The Origin and Evolution of New Businesses - Amar Bhidé
Book Title:
The Origin and Evolution of New Businesses - Amar Bhidé
Author:
Amar Bhidé
Genre:
Economics, Political Economy, Entrepreneurship, Capitalism
Synopsis:
The Origin and Evolution of New Businesses is an extensive study by Professor Amar Bhidé on the origins of entrepreneurship — how businesses start and grow, an essential activity in market economies and for economic development. In an environment filled with talks about glamorous, venture-backed businesses and their dazzling valuations, Professor Bhidé instead focuses on bootstrapped entrepreneurs and what he calls “promising businesses”.
Professor Bhidé begins by differentiating between various types of business opportunities, drawing on Frank Knight’s theory of profit and uncertainty to categorize each opportunity along an “investment uncertainty” diagram. In this diagram, we find marginal businesses, promising startups, venture-backed startups, corporate initiatives, and revolutionary ideas. The diagram categorizes initiatives across three dimensions: uncertainty, investment, and the likelihood of substantial profits.
Marginal Businesses—for instance, lawn-mowing companies, nail salons, snow removal, or floor cleaning—cluster in the lower-left area of the diagram. These ventures have very low uncertainty and produce profit distributions that hover around a mediocre average.
Promising Businesses cluster in the upper-left area of the diagram. They require very little initial investment, and while early profits may be modest, shrewd entrepreneurs and operators still have a small chance of realizing substantial payoffs.
VC-backed startups and corporate initiatives typically arise further along the investment uncertainty curve. They are usually better planned and researched, have substantial initial funding (especially corporate initiatives), and demand more staffing and higher-caliber employees than promising businesses. Their higher payoff potential reflects these greater resources and more rigorous planning.
Although the book focuses mainly on promising businesses, it analyzes a wide range of economic initiatives in its first section. When exploring promising businesses, Professor Bhidé examines both the personal traits of the entrepreneur and the broader characteristics of these opportunities.
Founders of promising businesses are neither revolutionary geniuses nor individuals with extraordinary financial or academic resources. They often seize existing opportunities or imitate what is already working. Successful founders excel at finding local maxima and profiting with very low costs to themselves. Professor Bhidé encapsulates the ethos of such founders with a memorable quote:
“Heads I win, Tails I don’t lose too much”.
Professor Bhidé goes on to analyze how promising businesses that succeed eventually evolve, examining both shifts in the business itself and changes in the entrepreneur’s traits. He distills the characteristics associated with each stage:
- Promising Business
- Nature of the Business:
- Dependent on the principal’s efforts
- Targets niche markets
- Initiatives and Task Characteristics:
- One-off
- low investment
- high uncertainty
- Opportunistic adaptation
- Entrepreneurs’ Traits:
Tolerance for ambiguity
Decisiveness
Open-mindedness
Self-control
Sales skills
Growing into a Mature Business and Becoming an Established Corporation
- Nature of the Business:
- Involves multiple assets
- Uses embedded coordination mechanisms
- Serves mass markets
- Initiatives and Task Characteristics:
- Complementary
- multi-period with higher investment and lower uncertainty Long-term goals
- General rules (“Strategy”)
- Specific choices (“Implementation”)
- Entrepreneurs’ Traits:
- Willingness to take risks
- Creative synthesis
- Ability to abstract
- Skill in synthesis
- Capability to inspire (and sometimes intimidate)
In the book’s final and most fascinating section, “Societal Implications”, Professor Bhidé argues that more than laws or government policies, fostering an entrepreneurial environment depends on social attitudes, trust, and feedback effects that promote the birth and growth of promising businesses.
Personal Reflection:
The Origin and Evolution of New Businesses is a truly impressive read for anyone interested in one of the most fundamental aspects of economic life: starting and growing businesses—a topic largely not studied by academia and policymakers. The book is astounding in its thorough analysis of entrepreneurial activity. It is one of the best books on entrepreneurship that I have read so far, especially since most recent publications focus only on glamorized, VC-backed startups. The final section, “Societal Implications”, greatly resonated with me and my personal experiences, coming from the developing world, from a country with a strongly socialist-like government where the state imposes substantial barriers to entrepreneurial activities and thus hinders economic development.
The Origin and Evolution of New Businesses charts the evolution of promising businesses into mature and successful enterprises. It distills different entrepreneurs' personal traits and general firm characteristics during each phase of the firm lifecycle, from promising business to mature and solid business. Going from a mentality of “Head I win, tails I don’t lose too much” and opportunistic approach to strategic initiatives and bigger risks to secure bigger payoffs is the essence of the evolution of new businesses, according to Professor Bhidé. In his conclusion, Professor Bhidé asserts that social attitudes and culture are more important in fostering an entrepreneurial environment than any government policy.
Political and economic decision-makers in most countries could readily use this book to better understand what it takes to foster an entrepreneurial environment and spur greater economic development.
Overall Rating:
5 out of 5