Monday, February 7, 2011

Enigma of Entrepreneurial Energy: Defying the Laws of Entropy?

Given my association at senior levels with entrepreneurs and entrepreneurial organizations, I am often asked the question “who is an entrepreneur”. Often, my answer has been that an entrepreneur is one who creates something out of nothing. I however realize fully that such a simplistic definition hardly does justice to what makes an entrepreneur or what an entrepreneur makes for the society or economy. Clearly, an entrepreneur creates wealth with his products and/or services that are innovative, exciting, outstanding or novel, that are developed, manufactured or delivered with very lean start-up resources, amounting to nothing more than his or her ideas and some savings. It is this unique characteristic that positions entrepreneurs in a class of their own, relative to common citizens, professional managers, governmental administrators, industrial leaders and academic scholars.

Much has been written about the skills, capabilities and attributes that characterize entrepreneurs. Two critical attributes of long standing entrepreneurs are irrepressible passion and boundless energy. Passion to achieve goals of distinction and energy that drives all actions towards the goals shape entrepreneurs into what they are. Mostly however it is the entrepreneurial passion that is spoken of and entrepreneurial energy rarely finds mention. If passion is the spark, energy is the fuel for entrepreneurial ventures. As automotive and chemical engineers are aware certain fuels and chemicals can spark themselves into high energy combustion by themselves under high pressures and a spark by itself can ignite only ignitable fuels or chemicals. Passion dims without energy, which possibly explains why entrepreneurs, as they mature, fail to translate their continued passion into sparkling ventures as they once could do.

Entrepreneurs have great expectations of themselves and their organizations. They expect their organizations to clone them in terms of passion and energy. In doing so, they ignore the differences between passion and energy on one hand, and themselves and their organizations on the other. Passion is akin to motivation while energy is very much the motive power. It is possible for individuals to be energetic but not necessarily passionate, and vice versa. Passion provides the aspiration but energy leads one to achievement. Bereft of passion, sheer energy can drive results provided the entrepreneur sets a goal model. In sum, the energy quotient of the entrepreneurial system rather than its passion equation drives the growth and sustainability of an entrepreneurial organization.

Entrepreneurial potential and paradox

Entrepreneurship is full of potential and paradox. Nations are made competitive by entrepreneurship. New ventures are established and additional jobs are created by entrepreneurs who eschew traditional jobs and push the envelope with their passion and energy. Sunrise sectors in advanced markets and growth sectors in emerging markets offer full potential for entrepreneurial play. Product innovation, manufacturing efficiency, and delivery excellence, either singly or in combination, help an entrepreneurial venture to succeed. Clearly, as a global economic system the full entrepreneurial potential is not yet tapped because advanced countries are unable to spark entrepreneurship in mature sectors while emerging countries have no roadmap for creating crucibles of entrepreneurship in sunrise sectors. While the high cost advanced countries may never be able to reenact entrepreneurial play in mature and commoditized sectors emerging markets have all the potential for broad based entrepreneurial play in sunrise sectors. To achieve this potential two paradoxes of entrepreneurship must be well understood and squarely addressed.

The first paradox is that entrepreneurship tends to be inversely proportional to scale. The faster and bigger an entrepreneurial enterprise becomes the lighter its entrepreneurial passion becomes and the colder its entrepreneurial fire becomes. From Microsoft to Google and from Sony to Ford, industrial history has several case examples of scale diluting entrepreneurship. There are several reasons for it. As entrepreneurs create industries out of their ventures they also attract follow-on entrepreneurs and competitors. As they grow organizationally, entrepreneurs integrate more managers than entrepreneurs in their organizational eco-systems and consequently become more deliberative and administrative in nature than intuitive and impulsive. Start-up entrepreneurship has more of goal directed execution and less of strategy driven execution while scale-sufficient entrepreneur firms become more process-dependent and less goal-inspired. Retaining entrepreneurial culture as an entrepreneurial firm grows is a daunting challenge for the entrepreneur.

The second paradox is that entrepreneurship is rarely linear. If the information technology leader of India, with a start-up investment of USD 10,000 in 1990 by its founders could become a USD 5 billion enterprise by 2010, with a net profit percentage of 27, cash and equivalents ratio of 70 percent and fund raising capability of say another 5 billion it does not mean that the firm can automatically grow to a USD 100 billion enterprise by 2020. The reason is that entrepreneurial organizations as they grow become stymied by the growth boundaries of the industries and their markets. Neither arithmetic nor geometric progression in entrepreneurship would be feasible in entrepreneurial organizations unless entrepreneurs overcome the constraints of scale sensitivity outlined above and pursue out-of-the approaches to achieve market hegemony. The challenge of achieving exponential growth would be next to impossible, however, passionate an entrepreneur is, and competent his organization is.

Limits to growth, ebbing passion or eroding energy?

Not enough research has been conducted as to why fiery entrepreneurs who created rapid growth organizations out of next to nothing fail to replicate their entrepreneurial magic proportionately either in scale or scope. While the above hypotheses offer several plausible explanations, possibly there could be other reasons as well. A natural inclination to seek a better work-life balance, a satiation of capitalistic thrust that triggers entrepreneurial urge, a failure to get synergistic technology or business partners, a changing macro-economic environment or a desire to self-actualize in areas other than corporate or industrial development could be some other reasons. Whatever be the reason, entrepreneurs in aspiration-driven and potential-plenty emerging markets should not forget that they are instruments of national wealth creation, and the nation cannot become a superpower unless the entrepreneurial fervor is personally maintained and/or is strongly institutionalized. There exist two ways to achieve this.

Entrepreneurs who are intent on retaining the individual charisma of entrepreneurship have few options other than becoming serial entrepreneurs. Successful serial entrepreneurs bring up their firms to critical scale and leave them in the hands of larger investors or partners, unlocking value and cashing out the stake, generating larger corpuses for subsequent ventures. This strategy is particularly relevant when their core entrepreneurial capabilities are not industry or technology specific or when the industry itself is on a mode of continuous expansion. India has its shining examples of serial entrepreneurs, for example Jerry Rao, the former Citi India head who set up Mphasis and is now in the fourth act of being a champion of affordable housing,GR Gopinath who founded India’s trail-blazing low cost airliner, Air Deccan and is now the creator of Deccan Express Logistics, and K Ganesh who recently sold his stake in his online educational venture, TutorVista, following three other exits in the past. That said, serial entrepreneurship is unlikely to be a major phenomenon in the Indian entrepreneurial scene which is marked as much by emotive attachment as by growth passion.

The second sustainable approach for institutionalizing entrepreneurial fervor lies in morphing firms into conglomerates. This unique method of institutionalization of Indian entrepreneurial spirit is best evidenced by Tata, Birla, Bajaj, Reliance, Essar, Dhoot, TVS, Murugappa, Apollo, and various other individual or family entrepreneurial ventures which became major conglomerates. From a simple strategic business unit (SBU) approach at the firm level to a diversified conglomerate group approach, there could be enormous opportunities for fervent entrepreneurs to co-opt other capable entrepreneurs to let them start up and grow such SBUs and constituents firms as future conglomerates. Institutionalization of this approach needs a breed of professionals who are fired with entrepreneurial passion and energy as much as individual entrepreneurs are. As one dwells on this approach, it is enigmatic as to why conglomerate entrepreneurship has been a preserve of entrepreneurial families rather than individual entrepreneurs. There is a need for conceptualizing and analyzing the entrepreneurial paradigm in a totally different perspective that emphasizes energy rather than passion as the key constituent.

Entrepreneurial thermodynamics

Although entrepreneurship is seen largely as an organizational or behavioral phenomenon, the challenges and paradoxes of sustainable entrepreneurship can be better understood in a thermodynamic perspective. All things in the observable universe are affected by and obey the laws of thermodynamics. Entrepreneurial systems are no exception. If entrepreneurial energy is considered the heat of a heat engine, the laws of thermodynamics apply strikingly to systems analysis of entrepreneurship. Entrepreneurial energy provides the power to performance of a start-up firm. Just as temperature, pressure and chemical potential of a heat system dictate the thermodynamic behavior of a heat engine, energy, passion and competencies of an entrepreneurial system dictate its behavior. As an analogous concept, entropy is a thermodynamic property that is a measure of the energy not available for useful work in a thermodynamic process such as in energy conversion devices, engines, or machines. Such devices can only be driven by convertible energy, and have a theoretical maximum efficiency when converting energy to work. During this work entropy accumulates in the system, but has to be removed by dissipation in the form of waste heat. Many entrepreneurial systems are affected by the entropy caused by the lag that typically exists between the passionate fast-forward of the entrepreneur and the conservative status quo of his leadership and managerial team.

When I postulate that an entrepreneur is one who creates something out of nothing, evidently I challenge the first law of thermodynamics, which is an expression of the principle of conservation of energy. The law expresses that energy can be transformed, i.e. changed from one form to another, but can neither be created nor be destroyed. It is usually formulated by stating that the change in the internal energy of the system is equal to the amount of heat supplied to the system, minus the amount of work performed by the system on its surroundings. However, to the extent that a successful entrepreneur draws more than proportionate output from lean inputs, whether meager financial resources, insufficient talent pool, indifferent regulatory policies or inadequate market perception, a true entrepreneur challenges the first law of thermodynamics. Drawing lessons from this, however, entrepreneurship in India would fly even higher if financing options for entrepreneurial firms are expanded substantially, talented people opt enthusiastically to support entrepreneurs, regulatory agencies provide fast-track, single window support to start-ups and expansion projects, and customers encourage indigenous entrepreneurial product and service offerings.

No two entrepreneur systems can be alike. This is because no firm, much less an entrepreneurial system, is insulated from the external eco system (as in a thermodynamic adiabatic process). Adiabatic processes of thermodynamics between two specified states of a closed system specify that the net work done is the same regardless of the nature of the closed system and the details of the process. Entrepreneurs who refuse to be insulated and introverted and in contrast excel in interacting with the eco system and in influencing to achieve positive outcomes achieve superior results. Successful entrepreneurs need to be seen, felt and experienced by various stakeholders, from employees to investors, from domestic associates to international partners, and from local governments to central government to reinforce faith in entrepreneurial capabilities. Entrepreneurs have to be sensitive to external eco systems to manage their expectations in a non-adiabatic fashion.

Systems of entrepreneurial energy calibrate with the second law of thermodynamics as well. The second law of thermodynamics is an expression of the tendency that over time, differences in temperature, pressure, and chemical potential equilibrate in an isolated physical system. From the state of thermodynamic equilibrium, the law deduces the principle of the increase of entropy and explains the phenomenon of irreversibility in nature. The second law of thermodynamics, also known as the law of increased entropy postulates the loss of matter and energy gradually over time. Usable energy of a power system is used for productivity, growth and repair. In the process, usable energy is converted into unusable energy. Thus, usable energy is irretrievably lost in the form of unusable energy. The greater the unusable energy the greater would be the inefficiency of the system. Entropy is defined, in practical thermodynamics, as a measure of unusable energy within a closed or isolated system (even, the universe as the ultimate example). As usable energy decreases and unusable energy increases, "entropy" increases. Entropy is also a gauge of randomness or chaos within a closed system. As usable energy is irretrievably lost, disorganization, randomness and chaos increase.

The second law of thermodynamics has several lessons for entrepreneurial organizations. Just as no heat engine is one hundred percent efficient, no entrepreneurial engine is totally efficient. It would be inappropriate on the part of entrepreneurs to equate their organizational energy levels to their individual energy levels. Smart and practical entrepreneurs, therefore, work to accept the theory of entropy and work towards minimizing the heat loss rather than expect the organizations to outperform their own energy levels. The second law implies that heat can never move from a colder body to a hotter body. So is it in entrepreneurial organizations; organizational teams would sap the energy of an entrepreneur unless the teams themselves are made up of high energy, entrepreneurial members. The need to look beyond the founder’s capabilities and build a high performance team, preferably also an entrepreneurial one too, is evident for the long term sustainability of entrepreneurial organizations.

The third law of thermodynamics, though much less known relative to the other two laws, is equally important for entrepreneurial organizations. It states that the entropy of a heat system attains zero when the system reaches the absolute zero temperature (Kelvin temperature of minus 273 degrees centigrade). The third law of thermodynamics means that as the temperature of a system approaches absolute zero, its entropy approaches a constant (for pure perfect crystals, this constant is zero). A pure perfect crystal is one in which every molecule is identical, and the molecular alignment is perfectly even throughout the substance. For non-pure crystals, or those with less-than perfect alignment, there will be some energy associated with the imperfections, so the entropy cannot become zero. Drawing an analogy, if an entrepreneurial organization becomes a pure perfect crystal organization, ie., an organization in which each employee has at least the same energy and talent level as the founder-entrepreneur then the entropy or loss in the system would become zero. As we can appreciate, such a pure perfect crystal organization is an impossibility. Entrepreneurs would do well, however, to seek high energy levels within their organizations to the best extent possible, providing opportunities of empowerment and business building to such members. Otherwise, as with Google and other entrepreneurial organizations, high entrepreneurial energy individuals would migrate to establish their own ventures.

Minimizing entropy and maximizing energy usage

The laws of thermodynamics are absolute physical laws - everything in the observable universe is subject to them. Like time or gravity, nothing in the universe is exempt from these laws. Human and corporate entrepreneurial systems are no exception. The laws of thermodynamics, the law of energy conservation, the law of energy loss and the law of zero entropy, urge the entrepreneurs to look beyond themselves and model their organizations around the core concept of entrepreneurial energy. Neither egoistic defiance nor fatal compliance to the entrepreneurial thermodynamics would ensure sustainability of entrepreneurial energy. Institutionalization of entrepreneurial energy through structure and talent optimizes entrepreneurial thermodynamics.

Posted by Dr CB Rao on February 7, 2011

1 comment:

Narayanan said...

As someone once said, Innovation is about "seeing what everyone sees but thinking of what no one has thought of"; entrepreneurs are masters at this with the added skill of converting thought to action culminating in profits. A very interesting and novel approach to invoking the Laws of Thermodynamics to explain dissipation of entrepreneurial energy. Since there is a component of time involved from inception of a firm to scaling up and the eventual increase in entropy, perhaps Thermodynamics gives way to Kinetics at this stage? As every student of Chemistry is aware, Thermodynamics can only tell you if a system is stable or not, it cannot address how fast (or slow) a reaction can proceed. Additionally, I suspect some of the Laws of Economics kick in at this stage as well, mainly the Principal-Agent problem. As the organization grows from a handful to hundreds, there is bound to be information asymmetry and an inevitable increase in agency cost. Neither Thermodynamics nor Kinetics is likely to address this issue convincingly. Successful entrepreneurs have an exquisite sense of timing on entry to and exit from businesses they fancy. Finally, although entrepreneurial passion has been addressed in literature, there is a tendency to confuse passion with risk-taking.

As Malcolm Gladwell so eloquently argues in his essay, true entrepreneurs are hardly risk takers. Arguably the term "predator" is hardly flattering but the logic of his argument is compelling!!