CHAPTER 8

The Entrepreneurial Mindset in the SME Sector

Introduction

Business success in the new economy is not merely a function of relevant skills but also requires people who have entrepreneurial mindsets. The key objective of this chapter is to determine the entrepreneurial mindset of Small and medium enterprises (SMEs) in general. SMEs are defined as separate and distinct commercial entities in some countries, in addition to their branches or subsidiaries. McGrath and MacMillan (2000) assert that an entrepreneurial mindset, which consists of elements such as goal orientation, hunting profitable opportunities, extreme discipline, and embracing a strong personal inner drive, is of utmost importance for any business to make ends meet. Kiyosaki and Letcher (2003) point out that not all business owners have the required “entrepreneurial mindset” to become successful, which is an essential concept to business success. There is no rule to follow to be an entrepreneur, so how is it possible to be one? This is not an easy question to answer because there is no role model for entrepreneurs, but in this chapter, we attempt to discuss how an entrepreneur thinks. We focus on how entrepreneurs who start SMEs think.

There are some factors that most successful entrepreneurs pay attention to. Here, we focus on the six most important aspects that successful entrepreneurs do. They always think big seeing the whole picture. They work on their business, not in it. They are risk takers, but they also know how to minimize or mitigate those risks. Regarding growth, they prefer small sustainable jumps rather than big unstudied growth. They know how to play in the new markets. Finally, they prefer to build a system-dependent company not people-dependent company.

The Concept: Entrepreneurial Mindset

An entrepreneurial mindset refers to the way of thinking about business and its opportunities that capture the benefits of uncertainty. Scheepers (2009) believes that “an ‘entrepreneurial mindset’ needs an innovative, willing and energetic pursuit towards a specified opportunity, by means of rapid sensing, acting and mobilized responses, in order to achieve a maximum gain.” Establishing an entrepreneurial mindset is important for sustaining the competitiveness of economic organizations and the socioeconomic lifestyle of the population through value and job creation (Dhliwayo and Vuuren 2007).

The Entrepreneurial Mind

Allen and Economy (2008) note that all entrepreneurs, habitual and accidental, have something like an “entrepreneurial mind,” as they all perform tasks that include, but not are not limited to, the following:

According to Nieman (2006), the failure of SMEs to either create job opportunities or grow is because of the perceived “mindset” of its owners. This is defined as one of the major causes of SMEs failure rates. Eno-Obong (2006) points out that entrepreneur with an entrepreneurial mindset can see the needs, problems, and challenges as opportunities. They develop innovative ways to deal with challenges and exploit and combine opportunities. McGrath and MacMillan (2000) argue that having an entrepreneurial mindset is the main reason for an individual to successfully move forward in an entrepreneurial process. Dhliwayo and Vuuren (2007) assert that an entrepreneurial mindset is significant for the success of SMEs, and without it, a business fails. According to Lotito, et al. (1997), this particular argument opens individuals/SMEs to modern styles of consciousness and helps them secure their place in business world.

Think Big

According to Johnson (2009), the first belief that the entrepreneur should have is “Think Big.” Thinking big means you need to have a broad vision because lack of this is one of the main reasons for SMEs’ failure. If you do not have a strategy, you will end up with either not surviving beyond the start or not getting the full potential of your business. A good example to discuss here is when an entrepreneur has a great idea, but he/she does not have a strategy to do it correctly. One of the biggest mistakes is to start even without a strategy to compete. Successful entrepreneurs always have a strategy from the beginning before paying one pound to pursue their ideas. There is no best strategy to use, but a start cannot be made without a strategy. In addition, successful entrepreneurs understand the tradeoff between the price and quality. Hence, they always focus on one factor as a competitive advantage. To act like an entrepreneur, one must get a strategy to work on before starting a small or medium business. As an entrepreneur, you must have a different point of view that is not limited by your environment. If you are an engineer, you should be able to see the world from your client point of view. If you are a doctor, you should be able to see the world from your patient point of view. However, this is not enough. You should go beyond this, and this is what is called “thinking out of the box.” Thinking out of the box is not just when you get an innovative idea. It means that there are no limits to your ideas. Real entrepreneurs can invest in many different fields that are so far from their specialization. This happens because they are not limited with the environment. They always smell business opportunities. This is something gained by practice.

Work on Your Business, Not in Your Business

According to Johnson (2009), another belief that entrepreneurs should have is working on their business. Not doing this is one of the most common mistakes that real entrepreneurs understand very well and know how to avoid. As mentioned in the first role of thinking big, one of the targets you must set from Day one is building an operational system that is independent of you. Think if you would die tomorrow, would your business be able to continue or it would die with you? It is normal during the introduction and part of growth phases that you as an entrepreneur would wear multiple hats, but you must work on getting rid of that very quickly. Your role as an entrepreneur is not the execution. Your role is planning and building the operational system. Think about the day when you might decide to sell your running profitable business. Do you think that an investor would buy a one-man-show company? From now, you should understand that your time is much more valuable to spend on execution. This may occur for a limited time to give the first push to your company, but you should set a target to build a self-running business that is able to operate and grow without need for you.

Entrepreneur Is a Calculated Risk Taker

According to Scarborugh (2016), “An entrepreneur is one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them.” In addition, the economic prospective or classical definition of an entrepreneur is simply the risk taker. Does this mean, though, that the entrepreneur is a gambler? Of course, this is not what is meant by risk taker. Entrepreneurs take what is called a calculated risk, with risk being “the possibility of loss.” Does this mean that someone who builds a business with a loss probability of 1 percent is an entrepreneur? Of course not. The difference is that an entrepreneur can go to more risky investments but with a good market study, hiring the appropriate staff, and managing the financial part of the project. This would decrease the risk of doing this business, and it is either a small or medium business.

Entrepreneurs Make Incremental Advances

According to Linkov, Bridges, Creutzig, Decker, Fox-Lent, Kröger, and Thiel-Clemen (2014), one of the lessons that entrepreneurs have been learned from the dot-com crash is that you cannot get very big jumps in a very short time. You have to get incremental steps, but those steps must be small and sustainable. This is how the growth happens in most successful businesses. If you were an earlier user of Facebook, for example, in 2004 or 2005, you can compare how it looks like now with how it was 15 years ago. Entrepreneurs building their start-up business must know this rule. You should not wait for the perfect model. The better option is to enhance as much as you can, then start the business with sustainable and constant growth rate. One of the known reasons for the failure of start-up companies is the unstudied growth. That would lead to many problems such as running out of cash or breaking the operational process that is not designed to handle this very high unexpected rate of orders.

Blue Ocean Is Always More Profitable

According to Linkov, Bridges, Creutzig, Decker, Fox-Lent, Kröger, and Thiel-Clemen (2014), one of the lessons in the start-up world is the rule that says “A competitive market destroys profits.” This would lead us to another important question, which is how successful entrepreneurs think of marketing. To better describe what the blue ocean is, it is better to take it from the Blue Ocean Strategy, which is one of the best-selling business books. According to Kim (2005), “Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant.” Finally, it is your decision to work as an evolutionary or revolutionary product, but most successful entrepreneurs prefer the revolutionary, which is the blue ocean strategy.

System Is More Important Than People

According to Johnson (2009), the next belief that an entrepreneur should embrace is to “[b]uild a company that is System-Dependent not People-Dependent.” This is necessary to avoid one of the most common mistakes known for experienced entrepreneurs. Successful entrepreneurs understand very well that system building is more important than getting the best talents in the market. Think about McDonalds. Surely, it is not the best burger you could eat. However, it is one of the best restaurants that have a consistent and sustainable process. Suppose you are trying to open a restaurant like McDonalds, you should pay more attention to the process than the skills of the chiefs. If you visited 10 restaurants of McDonalds in the same country, you would certainly notice that the taste is the same exactly. However, the staff is different people who may have not ever met. This is the power of building an easy to use system. Of course, you still may need some highly skilled employees, but that must not be the default case. This is a common mistake in many SMEs, especially when the entrepreneur has a technical background like being a programmer for example. You may find him occupied all the time with writing and modifying some codes. However, he must be busy with building a system for programmers to work on. That is also one of the very known concepts in management, which is that a “manager must not be involved in the execution.” Hence, an entrepreneur must not be trapped in process implementation. Rather, what must be focused on is process creation that would guarantee business continuity regardless of who would be involved in implementation. In addition, the job description and responsibilities for each member in the company must be clearly set.

Self-Theories and the Characteristics of the Entrepreneurial Mindset

Dweck (2006) developed two self-theories of intelligence by providing insight into the psychological (motivational) processes essential for achievement. She stated that individuals hold either an entity theory of intelligence, known as a fixed mindset, or an incremental theory of intelligence, known as a growth mindset. A core tenet for individuals with a fixed mindset is that intelligence, talents, abilities, and attributes are permanent and unchangeable. According to Dweck (2006), they further infer that one’s ability come from talents rather than from their slow development of skills through learning, and as such, they give up or go into a decline in the face of setbacks. According to Johnson (2009), individuals with a fixed mindset, who have low confidence, tend to adopt low performance goals, which in turn causes them to respond in a helpless characteristic manner/pattern of typical behaviors, thoughts, and feelings when faced with challenges. Individuals with a growth mindset, on the other hand, believe that ability and success are based on learning, and that intelligence can be enhanced and change with effort. They also believe in trying other approaches, seeking help when faced with difficulties, and tending to adopt learning goals. Individuals with high or a low confidence respond with a typical response pattern of thoughts, behaviors, and feelings in any situation they face by focusing on learning new ideas (Johnson 2009). The reason of this is that most successful business leaders have a growth mindset.

The Impact of Training, Work Experience, and Education on the Entrepreneurial Mindset

A positive relationship has been established between education and business creation. The firm needed to educate and give training to maximize the returns. In this view, Timmons and Spinelli (2004) asserted that entrepreneurship education is very important as it can be taught, and it will contribute to job creation and create a great impact on poverty alleviation. Experience is an important factor in entrepreneurial success. Most literature studies have confirmed a positive relationship between the entrepreneur’s experience, a firm’s growth and survival of the businesses.

The Impact of Creativity and Motivation on Entrepreneurial Mindset and Business Success

According to Dhliwayo and Vuuren (2007), entrepreneurial mindset is about creativity, innovation, and catching opportunities that lead to the success of the organizational and wealth creation, and this type of mindset enables individual to make realistic decisions when they face uncertainties. Creativity is a means to unlock the entrepreneurial potential of individuals, entrepreneurs, and organizations, as new ideas is the key of promoting an entrepreneurial culture. Creativity is essential for the success of the organization. Encouraging creativity is a strategic decision that firms should take into consideration.

According to Dunnette and Hough (1990), motivation, on the other hand, reflects a complete psychological force that determines the person’s behavior in the organization, the effort of the person, and a person’s extent of persistence of the person to face of setbacks. Motivation helps entrepreneurs to acquire skills, knowledge, and abilities and thus provide the impetus and energy needed for implementing the action. Motivation can possibly separate individuals who positively evaluate opportunities from those who do not.

Entrepreneurial Characteristics and Their Impact on the Long-Term Survival of SMEs

What defines successful and potential entrepreneurs from different individual are those characteristics that are distinctive to them. O’Connor and Fiol (2002) defined entrepreneurial characteristics as a typical feature or quality that someone or somebody has such as being innovative, creative, and open to change, have the ability to identify opportunities and achieve stated goals, which can build something of recognized values around perceived opportunities. Neneh (2011) identified creativity, self-reliance, and ability to adapt; tolerance of ambiguity and uncertainty; opportunity obsession; commitment and determination to be the necessary entrepreneurial characteristics required for the long-term survival of SMEs. This study, thus, adopts these characteristics established by Neneh (2011) as the necessary characteristics for the long-term survival of SMEs.

The Entrepreneurial Mindset in Egypt

Egypt has witnessed a dynamic entrepreneurial movement that had started to take place among youth and young professionals in Egypt and the region. Egyptian society’s perception of entrepreneurship is particularly high and continues to grow. More than 73 percent of Egyptians think entrepreneurship is a good career choice. While more than 30 percent of Egyptians shy away from starting a new business due to fear of failure, 46 percent of Egypt’s adult population is actually able to recognize good market opportunities for new businesses, perhaps suggesting that more people have the capability and knowledge to be entrepreneurs.

Entrepreneurship and Job Creation

Entrepreneurship and job creation have recently become buzzwords used by the country private sector and civil society leaders as a way to develop and stabilize Egypt. Numerous scholarly pieces and technical reports have been produced on the state of entrepreneurship in Egypt and the Arab world, on the necessity of entrepreneurship for fostering more inclusive economic growth, and on the region’s glaring unemployment rate. The focus on entrepreneurship is not surprising, given the role that it can play in tackling unemployment. A well-directed entrepreneurship ecosystem can offer a sustainable solution to the country’s most pressing socioeconomic challenges—unemployment and inequity—while at the same time sparking a culture of innovation. Literature on what is needed to support an increase in sustainable and scalable start-up enterprises references several weaknesses in Egypt’s entrepreneurship ecosystem. These weaknesses range from issues with existing legal frameworks to the availability and accessibility of financing options to problems with the educational system.

Legal Frameworks

A cumbersome and complicated registration system had been a major barrier to entering the market and prevented already existing informal enterprises from formalizing. While economic reforms introduced in 2004 dealt with issues of registration, contract enforcement and taxation remain barriers to entrepreneurial growth. Doing business in Egypt also continues to be an easier endeavor for those who are well connected, decreasing the chances of the marginalized and those with minimal social capital from entering formal markets and exiting poverty. Yet even those who are well connected and affluent struggle to take their businesses to scale, as can be seen from the overall size of the Egyptian private sector, which remains far from its potential.

Access to Capital

Access to capital has been another major barrier for entrepreneurs from different walks of life, especially youth. Major banks and financial institutions are biased in favor of larger and less risky constituencies of the market, with the accompanying strong belief that start-ups and existing SMEs are not bankable. The introduction of the Social Fund for Development (SFD) in 1991 was an important step toward making small loans available to young people, but it has failed to create a booming SME sector. A dearth of financial literacy has prevented youth from utilizing opportunities like the SFD, given their lack of awareness and understanding of loaning schemes and the negligible risk associated with them. Aside from the SFD, available financing options are mainly limited to a select segment of the population—those who are well educated and English literate.

In addition, up until recently, alternative nonbanking financing mechanisms such as venture capital, private equity, and crowdfunding have been absent from the Egyptian market. It has only been lately that such financing options have emerged; these include entities such as Sawari Ventures. Vodafone Ventures, Ideavelopers, the Cairo Angel Investors. Delta Shield, Ahead of the Curve, and Shekra. Most of these alternative financing options are primarily focused on tech-based entrepreneurs. Further, the Egyptian American Enterprise Fund (EAEF), though announced in President Obama’s 2011 Cairo speech, was not officially launched until March 2013. The EAEF commenced with $60 million from the U.S. government, with hopes of reaching $300 million in three years. To date, the EAEF has yet to disperse loans or equity investments, and it remains unclear how the fund will strategically go about supporting start-ups and SMEs. Moreover, the amount of money pledged by the United States for this fund is minute compared to the needs required, and in the case of Egypt, it is miniscule in contrast to the amount of U.S. dollars invested in military aid. Nonetheless, if the fund takes off, it can play an important role in the ecosystem alongside the already existing local players.

Education

A third principal barrier to fostering entrepreneurship in Egypt has been the country’s public educational system, namely the fact that it does not teach an entrepreneurial mindset, including risk-taking and innovative thinking. Youth are not equipped with basic entrepreneurial skills such as business development, which is required for business expansion. Fortunately, the new equity financing options aforementioned were introduced with acceleration and incubation packages that provide start-up entrepreneurs with the needed business development and mentorship support services. Such an introduction to the ecosystem has significantly changed the landscape, as it leads entrepreneurs through the hardships of starting a business in Egypt. Also, some entrepreneurship education programs have been introduced to private universities such as the American University in Cairo (AUC) and the British University in Egypt (BUE). Injaz Egypt has launched a unique program with the aim of raising awareness of entrepreneurship and entrepreneurial skills among young adults. More recently, Silatech and Microsoft Egypt have partnered to make basic entrepreneurial resources, such as business plan writing resources, available online through an English and Arabic portal. Informal awareness and educational opportunities offered through seminars and networking events on the topic are also available in urban centers like Cairo and Alexandria. Yet with the exception of Injaz and Microsoft/Silatech’s efforts, entrepreneurship education and awareness efforts are primarily accessible to well-educated and English-literate individuals.

After the 25th of January revolution, the youth was going to have ambitious ideas regarding the life in Egypt, including justice, living conditions, and job opportunities; however, all these expectations were not met, and people were frustrated, specially after the slowdown in economic growth, which led to high unemployment rates and job losses. These issues affected the quality of available job opportunities, and people in Egypt were divided. Some were seeking jobs even if these jobs were not enough for their qualifications. Others, though, thought that they should think out of the box and try to make some changes as independence and leaving positive impact on their society. These factors contributed to increasing interest in entrepreneurship in Egypt. Entrepreneurship has a magnificent effect on country economy. It does not only provide job opportunities but also impacts the whole economy by fostering competition, productivity, innovation, and provides an opportunity to include more segments of society. SMEs in Egypt already contribute to the economy as they play a vital role in the national economy, which countries depend on as a major means of development. They have become one of the strongest social and economic growth tools and the most important strategic elements in the process of development and growth.

Based on global competitiveness reports, I made a simple comparison between the years 2018 and 2019 about the factors affected, and following are the conclusions reached.

Egypt was raised one level from ranking 94 out of 141 in 2018 to 93 in 2019, even though it is still in the same ranking compared to the Middle East and north African countries. The index includes the following 12 main pillars, which are divided into subindicators: Institution, infrastructure, adoption of information and communication technology, macroeconomics, health, skills, product market, labor market, financial system, market size, business dynamics, and innovation capability.

Figure 8.1 Factors affected in the performance 2019

In, 2018, Infrastructure ranked 56, Market Size 24, Macroeconomic Stability 135, and Labor Market 130. In 2019, Egypt made good achievement at the best pillars, which are Infrastructure (ranking 52) and Market Size (ranking 23), while in the two pillars of Macroeconomic Stability and Labor Market, the ranks were (135)—same as in the 2018 index— and (126), respectively.

Although there was great improvement in the Institution pillar as it ranked 82 in 2019 and 102 in 2018, we are still in a late ranking in some of the subindicators as the Terrorism Incidence got rank 136 (compared to 135 in 2018) and Freedom of the Press ranked 132 (same as 2018), while Government Responsiveness to change was at its best as it ranked 23 out of 141.

Apart from the Institution pillars and the factors that could affect the entrepreneur eco-system in Egypt, we should focus on some subindicators in that pillar such as Public Sector Performance, Transparency, Corporate Governance, and Future Orientation of Government as these subindicators will help in improving business start-up companies and finally will affect the whole system of entrepreneurship. For the Infrastructure pillars, Egypt made a good progress from 2018 (was ranked 56) as it ranked 52 in 2019, and the best subindicator under this pillar was Liner Shipping Connectivity (ranking 18 in 2019 compared to 26 in 2018). We can see that we achieved great performance in connecting the shipping and marine systems with the world, as we have many ports that can carry great numbers of vessels. This can be a great indicator for entrepreneurship, especially after all the recent projects supported by the government.

Followed by Liner Shipping is Quality of Road Infrastructure, which also made great improvement by moving from 45 in 2018 to 28 in 2019.

The lowest subindicator in that pillar is the Electricity Supply Quality, which ranked 77. Accordingly, we should make some efforts to improve the system of electricity supply.

For the Information Communications Technology (ICT) Adoption, Egypt stepped back six levels from 2018 to rank 106 in the 2019 report. All the subindicators of that pillar ranked very low in that report, thus indicating that there is a need for implementing the entrepreneur system and trying to apply it in Egypt to improve the system of broadband Internet subscription.

In Macroeconomic Stability, Egypt did not make progress from 2018 as it ranked the same (135). In Health, we stepped back five places from 99 in 2018 to 104 in 2019. As for the Skills pillar, Egypt made no progress also from 2018 as it ranked 99. This pillar should be considered especially if we are talking about entrepreneurship.

Egypt scored 11 levels up in the Product Market pillar ranking 100 globally, and the best subindicator was represented in the Services Competition Index (33 globally), while the worst subindicator was represented in the Trade Tariffs, where Egypt ranked 136, followed by the Complexity of Tariff at the 86th position globally.

Egypt scored also four positions in the Labor Market pillar ranking 126 globally out of 130 in 2018. The best subindicator was Flexibility of Wage Determination, which came in the 14th ranking globally, while the worst subindicators were Ratio of Wage and Salaried Female Workers to Male Workers in the 131st global ranking.

With regard to the Financial System, Egypt moved seven points ahead from 99 in 2018 to 92 in 2019. The Soundness of Banks indicator was the best of this pillar as it ranked 23 followed by Financing of SMEs, which ranked 41. The worst indicator in this pillar was the Credit Gap Index, which ranked 124 on the global scale.

As for the Market Size pillar, which was the best ranked pillar on the global scale, it moved one point ahead in 2019 to become 23. Egypt achieved two points progress in its rank regarding Business Dynamism to become 95 on the global scale. Growth of Innovative Companies came as the best subindicator (ranking 29), while the worst indicators was the Index of the Cost of Starting a Business, which ranked 124 globally.

Concerning Innovation Capability, Egypt improved its situation, ranking 61 in 2019 compared to 64 in 2018. Diversity of Workforce was the best indicator ranking the 12th globally, while the worst indicators were Trademark Application followed by Patent Applications ranking 101st and 92nd, respectively.

Entrepreneurship varies across countries and depends not only on economic growth but also on other factors according to the global competitiveness report. To make entrepreneurial improvement, which could be a key factor in reaching the next stage of development, we should work on the Skills pillar by improving critical thinking in teaching, the quality of vocational training, and the skills of graduates as this could help boost the entrepreneurship system. This added value requires highly skilled workforce capable of performing complex tasks and who can adapt quickly to the changing needs of consumers. Therefore, the role of education and training is crucial for countries seeking development. Moreover, increasing the productivity and competitiveness of a country requires a workforce as healthy as possible. Poor health will result in a low yield of work and a significant cost to business. Therefore, investment in health is vital for sustainable economy. Macroeconomic stability is also important for business and, therefore, for the overall competitiveness of a country. It is true that macroeconomic stability should be cumulative with a number of other determinants in order to enhance competitiveness. Without technology and networking, we cannot make any step forward in any field, especially entrepreneurship, as it is strongly connected to them. The institutional environment of a country depends on the efficiency and behavior of involved stakeholders, both public and private. The legal and administrative framework in which individuals, firms, and governments interact determines the quality of public institutions of a country, and it has a strong influence on competitiveness and growth. It influences investment decisions, including entrepreneurship, and it plays a key role in the ways in which societies distribute benefits and bear the costs of development strategies and policies.

Finally, all these factors contribute to build a country with entrepreneurial vision, and the main factor and indicator to measure this is SMEs. In Egypt, SMEs play a vital role in the national economy, which countries depend on as a major focus of development. They have become one of the strongest social and economic growth tools and the most important strategic element in development and growth. Entrepreneurship is a very important activity for the competitiveness and growth of a country and a significant source of social mobility. New ventures have become an important aspect of country economic development, especially in terms of their contributions to new job creation.

There is a strong relationship between SMEs and entrepreneur ventures. They are interrelated as entrepreneurial ventures are not just concerned with making money. They want to make more. They are the ones that dare to shake up a market by introducing an innovative product or feature or become the most recognized brand from the quality of service or production. Entrepreneurial ventures are typically founded with a great idea or concept behind them, while small businesses are not always concerned with growing or becoming more profitable. They just care about the work they do day to day. Their goal is to ensure longevity and continual development.

Conclusion

In sum, entrepreneurship is a very important variable with enormous importance for country growth, especially in Egypt. Its importance increases as countries grow in terms of competitiveness and economic growth and move on to new stages of development that require a systematic and clear structure for support and promotion. We need to look for more opportunities to create a market open for youth to innovate and make creative ideas, which can result in a useful outcome to our economy. We should all make some effort to help boost country growth by supporting innovators and creative people. Entrepreneurs should adopt the ideal entrepreneurial mindset (passionately pursuing new opportunities with enormous discipline, pursuing only the very best opportunities, focusing on execution, and engaging everyone’s energy in their domain) (McGrath and MacMillan 2000). Establishing an entrepreneurial mindset is important for sustaining business continuity.