HomeBusiness DigestThe Human Capital Telescope: Schumpeterian entrepreneurs key to economic growth

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This embryonic understanding was later refined to describe an entrepreneur as one who, in addition to assuming personal financial risk, also manages the business.

Israel Kirzner thought that an entrepreneur was an individual who, ahead of others, spots business opportunities presented by pricing inefficiencies. The Kirznerian entrepreneur exploits information advantage. In contrast to Kirzner, Joseph Alois Schumpeter, a celebrated economist and business management professor who popularised the idea of creative destruction, having adapted it from Karl Marx, regarded an entrepreneur as an individual who finds new ways of combining resources to create new products or new methods of production.

 

The Schumpeterian innovator is a ‘creative destroyer’ — his innovations decimate the older and inefficient economic order, replacing it with a more efficient one and in the process employing more people. According to Schumpeter, the innovative entrepreneur is the lynchpin and catalyst of economic growth — the true hero of capitalism. Schumpeterian thinking posits that inefficient enterprises facing demise from newer innovative enterprises should not be protected. In this sense, Schumpeter’s innovator is an ‘undertaker’ who destroys and buries the old inefficient enterprises.

 

If Schumpeter were alive today, he would have no sympathy for the Zimbabwe United Passenger Company (Zupco), Air Zimbabwe and a host of other parastatals and private companies reeling under inefficiencies. Zupco is a classic case of creative destruction. Its demise spawned growth of the commuter omnibus business, which employs more people than Zupco could possibly do.     

  
A sober analysis of the nature of the Zimbabwean entrepreneurs shows that we have more of the Kirznerian entrepreneur or the ‘mark-up entrepreneur’ who thrives on identifying and exploiting arbitrage opportunities (pricing differences). As a nation we need to develop the capability of producing the Schumpeterian entrepreneur, who constantly unleashes ‘gales of creative destruction’. Neither a mark-up entrepreneurship nor ‘tenderpreneurship’ culture can produce a Steve Jobs, a Sam Walton, a Mark Zuckerberg or a Tawanda Nyambirai. To migrate from mark-up entrepreneurship and ‘tenderpreneurship’ we need to understand how Schumpeterian entrepreneurs think.

Question-answer ratio

According to a study by Clayton Christensen and others, the Schumpeterian-type of entrepreneur has a high question to answer ratio. Simply put, serial innovators habitually question convention. In our culture, it is often regarded as a sign of disrespect to question the rationale of accepted practices. Often, such inquisitiveness is misconstrued as an attack on the person or the powers that be. In cultures where individuals have a question-to-answer ratio that is below one, ie, where individuals have more answers than questions, Schumpeterian entrepreneurship is suffocated. 

To develop Schumpeterian entrepreneurial culture, the following cluster of questions should be constantly asked: 

lWhat are the factors industry has never offered which we must introduce?  — Phil Mataranyika, the founder of Nyaradzo Funeral Assurance Company (NFACO) asked this question in the context of the funeral services business and found out no firm was offering funeral services that upheld Zimbabwe’s indigenous cultures and traditions. NFACO now listens to questions from potential clients, who ask them why they do not provide certain services.  
lWhich factors does industry take for granted which we must raise well above the current accepted standard? — One innovator in Zimbabwe is arguing cattle are a financial asset class that should be mainstreamed into banking.

lWhat factors is our industry over-delivering on which we must reduce? — No frills airlines such as Western Airlines (USA) and One-Time (South Africa) arose out of asking this question. 

lWhich standards does the industry uncritically and habitually deliver on which we can completely eliminate? For instance, why do all new producers of cordial drinks package in 2-litre plastic bottles, imitating the original Mazoe? In other words, are there no better and cheaper ways of packaging these new products? — Enter Schumpeter.  

This set of four questions, Renee Mauborgne and Chan Kim of the Blue Ocean Strategy fame discovered, were constantly asked by innovators that created new profitable business growth since 1880.

Successfully answering the first question results in value innovation, ie engineering new fundamental or intrinsic value for customers. This is what will attract potential customers.

A well-thought out response to the second question arms you with enhanced value. Unfortunately, many enterprises in Zimbabwe focus chiefly on the second question and ignore the third and the fourth questions. Focusing on either the first or the second question alone, ironically, will result in one innovating themselves out of business. It’s simple really — introducing new value or enhancing value lifts the enterprises’ cost curve. 

Successfully addressing the last two questions results in cost-reduction innovation. This is what will drive up margins and compensate for the cost of new customer value innovation and customer value enhancement.

Superficial innovators focus on one or two of the four questions above.  Deep Schumpeterian innovators focus on the entire quartet of questions. Even Chinese industrial policy is shifting from the direction “Made in China” to “Designed and Made in China”, as one analyst puts it. 

Associational thinking

Schumpeterian entrepreneurs are associational thinkers. They are able to establish connections and relationships between and among seemingly unrelated entities. The Renaissance of the Middle Ages Italy is partially credited to a practice whereby musicians, artists, philosophers, scientists, etc would be brought together to interact at Medici.

 

Breakthrough discoveries were made when ideas from these varied backgrounds occasionally intersected. This phenomenon is now known as the Medici effect. Schumpeterian entrepreneurs invariably apply the Medici effect. When Tawanda Nyambirai bought ailing Tedco three years ago, investment analysts questioned the logic of a banking outfit buying what they sarcastically called a ‘shell’. I

 

t’s only now that many people are experiencing an epiphany and seeing the logic of a seemingly unwise commercial move. In his mind Nyambirai saw Tedco as being much in sync with his banking vision. Now, former Nyore Nyore outlets have been turned into one-stop shops that offer furniture, banking, medical aid, pharmaceuticals, fast food –  all under one roof. Imagine the business efficiency that this translates into — One rental for five businesses!

Interestingly, the majority of Schumpeterian entrepreneurs are not products of business schools. They include the late Steve Jobs of the iPhone and iPad fame, Mark Zuckerberg of Facebook, Sam Walton of the Walmart fame, and at home, Philip Mataranyika and Tawanda Nyambirai, to name but a few. Is it possible that the business school is poor at developing associational thinking? Schumpeterian entrepreneurs have the uncanny ability to turn inventions into commercial success stories. Had Steve Jobs, for instance, not pulled out his associational thinking skills, we could be still be typing line and commands to operate a computer.

Jobs saw a greater use for the Graphical User Interface (GUI) — the technology that allows you to ‘click and point’ icons on a menu, which technology was originally developed by Xerox for its photocopiers. Once introduced to computers, this helped Jobs achieve his dream of placing a computer in every household. In fact Jobs is famed for boasting that Apple outgunned companies that outspent it in research and development 10-fold. The Schumpeterian entrepreneur is needed to translate the language of the technical expert into the language of the consumer, taking innovations to the masses.

The original computer ‘mouse’ was close to the size of a roller-skater. Jobs tasked the inventor to produce one that would be small enough to comfortably fit the palm of a user’s hand and would cost no more than US$20.

Mark-up entrepreneurs and ‘tenderpreneurs’ will take Zimbabwe nowhere. We will continue to have jobless growth.

 

Let’s discuss at brettchulu@consultant.com

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