Need, Dream, Desire, by alexis-fauvet-via-unsplash.jpg

Ask enough entrepreneurs, founders, and CEOs what made them successful in their industry when others have failed, and you will inevitably hear some variation of “We succeeded because we had to! We had no other option but to find new ways to win.” While such tales make for wonderful origin stories and corporate lore, necessity is not a reliable business strategy. When necessity leads to failure, those stories are often forgotten, despite the fact that failures outnumber successes by 2 to 1. For leaders looking to find creative genius in the face of necessity, it is time to take a closer look at the relationship between necessity and entrepreneurship to see how you can stack the odds in your favor.

Research typically defines entrepreneurship as a process by which opportunities are identified, valued, prioritized, and exploited. It is an active process of resource acquisition, bundling, and capability creation that is used to create and extract value. When it comes to defining necessity, however, research has typically conceptualized it as a complement to opportunity, with its presence being at least partially defined by the subjective reality and underlying motivation of individuals that experience it. Necessity is characterized by negative factors that push individuals to respond to avoid the consequences of inaction. In contrast, opportunity is characterized by positive factors that entice individuals to action in pursuit of gain or reward.

While simple in concept, this dichotomy is rarely so clear-cut in practice. For example, many employees and business leaders have embraced the shift to remote work in the pandemic as an opportunity to be leveraged in the short and long term to empower employees, access new talent, and decrease costs. For others, it is a necessity to be tolerated so long as it allows the firm to continue operations despite the pandemic, and a return to the traditional office cannot come fast enough.

As understanding of the relationship between necessity and entrepreneurship continues to evolve, Dencker, Bacq, Gruber, and Haas’ paper in the January 2021 issue of the Academy of Management Review offers useful insight. The team examined how necessity influences the entrepreneurial process for individuals seeking to create value in response to circumstances beyond their control. The authors point out that not all necessity is created equal as they draw on motivational theory to distinguish between different kinds of necessity. The necessity to fulfill basic needs, such as existence and solvency, are fundamentally different from higher-level needs such as the pursuit of psychological fulfillment and meaning. For organizations, higher level necessities relate closely to constructs like meaningful work as well as the mission and vision of the organization.

Redefining Necessity: Denker et al.’s core contribution is a reconceptualization of necessity as one part of a larger motivational continuum instead of the traditional binary and subjective push-pull model of necessities and opportunities. Drawing on Maslow’s hierarchy of needs, the team identified three broad categories of need to which the process of entrepreneurship can be applied. These include meeting basic needs, psychological needs, and self-fulfillment. They posit that the entrepreneurial process is the same under all three states and that it is only the focus or purpose for which the process is used that changes based on the perceptions, motivation, and capacity of the entrepreneur.

When the entrepreneurial process is used to address basic needs, it focuses the energy of individuals and the organizations they lead on survival by prioritizing attention on inputs such as the supply chain (food & water), production processes (basic security), and outcomes such as covering overhead costs (basic financial needs to stay afloat).
Higher order psychological needs focus entrepreneurship on outcomes such as reputation, industry leadership, and market share while self-fulfillment remains the domain of individuals and firms successful enough to focus their attention firmly on progress toward the mission and vision of the firm without concern over the basic business model.
Denker et al.’s framework reminds leaders to stay focused on the needs they have identified for their organization and to pitch their entrepreneurial processes accordingly regardless of whether action is needed to avoid bad outcomes (necessities) or pursue good ones (opportunities).

Resources and environment matter: The authors argue that the type of need that individuals seek to fill is determined in part by the resources they have access to, including human capital (knowledge, relationships, expertise), financial capital, and environmental supports. “[A]n individual’s stock of prior knowledge and experience will… affect the opportunities that they identify” (p. 64).

Leaders must look beyond their balance sheet to identify and leverage the human capital within their organization and apply it to the entrepreneurial process.
The lone genius who single-handedly saves the firm through sheer brilliance and insight is a myth. Leaders that continue to look for them waste valuable effort that could be spent gathering and distilling the insight and efforts of their people across the entire firm. Worse yet, leaders who believe that they must be that genius set themselves up for failure and deny themselves access to the collective wisdom of their organization as they engage in the entrepreneurial process.
The business environment matters. The leaders of firms in mature markets within developed economies have numerous advantages including access to insight from the large number of firms that have likely preceded them, a network of potential business allies within their supply chain, and an established customer base with a vested interest in the firm’s continued success. The ability of such leaders to activate these resources in ways that allow them to borrow additional human capital and extend their reach beyond the limit of their firm is incredibly powerful. It increases the their firm’s capacity to identify new opportunities, determine value, and organize capabilities to create and extract value under novel conditions.

Organizational agency & capacity for risk: Entrepreneurship is influenced by the presence or absence of resources that support individuals and prepare organizations for entrepreneurial activity. These support mechanisms make resources and expertise available and ensure that failure is not fatal. “[T]he absence or presence of supportive institutional levers” explains why “otherwise similar” entrepreneurs often follow “starkly different entrepreneurial processes” that result in wildly divergent outcomes (p. 62). While the authors focus on social and government programs designed to assist individuals and startups, the same logic can be applied within established organizations as well.

For internal entrepreneurship and venture creation to flourish, organizations must ensure that institutional support mechanisms exist to support an entrepreneurial response to external stimuli.
Leaders must ask themselves where they want innovation and entrepreneurship to show up in the firm so that they can put the resources and support in place to prepare for it’s arrival, identify it’s emergence, and support it’s growth.
They must be prepared for some innovations to fail and create mechanisms to learn from it as they create an iterative pathway to success.
They must also identify the areas of the firm in which entrepreneurship and innovation is unwelcome. To do that they must assess which areas of the firm are ready for entrepreneurship and the change that comes with it.

Business lore is replete with stories of entrepreneurs and innovators for whom necessity proved the mother of invention. But for every successful legend, data tells us that there are two failures relegated to the dust bin of our collective business memory. Dencker, Bacq, Gruber, and Haas’ work is a reminder that while necessity may invite innovation, it will never ensure success. Success comes when the needs of the entrepreneur, or organizational leader, are focused on the right level of need, resourced properly in the right environment, and skillfully positioned where there is agency to act and tolerance for risk. It is hard work, but you can do it.

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References:

Necessity is a Mother…

What’s Your Story?

Leadership Legitimacy