAs were printing the project reports as only few changes had to be made for the next set of entrepreneurs who walked in for a study and report. 

Research from Cox Business has found that more than half of small business owners start their own business in order to be their own boss. The researchers found that people were also motivated by the idea of creating something from the ground up. If people enjoy freedom to do things and want to genuinely build organisations, then why the culture is not in sync with the long term objectives. Why the Indian scenario is so different? Social Influences!!!

The peer pressure for entrepreneurs to do a business was so high that they don't mind taking the beaten down path. There are various pressures for an entrepreneur. Fist is validating his business idea, second is to arrange finances and fund the venture and cope up with any fluctuations in the plan, thirdly to cope up with the influence on his business from external factors and change of regulations and lastly attracting talent. All these play a huge role in the decision making of an entrepreneur on a day to basis.

Measuring entrepreneurship

To analyse the influences for a promoter we need to understand the environment he operates.

Entrepreneurs, with deep pockets validate their idea with fair amount market research and understanding the business case in detail. Without such study he will be shooting in the dark and seldom can decide his goals for medium and long term. He will not be able to see the goals clearly and the market research and business validation clears the mist of execution and solidifies the path to the goals. with clear data on hand the entrepreneurs venture into capital intensive businesses. 

Those without those deep pockets do basic validation and rely on publicly available data to solidify on the short and medium term goals and wait for an opportunity to strengthen their business case. These businesses are generally working capital intensive. They reply not only on their capabilities but are also convince others to join them to take risk on their business mostly family and friends.

The third type of entrepreneurs who are gutsy, take a call on the business without any of these. They completely rely on their idea. Such businesses are generally small in nature and are not capital intensive. The entrepreneurs heavily rely on their own capabilities and experience.
Now coming to the mind controlling factors. 

The economic environment : 

More adversities, the more opportunity hunting unlike the popular belief that the businesses thrive only when economic environment is on growth path. The arbitrages that exist are very high and thus more inclination to profit from them. Even the wealth disparities help the entrepreneurs to fish business opportunities. In economies where there is well spread incomes and prosperity, the entrepreneurship does not thrive as much.

See also Fritsch (1996) who shows that entry and exit varies during the product cycle, i.e. it is particularly high in the earlier stages.

Industry level factors:

On the industry level the most prominent factors that have been identified to impact entrepreneurship are the level of profits, entry barriers, level of demand, and the extent of agglomerated or urbanized production structures (Reynolds 1992, Reynolds and Storey 1993).The determinants of entrepreneurship thus relate to variables derived in the industrial organization, economic geography and standard microNeconomic theories of economics.   There are mixed results for different variables in different countries but basically profits, industry growth and industry size are positively related to startups while increasing capital requirements and need for product differentiation seem to negatively impact entrepreneurship. 

The regulatory environment : 

The evolving economies have more red-tap and corruption. In that scenario the entrepreneurship thrives as few can get their way through the regulators and thus benefitting from such information and communication asymmetries.

At the individual level progressive marginal tax rates seem to negatively impact entry, even though the magnitude depends on the difference between taxes on wages and taxes on profits (Gentry and Hubbard 2000, Hansson 2008). It is also noteworthy that individuals in either the highest or the lowest income brackets are most likely to start a firm, which probably mirrors that individual abilities govern whether opportunity  or necessity based entrepreneurial ventures is embarked upon.

Beaten down paths: 

You will see the third type of entrepreneurs mentioned above preferring the proven businesses and thus the more number of successful businesses, more followers you see lining up. 

Cultural and social aspects:

A number of studies find that social norms, or entrepreneurial culture, do influence entrepreneurship.An obvious indicator of this is the parent effect, that is, the likelihood of becoming a firmNowner or starting a  new firm increases if the parents had their own firms (Dunn and Holtz Eakin 2000, Davidsson and Honig  2003, Gianetti and Simonov 2004).  There also seem to be the case that an environment dominated by smaller and independent firms become more conducive to entrepreneurship than environments hosting 
(http://entreprenorskapsforum.se/wp-content/uploads/2013/03/WP_02.pdf) larger firms (Glaeser et al 2009, Glaeser and Kerr 2009). Holding an industry’s establishment size constant (or/and city), entrepreneurs increase when the surrounding city has a greater number of small  establishments. In addition, there is a remarkably strong correlation between average establishment size and subsequent employment growth through startups, particularly in manufacturing (see also Rosenthal and Strange 2009). Growth of new startNups is thus correlated to the number of existing establishments in the area. The direction of causality is however not clear.

According to literature and various studies the fundamental source of economic development, dynamism and changes can be ascribed the institutional setting in which agents operate. Even though needs may drive individual actions, the way those needs are fulfilled and the efficiency in accomplishing them, depends on institutions. Hence, at an overarching level, the extent and type of entrepreneurship can always be attributed institutions, formal and informal (de Soto 1989, 2000, Baumol 1990, North 1990, 1994, Henrekson 2005).Institutions also appear at all levels of economic activities: the macroeconomic framework, industrial policies, knowledge creation, attitudes and individual incentives.(http://entreprenorskapsforum.se/)

Rather than being synonymous with starting a new venture, entrepreneurship refers to a set of abilities embodied within an individual. Adequately capturing such abilities in data that are comparable over individuals, not to mention comparisons across regions or nations are simply not possible. Thus, the measures of entrepreneurship will always be partly erroneous and subject to criticism since empirical studies have to rely on proxies which are correlated with entrepreneurship.

Some of these factors relate to the business cycle–i.e. there may be a cyclical component in entrepreneurship activity – while other, albeit less explained, can be associated with long waves influencing economic activity, innovation and entrepreneurship (Schumpeter 1939).

In 2009, George A. Akerlof and Robert J. Schiller published, now well celebrated book, Animal Spirits:How Human Psychology Drives the Economy and Why It Matters for Global Capitalism wherein they have identified core psychological factors that are the ultimate reasons for the boom that preceded the world economic crisis, the crisis itself and much debated recovery in USA. The term 'Animal Spirits' was first pronounced by none other than Lord John M. Keynes in his seminal work The General Theory of Employment, Interest and Money in 1936.

Next week : Will delve more into psychological aspects.