Week 5 Critical Analysis Paper

Critical Analysis Paper
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Critical Analysis Paper
Introduction to Entrepreneurship
Entrepreneurship defines a process of designing, running and developing new business. According to Chaston and Scott (2012), it also includes the capacity and willingness to take risks in introducing new product or service and manage it effectively to become a success. It relates to the economy in that through its various innovations; an economic benefit is achievable. It also provides a healthy economy brought by the dynamic disequilibrium resulting from the change. In addition to these advantages, the creation of jobs and wealth are universal benefits. Although it provides multiple advantages, its application at times may result in failure further aggravating the situation. Changes in the economy in conjunction with history in entrepreneurship, proof that innovations are not an apparent success. Thus, this paper looks into innovation and economic downfalls. It argues through examples that entrepreneurship drive and persistence have not always managed to provide solutions.
Economic Downturn
Based on Fairlie (2013), economic recessions occur when the rate of monetary growth is slow progressing towards recession. It is part of the business cycle lasting for a few months. It includes periods when the economic growth amounts to 0%. Characteristics of this period include high inflation rate, an increase in poverty and rise in unemployment. Weak economic or negative economic growth, falling asset prices and falling assets mark the key features of the cycle.

It is imperative to understand that there is usually an increase in government borrowing following higher spending on benefits and low tax revenue.
In the UK downturn is found to occur since early 2008. It describes a period of negative economic growth for two consecutive quarters. Consequently, wartime significantly contributes to the occurrence of a financial crisis. The causes of the recession include the demand side shock which involves features such as appreciation in the exchange rate, credit crunch and high-interest rates reducing borrowing and investments. Similarly, supply side shock causes a recession in that it lowers the real Gross Domestic Product (GDP) and increases inflation. The progress of recession develops into depression with far reaching consequences.
According to a report by Fairlie (2013), recession in the US dates in 2007. Based on a report by the National Bureau of Economic Research (NBER), shedding of about 8.7 million jobs occurred from December 2008 to February 2010. The GDP declined by 5.1% raising the unemployment rate from 4.7% to 10% by October of 2009. The period also marks the drop in household net worth from $68 trillion to $ 55 trillion by the first quarter of 2009. Poverty significantly increased reaching peaks of 15% and further dropping to 14.5% in 2013. The recovery process from the recession initially was weak, but by 2011, a steady growth of job became noticeable.
Causes of Economic Downturn in the US
Inventions in the internet and technology gave birth to the much popular internet trade. Consequently, the investment banks flourished, but at a price of loss to transparency and regulatory controls. The creation of the “securitization food chain” linked the financial conglomerates, investments banks and insurance firms that together functioned to transfer mortgage through the economy. The group comprises of five major positions including home buyers, lenders, investment banks, investors, and insurance companies. The chain of activity involved the granting of mortgage to the lender by the home buyer. The lender then passes the mortgage to the investment banks as collateral debt to earn interest. The banks then sell these debts to other investors with an aim to earn interest. Based on the fact that the investment was risk-free, the demand for the collateral debt grew especially for the housing sector resulting in the housing bubble. Consequently, this trade led to a sharp increase in the prices of homes and other real- estate structures. The US Secretary of the Treasury referred the housing bubble as the significant risk to the economy. Although it achieved much success through the open trade, in 2008 a large price dropped increased the foreclosure rates for the house owners. It also resulted in a situation of crisis among the concerned positions.
High-interest rates raise liquidity, which is the amount of available money available to invest. The Federal Reserve often increased the interest rates in an aim to protect the dollar, battle stagflation, which characterized recession of 1980.In a similar event; it raised interest rates to protect the value of the dollar leading to the great depression. In regards to Kumhof, Ranciere, and Winant (2015), loss of confidence is one of the leading causes of the economic downturn. The stock market crash resulting from the sudden loss of trust in investment created bear markets and the draining of capital from businesses. Once the consumer loses confidence, they resolve into defensive modes influenced by panic creating a negative turn to the economy. In October 2006, a slowdown in manufacturing orders for durable goods started to decrease propelling the recession of 2008.
A significant cause, especially in the 1990 recession was the injustices and illegal activities of the time. There were massive swindles in the land and questionable loan acquisition. Close to 1000 banks loss assets of amounting to $ 500 billion. Introduction of wage- price controls by President Nixon kept prices too high thus cutting out demand. As a result, employees were laid off. Period of war created a slowdown leading to the recession of 1953 following the Korean War and the 1945 recession through World War II. Credit crunch resulting from losses by Bear Stearns following a collapse of its hedge funds influenced the occurrence of depression. Investment of the funds focused on collateralized debt. Similarly, following the announcement by Bear Stearns other banks followed suit and stopped lending creating a massive credit crunch.
In 2001, irrational exuberance in high technology following the economic boom in sales from computer and software by Y2K influenced recession. Many companies and individuals bought computers and ensured that the software was compliant to the Y2K model. Consequently, the stock price of software businesses and high-tech companies increased leading investor to contribute to these enterprises. A surprising turn of events resulted in a reduction in computer orders due to their two-year shelf life. In effect, a stock market sell-off led to the massive losses and bankruptcy in many companies. It is imperative to note that the Federal Reserve continued to increase the interest rates despite the situation, thereby minimizing the chance to acquire business loans and mortgages.
Entrepreneurial Drive and Persistence
Entrepreneurs’ develop unique characteristics that enable them to take risks and embrace failure as part of the process. As an aspect, effective communication of the vision allows for others to join in the venture and participate in the innovation. Skills and ingenuity cultivate creativity in the entrepreneur. As part of the drive, focus helps to maintain vision and unwavering diligence. Regarding perseverance, the entrepreneur must remain focused on the goals and objects even when challenges arise. Other characteristics include self-discipline, problem-solving and opportunistic nature to cope with the challenges of creating a new business. Based on Drucker (2014), innovation by entrepreneurs is a contribution of factors such as the unexpected which could be either success or failure, the incongruity of what is against what should, process need, changes in industry or the market, lifestyle changes, change in perception and the development of new knowledge.
The productivity of a country drives the economic growth. According to Hausman and Johnston (2014), Robert Solow demonstrated that most of the economic growth is an outcome of productivity driven by innovation. The increase in workers efficiency corresponds to an increase in profits and more income. Consequently, it reduces the cost, creating more jobs and acceleration in growth. Significant innovation for the past 100 years with examples of electricity, railroad, telegraph, telephone, computers and automobile are clear markers of economic transformation. Researchers in start-ups indicate that they are the primary source and have continuously been providing employment in the past decades. Although successful factors such as regulatory burden, complexity, and uncertainty threaten the expansion of innovation and thus raising a national economic emergency. 90,000 new regulations have been included in the last 20 year, thereby straining innovators efforts. It is through these laws that rules for competition, participates behavior, public, and consumer protection become established. Consequently, the down-side of this regulation includes the imposition of enormous costs, economic distortion and entrenched interests. Accumulation of laws over time suppresses innovation and the growth, which in effect threaten the success of the economy.
Regarding the challenges of change to the public service institutions, Drucker (2014), describes timid bureaucrats, power-hungry politicians and servers with delayed payrolls to be the cause of the slow innovation in the public sector. Budget problems also strain the progress of change in these areas. Increasing changes in these sectors mean massive budget provisions which come from taxes and charitable institutions. Consequently, the agencies depend on a multitude of constituents that have the power in deciding about the innovation. All parts must be satisfied with proposed changes before their execution. Additionally, powerful constituencies led to cronyism and dependency.
To overcome the challenges, entrepreneur practice innovation management using four strategies including Fustest with the Mostest, hitting them where they ain’t, finding and occupying a specialized ecological niche and changing the economic productivity of the subject which includes the market, product, and industry. It is imperative to understand that each of these factors is not mutually exclusive. Their elements could be integrated to achieve the better strategy.
Importance of Entrepreneurs to the Economy
According to Birchall (2013), there are six important benefits of entrepreneurship to the economy. It creates new businesses consequently providing employment, which promotes the economy. The development of new markets opens up opportunities for other companies and service providers. An example is IT business in the US, in 1940. The nature of the business associates with other industries such as call center operations, network maintenance and providers and hardware developers thus leading to their flourishing as well. Regarding education, infrastructure development, and real estate companies capitalized on the growth.
Entrepreneurship increases national income. The innovation leading to new business promotes new markets thus generating more income. Contrary to old business with fixed markets. New business means, more employment thus higher tax revenues. Social change through innovations creates economic freedom. The break from traditional methods of production and technology reduce the dependence on the antiquated system. The role it plays in the community includes financially supporting charity organizations, education and health facilities. Bill Gates is a world recognized entrepreneur whose contribution to the society speaks of the importance of these innovations.
Innovations during Economic Downturn
Economic downturn presents the most difficult situation for entrepreneurs looking to engage in new businesses. Most investors at the time are practicing cost- cutting measures to preserve profits and cash flow. The focusing characteristic of this period is more inward aiming to ensure that the business stays afloat. According to Brunnermeier and Sannikov (2014), Apple Company is notorious for these innovations even when downturns and recession threaten most business. The company began its transformation in iPod around 2001 a period shortly after the internet bubble burst. Notable is the introduction of the iPad in 2008 at the time where the country was experiencing a downturn. As a lesson from the Company risk taking in innovation during periods of economic crisis, entrepreneurs contribute through performing research in the market trends using non-traditional methods, which are cheaper and engage the direct customers. Sealed Air utilizes its employees to obtain feedback and thus implement the ideas. Another example is McDonald’s who created a casting call, thereby providing the consumers with an opportunity to contribute directly to the products. An important lesson from these companies is the importance of establishing cost- conscious creative market regardless of the economic environment.
Regarding customer satisfaction, Reinhart and Rogoff (2014), suggests that companies should prioritize their client’s needs even during downturns. The importance of this ensures that the firm continues to make profits and retains its customers. It is imperative to consider the customers’ satisfaction as it motivates them to continue purchasing the products and thus keeping the business afloat. An example is the innovation of the credit card “Venture” by the Capital One Bank. The travel card attracts customers through the provision of 100,000 bonus points on sign up, translating into $1000 credit towards travel expenditures. Consequently, the card appeals to the majority of people including the credit-card weary customers.
Based on Hausman and Johnston (2014), significant innovation took place during periods of economic challenge. Among the notable change involved the technology industry. Entrepreneurs hunt for opportunities to form partnerships with the start-ups and business facing limited cash flow. These organizations prove beneficial during upturns and enable the companies to be ahead of their competitors. A recent example of hunting opportunities during a downturn is the case of Facebook acquiring the photo-sharing service from Instagram. The service provided Facebook with new technology before its rival Google could develop or acquire a similar feature.
Open, and purposeful innovation is an outcome of research involving an analysis of the present situation or the current and ongoing challenges. Research helps determine the possible results of a new business, thus directs investment. It focuses on tapping new resources, knowledge, and technology outside the operating environment. According to Drucker (2014), factors such as incongruity foster innovation. It is a symptom of change within the industry, market or a process. An example is the thriving of the mini-mill in producing steel. Kimberly-Clark launched the Huggies Mom Inspired Company. The company provides financial grants to mom entrepreneurs developing unique products and services. It also provides the right to partner and acquires new inventions. The advantage of these provisions especially in economic upturns is that the businesses continue to source and purchase new inventions.
Based on Summers (2014), an important sector to consider are the events following a period of economic downturn and the onset of upturn during post-recession. Most companies having survived usually jump into hiring more employees based on the assumption that business will immediately pick up and more profits will flow into the firm. Correspondingly, companies purchase higher quantities of stock projecting an upsurge in demand. Often, these expectations are met with much shock thus, reversing the companies into a panic. True to this is the recent recession where the surviving companies bust immediately economic stability is achieved. Data on these researches indicate an increase in the rate of failure at economic recovery than during the recession. According to Cowling, Liu, Ledger and Zhang (2015), some reasons put forward to explain on this include a lack of cash and not profit. Entrepreneurs fail to conduct appropriate research on the required resources to match the increase in demand and the capital necessary to maintain the sudden spark in growth.
Overtrading is a standard feature following a recovery from economic hardship. Overtrading effects on the financial structure of the business and the operation. An appropriate illustration of is the ever-changing technology. Technology evolution following a downturn faces an increase in customer expectation requiring the services or product to be delivered promptly. Consequently, these expectations influence the businesses to hold more stock. It is the general assumptions by most entrepreneurs that for productivity to increase, investment must also increase parallel to productivity.
According to Cowling et al. (2015), the small business experienced massive closure especially in 2008 and 2010 as reported by the Business Journals of US. The economic recession in 2007 to 2009 had most employees being laid off. These individual resulted in starting up personal small business only to later shut them down. It is interesting to understand these outcomes about entrepreneurship innovation during periods of economic stress. As noted, most of these businesses did not provide employment close to over three years of being operational thus a negative contribution to the economy. Additionally, these firms functioned on slow profits that discouraged their growth and expansion.
Sony Company provides a clear example where innovation during and after downturns do not correspond to economic benefits. The company in 2000 took a prevention approach and reduced the number of its employees and its capital expenditure. The strategy positively influenced the earnings margin to 12%. Comparatively, its innovation efforts in technologically advanced models such as e-books, gaming console and organic light-emitting diode TV sets met significant challenges, especially from competitor companies. Similarly, it is the case of Hewlett-Packard following the 2000 recession. The Company engaged in a massive restructuring of programs. A significant innovation is the buying of Compaq for $25 billion. These changes increased their capital expenditures by 9%. Additionally an extra $200 million was spent on a corporate branding campaign. These initiatives did not reciprocate profits leading to organizational strain. The Company faced stiff competition from competitors such as Dell and IBM, especially after the recession.
Conclusion
Entrepreneurship drives innovation, which fosters the development of stable economies and growth. The motivation to endure challenges resulting from the economic downturn and depression involve a careful application of entrepreneurial strategies and management. Thus, a financial crisis can efficiently be met through innovation although research proves it is not always the case. Faithful to the entrepreneur’s world, change is both active and adverse. Positivity is enhanced through scientific studies in the underlying conditions so as to project the possibilities of future investments and modifications.

References
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