Economic subjects | Undertaking knowledge » Entrepreneurship, The Social and Business Revolution

Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2 Chapter 1 – Entrepreneurship: The Social and Business Revolution 1. Introduction  One outstanding driver of small businesses in today’s world is the global connectivity – an increasingly complex world full of interconnections formed by a global marketplace linked by new technologies that allow instant communication from almost anywhere.  The ability to create new sources of competitive advantage quickly, again and again, is proving to be the only sustainable source of real competitive advantage while the new age brings social pressures and corporate social responsibilities. 2. An Age of Change and Opportunity  Change in CSR as an opportunity to be ethical and improve competitiveness by differentiation.  The move to a knowledge economy has meant that economies of scale have become less important as a form of competitive advantage; small firms are able to deliver a more

personalized, flexible, service at local level; higher proportion of high-growth firms (‘gazelles’) hold IP and intangible assets.  Technology has influenced the trends in three ways: 1. New technologies have been pioneered by new, rapidly growing firms 2. Easier communication allows growth of smaller businesses and smaller market segments to be served 3. Technologies have reduced fixed costs so production can be profitable in smaller, more flexible units; beneficiaries of outsourcing activities of large firms are small firms; cheaper distribution network.  Market niches are becoming slimmer and markets more competitive; better served by smaller firms; new technologies mean that these niche markets can be attacked globally, making them economic (‘international start-up’).  Social trends have accelerated the growth of small firms; after periods of high unemployment, people see self-employment as more attractive and more secure than employment. 3. Managing Change

and Uncertainty  In contrast to smaller firms, larger, more established firms find change difficult to deal with and threatening. 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2  Larger firms became leaner to reduce risks and fixed costs, e.g by outsourcing activities to smaller firms; small firms may seen as dependent on large ones.  Traditional management’s core problem is that it focuses on efficiency and effectiveness rather than on creativity and innovation – control rather than empowerment. 4. The Entrepreneurial Revolution  Small firm create more jobs than large firms in the U.S  Entrepreneurship has become something that society, governments and organizations of all sizes and form wish to encourage and promote; small firms are the catalysts for economic and sometimes social change. 5. Entrepreneurial Management  Entrepreneurs have a different approach to dealing with risk and uncertainty; at the core

is a very personal approach to management emphasizing that a new business is a social entity built around relationships and around one person, the founder, whose personality affects the business.  Successful entrepreneurs are good at developing relationships with customers, staff, suppliers and all stakeholders in the business; manage informally to increase flexibility, setting an example by behavior; danger of overdependence on the founder and too little delegation of authority as it grows.  Decision-making incremental (limited launch to see if opportunity is real) and short-term; capital investment and fixed costs as low as possible, e.g by subcontracting activities; network of personal relationships as early warning for risks or opportunities; compartmentalizing risk (e.g separate legal entities to limit risk)  Successful entrepreneurs develop a strong vision of what they want their business to become; do not always know how they will achieve the vision because of

uncertain environment; strong ‘strategic intent’ with flexible strategy and continuous strategizing.  By creating more strategic options they improve their chances of successfully pursuing at least one opportunity and avoiding risks – albeit possible at the expense of short term profits. 6. Defining the Entrepreneur  Schumpterian view: opportunities emerge out of the entrepreneurs’ internal disposition to initiate or create change; disturb the economic equilibrium during times of uncertainty; emphasis on independent firm formation by entrepreneurs leading to this ‘creative destruction’.  Kirznerian view: emphasizes opportunity recognition and implies that entrepreneurial profits are secured on the basis of knowledge and information gaps that arise between people in the market (information asymmetry).    Based in the general equilibrium or neoclassical model of economics. Entrepreneurs discover opportunities; acting as arbitrageur or price adjuster

in the market. An entrepreneur creates and/or exploits change for profit by innovating, accepting risk and moving resources to areas of higher return. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2  Intrapreneurs undertake activities for established, larger firm while remaining in salaried employment, content for the profits (and risks) of their work to go to their employees.  Owner-managers own the business they manage (e.g sole traders, managers of companies owning over 50% of share capital); not all owner-managers are entrepreneurs.  Profit is not always the motivation for creating a new venture; what defines the entrepreneur is their willingness to act upon the idea.  Salary-substitute firms set up that simply generate an income comparable to what they might earn as an employee (e.g plumbers, store owners); more practical; lifestyle: “would you do it if it wasn’t your job?”; can sell a lifestyle but doesn’t

need to live it him/herself.  Lifestyle firms allow the founder to pursue a particular lifestyle while earning an acceptable living (e.g sports instructors, artists); self-employment as conventional/accepted way of pursuing these life options  Entrepreneurial firms bring innovative ideas and ways of doing things to the market; set up to grow from the start.  Gazelles are firms of this group of young firms with the highest growth.  While the salary-substitute firms and lifestyle firms focus on providing family income, entrepreneurial firms base their goals upon growth and profit.  Serial entrepreneurs are selling-on the successful business and going on to grow another, capitalizing on their ability to start a new venture and creating personal wealth from their sale rather than from its operation. 7. Defining small firms  Small and medium sized enterprise (SME) refers to an organization employing fewer than 250 people.     Micro: 0-9 employees

(95.6%) Small: 10-49 employees (3.7%) Medium: 50-249 employees (0.6%) Large: 250 or more employees (0.1%) 8. Small firms in the UK  UK small firms often offer no more than self-employment; mostly lifestyle businesses; few firms grow to significant size.  Statistics measure only firms that register for VAT; bc of high registration threshold, many small businesses never register (underestimated); small firms are particularly vulnerable to economic changes because of their precarious financing situation.  Regions with high registration (of firms) tend to have high deregistration rates – an effect called ‘churning’; indicates that high economic growth may cause or be caused by more firms coming into existence (more registrations) which results in increased competition and drop out of firms (more de-registrations).  Most dangerous time for a new business is its first three years; 50% will deregister in that period (not all due to financial issues); churning effect

as part of dynamism of the sector as they respond to changing opportunities in the marketplace; net stock of businesses more important than individual number of failures. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2  Smaller firms have a higher failure rate than larger firms but those that survive will then grow faster than larger firms; small firms tend to have lower productivity than large firms, even in the same industry, largely bc of lower capital backing.  SMEs have disproportionately high number of ‘bad jobs’ with low pay and poor working conditions and higher accident rates; availability of flexible (family-friendly) working practices appears arbitrary. 9. Small firms around the world  SMEs dominate many service sectors, particularly hotels, catering, retailing and wholesaling; EU SMEs are quite similar to UK SMEs; importance of SMEs in growing; in many countries, the ‘informal sector’ is not recorded in

official statistics implying that the dominance of SMEs is underestimated.  While entry, exit and survival rates are similar, the main differences between EU and US SMEs are:      New firms expand more rapidly in the USA than in the EU New firms display higher dispersion of productivity in the USA than in the EU The ore productive firms in the USA have a stronger tendency to increase their market shares than those in the EU; bc fewer barriers to growth, more competition (need to survive) US SMEs are on average larger SuperEntrepreneurs: founded new firms and earned at least $1B between 1996 and 2010; varies across countries. 10. Global Entrepreneurship Monitor (GEM)  GEM is a research programme representing 75% of the world’s population and 90% of the world’s total GDP; assesses the level of national entrepreneurial activity in each country which is product of two things that are influenced by a nation’s culture, economic infrastructure, education and

demography:    Entrepreneurial opportunity (demand) Entrepreneurial capacity (supply) Problem: Doesn’t attempt to measure differences in culture (use of a single questionnaire in every country) 11. Social and civic entrepreneurs  Social entrepreneurs usually operate as entrepreneurs within organizations whose primary purpose is social rather than economic – called social enterprises; either create organizations themselves or operate within an existing social enterprise. 4 Source: http://www.doksinet Daniel Schemmert  Have a clear social or environmental mission set out in its governing documents Generate the majority of its income through trade Reinvest the majority of its profits Be autonomous of the state Be majority controlled in the interest of the social mission (very important to social entrepr.) Be accountable and transparent Social entrepreneurs operate at the intersection of the public and private sectors, pulling together resources from both

(always w/ the purpose of serving social mission); might pull resources from the voluntary sector; two dimensions: trading/non-trading and global/community based.     ESBM | Tutorial 2 Social enterprises operate in a commercial way to achieve its social objectives; any profits it generates are ploughed back to help achieve them; often at community level; six criteria must be fulfilled (UK):        Maastricht University Private sector: focus on trading; objective of profit maximization; global and community based. Public services and government: operate planned and in a non-trading way; bureaucratic and inefficient; global and community based. Social economy: incl. social enterprises, voluntary and charity organizations, family economy; can be both planned or based upon market-trading; mostly community-based. Civic entrepreneurs operate within larger civic organizations in the public sector, such as government, local councils, schools, health

authorities and police forces; intrapreneurs; like intrapreneurs, their freedom of action may be limited by the rules and regulations of the organization they work for. 12. Conflicts within social enterprise  First conflict of interest between societal and commercial operations; social objectives can be ‘integrated’ with its commercial operations or ‘complementary’; integrated model: surplus generating activities simultaneously create social benefit and objectives don’t get in conflict; reality: one side often dominates.  Complementary social entrepreneurship: when surplus from the commercial activity are simply used as a source of cross-subsidy for the social objectives.  Second conflict refers to democratic accountability; social enterprise operates at the boundary between public and private sectors with an inherent conflict in the values and beliefs of the two sectors. 5 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM |

Tutorial 2 Third conflict concerns the nature of the objectives a social enterprise is set up to achieve; politicians can use social enterprise as a way of forcing change on the public sector because social enterprise is seen as innovative and efficient; taking over tasks that were traditionally in the responsibility of politicians. 13. Sustainable Entrepreneurship  Sustainable entrepreneurship: issues of CSR, sustainability, ethics and good corporate governance are at the core of a ‘for-profit’ commercial enterprise; meeting the needs of today through profit without prejudicing the future; CSR not as add-on, but as core.  Environmental entrepreneurship (eco-entrepreneurship, eco-preneurship): entrepreneurship that emphasizes joint economic and ecological value creation.  Six dimensions of sustainability:  Economic:   Technological: Social:    Environmental: Value: Learning: Business model is commercially sound, development tools based upon

core competencies of the region. Technology as driving force behind the development tool. Belief that enterprise must partner with local community to improve living standards rather than treating community members as customers. Aim for beneficial or at least neutral effect. Creating of value-based society that reduces conflict. Infrastructure to facilitate learning and transfer of knowledge, encouraging innovation. 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2 Chapter 2 – The Economics of Entrepreneurship and Public Policy 1. The economics of entrepreneurship  Marxist theory: capitalism will degenerate into economies dominated by a small number of large firms and society will polarize between those that own them and those that work in them; small firms dependent upon larger firms for their well-being; absorb risk and push down pay and working conditions (rarely unionized).  Growth of small firms seen as the triumph of the free

market and the success of the ‘enterprise culture’ resulting from increased competition to prevent private and public monopoly.  Traditional industrial economist would explain the growth of new firms in terms of industry profitability, growth, barriers to entry and concentration; entry is high when expected profits are high.  Entry by small, primarily new, firms is not the same as entry by large firms and that the birth of small firms is lower in highly concentrated industries and ones where innovation plays an important part. 2. Entrepreneurship and economic growth Definition Process of economic development Role of entrepreneurs Traditional model New model Neoclassical model (Knight, Kirzner) Focused on optimizing existing resources within a stable environment and treated any disruptions, e.g growth of entrepreneurial new firms that created whole new industries, as “god sent” external forces Economy tended towards equilibrium; changes in that equilibrium could

only occur through changes in the underlying conditions of the economy (e.g population growth, external shocks, wars) Creative destruction (Schumpeter) An endogenous process within capitalism of wrenching the economy out of its tendency towards one equilibrium position and towards a different one Minor role in overall economic activity Initiate change and generate new opportunities “knowledge filters”, facilitating “knowledge spill-overs” or “knowledge transfers”; reaps profits and disturb equilibrium until imitators lower prices/costs; people have financial incentive to leave secure employment due to information asymmetry (e.g different prior experience) leading to opportunities which grow to survive, thus gain economic performance of nations. Process of economic development as a process caused by enterprise – or innovation – and carried out by entrepreneurs; cycles of disruption by technological innovation (growth cannot be accounted for by changes in labor and

capital);  Three reasons why entrepreneurship encourages economic growth through innovation: 1. Encourage competition by increasing the number of enterprises; cumulative phenomenon as competition is more conducive to knowledge externalities (new ideas); entrepreneurship encourages entrepreneurship. 2. “Knowledge spill-overs” mechanics; transmission of knowledge from point of origin to other individuals or organizations; entrepreneurs spot opportunities and innovate. 3. Generates diversity and variety among enterprises in any location which influences economic growth. 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2 3. Invention, innovation and creativity  At the micro level, innovation is the prime tool entrepreneurs use to create or exploit opportunity.  Creativity is the ability or quality displayed when solving hitherto unsolved problems when developing original and novel solutions to problems, others have solved

differently, or when developing original and novel products; underpins innovation and fuels its process.  Innovation refers to the means to break away from established patterns; generation, acceptance, implementation of new ideas, processes, products and services; involves creative use and original invention.   Invention is the extreme and riskiest form of innovation; the development of a completely new or better product or process. The difference between invention and innovation is a question of scale and successful implementation; three forms of innovation:    Product innovation: improvements in the design and functional qualities of the product or service. Process innovation: improvements in how the product is produced, assembled or delivered (better or cheaper process). Marketing innovation: improvements in the marketing of the product or services or changes in the business model that might open up new markets  To be successful innovation must be linked

to customer demand; much innovation is incremental, depending more on accumulation of small insights than on a single major technological breakthrough; however, many small innovations (though less risky) equate to one big step in innovation.  The impact of innovation on competitive advantage can be measured on two dimensions: frequency of innovation and scale or degree of innovation; competitive advantage is increased by pushing out the envelope; truly innovative firms will tend to cluster along this envelope. 4. The link between innovation and business growth  Finding a general relationship between business growth and innovation is not straightforward due to methodological and measurement issues of both variables, e.g innovation links with growth in profit is likely to be lagged as it takes years for innovations to feed back into growth in profits.  Innovation is positively associated with growth in employment; however, the cycling issue – the tendency of firms to

innovate in one period and then consolidate in the next – and the question of causation remains.  Still, the rate of innovation seems to vary between firms of different size, across industries and sectors depending on industry age, stability and location. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2 5. The link between innovation and firm size  Larger firms are more likely to be innovative than smaller ones; large firms have greater access to resources (capital, R&D, experience).  Smaller firms find gaps in the market by providing marginally different product or services; innovate in terms of marketing and customer service which may be highly valued by a small group of customers therefore becoming highly profitable.  Smaller firms have behavioral advantages (closeness to the market, a greater willingness to take risks, an ability to act quickly); important in sectors where small firms are more important in terms

of innovation. 6. The influence of industry structure  Innovation is less likely in mature industries that are highly concentrated and therefore dominated by larger firms; larger firms are the dominant innovators.  Less concentrated industries were more likely to have a radical or disruptive innovation – step changes in products, processes or the framing of markets; small firms tend to be the dominant innovators in less concentrated industries.  Larger firms have the advantage when it comes to incremental advantage due to product experience, established marketing channels and resource capabilities; could disappear with disruptive innovation.  In a disrupted market, competitive advantage has to be built from scratch so entrepreneurial firms are more flexible than larger ones.  Larger firm miss out on disruptive innovation because they develop a dominant logic (mental model) which dictates how the world is viewed, it filters the information received,

subconsciously interpreting environmental data in a certain way. 7. The influence of industry age and stability  Innovative behavior is not entirely related to firm size and varies across industry sectors, depending on:     SMEs are more active when resource costs are low, although they use these resources more efficiently than large firms. Size of markets: SMEs thrive where economies of scale are less important than other factors (marketing, service quality), where low-cost innovation might be possible. Industry concentration, age and stability: SMEs role of introducing disruptive innovation and creating new industries; less important in stable, mature, high-concentration industries where innovation focus is on efficiency and cost-reduction. Innovation costs: Advantages of large firms are generally the disadvantages of small firms, vice versa. 8. Innovation, location and network effects  Innovative milieu theory: innovation can be geographically concentrated

in certain areas, this lead to “clusters” of small firms that form mutually supportive networks; assumes that knowledge is a crucial element in the process of innovation; collective learning within these clusters  Whereas large firms have their own R&D functions to help generate knowledge, small firms have to rely on networking that allows them to collect information and accumulate knowledge. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 2  Collective learning can be either conscious (e.g in research collaborations) or unconscious (eg skills and knowledge vested in workforce shared between small firms).  Clusters are often located around universities benefiting from the knowledge and workforce.  Some locations attract talented, creative people (‘creative class’) which in turn attract creative, innovative firms, creating a virtuous cycle of growth; creative class wants open, tolerant, and diverse communities.

 Coral reef analogy: despite competition for resources, existence is dependent on cooperation; networks may induce ideas due to its diversity or enables finding new business partners with complementary skills or assets, e.g supply chain or strategic alliances 9. Social enterprise and social innovation  Social innovations involve “new ideas” that simultaneously meet social needs and create more social relationships and collaborations; good for society and enhance society’s capacity to act.  Successful social enterprises network and mobilize a wide range of supporting resources, often at a low cost. 10. Public Policy towards SMEs  Characteristics of liberal market economies where entrepreneurship flourishes:         Ownership rights for private property Freedom of movement and association Confidentiality specifically of business information Protection of intellectual property rights Access to impartial and competent courts to enforce

these rights A stable currency based on prudent control of the money supply Democratic, stable government Openness to immigration by entrepreneurs and skilled workers  Market failure might include he inability of individuals to accurately assess the private benefit of starting their business or the inability of financial institutions to offer finance to SMEs because of the hard to determine risk of lending.  Government economic policies (that tries to encourage start-ups) generally fall into six categories: 1. 2. 3. 4. 5. 6. The regulatory framework (taxation, administrative burdens for market entry (‘red tape’)) Entrepreneurial capabilities (business education and skills training, advise and mentoring) Enterprise culture (attitude; policies targeted e.g at young or general public) Access to finance R&D and technology (incentives, university interaction, patent systems) Market condition (competition policy and anti-trust laws; involvement of government) 4 Source:

http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 2 Governments may counter an economic recession by improving entrepreneurial activities and access to finance to lower unemployment rates; also brings risk for entrepreneurs; in times of growth, the government would turn to R&D and technology and competition policies. 11. Policy intervention  Need to balance the following policy options: 1. Encourage more start-ups 2. Increase the capabilities of existing SMEs (issue of how to select surviving SMEs, especially for the role of the government)  Skewed shape of both curves reflects the decreasing number of firms that move from the idea stage to become growth businesses. 12. The effectiveness of policy intervention  Micro-level interventions: advice and assistance for SMEs (seen as ineffective; exception: support for technology businesses and R&D bc of information/knowledge imperfections); macro-level interventions:    

Low tax rate (esp. capital gains tax): assoc w/ high proportion of super (millionaire) entrepreneurs Regulation: low regulation assoc. w/ super entrepreneurs; does not necessarily constrain SMEs and might even improve performance. Competition policy: seen as way of addressing market failure (prevents mono- or oligopolies; prime beneficiary: consumers. Not only the policy plays a role but also whether it is actually implemented and delivered. 13. Social enterprise policy  The issue with social enterprise is that the diverse nature of the motivations for encouraging them can sometimes appear altruistic and naïve, while sometimes they appear highly political.  Social enterprises cannot be relied upon to deliver social objectives as a matter of policy because they rely too much on the philanthropic motives of individuals and/or governments; the market is not a legitimate benchmark to justify changes from a rights-based welfare system.  Problem of mixing social and economic

objectives and the trade-off between them as well as measuring the ‘return’; social enterprises can avoid monitoring because of their lack of an accounting framework and because of the complexity of the interests of their diverse stakeholder base. 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 3 Chapter 3 – The Entrepreneurial Character 1. What you need to be an entrepreneur & Motivation  It is an all-consuming, 24-hour, seven-day-week activity; need to be emotionally self-sufficient, task oriented, and need to be able to live with a degree of risk and uncertainty.  You need to understand your own motivation to be an entrepreneur and to match your personal motivations and lifestyle with the business; understand personal strengths, weaknesses, and constraints. 2. Start-up capital  Financial, human and social capital are seen as facilitators of innovation activity, particularly in hightechnology firms.  Financial

capital comprises cash and other assets or resources you bring to the business; using resources that you may not own is called bootstrapping; minimizing your ownership of resources reduces risks and gives more flexibility (commit and de-commit quickly to new opportunities.  Human capital comprises your skills, abilities, knowledge and experience; vital for any business; human capital in the form of education and track record increases your credibility with financial backers.  Social capital is derived from access to personal networks of friends and commercial contacts; built on social skills and relationships; core of the entrepreneurial approach to doing business; enables credibility w/ stakeholders.  Networks as one of the most important factors of long-term business performance; can increase your flexibility and reduce or give you early warning, of the risks you face and also might yield up partners or ways of bootstrapping resources. 3. Triggers for entrepreneurship

 Many people with a good idea, capital and the necessary business skills never take the plunge into selfemployment; they face real and psychological barriers.  Some people are ‘pushed’ into setting up their own business because they are made redundant; many people, are ‘pulled’ into starting up a business for more positive reasons; pull factors are typically psychological; two peaks in the age of becoming entrepreneurs in early 20s or late 30s (when barriers might be low). 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 3 4. Myths about entrepreneurs  Entrepreneurs may have certain characteristics; there are seven myths about entrepreneurs that create psychological barriers, but some barriers can also be very real, arising from your situation. 1. 2. 3. 4. 5. 6. 7. Entrepreneurs have good ideas and you don’t Entrepreneurs are risk takers Entrepreneurs have money and you don’t Entrepreneurs are extraordinary

forecasters Entrepreneurs are not like the rest of us Entrepreneurs are visionary You don’t know how to take the plunge 5. Character traits of entrepreneurs  Your personal drivers and fears about entrepreneurship derive from your personal character which influences the importance you place on ‘pull’ factors and how you react to ‘push’ factors.  Many researchers believe that entrepreneurs have certain identifiable character traits or personality dimensions that incline them towards setting up their own business and help them navigate through the uncertainties of entrepreneurship though they change over time and in different circumstances. Need for independence Need for achievement Internal locus of control Drive and determination Creativity, innovation and opportunism Acceptance of risk and uncertainty  The need to ‘be your own boss’. People measure their achievement in different ways, depending on the type of person they are; a ‘need’ for

achievement does not necessarily mean that they are actually high achievers, only that this ‘need’ creates a drive within them. A belief that they control their own destiny; self efficacy – self-confidence in their ability to complete a task successfully; can lead to preoccupation with detail, overwork, desire to control everything, lack of trust and stress. Motivated by their need for achievement and underpinned by internal locus of control gives them self-confidence in their ability to complete the task successfully. They also seem to do things twice the pace of others, unwilling or unable to wait for others to complete tasks, can be downside. For entrepreneurs, creativity is focused on commercial opportunities; they spot creativity and innovation to exploit it; the more creative, the more growth potential; timing is crucial (too early can lead to business failure, too late is just copying) This does not mean entrepreneurs are gamblers, rather they have a distinctive approach

to risk mitigation which involves gaining knowledge and information from networks and partnerships and the compartmentalization of risks. Entrepreneurs also develop or have a vision which is part of their self-motivation. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 3 6. Cognitive development theory  Cognitive development theory shifts the emphasis from the individual towards the situations that lead to entrepreneurial behavior and seeks to understand how people think and react in different situations, the mental models or ‘dominant logic’ that influences entrepreneurial behavior and how they can be affected.  Important part of human capital but can also act to constrain thinking; self-efficacy, affected by previous experiences (even though there may be only a few that the mental model is based upon), may lead to more objective and analytical thinking but contributes failure to outside factors such as insufficient effort. 

Entrepreneurs appear to make extensive use of cognitive heuristics – simplifying strategies – in decision making; as a result, successful entrepreneurs can be seen as over-confident w.rt predicting future outcomes  Intrinsic motivation suggests people who undertake tasks for their own sake perform better than those motivated by external factors (‘A’ behavior); tend to be goal-focused and exhibit high levels of drive and locus of control.  Intentionality suggests people who intend to do things are more likely to do them than people who do not; result of entrepreneurs’ internal locus of control. 7. Evaluating the trait approach  Studies about entrepreneurial character traits have been widely criticized as entrepreneurship is not consistently defined; a list of methodological problems:      Traits are not stable and change over time Measuring personality traits requires subjective judgments Measurements tends to ignore cultural, environmental and

contextual influences The role of education, learning, and training is often overlooked Issues such as age, sec, race, social class and education can be ignored 3 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 3 Numerous meta-analyses of psychological studies using the widely accepted ‘Five-Factor Model’ of personality have consistently found robust linkages between personality traits and entrepreneurship; high scores in these five traits indicate: Openness Conscientiousness Extraversion Agreeableness Neuroticism A more curious and inventive personality, compared to a more cautious, reserved approach. An organized, self-disciplined and driven approach to undertaking tasks with a strong aim for achievement compared to a more easy-going approach. An energetic, assertive, outgoing personality with a ‘can-do’ view of life compared to a more solitary and introverted approach. A friendly, cooperative and compassionate personality

compared to a more detached and analytic approach. A sensitive, nervous and anxious personality compared to a more self-assured and confident approach. 8. The influence of national culture  National cultures vary widely reflecting underlying core values, but measuring them in any meaningful way is extremely difficult. The most widely used dimensions of national culture are those developed by Hofstede (1981). Individualism versus collectivism The degree which people prefer to act as individuals rather than groups (cooperative within in-groups, competitive with out-groups). Power distance The degree of inequality among people that the community is willing to accept; low: relations are open and informal; high: endorse hierarchies, formal relations The degree to which people would like to avoid ambiguity and resolve uncertainty, and prefer structure rather than unstructured situations; low: prefer flexibility, stress personal decision-making and risk-taking; high: rules and

procedures, compliance, punish error, loyalty. ‘Masculine’ virtues include assertiveness, competition and success; ‘Feminine’ virtues include modesty, compromise and cooperation. A short-term orientation focusses on past and present and therefore values respect for the status quo; a long-term orientation focuses on the future and therefore the values associated with this are more dynamic (entrepreneurial culture). Uncertainty avoidance Masculinity versus femininity Short/long-term orientation  The anatomy of an enterprise culture, one that encourages enterprise and entrepreneurship: highly individualistic, ‘masculine’, with low power distance and uncertainty avoidance (e.g US)  Evidence for the mediating process linking culture and behavior remains inconsistent; often with methodological challenges. 9. Social and demographic influences  Academic research on the other influences on entrepreneurship is even more confusing and contradictory, than with personal

character traits; too many variables to control and causal lings remain questionable. Education Age Family background Partnering Many studies show a positive association between the probability of starting up in business and increases in educational attainment (may be bc it increases social capital) Entrepreneurial activity is spread over all age groups; peaks in the young (early 20s) and middle-aged (late 30s); these entrepreneurs are most likely to be associated with growth companies; youth brings creativity while age brings experience, knowledge and a network. Having a parent who was an entrepreneur or having worked in a family business, increases the probability of starting up in business. High-growth companies are more likely to be set up by groups rather than by individuals, and these groups share in the management and ownership and therefore the success of the business. 4 Source: http://www.doksinet Daniel Schemmert Emigration and ethnicity Gender Maastricht University

ESBM | Tutorial 3 Ethnic minorities tend to have high self employment rates in most Western industrialized countries and immigration to a foreign country is positively associated with entrepreneurship; problem: ethnic groups are no longer homogeneous with a complex set of family, community and societal influences to play. Women are less likely to start business than men, but the situation is changing quickly; womenowned businesses are likely to perform less well than men-owned businesses; one reason for this might the lower amount of capital to women, constraints and industry differences. 10. Intrapreneurs  Intrapreneurs work in and come from within larger firms; hybrids: working hard to create entrepreneurial structures and cultures while having to communicate with more bureaucratic individuals in the organization.  They share many of the characteristics of entrepreneurs, but they are less willing to rely intuition and more willing to undertake market research into a new

project; characterized as goal-oriented and self-motivated but, unlike entrepreneurs, also motivated by corporate reward and recognition.  The process of influencing w/o authority, based upon reciprocity, is at the heart of the skills of intrapreneurs. 11. Social and civic entrepreneurs  Social entrepreneurs seem to enjoy most of the character traits and behavioural characteristics of their business counterparts; non-for-profit contexts have more stakeholders and faster changing environments than commercial ones.  The important extra dimension is one of social virtue and personal credibility – a demonstrable commitment to some social objective that gains the trust of the diverse range of stakeholders.  Mort et al. (2003) developed a social entrepreneurship construct based up on the overlap of four elements: (1) ‘virtue’ – a social mission, (2) sound judgement, (3) an ability to sport ‘social opportunities’; (4) and a pro activeness and willingness to

take risks.  Because public sector objectives are so diverse and unquantifiable, civic entrepreneur’s interpersonal, political and even Machiavellian skills need to be even greater.  A civic entrepreneur either needs to be highly placed or, like an intrapreneur, to have a high-level sponsor to protect them when times are difficult or vested interest are upset, and to help them unblock the blockages to changes as they occur.  A major difference with civic entrepreneurship is the degree of risk that is acceptable within the service offered in the public sector – it usually intimately affects people’s lives, e.g in healthcare, education, etc  The civic entrepreneur therefore has to be willing to live with this lower risk threshold and, at the same time, to be subject to the degree of public accountability that goes with it. 5 Source: http://www.doksinet Daniel Schemmert 1. Creativity Maastricht University ESBM | Tutorial 3 Chapter 4 – Discovering a

Business Idea  Innovation is the prime tool entrepreneurs use to create opportunity; creativity is used to seek out business opportunities, finding unmet needs in the marketplace or finding innovative ways of meeting these needs.  All other quadrant than 4 fail to achieve their full economic potential; quadrant 3: firm struggling with too many wasted ideas; quadrant 2: firm lacks creativity but can at least copy and perhaps improve on the creative inventions coming from other firms; quadrant 1: certain never to grow, survival may be questioned. 2. Understanding creativity  The brain has different parts which work in different ways and facilitate different human functions; left half: performs rational, logical functions (vertical thinking), prefer working alone, learning about things instead of experiencing them; right half: intuitive and emotional (lateral thinking), group work and experience.  People have a preference for one approach but can switch between them

for different tasks and contexts.  The two halves complement each other, but many factors (e.g education) encourage development of leftbrain activity; one can develop and train right-brain activity which results in more than one solution and often restructures problems in contrast to left-brainers who don’t question the premise of a problem.  People are inherently creative but most of us stifle it because we find questioning leads to change and change is threatening and uncomfortable; blocks and barriers that keep us from being creative:         The belief that there is only one solution and reluctance to accept uncertainty and ambiguity The tendency to be practical and logical in looking for that solution The tendency to think too narrowly and with too much focus – not thinking ‘outside the box’ The tendency not to question the premise on which a problem is based and thus not to reframe it The tendency to accept the ‘rules of the game’

and the status quo unquestioningly The unwillingness to appear foolish by suggesting unconventional approaches or ideas The unwillingness to take risks in looking at different approaches or ideas The lack of belief that you can be creative 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 3 3. Generating knowledge and awareness  A prerequisite to creativity is the generation of knowledge and awareness of different ideas; our thinking is constrained by our prior knowledge; we are unaware of the information generated around us; subconscious ‘incubation periods’ when engaged in other activities (instinctive, no left-brain activity), e.g sleep  Ideas take time to generate; often the big idea comes from the collision of smaller ideas; chance of these collisions is increased with the exposure your have to more people and different ideas.  While creativity underpins the generation of ideas, a prerequisite of this is connectivity –

a connection with and an awareness of what is going on in the world in general; networks can provide opportunities to form partnerships, either formally or informally so as to better exploit an opportunity by gathering knowledge.  Connectivity, extends beyond any industry or market context; it is not just about being aware of different approaches or perspectives on a problem, but also about getting the brain to accept that there are different ways of doing things, developing an open and enquiring mind. 4. Developing discovery skills  Dyer et al. (2009) found five ‘discovery skills’ that made entrepreneurs particularly adept at linking market opportunity and innovation: Associating Questioning Observing Experimenting Networking They are able to recognise relationships among objects, processes, cause and effect, people and so on that other do not see, searching for different, unorthodox relationships that can be replicated in a different context. Innovative entrepreneurs

have the curiosity to challenge conventional wisdom, asking ‘why?’, ‘why not?’ and ‘what if?’. Innovative entrepreneurs observe common phenomena and people’s behaviour, particularly that of potential customers, in fine detail. Innovative entrepreneurs actively try out new ideas, creating and launching pilots. Entrepreneurs spent time finding and testing ideas with a network of diverse individuals in different countries and not only like-minded people 5. Finding a business idea  Generating good ideas is a numbers game: the more ideas you generate, the more are likely to see the light of the day; for every 11 ideas starting out on the process only one new product will be launched successfully  Often the only sure way of knowing whether the idea will make a lucrative business is to try it out; the more the idea is original and different and without established competitors, the less likely is market research to be helpful as customers may not know how it might be

used. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 3 6. New venture typologies  There are six types of new venture, each has implications for how you go about finding a business idea and each requires a different business model which influences the complexity of your business plan.  The further you move away from being a copy-cat start-up the higher the investment you are likely to need but also the higher the profit you are likely to make; concluding there are two options:   You must create your opportunity, because it is unlikely that there is evidence of market need. You can spot an opportunity that meets an unfilled current or future market need (easier, less risky) Copy-cat Incremental product/service innovation Market development Disruptive innovation or invention Market paradigm shift New-to-the-world industries You can introduce an already existing product or service into an existing market; you will probably be

let to compete on price (though it is hard as big competitors benefit from scale economies); low profitability and low growth; majority of small owner-managed firms. Spot gaps in the market by altering the elements of the product/service in some significant way that adds value to the customers; danger with lifestyle business: competing against established suppliers with recognized brands and distribution channels; need to protect IP Spot incrementally new customers or markets not currently served by existing suppliers, for example in different geographical markets; danger: established firms have resources to also go into new market and compete, thus the need to move with sufficient speed. Introducing radically new products/services into existing markets confounds competition, particularly if your innovation can be safeguarded, but it is not something that all of us are able to do; mostly with technological developments; must be commercially viable. This is when you create radically new

markets by challenging the paradigms or conventions upon which an industry bases its whole marketing strategy, e.g creation of low-cost airline needed no new technologies but still changed the market. Sometimes radical new inventions create radically new markets, e.g the world wide web; disruptive and difficult to predict 7. Creating opportunity  Disruptive innovation/invention is a step change in products, processes or the framing of markets; can have large-scale disruptive effects on markets, industries and economies.  Market paradigm shift happens when entrepreneurs challenge the conventional ways of marketing a product/service; becomes part of the dominant logic of an industry; probably easier to create than invention and can be just as profitable; need to constantly question status quo.  ‘Blue-ocean strategy’ refers to market needs that are currently unrecognized and unmet; strategy never benchmarks against competitors, instead ‘creating a leap in value for

both the buyers and the company itself’. 3 Source: http://www.doksinet Daniel Schemmert  ESBM | Tutorial 3 ‘Red-ocean market’ strategies involve gaining competitive advantage in existing, often mature markets; to develop a ‘red-ocean’ strategy you can ask the following three questions: 1. 2. 3.  Maastricht University What new types of customer benefit should you seek to provide in 5, 10 or 15 years? What new competencies will you need to built or acquire in order to offer these benefits? How will you need to reconfigure your customer interface over the next few years? There are three convention (market paradigms) that can be challenged for a blue-ocean strategy: Sectoral conventions Performance conventions Customer conventions These are the strategic rules that guide the marketing operations of the majority of firms in a sector, such as efficiency of plants, economies of scale, methods of distribution and so on; reorienting analysis from competitors to

alternatives. These are set by other firms in the sector such as profit, cost of production, quality and so on. These conventions make certain assumptions about what customer want from their purchases, e.g price, size, design; reorienting analysis from customers to noncustomers 8. Spotting opportunity  The main source of opportunity is change, e.g in technology, law and regulation, market and industry structures, demographics and culture, e.g the internet; opportunities where markets are failing to meet changing customer needs through dominant logic, laziness, ignorance.  Seven ‘basic symptoms’ of change that can be used to search systematically for entrepreneurial opportunities alongside the PESTEL analysis: The unexpected Incongruity Inadequacy in underlying process An ability to react quickly to changes is a real commercial advantage. The difference between what actually happens and what supposed to happen. Processes are taken for granted despite the fact they can be

improved or changed; process engineering especially important if the product is competing on price. Changes in industry or market structure Unexpected change or other outside events, creates an opportunity to strategize about how the firm might cope and, as usual, first mover advantages is usually worth striving for. Caused by changes in birth rates or wars, medical improvements etc. Can be brought by the ups and downs of the economy, culture, fashion etc. Demographic change Change in perception, mood and meaning New knowledge Can be scientific and non-scientific  One way you can discover inadequacies in underlying processes or question market paradigm is by analysing the value chain in an industry:  By looking at the costs associated with each activity and trying to compare them to the value obtained by customers from the particularly activity, you can seek to identify any mismatches.  An effective entrepreneurial strategy is to identify a sector in which the

relationships are weak to create value by tightening them up.  Another major source of ideas is new business ideas in other parts of the world. 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 3 9. Exploring change to find a business idea Brainstorming Designed to generate volume and used for either spotting or creating opportunity; not restricting any ideas; ideas serve as springboard for other ideas. Used to help think about future developments in the wide environment; looks at the changes that are likely to occur in the areas spelled out by the acronym PESTEL: Political changes, Economic changes, Social changes, Technological changes, Environmental developments, Legal changes. It tries to take a holistic perspective developing a vision about the future state after change has taken place, aided by a PESTEL analysis; from this, the commercial opportunities can be identified, again using brainstorming; current constraints to action are

ignored Helps develop and refine a business opportunity, whether it is spotted or created; suspend disbelief; it can help you think outside the square and generate relationships that might not initially have been apparent. PESTEL Analysis Futures thinking Mind maps 10. Exploring existing products to find a business idea 10.1 Thinking inside the box  Innovation in existing products or services can also be pursued systematically using five simple ‘templates’ for looking at their characteristics: Subtraction Division Multiplication Task unification Attribute dependency Innovate by taking out features of a product that do not add value for some segments of the market, e.g low-cost airlines Dividing the functions of a product – making things smaller or slimmer, e.g remote control Taking characteristics or features of a product and duplicating it, e.g picture within picture Bringing together multiple tasks into one product or service can add value for customers, e.g sun

screens provide protection and moisture Two or more apparently unrelated attributes can be correlated with each other 10.2 Analogy  Analogy is a product-centered technique that attempts to join together apparently unrelated combination of features of a product/service and benefits to the customer to come up with innovative solutions to problems; similar to brainstorming; once initial problem is stated which are related to opportunities in the marketplace.  To build analogy, ask some basic questions: What does the situation or problem remind you of? What other areas of life or work experience similar situations? 10.3 Attribute analysis   Attribute analysis is another more focused product-centered technique designed to evolve product improvements and line extensions – used as the product reaches the mature phase of its life cycle. An existing product or service is stripped down to its component parts and then you explore how these features might be altered, using

brainstorming; opportunities from inadequate existing products or services. 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 3 10.4 Gap analysis  Gap analysis a market-based approach that attempts to produce a ‘map’ of product/market attributes based on dimensions that are perceived as important to customers, analysing where competing products might lie and then spotting where there is little or no competition; approaches to this task: Perceptual mapping Non-metric mapping Repertory grid This maps the attributes of a product within specific categories, e.g sophisticated vs unsophisticated. Mapping products in generic groups that customers find similar and then tries to explain why these generic grouping exist; key is finding appropriate dimensions that create opportunities for differentiating the product. (1) Customer are asked to group similar products within a market, normally again in pairs. (2) they are then asked to explain the

similarities and dissimilarities. (3) the sequence is repeated for all groups of similar and dissimilar products. (4) the explanations are then used to derive ‘constructs’ which describe they way in which people relate and evaluate the products. (5) These constructs form a grid that can be used to map the products, using the words used by the customers themselves. 11. Finding an idea for a social enterprise  The same principals and process outlined in this chapter to find a commercial business idea can be applied to finding an idea for a social enterprise; the only difference is that you are looking for a social rather than market need. 12. The idea generation process  The process of generating ideas involves three stages which need time: 1. 2. 3. Ensure that you are exposed to as many diverse and different ideas, influences and people as possible and that you are aware and alert to these influences. Recognize market opportunities by observing how consumers go about

their daily lives and questioning whether their needs can be met ‘better’ in a different way. Formulate and reformulate your business idea so that there is a commercially viable business model. 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 Chapter 5 – Researching and Evaluating the Business Idea 1. The importance of research  Essential question to market research: Why should someone buy from and not from your competitors?; essential to show backers that you have an understanding of the market.  Understanding the shortcomings of companies in an industry can sometimes yield new business opportunities which may lead you to come up with a better or completely different business idea. 2. Defining your market or industry  Most markets or industries have some underlying structural conditions that help define them and that influence the degree of competition within them; can be difficult as an industry is any group of firms

that supplies a market, but markets are rarely homogeneous.  An industry comprises a number of market segments; competition within segments can be very different; e.g different car segments (family, luxury) or geographic segments (supermarkets in an area)  To some extent, markets and industries can overlap; an industry is likely to comprise a number of markets; drawing boundaries of your industry and the market segments within it is a question of judgement. 3. Market/industry typologies – life cycle Stage Implications Completely new (market paradigm shift)       High risk, but also potential for high returns Customers and demand difficult to identify, market is not provenNo competitors Gaining first-mover advantage Opportunity to dominate the market Processes and procedures need to be developed High marketing costs (customers may not understand product/service benefits) Emerging               Preferred by

backers (as opposed to completely new or declining markets) Few competitors Customers starting to be identified, proven demand, market size still uncertain First-mover advantage still significant Redefine processes and procedures that are not operating effectively Still opportunity to dominate the market, no dominant brands or market leaders Marketing costs still likely to be high Barriers to entry probably in the process of being established Proven and growing demand, buying patterns becoming established Growing number of competitors, also competitors dropping out Product/Service extensions likely to be emerging Aggressive marketing strategies (e.g competitive pricing) Dominant brands beginning to emerge Market looks good on paper, but entrants may be too late unless their product/service is based upon significant innovation Well-established competitors (market might be fragmented or consolidated) Defensive pricing possible (meeting or beating new entrants) Difficult to break into

market, competition strong Opportunity to innovate based on existing product/service Opportunity to innovate based upon process or after-sales services Growing Mature      1 Source: http://www.doksinet Daniel Schemmert Declining Maastricht University            ESBM | Tutorial 4 Opportunity to innovate based upon established marketing processes Generally limited innovation Buying and repeat-purchasing patterns Slow or non-existent growth Market has a limited life expectancy Declining range of products, no innovation Opportunity to consolidate market by becoming dominant player (probably by buying out competitors) May be opportunity to establish niche if reducing competitors means demand is still high May be opportunity to cut costs by re-engineering production process to reflect reducing market demand May be opportunity to buy stock at ‘distress prices’ from companies going out of business and sell on at a profit

Opportunity for radical product/service innovation 3. Market/industry typologies – concentration Concentration Fragmented Consolidated Implications  Easier to start up in a fragmented market  Usually in mature or declining industry  Large number of well-established competitors of about the same size  Competitive pricing, limited profitability  Opportunity to consolidate industry and become market leader (probably by buying out competitors)  Usually in mature or declining industry  Few, large and well-established competitors  Defensive pricing possible (meeting or beating new entrants)  Barriers to entry are likely to be high  Few entrepreneurial opportunities other than radical product or market innovation 4. Market/industry typologies – geographic extent Geographic extent Implications Local, regional or national  Easier to start up in a local market and gradually spread out  Gradual geographic roll-out allows marketing mix to be

fine-tuned, but at the expense of first mover advantage  Market dominance easier in smaller geographic markets  Some markets (e.g technology-based) can develop geographically over time from develop to developing countries  Competitors quickly become established in foreign markets  Opportunities exist for foreign start-ups where others have followed a local, regional or national strategy  Internet-based new ventures have the opportunity to ‘go-global’ at start-up  ‘Going-global’ at start-up can by very expensive  Opportunity to expand on a country-by-country basis, varying product/service offering as appropriate  Becoming easier to be established bc of internet Global 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 5. Market research 5.1 Desk research  Desk research refers to research that you can do from a desk, at home or in a library using the computer and internet or journals etc.; quick to do, cheap

and usually good for getting background information      not specific to your business, can be incomplete or inaccurate and may be out of date. to identify new customers, products or services, market share and growth of the market, product developments and trends. provides info on competitors’ product/service offerings, size, profitability, operating methods might be suitable for established markets but difficult for new or emerging markets. Distinguish search between customers: - Private customers: demographics such as age, gender, socioeconomic group, occupation - Industrial profiles: type of business, size, sector/industry, location, creditworthiness 5.2 Field research  Field research involves going out and collecting new information – usually about customers – that is not publicly available; common tools/methods are individual or group interviews, telephone surveys or administrating text, email or postal questionnaires.  Sampling and observation can

be lead to mistakes and subjective data collection; closed, multiple choice, scaled or open question; should go from general to specific, factual to opinion, least to most sensitive.  Observing general competitor actions and customer behavior when going to competitors; still, the only way to know if the business idea is lucrative is trying it out, e.g test market or low-cost launch  The more original the business idea, the less likely market research is to yield an insight into demand, simply because customers do not understand how the product or service might be used. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 6. Estimating your market size  You can measure a market size in either value or volumes (units), but you need to distinguish between the different types of market: 1. 2. 3. 4.  Potential market: size of a general market that might be interested in buying a product. Total available market (TAM): size of your

prospective market; those in the potential market who might be interested in buying your particular product; reflects the total sales of competing products. Served available market (SAM): size of the target market segment you wish to serve within the TAM Penetrated market is the size of the SAM you capture. SAM is the market segment(s) you are targeting, given any restrictions such as demographics, geography, language, technology etc.; market share is your penetrated market divided by SAM 7. Identifying your competitors  You should asses the influence competitors have over the market; the level of industry competitiveness; with disruptive innovation or market paradigm there may be no real, direct competition initially; three types:    Direct competitors offering similar or identical products or services. Indirect competitors offering close substitutes. Future competitors who could enter your market in the future. 8. Assessing industry competitiveness: Porters Five

Forces  1. Competitive rivalry in the industry: Number & size of firms, concentration, its newness and growth and attractiveness (profit, value added), overcapacity; important: extent of product differentiation, brand identity and switch costs; greater rivalry, less able to charge high price. 2. Threat of substitutes: Relative price performance of substitutes, the switch costs and the propensity of the customer to switch; greater threat of substitutes means less able to charge high price. 3. Threats of new entrants: Barriers to entry keep out new entrants; legal protection (patents), scale economies, capital costs, etc.; greater threat means lower bargaining power and control over price 4. Power of buyers: Relative size of buyers or customers and their concentration; the fewer there are, the higher their buying power; influenced by purchase volume, switch costs, backward integration. 5. Power of suppliers: Relative size of firms and the other factors mentioned above

– the fewer there are, the higher their power. The higher the degree of differentiation and inbuilt switch costs for your product/service, the more likely your business is to succeed; generally, the fewer competitors, the more likely you’ll succeed though it depends on the market power of those competitors. 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 9. Industry futures  The SWOT analysis as a tool for examining potential threats and opportunities in your industry; weakness: it focuses too much on the current, not the future market and industry situation.  Some of the previously mentioned tools can be combined to examine the future of an industry: 1. 2. 3. 4. The PESTEL analysis can be used to identify the future influences on the industry. Apply these influences to the broad trends you have identified through research into the industry. The future thinking technique can then be used to evaluate how direct and indirect

competitors might react to your entry into the market and where future competitors might come from. You can then brainstorm to explore how you might react to these trends and competitors.  Scenario planning: tries to assess how possible future situation might impact on a firm; trends are identified from the PESTEL analysis and built into scenarios; situations must be logically consistent possible futures; optimistic, pessimistic and ‘most likely’ future, based around key factors influencing your firm.  Scenario planning helps to generate strategic options that you might undertake if risks or opportunities might materialize.  Critical success factors are things you need to get right to ensure survival and success; might come out of scenario planning and will be amplified and developed as the business model evolves. 10. The go/no-go decision  Entrepreneurs can either be pulled (seeing an opportunity) or pushed (losing a job) into entrepreneurship. 

Market-testing and prototype developing is necessary to see if an offer is really what customers want; need to constantly check commercial viability. (iterative process) Porters Five Forces: 6th Force is complementors 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 Chapter 6 – Start-up: Developing the Business Model 1. Bringing your idea to life  Entrepreneurs engage in ‘effectual reasoning’ or ‘effectuation’ (making something happen) in contrast to causal or deductive reasoning used by professional executives.  Five main conclusions about how successful entrepreneurs approach decision making in their uncertain, rapidly changing environment: 1. 2. 3. 4. 5. Executives set goals and achieve them sequentially; entrepreneurs’ goals were broad and evolved over time based on personal strengths and resources they had, creatively reacting to contingencies as they occurred (learning by doing). Entrepreneurs go to the market

as quickly and cheaply as possible and assess market demand from it; ‘affordable loss’ represents the max. amount they could afford to lose in the event of failure Entrepreneurs do not like extensive, formal research/planning, e.g market research; belief that while they could not predict the future, they could control it (high internal locus of control) and recognize and respond to opportunities as they develop; adopt formal structures as business grows. Entrepreneurs use networks of partnerships to generate knowledge, leverage resources and make the future become reality; in contrast, executives know the path and without seeking partnerships. Entrepreneurs believe they were different or better than competitors in a way that gave them a differential advantage. 2. New venture creation framework  A business model is the plan for how a business competes, uses its resources, structures its relationships, communicates with customers, creates value and generates profits.  The

‘New Venture Creation Framework’ mirrors an approach developed for large companies – the business model canvas; central to both approaches is the development of an innovative business model. Market segments and the value proposition Marketing strategy Operations plan At the core of a business model is the identification of different groupings of customers with similar characteristics (market segments) and the motivations each segment has for buying your product/service (the benefits they are seeking); pulling these benefits together for each segment is called the value proposition. Your marketing strategy describe how you will deliver your value proposition to each of the customer segments you have identified with a certain marketing mix (e.g price, service, promotion, distribution channels); needs to cover core + launch strategy. The operations plan highlights the practical things you need to do to launch a new venture, e.g legal and operating issues, partnership

opportunities; identify key activities 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 Risk and strategic options The business model should tease out the major risks you face and how they might be mitigated or avoided entirely (strategic operations); identify critical success factors. Resources available and resources needed Financial plan This defines the resources you bring to the business – human, social, intellectual and financial – and the resources you need; major component: ability to manage a team.  Possible alternatives for business models:     This shows the profit the business should generate and how it will be used; shows the cash flow of the business and the external finance that is required; set of financial forecasts – revenues, related costs and resulting financial structures of the business. Network effect or multisided platforms: Bringing together different market segments that derive value from

the presence of each other. Free product/services: Non-paying customers are financed by other parts of the business model or other customer segments. Open business model: Value is created through collaboration between partners. Internet business models include:       Direct sales model: Products/services are sold directly online (e.g Amazon) Advertising model: Ads are being placed on the website (e.g YouTube) Pay-per-click model: Paid for clicks onto an advertiser’s link (e.g Google) Subscription model: e.g The Times newspaper Freemium model: Basic service is free, extras are charged for (e.g Spotify) Affiliate model: Website hosting ads is paid commission on sales (e.g eBay) 3. Lean start-up  One approach to the challenge of launching a business with limited resources is called ‘lean start-up’ which is a venture that minimizes the lead time as well as its investment in a new product/service launch.  Product/service is not launched in a ‘perfect

state’ but in its ‘minimum viable’ state; refined using customer feedback in an iterative fashion to further tailor the product/service to the specific needs of customer, a process called ‘validated learning’; key is close customer relationships and feedback mechanisms.  Product development and concept/market testing go side-by-side (elements of ‘lean manufacturing’); the internet increases opportunities; risk of being in the market too early or core product does not function so customers reject it and your brand equity dilutes. 4. International start-ups  Entrepreneurs can capitalize on international market imperfections by linking resources from around the world; three different groups: 1. 2. 3. New international market makers: simply moved goods from one country to another where there was higher demand; can be done by establishing an online sales platform rather than physical presence. Geographically focused start-ups: using foreign resources like raw

materials, people or financing to service the needs of other countries more cheaply. Global start-ups: just perceive themselves as global businesses from inception and derive some form of significant competitive advantage from doing so; often in high-tech niche markets. 2 Source: http://www.doksinet Daniel Schemmert  The international vision of the founders The desire of the founders to be international market leaders The identification of specific international market opportunities that needs to be exploited quickly The possession of specific international contacts, networks and sales leads Home-based social networks play a mediating role in the relationship between inward and outward internationalization; allows firms to go international more rapidly and profitably by providing opportunities for:     ESBM | Tutorial 4 The main reasons to internationalize are:      Maastricht University Knowledge of an information about foreign market

opportunities; Obtaining advice and experiential learning; Gaining referral trust and solidarity – also often leading to a partnership, alliance or joint ventures to reduce the risk in exploiting an opportunity. Link of four dimensions of internationalization to performance: relationship quality, cooperation, trust, and commitment; benefits go beyond financial measures, e.g it enhances future product innovation 5. Identifying your market segments  The initial target market should be the group of customers that most need your solution to their problem because other solutions are less satisfactory; start-ups should focus only on 3 to 4 clearly defined, important and sizeable market segment to use resources optimally; to be viable a market segment must be: 1. 2. 3. 4.  Distinctive with significantly different needs from other segments. Sufficiently large/willing to pay a high enough price, to make the segment commercially attractive. Accessible through communication and

distribution channels. Defendable from competitors; otherwise prices and profits will quickly fall. The slimmer the market segment that the product/service is tailored to suit, the higher customer satisfaction is likely to be, but so too is cost and price; trend toward slimmer market segments; danger of overreliance on small customer base, e.g if taste changes, segment might disappear 6. Defining your value proposition  Customers essentially purchase services rather than goods; goods should be viewed as a medium for delivering services; service is the application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself.  Focusing on the benefit-needs (physical and psychological) of market segments and delivering distinctive, differentiated value propositions to each of them is at the core of developing a market strategy; many ownermanager like to define their products in physical terms

and think they are selling one thing.  One should start with the benefits that customers are looking for and then construct features that provide those benefits. 7. Tailoring your marketing mix  Lock in customers by implementing switching costs into value proposition or offer additional benefits for customer loyalty.  The marketing mix is only as strong as its weakest link (need for consistency); while any individual element of the marketing mix may not be unique and can often be easily copied, it is the combination that is unique which can provide a differential advantage over competitors. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 8. Linking features and benefits with marketing mix  The final step then is to be able to engineer the features of a product or service deliver distinctive benefits that customers value, and craft these into some sort of strategy; features can be many and varied, covering all the elements

of the marketing mix, and combined in almost endless variations.  Supply push involves taking the product directly to the customer, e.g via wholesalers which receive special sales incentives in exchange for increased visibility.  Demand pull refers to a strategy where end-user demand is stimulated by advertising directly to them and persuade them to seek out the product from the distributor; only works if product is highly differentiated (e.g through branding) 9. Channels of distribution  You must tailor your marketing mix to suit the needs of customers and consumers at each stage in the chain; you do not control your distribution channels directly, you influence them – and they eat into your profit.  If you decide to sell directly to consumers, revenues may be higher but so too are your costs, e.g own direct sales-force, costs of developing a website, online/telephone sales team, advertising, delivery costs.  There is no one ‘best’ way to distribute a

product or service and; deciding to do it differently than the competition can prove profitable if the customer value the difference. 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4 10. Understanding customer and consumer benefits  When you design your marketing mix you need to distinguish between customers and consumers and have to design the marketing mix appropriately to them; there is no blueprint to work from since most products/services and their markets are different. 11. Generic business models  Generic business models, generic marketing strategies or value disciplines are consistent with fundamental ways of creating sustainable competitive advantage and combine to produce the niche business model of highly differentiated products/services offered in small volume at a relatively high price. Low price/low cost High differentiation Customer focus or intimacy This is where customer value low price more than anything in the

marketing mix; operational excellence is needed to achieve this (scale economies); products as commodities; often with few dominant big players that are efficiency- and cost-focused; not suitable for a new venture; new flexible manufacturing technologies allow for variety. This is where customers value the other elements of the marketing mix more than price and are therefore willing to pay a premium, e.g quality, innovation Customer are provided with a product/service more closely tailored to their specific requirements; often based on good customer service; high customer loyalty; opportunity to develop strong brand; economies of scope allow to spread costs over different products  Each of the value disciplines has different business imperatives which are things that you need to keep on top of, or risk failing to deliver your value proposition; can become critical success factors; can be conflicting and need judgement.  Once you have identified your core discipline or model,

there are four questions you need to answer: 1. How important is each value discipline or business model to each market segment? 2. Which competitors provide the best value in each of these value/model dimensions? 3. How do you compare to the competition on each dimension? 4. If you fall short on the value leaders in each dimension, how can this be remedied? 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 4  The core competencies of a business are the resources or capabilities it has that can lead to competitive advantage over its rivals; for a start-up it’s mostly the skills and capabilities of the founder; the opportunity identified and the uniqueness of the way they intend to service the market.  Strategic assets of a business (e.g equipment, trademarks, patents, brands) can be combined with core competencies to create a sustainable competitive advantage. 12. Niche business models  Companies that offer both high

differentiation and high customer focus have a niche business model; targeting smaller markets; best suited for a start-up because it can charge higher prices and is more likely to sustain a competitive advantage as competitors are not attracted by small market size (at least initially).  There is usually a trade-off between price and other elements of the marketing mix; the stronger or more distinctive these other elements, the higher the price you can charge.  The smaller the group, the more homogeneous their needs are likely to be; original target market can often be broken down into smaller niche markets; meeting each need may either involve extra costs, by adding more features, or subtracting costs by eliminating less valued features. 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 5 Chapter 7 – Start-up: Developing the Business Model 1. Your values  It is important that your business reflects your vision and values;

when you are successful in adopting strong ethical and social values, you may be able to charge a higher price and create commercial and social value.  Organizations with strong values recruit staff who are able to identify with those, thus become reinforced; create bond with customers and suppliers and underpin strong brand identity; articulate values not only with words but also by practicing what you preach and make them explicit to avoid misunderstanding. 2. Your vision  A vision for what the business might become is important for the motivation of stakeholders of a business; a vision is a shared mental image of a desired future state; must be aspirational but realistic, usually qualitative rather than quantitative; intrinsic (do things better in a way) or extrinsic (beating competitors).  Kosoryoku (Japanese) describes what is needed to develop entrepreneurial strategy in an uncertain environment; ‘vision’ with the notion of ‘concept’ and ‘imagination’,

but unlike imagination, it has no sense of daydreaming, it’s rather an ability to see what is invisible and shape the future so that the vision succeeds. 3. Your mission  The formal statement of business is called mission statement and it says what the business aims to achieve and how it will achieve it; includes scope of business by including reference to the product/service, value proposition, customers groups and the benefits they derive.  Vision and mission statements for a social enterprise are the same as for commercial enterprise, expect for the social purpose; must be consistent with your values.  Tactics are activities you conduct on a day-to-day basis, e.g promotion or sales campaigns 4. Creating value through values  Your values and vision are tools that create identity for your business; if this identity is attractive to customers it can create value as part of your value proposition.  Values-based marketing or Marketing 3.0 seeks to actively use

customers to help sell existing product/service and develop new ones; based upon establishing a good relationship with customers; participate customer at the center.  As customers become increasingly sophisticated, marketing should move away from just relationship to value-based strategies that reflect customer priorities and needs. 1 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 5 The sources for this values-based strategy are:      Management vision: Clarity in direction and purpose, effective communicated through a wide range of communication media. Market sensing and organizational learning: Understanding and responding to the external world using all the networks and channels of communication possible. Differentiating capabilities: Using core competencies to build differential advantage. Relationship strategy: Managing the network of relationships and channels of communication used for market sensing to achieve

superior performance. Reinventing the organization: Changing the organization form and processes to sustain and renew this strategy. 5. Branding your values  Your values need to be linked to your value proposition and you also need to communicate this ‘valuesenhanced’ value proposition to customer and consumers by developing a brand and bundling values which cannot be bundles easily by the customers themselves.  A good tradesman will take time to develop a personal relationship with their customers – something big companies have difficulty doing – and that relationship will be based on trust and respect.  Good design is aesthetically pleasing and conveys emotions that functionality cannot; a brand should be the embodiment of the product or service value proposition to customers; the more points of differentiation from competitors you have the more sustainable your competitive advantage. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University

ESBM | Tutorial 5 6. Corporate social responsibility (CSR)  CSR can be used both to bring social and economic goals into alignment and to leverage capabilities and relationships in support of charitable causes.  The more a firm can benefit from CSR the more it will be inclined to integrate it on a strategic decisionmaking level, thus increasing its effectiveness in promoting its social causes.  Without strategic integration, the result will be a ‘hodgepodge of uncoordinated CSR and philanthropic activities disconnected from the company’s strategy that neither make any meaningful social impact nor strengthen the firm’s long-term competitiveness’.  CSR policy can have three sound commercial benefits: 1. 2. 3. Increased sales, brand identity and customer loyalty (by differentiating e.g the product) Reduced operating costs and productivity gains (e.g reduced waste, recycling, work conditions) Improved new product development 7. CSR and financial performance

 There is a positive relationship between CSR and financial performance, but one can never be completely sure since there a lot more factors that influence financial performance.  Four ways CSR can add value: 1. 2. 3. 4. Reducing costs and risk Strengthening legitimacy and reputation, particularly through branding Building competitive advantage through reputation and branding ‘Creating win-win situations through synergistic value creation’ by linking economic and social goals 8. Building the brand  Building a brand takes time; it is built up through effective use of communication media and is recognized through the brand or company name and logo.  You create the culture of your business through your leadership and you need to ensure that you create the culture and identity you want. This involves being consistent in words and actions  Brand and company names must be distinctive and easy to remember and even spell across different cultures and nationalities

which implies that short names are best which don’t mean bad things in other languages. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 5 9. Setting your prices  Setting prices an art rather than a science; the underlying principal is that the price charged for a product or service ought to reflect the value-to-customer of the package of benefits which can be different from customer to customer and in different circumstances.  There is usually a going rate charged by competing firms for similar products or services which is the current standard or usual price, rate, or salary for something.  Cost+ or full-cost pricing takes the total cost of producing a product or delivering a service and divides it by the predicted number of units to be sold, to arrive at the average cost, to which a target mark-up is then added.  If you want to charge a range of prices to different market segments, these can be as low as your variable

cost, so long as the average price you charge is above your full-cost; the lower the variable cost, the greater discretion you have in pricing.  Minimum short-term price is set by the variable cost, but long-term variability is set by the full-cost price; to make a profit, the average value-to-customer price needs to be above this.  Shouldn’t be underpriced as consumers associate high quality with high prices; customers that show resistance to higher prices can be offered a one-off, introductory discount; this needs to be consistent with your launch strategy. 10. Price and volumes  How demand reacts to changes in price is determined by the ‘cross elasticity of demand’; the more differentiated the product or service, the more price-inelastic is demand.  The lower the contribution margin (sales price minus variable cost, expressed as percentage of the sales price), the less you are able to reduce the price and the more vulnerable you are to price competition.

 The contribution margin varies enormously from market to market, product to product, sector to sector; sometimes due to the high fixed overhead costs that some businesses need to cover in order to make a profit (e.g in bricks-and-mortar retail stores) 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 5 Chapter 8 – Launching Your Business 1. People, people, people  The only way you will grow is by recruiting appropriate staff, including managers, to deliver your product/service to more and more customers; will bring skills, capabilities and knowledge; start by developing a skills profile for the business and identifying where the gaps exist.  You can recruit people on a number of different bases:     Full/part-time Regular hours/shift work Fixed-wage or salary/commission/piecework Job descriptions can be problematic in a small, growing business where the nature of tasks can change dayto-day and over time; based

upon the list of duties in the job description, you can then produce a person specification that lists the criteria on which to base selection of the person. 2. Finding a team  If you are short in cash you may offer incentives such as target linked bonuses, shares or share options.  Sweat equity refers to shares that reflect the cash, intellectual property or simply the time and effort someone has brought in to get the business off the ground.  Once you have people interested in joining your team, you need to shortlist those that meet your person specification and then interview those shortlisted to assess their suitability.  Shared cognitions refers to shared goals and effective communications and transfer of knowledge between partners; helps individuals with different functional background to reach consensus.  Conflicts takes to forms: relationship conflict (not beneficial, erode cohesion within the team negatively affecting performance) and task conflict

(can be productive and beneficial).  When being unable to find the ‘right person’ for the role you have identified, it may be possible to ‘buy in’ these roles through advisors, at least temporarily. 3. Using professional advisors  Professional advisors can be invaluable source of this knowledge, skills and advice as well as providing an additional network of contacts for the founders; types of professionals you might include:     Accountants: Produce a financial plan; benchmark against industry financial norms; tax advice etc. Lawyers/attorneys: Business licenses and permits; set up contracts, e.g with suppliers or staff Business consultants: Advise on marketing and strategic planning; help with business plan Skills gaps can also be addressed through:    Your board of directors Different forms of partnerships Equity investors 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 5 4. Selecting and

developing the team  Demographic diversity such as age, gender, and functional background is not as important for entrepreneurial team effectiveness as team process variables – how the team functions and their commitment to achieving overall goals.  Three ‘personal orientation’, each of which translate into three ‘team roles’ and all nine elements need to be present in a team for it to work effectively:    Thinking orientation 1. Plant: chief source of new ideas, creative, imaginative, can be distant/uncommunicative 2. Monitor-Evaluator: Introvert, strategic, discerning; explore all options, deep analysis, unlikely to inspire or excite others. 3. Specialist: chief source of technical knowledge; single-minded, self-starting, dedicated People orientation 4. Coordinator: Team’s natural chair; mature, confident, trusting; clarify goals, promote decision-making; strong interpersonal skills; can be perceived as manipulative. 5. Team-Worker: Team’s

counsellor; social, perceptive, aware of problems, good listeners; promote harmony; valuable at times of crisis; can be indecisive. 6. Resource Investigator: ‘the fixer’; extrovert, wealth of contacts; explore opportunities; can be undisciplined and can lose interest quickly after initial enthusiasm. Action orientation 7. Shaper: self-elected task leader; extrovert, dynamic, outgoing, argumentative; tendency to bully, not always liked; generate action and thrive under pressure. 8. Implementer: team’s workhorse; disciplines, reliable, conservative; turn ideas into practical actions; logic and loyalty; can be inflexible and slow to change. 9. Completer-Finisher: team’s worry-guts; sticklers for detail, deadlines and schedules; picking up errors and omissions; sometimes reluctant to delegate and cannot let go.  The ‘prototypical entrepreneur’ might be a mix of three Belbin roles: plant (creative, idea person), shaper (dynamism, full of drive and energy), and resource

investigation (exploring opportunities).  First team member to recruit should be an implementer who needs a completer-finisher, team-worker, and possibly a specialist in turn working under them.  Building a cohesive team involves building consensus towards the goals of the firm while balancing multiple viewpoints and demands; too great reliance on consensus can lead to slow decision-making; successful entrepreneurs build strong relationships between their team. 5. The customer journey  You need to attract the customers segments you are targeting and persuade them to start the journey to become valuable loyal customers; the journey a customer takes in becoming a regular customer can be broken down into a four-stage process: 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 5 Stage 1: Launch – Once your prospective customer becomes aware of your product they will evaluate the value of the proposition it offers; need to be made

aware and encouraged to make that all important first trial purchase; AIDA principle: awareness, interest, desire, action. Stage 2: Take-off – Once they have purchased your product/service, customers will evaluate whether you have delivered the value proposition that you promised; whole marketing mix is evaluated Stage 3: Growth – If the value proposition that is delivered meets their expectations then they may be persuaded to repeat purchase and become regular customers. Stage 4: Maturity – Objective: move customers up the loyalty chain from regular customer to a supporter who things positively about the product/service, and ultimately to become an advocate; ideally, relationships are based upon one-to-one and face-to-face interaction, but they can be influenced by various media. 6. Finding your first customer  It all depends on who are your prospective customers and how you get to them; much of business-tobusiness selling is face-to-face, particularly when you are looking

for that first order.  Face-to-face selling ca be necessary for mass consumer markets; as there are so many people, finding prospective customers that meet your marketing segmentation profile can be extremely time consuming; referral of family, friends or already loyal customers may be important.  What media to use depends on the target market you wish to reach and the product/service you are offering. 7. Developing your sales skills  First thing is to make certain you have identified the benefits this specific customer is looking for and thoroughly understand your value proposition; the larger the potential sale, the more important the research and the longer you should spend on it; knowing personal details can break down barriers.  At the meeting, you need to establish what they want – the ‘problem’ they have – and how your product/service can solve the problem for them.  You are likely to encounter objections by potential buyers before they sign off

on a deal, but you have to handle them or often take a price cut.  If interest is confirmed by asking a few questions, body language, etc. the whole process can be shortcircuited and you can go to the most important stage of all closing the sale 3 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 5 Insight selling involves trying to disrupt pre-meeting decisions; customers may have sought out advice from independent resources beforehand and come to a sales meeting just to negotiate the deal.   Establish a relationship with prospective customers well ahead of the meeting in their learning phase so that you are seen as an expert consultant with valuable knowledge. Use this position to disrupt and ‘reset’ customer thinking by challenging their assumptions, perhaps by identifying undisclosed problem they might face. 8. Communications media  Word-of-mouth recommendation is a low-cost option that involves personal time and

effort; spread through relationships and network; can be very effective way of promoting a local start-up; once you are established, unpaid customer recommendation is very powerful.  Social networks and media can spread work-of-mouth recommendations in form of viral marketing through very cheaply; extremely fast and can reach enormous audiences; more effective in developing brand identity through shared values rather than traditional mass-market advertising that focuses on product characteristics.  Guerrilla marketing is a term that refers to any low-cost approach to creating awareness of a product/service; might adopt unconventional ways and aims at creating a buzz and encouraging rumors.  Public relations (PR) and publicity involves getting media to recognize and report what you are doing; react a wider audience than your network of relationships; need to find something newsworthy or interesting; free, greater credibility; problem: not much control on content. 

Advertising can be expensive and there can be large-scale economies, but it can guarantee a wide audience – which is important for consumer goods and services; highly focused advertising can be very cost-effective. 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 5 9. Developing a communication campaign  You need to develop a communications campaign as part of your launch strategy; can be aimed at your enduse customers and/or distribution channels; the major aims at each stage are: Stage 1 2 3 4  Aims Launch stage of the business; creating (brand) awareness of the product/service and persuading your first customers to purchase it are important; customers need to understand the product/service to create desire. Take-off stage; still trying to persuade more customers to try your product/service at the same time as persuading those who have tried it to repeat purchase (facilitating brand purchase, e.g educate where to buy); create

brand attitude (getting customers to recognize how it is different). Continuing to facilitate brand purchase and restating brand attitude and identity, reinforcing your value proposition so that regular customers are convinced that they are making the right purchase decision. In this stage you try to cement the relationships with the customers, involving them in prospecting, encouraging new customers and product/service development. Developing such a campaign involves six steps: 1. 2. 3. 4. 5. 6. Identifying the target market you wish to communicate with Identifying the media that reaches this target market. Defining your communications objectives Developing and refining your communications message – words and images. Setting the budget. Deciding whether the media that reaches your target market is appropriate for your message and is within your budget. Preparing your communications plan – media, dates, times etc. 10. Creating awareness  With any product/service launch it is

important to get the right message to prospective customers; the message you want to convey to your target market segment is that you have a value proposition that meets unmet needs they have or meets it better than other products or services.  For those start-ups where the product innovation is incremental, the job of creating awareness is more difficult because the launch is less newsworthy. 11. Getting customers to buy  While you might be able to contact distributors directly to create awareness of your product, they will need an incentive to stock it; they will be interested in the uniqueness of your product and will also react to whether customers are already seeking it out because of your customer awareness campaign.  Might be persuaded to stock your product, particularly if initially it is offered on a sale-or-return basis or extra initial discount; can leave decisions about promotion activity entirely with the distributor which can be dangerous, e.g by entering a

price war which doesn’t fit your marketing mix 5 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 5 If your product/service is sufficiently unique or novel, it may be possible to premium price at launch, particularly if customers are unlikely to repeat the purchase quickly; creates a certain status associated with ownership of the product or service; price might be effectively ‘reduced’ by adding features with the time. 12. Penetrating your market  As your product/service attracts more customers, it will attract more attention from competitors; your marketing strategy may need to adapt and change to suit this.  While the first customers are characterized as ‘innovators’ who constitute 2-3% of the market and like novelty and try things, ‘early adopters’ (14% of the market) - who are people with status in their market segment and opinion leaders - follow in the second wave. 12.1 Strong competitive position  If you

are in a strong competitive position you need to expand as rapidly as possible, investing in whatever is the basis for value offering and developing your brand identity:  If your core value proposition involves high differentiation, you should further differentiate yourself from the competition, creating and building your brand; decrease premium price or add features.  If your core value proposition involves cost leadership (low price) then you must obtain the necessary economies of scale as quickly as possible to gain that dominant position; expanding sales through aggressive marketing, including price promotions. 12.2 Weak competitive position  One attractive option is to find a market nice within a competitive industry – at least in the short term; avoids high fixed costs associated with mass markets; higher price can be charged.  The early and late majority of customers make up about a third of customers and are more conservative, with slightly higher status

and are more deliberate, thinking purchasers; only adopt the product after it has come acceptable; compare different offerings. 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 7 Chapter 9 – Legal Foundations 1. Safeguarding your business idea  There are number of ways you can safeguard your intellectual property: patents, trademarks, copyrights, industrial design rights, and in some countries, trade secrets.  These rights encourage the creation of IP and pay for associated research and development; there are substantial benefits in terms of economic growth for countries that encourage IP protection.  Critics characterize these rights as intellectual protectionism or monopoly and argue that public interest is harmed by protectionist legislation.  Intellectual property rights (IPR) can inhibit collaborative working on innovation because collaborators want to safeguard their own IPR, despite the possibility that

collaboration might generate far greater value.  Only a limited level of IPR is desirable to encourage risk taking and innovation; should not rely too much on IPR, and do not let it get in the way of networking or collaborative working where external knowledge is an important part of your systematic innovation.  For a start-up, IP on the business idea is one of the few real assets; need to seek maximum IPR as you will expose your idea to many while seeking finance; being the first to market is sometimes more effective in creating competitive advantage than IPR on an idea that has missed its window of commercial opportunity. 2. Intellectual property law 2.1 Patent  A patent covers how new inventions work, what they do, how they do it, what they are made of and how they are made.  For the invention to be eligible for patenting it must be new, have an inventive step that is not obvious to someone with knowledge and experience in the subject and be capable of being made

or used in some kind of industry.  In dealing with individuals you might approach regarding an unpatented invention, such as prospective partners, suppliers of financial backers, you may ask them to sign a non-disclosure agreement.  There also exists a list of things which cannot be granted a patent on, e.g a scientific or mathematical discovery, artistic work, animal or plant variety or a method of medical treatments, etc. 2.2 TM TRADEMARK  A trademark is a sign made up of words or a logo or both which distinguishes goods/services from those of competitors; must be distinctive for the goods and service provided; may put people off using the trademark without permission and allows you to take legal action against anyone who uses it without your permission.  The same trademark can be registered for different goods or services and by different proprietor. 1 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 7 There is also a

list of things that cannot be registered as a trademark, e.g non-distinctive trademarks, describe goods or any characteristics of them (e.g Cheap Car Rentals), etc 2.3 ® Registered design  A registered design is a legal right which protects the overall visual appearance of a product in the geographical area you register it; covers the things that give the product a unique appearance, such as the lines, contours, colours, shape, texture, and materials and the ornamentation of the product.  It does not offer protection from what the product is made of or how it works.  To be able to be registered the design must (1) be new and (2) have an individual character. 2.4 Copyright  Copyright allows you to protect your original material and stops others from using your work without permission; can be used to protect any media; does not protect any ideas, only how you ‘publish’ your ideas, e.g in writing the words cannot be copied  This happens automatically in most

countries, which means that you do not have to apply for it so long as it falls within one of the categories of media protected but is also means there is no official copyright register.  You can sell or license work and sell or retain your ownership; you can also object if your work is distorted or mutilated; as copyright is a private right, the costs of enforcing it falls to the individual.  Copyright infringement only occurs when a whole work of substantial part is copied without consent; what constitutes a substantial part is not defined and to be decided by court. 3. Legal forms of business  Starting up in business is inherently risk and how you structure your business has implications for how much risk you face personally. (60%)  Sole trader: This is the business owned by one individual; the individual is the business, and the business is the individual; simplest form of a business to start.  Partnerships: Some professions, such as doctors and

accountants, are required by law to conduct business as partnerships; groups of sole traders who come together, formally or informally, to do business; allows to pool resources 2 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 7 Limited Liability companies: A company as a separate legal entity from its owners, shareholders, directors and managers; divorce between management and ownership, with a board of directors elected by the shareholders to control the day-to-day running of the business; pays tax separately; can sue or be sued; best form for a growth business that will require capital and face risks as it grows.    Public limited companies: shares are traded publicly on a stock market; additional regulation. Private limited companies: shares are not traded publicly. Corporations are separate legal entities in the US organized under the authority of the state.  C Corporations are subject to double taxation at both the

corporate and shareholder level; losses reside with the company and cannot be deducted from SHs other sources of income.  Subchapter S Corporations don’t pay tax; profits/losses are passed through to individual shareholders and can be deducted from SHs other sources of income; number of investors is restricted to 100 as opposed to C corporations or limited liability companies. 4. Corporate Governance  For a LLC, corporate governance – that is, the responsibility for overseeing strategy and ensuring its efficacy – rests legally with the company’s board of directors whose legal duties arise out of common law and statute, varying from country to country, and may be detailed in the bylaws of an organization.  Directors have a fiduciary duty, a legal duty of loyalty and care, to act honestly and in good faith, exercise skill and care and undertake their statutory duty; must act in the best interests of the company and all SHs.  A non-executive director is an

outside director who is not an employee and part of the executive management; often condition for equity funding; bring skills, independent perspective, network, knowledge  Future orientation – arguably the prime function of the board is to be outward looking and future orientated – to review and guide corporate strategy and policy.  Past and present orientation – the board then monitors performance against these strategies and policies and the ensuing risks it faces, as well as compliance with the law; most boards, particularly in large companies, spend too much time on monitoring management performance and legal compliance. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 7 5. Partnerships and joint ventures  Partnership, strategic alliances and joint ventures are ways of exploiting a business opportunity where you may not have all the skills or resources to pursue it yourself.  Partnering with others or

organizations in setting up a new ventures simplifies the operating tasks you face and mitigates your risks; since assets are owned or contributed by all the partners, the financial resources needed and the risks are spread and flexibility is increased.  Strategic alliances are a form of partnership whereby separate organizations come together to pursue an agreed set of objectives; can be an effective way of sustaining competitive advantage; particularly important in relation to innovation where partners have different competencies; explicit strategic/operational motives.  Joint ventures (more formal) usually have a degree of direct market involvement and therefore needs to be underpinned by some form of legal agreement that determines the split of resource inputs and rewards; often as separate legal entity  The potential disadvantages of partnerships and alliances include loss of intellectual proprietary information, increased management complexities, increased

financial and organizational risk, increased risk of becoming over-dependent on the partner and partial loss of decision making autonomy. 6. Franchising  Franchising is a form of legal partnership; owner of the name and method of doing business (franchisor) allows a local operator (franchisee) to set up a business under that name offering their products or services; effective way of rolling out a business model quickly by leveraging capabilities and capital of franchisees. 7 7. Legal forms of social enterprises  Six legal forms of social enterprise in the UK; primary restriction: all profits must be ploughed back into its activities; can make raising capital difficult. 4 Source: http://www.doksinet Daniel Schemmert Unincorporated associations Trusts Charitable social enterprises Community benefit societies (BenComs) Community interest companies (CIC) Charitable incorporated organizations (CIO) Maastricht University ESBM | Tutorial 7 These are informal associations

of individuals that can form (and re-form) quickly – similar to sole traders or informal partnerships; not regulated; can trade but cannot own assets or borrow money because an association has no legal status, unless setting up a trust for it; each individual in the association is personally liable for debts. Run according to the social objectives set out in the trust deed; trusts are unincorporated bodies; many organizations involved in health, social care and education; can hold assets, but cannot distribute any profits; trustees are personally liable for debts. These are set up wholly for charitable purposes that benefit the public; must be registered and are regulated; charity is run by directors or trustee who shape the strategic direction (can’t be paid); tax and rate relief; surplus must be reinvested. These are incorporated ‘industrial and provident societies’ (cooperatives) – legal entities set up with social objectives, which conduct business for the benefit of

their community; profits cannot be distributed and must be reinvested; can raise funds by issuing shares to the public; must submit annual accounts; difference to cooperative in that cooperatives operate for the mutual benefit of their members – which is not necessarily the community and therefore it cannot be registered as charity. Essentially LLCs, but with extra requirements; must demonstrate their social and environmental impact each year by issuing an annual community interest company report alongside the annual accounts; companies limited by guarantee may not distribute profits, whereas those limited by shares can do so; must have asset lock (assets cannot be transferred for less than half of their market value); dual form: CIC runs in businesslike way, and charitable social enterprise gets profits (so less reliance on grants). Newer form of incorporated organization that is set up for charitable purposes and therefore report to the Charity Commission; must benefit local

communities and have an asset lock; not able to distribute profits; unlike CICs which have directors, CIOs have charity trustees; CICs and charitable enterprise can convert into CIO. 8. Taxation Income tax for sole traders and partnerships Local taxes Form of sales tax that is common throughout the European Union; if turnover is above a certain level you must register for VAT; will be added to goods sold but can be deducted when paying for goods; some goods may be exempted. Limited liability companies pay corporation tax on their profits; imposed on the country or state level; rules about how profit is calculated for tax purposes; SHs receiving dividends are charged income tax. Sole traders and partnerships pay income tax on their business profits; higher than corporate tax rates as there are different rates depending on level of income. In many countries this takes the same form as corporate or income tax. Income tax due from employees In many countries businesses are responsible

for collecting income tax from employees and remitting it to the government. Charities Registered charities are normally exempt from tax on their income and exempt from VAT, but they have to deduct income tax from employees. Value Added Tax (VAT) Corporation Tax 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 7 Chapter 10 – Operations and Risk 1. Managing the business  Managing a business is concerned with handling complexity in processes and the execution of work; as a manager you need to understand how the business delivers a product or service.  Critical success factors are distilled from key operating imperatives – key things that you need to do, although not all are critical; not about urgent tasks, efficiency, but which imperatives are critical is a question of judgement about how things affect the success of the venture. 2. Business model imperatives  Your business model and the operating imperatives associated

with the three core value propositions are likely to form some of your critical success factors; critical success factors can change over time. 3. Key operating activities  Every business has its own key activities upon which its competitive advantage probably hinges; key operating imperatives come from the business model (incl. marketing, operations and risks); need to be completed prior to the business launch (e.g obtaining licenses) or will be part of the day-to-day activities  Key activities cascade down an organization and what might be important or critical for a department within a larger business might not be of the same importance for the business overall.  Key operating activities can be to some extend generalized for specific industries – retail, internet, manufacturing, and service; however, they are specific to each business. 4. Retail imperatives  For retailers, the ‘place’ element of the marketing mix is very specific and very important; may be

able to ‘pull’ customers when they seek you out at secondary locations; secondary locations have much lower rent and rates than primary locations; small retailers might group together in secondary areas and establish ‘pull’.  Storefront and ambience must reflect value proposition; special opening price discounts may be offered; launch event to get attention; guest lists (e.g for restaurants) to create exclusivity; safeguards against theft 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 7 5. Internet business imperatives  The pure internet firm doesn’t require major fixed costs of a retail business like the high-street site or the shop-floor staff; brick-and-mortar stores offer online retailing offering customers the best of both worlds.  Internet-based retail is most successful for branded products where the features are already understood, or for ‘low-touch’ products or services such as music downloads, books, or

airline tickets.  All internet businesses need to ensure that potential customers searching the web for sites such as theirs get links to their site as quickly as possible; the more relevant content with keywords or phrases, the more likely your site is to be featured on a search.  Search engine optimization (SEO) ensures that you catch any potential customers searching for your type of product on search engines as quickly as possible; can be expensive if a third party is employed for it. 6. Manufacturing business imperatives  There are five types of operations processes involved in manufacturing or production: Project Jobbing Batch Line Continuous Production of one-off, large scale products to meet the specific requirements of a client; normally manufactured on-site; operational issues: effective resource delivery to and allocation around the site and the coordination of interrelated activities; challenge: on time and within budget delivery; bc it is one-off,

specialist knowledge and accurate costing are vital; e.g buildings One of-off production to meet the specific requirements of a client, but the process can be undertaken in a factory and then shipped to the client making the organization easier, e.g machine tools; challenge: on time and on budget; specialist knowledge and accurate costing is vital. When there’s sufficient volume of production to justify organizing production in the most efficient way; task repetition; volumes rarely justify time invested in task analysis; e.g components to be assembled into a more complicated product; often suitable for small businesses bc batches are not sufficiently large to warrant pursuing efficiencies/economies of scale; can involve high volumes and wide range of products competing for the same processes so control can be complex. This is where there is a further increase in volume, with a regularity of order that justifies the investment in task analysis and dedicated resources; e.g limited

range of clothing; assembling subcomponents to form the final products as an important part of the process; need for efficiency. This is where volume have increased to such an extent that an inflexible, dedicated process is in place to run all day, every day, with a minimum of shut downs; manufacturing and assembly can be complicated and often requires expensive machinery; outsourcing may be an option. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 7 7. Service business imperatives  The most important imperative for a service business is the ability to deliver that service, and that depends upon the knowledge, skills and abilities of those delivering the service.  Service delivery has similarities with manufacturing; table 10.6 is applicable to key operating activities in the manufacturing as well as the service sector, e.g:     Larger consultancy assignments take the form of projects and require the same degree of

coordination/control. Tailor-made training programs are similar to jobbing. Computer bureau that processes different clients’ work is similar to batch manufacturing Fast-food restaurants are similar to line manufacturing. 8. Identifying risk  Risk goes hand in hand with return; while risk cannot be avoided, it can be identified and even quantified so that it can be managed down to acceptable levels; involves putting in place controls or monitoring early warning of potential problems materializing; see p. 255 for risk checklist; risks might come from:    External incidents (flood, fire, pandemic illness etc.) are difficult to predict and the probability of occurrence might be low; however, possible impact might be great so you need a contingency plan; might be generic to an industry, e.g reaction of competitors Internal incidents (loss of source of supply, malfunction of a major machine etc.) can be many and varied, depending on the operations of your business; need

to control key operating activities. Effective risk management is a five stage process: 1. 2. 3. 4. 5. Identifying the risks (internal or external). Evaluating the probability of the risk materializing. Evaluating the impact of that risk materializing. Deciding how the risk might be mitigated (reduced or avoided). Deciding what early warning signs might be monitored to identify that the risk is materializing. 9. Assessing risk  Risk management is about prioritization; ideally the risks with the highest probability of occurrence and the greatest loss to the organization are handled first and those with the lowest probability of occurrence and the smallest loss are dealt with last.  In reality, it is often difficult to quantify the probability of a risk materializing or the monetary impact beyond a simple low (1), medium (2) or high (3). 3 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 7 The composite risk factor is defined as the

probability of occurrence multiplied by the impact of the risk event; the highest is therefore 9 (3x3); this 1 to 9 scale can be reclassified as low (1-3), medium (4-6) and high (7-9) which is called a risk index. 10. Mitigating risk  You have four options after you have indexed your risk: 1. 2. 3. 4. Attempt to eliminate the risk, e.g withdraw from the area of activity that generates the risk Attempt to reduce the risk, e.g increase internal controls, training or supervision; select alternative strategies that are less risky. Transfer the risk, e.g insurance, foreign exchange or interest rate hedging by buying forward, partnering (e.g subcontracting, outsourcing) reduces risk but also the return Accept the risk; one can plan to manage the risk by putting early-warning indicators in place. 11. Monitoring risk  For the highest risk index numbers, you need to identify parameters or events that indicate an increased likelihood of the risk materializing – called key risk

indicators – which need to be monitored on a regular basis so you can then take remedial action; networking can also help in gathering knowledge about risks.  To be effective, key risk indicators must be easy to monitor as part of your regular activity, highlight when corrective action is needed and providing guidance on what action is needed, e.g cash flow (for bankruptcy) 12. Generic risk management strategies 12.1 Partnering and other forms of networking  Partnerships, strategic alliances, joint ventures and franchising can provide knowledge and information about the risks you might face, how they might be mitigated and what you might select as your key risk indicators; these are ways of actively mitigating and sharing risk. 12.2 Strategic options  Contingency planning: creating as many options for future courses of action as possible; maintaining as much flexibility as possible for as long as possible; will come out of review and risks. 4 Source:

http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 7 12.3 Affordable loss and lean start-up  Affordable loss refers to entrepreneurs going to market as quickly/cheaply as possible and assess market demand from it; evaluate opportunities based on acceptable loss rather than attractiveness of the predictable upside, therefore no need to worry about accuracy of predictions; can be calculated with certainty.  It is a two-step process that shapes the risk/return profile of the start-up: (1) set the acceptable level of risk (affordable loss) and (2) push to maximize the return this will make.  Linked to the concept of lean start-ups: gain maximum information about viability by small-scale market entry; as you gain more information, you might set higher levels of affordable loss.  Commercialization risk refers to the risk associated with developing a new product and insuring customer acceptance; minimized through the knowledge and information you

gain by partnering and networking. 12.4 Borrowing and bootstrapping  To minimize your risk, you will have to minimize your borrowings; may affect financial returns; the lower your external funding requirement, the easier it is to start up; funding is partly determined by assets you need and your affordable loss.  No need to own a resource to be able to use and control it; may be able to borrow the resource or partner with others who provide it; gives more flexibility due to quick (de-)commitment; called bootstrapping. 12.5 High margins and low fixed costs  Keep your contribution margins as high as possible through strong differential advantage; allows to tailor prices for different market segments, thereby maximizing sales.  Keep your fixed costs as low as possible; high fixed operating or overhead costs are called high operating gearing; high financial costs are called high financial gearing (or leverage); if turnover goes down, interest payments for leveraged

investments in fixed assets could be dangerous.  Firms with high margins are associated with high fixed costs; tension between a high contribution margin and low fixed costs; thus, the relative level of both need to be considered, measured by the breakeven point   High differential advantage may come from high investment in technology. Firms competing on price keep their costs low through economies of scale which are associated with investment in fixed assets such as plant and machinery. 12.6 Compartmentalizing risk  Compartmentalizing risk by setting each operation up as a separate legal entity; should one fail, it will not endanger another; possibility to sell off each business separately. 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 7 13. Risk management, strategic options and critical success factors  Action plans (what actions, who is responsible, timelines) and strategic options (actions if critical success

factors do not go according to plan) need to be made; preparing scenarios of ‘worst-possible’ cases in advance of the happening allows you to prepare contingency plans rather than trying to react after the event.  The risk management framework can be turned on its head and used to look at business opportunities and strategic options, seeking to identify those with the highest impact (profit), highest probability (of success) and highest controllability (quadrant D, again); process is continuous, called strategizing.  The key risks you face need to be highlighted in the business plan; how you deal with them will lead to the development of your critical success factors underpinned by detailed action plans and strategic options. 14. Operating plans and critical paths  Need for a ‘high-level’ version of the operating plan to go into a business plan with major linkages and critical paths; below should be more detailed action plans; activities can then be ordered, with

critical and high-risk ones scheduled as early as possible; Gantt charts are an excellent way of showing this linkages.  The operations plan should produce a series of milestones – operating objectives that are measurable and time deadlines for meeting them; behind these will go a lot of detailed planning that do not show themselves in the business plan.  If there is no slack in the schedules (e.g Gantt chart on p 264), added sophistication would be to build in fastest and slowest completion times and then check the effect on the critical path time.  Might produce a number of operating and action plans for different levels of your business; you can assign responsibilities and costs for each task; should be split in pre-launch and operational activities. 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 Chapter 12 – Growth: Building the foundations 1. The challenges of growth  Greiner stage model offers a framework the

development of a business and the managerial challenges facing the founder as they recruit more staff; each phase of growth is followed by a crisis that necessitates a change in the way the founder manages; if the crisis cannot be overcome, then the business risks failure.  The length of time it takes to go through each phase depends on the industry; e.g in fast-growing industries, growth periods are relatively short.  The model predicts four crises: 1. Leadership: 2. Autonomy: 3. Control: 4. Bureaucracy: Growth initially comes through creative opportunity-seeking; leads to a crisis of leadership as staff, financiers and customers fail to understand the focus of the business; challenge is to give direction by effective leadership. Strong internal locus of control implies that they might try to do everything themselves; challenge: develop management team and delegate to them. There is a danger that delegation becomes an abdication of responsibility and there is a loss

of proper control; need to balance autonomy and control; challenge: coordinate decision-making through appropriate organizational structures and culture The organization might lose its entrepreneurial drive; need to facilitate collaboration through a sense of mission rather than a reference to a rule book.  Churchill & Lewis emphasizes the link between management style, organizational structure, formality and the strategic imperatives as the business grows; shift from operational to strategic ability and increasing importance of personnel and systems and the right management team.  Not all firms go through all stages; all go through 1 and 2 (prove the success of the business model of gazelles) but most do not go beyond 3 (success: disengagement): 1 Source: http://www.doksinet Daniel Schemmert       Maastricht University ESBM | Tutorial 8 Stage 1 – Existence: Simple organization, direct supervision; owner involved in operations. Stage 2 –

Survival: The business must demonstrate that it has enough customers to be viable. Stage 3.1 – Success: disengagement: Strategic imperative is to maintain a profitable status quo; typical lifestyle or salary substitute business. Stage 3.2 – Success: Growth: becomes a platform for further growth and stage 4; stage 3 is crucial; must consolidate and start assembling financial and human resources that are needed for growth. Stage 4 – Take-off Stage 5 – Maturity 2. Building the organizational structure 2.1 Spider’s web structure  The most typical organization structure seen in small scale start-ups is the spider’s web; the founder sits at the centre with each new member of staff reporting to them; the founder manages through strong informal relationships rather than hierarchies; shows how to do things instead of having prescribed tasks.  This structure can respond quickly and flexibly to change; beneficial as in small firms everybody has to be prepared to do other

people’s jobs because there is no slack in the system; overheads are reduced.  Number of interactions: (n*((n-1)/2)); Parkinson’s Coeffecient of Inefficiency proposes that the optimum inefficient number for a group is 21; after, it becomes increasingly inefficient to manage all linkages bc:   Communication becomes more complicated (greater misunderstanding and conflict). High internal locus of control means that the owners want to control everything themselves; will have informal reporting lines to new staff, circuiting the manager they are supposed to report to; creates resentment and frustration. 2.2 Hierarchical structure  The larger an organization, the greater the need for hierarchical structure; creates order and allows coordination of complex tasks; allows coordination, cooperation and specialization; simple hierarchy offers fewer interactions/relationships to manage (says nothing about quality; can discourage knowledge sharing).  Structures show

individuals that there is a career path; there is no one ‘best’ structure; tendency to adopt a divisional structure; issue with any hierarchy is the span of control within them (narrow: few people reporting; flat: wider span of control; the taller and narrower, the more managers are required. 2.3 Matrix structure  A business that has multiple products, functions or geographic locations still needs to coordinate activities across all these dimensions; matrix structure aids this by having multiple reporting lines; complex and slow responsiveness. 2.4 Team-working structure  This kind of structure is used extensively in business that seek to encourage creativity and innovation, particularly in technology-based firms; brings together different functional disciplines, foster communication and interaction; can be highly flexible; allow informal coordination within formal structures.  Less hierarchical forms such as teams rely on coordination by mutual adjustment rather

than control through hierarchy; more flexible and quicker; individuals within often have multiple roles; need to ensure that structures, systems and organizational culture are consistent and reinforcing each other. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 3. Controlling people  The more staff you employ, the greater the need for formalizing the control you have over them; the degree of control you exert on the people in your business should reflect your own philosophy and the business is based, e.g low-price business model: highly efficient (no slack, defined tasks), controls need to be tight  The simpler and more repetitive the task, the easier it is to impose control and the less need for initiative; the more stable an environment, the less need for initiative; vice versa.     Quadrant 1: Need well developed information systems; more concerned with production; appropriate for continuous and line production

typologies. Quadrant 2: Culture is important because the workforce needs to be motivated to make frequent changes to the workplace; appropriate for jobbing and batch production. Quadrant 3: In a changing environment, the matrix team needs more autonomy as protocols may be inappropriate to the changing circumstances; jobbing and batch production. Quadrant 4: Organic structure: highly flexible, limited hierarchy; great emphasis on relationships; project production. 4. Autonomy and motivation  Autonomy is a major motivational influence on individuals undertaking cognitive (compared to mechanical) tasks involving complexity or creativity; important for being innovative and proactive rather than compliant.  The dilemma is the amount of autonomy to give; too much, and anarchy or worse might result, too little, and creativity, initiative and entrepreneurship will be stifled; Julain Birkinshaw model to helps to guide and control entrepreneurial action: Direction Space or slack

Boundaries Support This is the company’s broad strategy and goals; managers should have scope to develop the strategy for their own operating unit, in line with the company’s general direction, values and mission; set broad direction and re-evaluate as the environment changes. Space or slack has to do with the degree of looseness in resource availability (monetary budgets, physical space and supervision of time); tightly run, highly efficient firm: no time or resources to innovate; creative organizations require a degree of slack; too much space: losing focus; goals should be clear but individuals should have the freedom in how the goals are to be achieved. These are the legal, regulatory and moral limits within which the company operates; rigid rules that are not shared beg to be circumvented; manage through training, induction, code of conduct, etc. Refers to knowledge transfer systems and training and development programmes you provide to help managers do their job; systems

should encourage knowledge sharing and collaboration; training and career-planning should be top-down; balance spoon-feeding and little collaboration of managers. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 5. The challenges facing social enterprise  When it comes to reviewing operations and strategies it has to review both sets of activities – commercial and social – and how it binds these together operationally; the virtuous circle of social enterprise shows how more resources can be gained through the strategic use of the existing ones. when project starts delivering objectives 6. Crises and strategy formulation  Once their business is established, entrepreneurs seem to approach strategy development differently and economists find it difficult to understand and to model their approach; more of “muddling through”.  Often, strategies evolve on a step-by-step basis; if one step works, then the second is taken;

keep as many options open as possible; emergent strategy development: a strategy-making process which is characterized by reactive solutions to existing problems with incremental decisions; inherent with effectual reasoning.  In reality, strategy development in SMEs is both deliberate (systematic) and emergent: changing from emergent to deliberate as the firm goes through recurrent crises followed by periods of consolidation; these crises force the entrepreneur to change the preconceptions ahead of learning new ones. 7. Coping with crises Phase 1 2 3 The entrepreneur risks being immobilized with shock; they will be anxious and uncertain about their changing role and the contribution they might take; effectiveness drops; applying old skills to the crisis might improve effectiveness in the short term but denial doesn’t deal with changed circumstances. They experience stress as they realize that they have to develop new skills and change their behavior to keep up with their

changing role; first reaction is likely to be anger and the tendency to blame someone or something; depression may tempt to give up, therefore it is the most dangerous point. Eventually the entrepreneur should start to change and acquire and implement these new skills; testing period can be as frustrating as it can be rewarding; mistakes may cause further depression. 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 8. Strategic frameworks  While entrepreneurs may not always want to write a formal business plan they will need to strategize – to think about the future, analyse their options and develop strategies – and strategic frameworks; they give your thoughts structure and focus and help you to make the right decision consistently. 9. Reviewing strategy  Strategies do not last forever, and launch strategies, particularly those for disruptive innovations, need to be reviewed shortly after start-up customer and competitor

reaction can be gauged; changing your strategy is called pivoting in the USA.  The strategic frameworks identified can easily be adapted to apply to a new or changed environment or new product/service launch; it is about competitive/business strategy (how the organization competes) and the distinction to corporate strategy that determines the scope and structure of the organization.  While competitive strategy is made at the divisional level, corporate strategy is made at the head office; for SMEs this distinction is irrelevant.  One of the areas that is likely to need reviews as a business grows is its involvement in corporate social responsibility; activities may grow to such an extent that they need to be separated from the business so as to form a separate social enterprise; allows objectives to be separated and may help resolve conflicts. 9. Strategic analysis  SWOT analysis seeks to identify an overlap between the business environment and a firm’s resources;

basis for undertaking customer analysis and deciding on market segmentation.  Three capabilities that form the basis for sustainable competitive advantage by Kay: (1) Reputation, (2) the way the organization innovates and (3) the organization’s strategic assets.  Three different tests for core competencies by Prahald and Hamel: 5 Source: http://www.doksinet Daniel Schemmert 1. 2. 3. Maastricht University ESBM | Tutorial 8 Provide potential access to a variety of markets rather than creating competitive advantages only in one. Make a significant contribution to the perceived customer benefits of the end-product; they add value. They are difficult for competitors to copy. Products are easier to copy than processes  One of the outcomes of this analysis is that it may get you to question your original value proposition and its match to target markets because you see your core competencies as of more value to different markets.  The whole process of strategy

analysis is an art rather than a science; there is no prescriptive approach. 10. Financial performance analysis  Ratio analysis can be applied to either historic financial statements or financial forecasts, depending whether you want to look backwards or forwards.  The founder’s salary is deducted in arriving at operating income; the rations can be distorted if your salaries are unrealistically high or low; both expresses as %.  A company seeks to maximize its operating profit and minimize its total assets, minus current liabilities. 10.1 Profit management  The first ratio measurer overall profitability and reflects the price you are able to charge, compared to the costs you face; should be as high as possible; both ratios are expressed as %.  The second ratio explains how direct costs of the product sold (COGS) are controlled; as high as possible. 10.2 Asset management (measure efficiency of the assets used; as high as possible; expressed as number) 12.3

Liquidity  Particularly of interest to those offering credit as they measure the firm’s ability to repay debt; expressed as numbers.  Current ratio: expected to be greater than 1; quick ratio: expected to be near to 1, perhaps as low as 0.8 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 12.4 Break-even  Both measures are measuring the riskiness of a business; while the break-even point (expressed in $ turnover) should be as low as possible, the margin of safety (expressed as %) should be as high as possible. 12.5 Financial gearing/leverage  High gearing or leverage (expressed as %) is risky; bankers like this to be under 100%, indicating that SHs have invested more than banks; above 400% is considered very high risk – the business is likely to fail.  The higher the interest cover (expressed as number), the better.  Margins need to be as high as possible and assets should be as low as possible; exception:

maximizing the financial return to SHs may be not the main objective of social enterprises; difficult to benchmark efficiency with these measures; thus, social SMEs are often divided into a commercial and cheritable organization. 13. Formulating strategy  Decide upon a strategy by using the firm’s strategic or core competencies, capabilities and resources to (1) match it to market opportunities, (2) to repair any organizational weakness that have appeared or (3) to combat any threats. 14. Using your business model to strategize  Osterwalder and Pigneur encourage you to challenge conventional business models using six techniques; allow you to ‘tinker’ with your business model, explore alternative scenarios and develop strategic options.      Generating new ideas – encouraging you not always to accept the dominant logic of how things in a particularly industry; Prototype development – encouraging you to explore alternative business models that might

add value for customers Storytelling – encouraging you to be able to articulate the concept behind the product/service and how it creates value for customers. Customer insights – encouraging you to develop a deep understanding of customer needs, even if they are not always derived directly from the customer themselves. Scenario development – building on customer insight and development in the competitive environment to make future possibilities more tangible. 7 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 15. Strategies that work  Research does give a clue about which competitive strategies are most likely to deliver sustainable competitive advantage and growth:     Differentiation is having a greater potential than low cost for producing sustainable competitive advantage; often in market niche. Speed of market dominance: When the product proves too unattractive, active waiting, i.e delaying until the market needs

are clearer may be appropriate; early market entry and dominance is still a key to success. Continuous innovation Flawless execution: It doesn’t matter which managerial techniques you apply but more that you execute it flawlessly; attention to detail. Differentiation and focus: 8 Source: http://www.doksinet Daniel Schemmert 1. Growth options Maastricht University ESBM | Tutorial 8 Chapter 13 – Strategies for Growth  Initially start-ups grow by increasing sales of their product or service in the target market(s) they have identified, called market penetration; important to investors since they want to maximize their ROI.  Once the original market has been successfully penetrated there are three growth options: 1. 2. 3. Market development – selling the existing product or service into new markets. Product or service development – developing the original business idea into new products or services that can be sold into existing markets. Diversification –

selling new products or services into new markets; often pursued through M&A. 2. Market development  Four reasons to selecting market development for expansion: 1. 2. 3. 4.  To achieve economies of scale; particularly important for cost leadership as core value proposition. Your key competency lies with your product, e.g introducing IP into a new market The product is nearing the end of its life cycle in the existing market. To reduce the risk of overdependency on one market. The low-risk option is to seek out segments in the countries that are similar to the ones you already sold to. 3. Internationalization  Market expansion involves for most businesses internationalization; Kuhlmeier and Knight associate four dimensions with internationalization: (1) relationship quality, (2) cooperation, (3) trust, and (4) commitment.  The Product Life Cycle Theory proposes that firms introduce new products into their home market, followed by exporting as overseas demand

grows and the product ages in its home market.  Finally, manufacturers start producing overseas as the product nears the end of its life cycle and cost reduction becomes important; eventually these foreign producers may start to export themselves as prices become the driving competitive force.  Many service businesses are pulled into overseas markets because their clients operate there. 1 Source: http://www.doksinet Daniel Schemmert   Maastricht University ESBM | Tutorial 8 The Uppsala Internationalization Model places learning and knowledge acquisition at the centre of the process by proposing that firm increase their knowledge about foreign markets before expanding abroad; they target physically close markets, initially through e.g exporting (bc of limited commitment)  As they gain knowledge and experience from their market involvement over time, so they increase their commitment (graduated entry); process is repeated from market to market.  Mirrors

‘learn by doing’ and incremental approach taken by entrepreneurs; resource-based view: as the firm develops its resource base over time, so too will it develop its export capability.  Critics: firms may skip or compress stages to the point where the model becomes meaningless; graduated entry fails to recognize first-mover advantage and the competitive reaction to the failure to exploit it. Leonidou and Katsikeas characterized internationalization through three stages: (1) pre-engagement – firm is active in domestic market but not in an export market, (2) initial – sporadic or exploratory export activity, and (3) advanced – actively and consistent involved in exporting and internationalization of its activities. 3. Selling into foreign markets  These stage models highlight the process that a SME might go through in developing its overseas markets, each stage requiring a greater degree of resource commitment and risk: Exporting Sales agent License and franchise

Strategic alliance, partnership and joint venture Direct investment  If your competitive advantage is based on resources located in your home country; low cost, low risk way of finding out about a market; risk: difficult to recover bad debts from overseas customers; currency fluctuations. To gain market presence; should have valuable knowledge and might suggest changes to the product or other elements of the marketing mix to better suit local needs; alternative: set up a sales outlet of your own in the country; same risks as exporting; agent also bears risk, e.g exclusive contracts come with constraints; time-limited contract; dependency Allows the licensee to capitalize on their knowledge but requires them also to take on many of the business risks; local market knowledge is vital; might need Head Franchisee. Partner brings different resources to the joint venture and shares the profit and risks; requires high commitment and can be legally complicated. Involves the setting up of a

wholly-owned subsidiary which may involve simply marketing and distribution or be fully integrated into the operations of your company. There is no prescriptive ‘best’ approach to internationalization; often the degree of involvement in the foreign market increases with the success of the product or service; need to undertake a thorough market and country analysis before deciding to get involved in a foreign market with any degree of investment. 4. Product life cycle  The generalization of the product life cycle must be treated with caution because all products are different, as are different market segment and the customers that compose them. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University  Innovators are people who think for themselves and try things (<5% of target market).  Early adopters are people with status in their market segment and opinion leaders (10-15% of target market).  Middle majority are more conservative, have

slightly higher status and are more deliberate purchasers; adopt after product is acceptable (30-40% of target market).  Late majority are typically below average status, are skeptical and adopt the product much later (30-40% of target market).  Laggards tend to view life through the rearview mirror and will continue buying products because of habit (10-20% of target market).  The problem with the problem life cycle concept is trying to establish where a product might actually be; firms don’t plot products but rather their ability to manage.  Products can be at their mature phase of their life in one market but at the introductory phase in another; cultural factors partly explain the differences in stages in some markets.  The take-off phase is generally becoming shorter; ‘waterfall strategy’: putting a product first in countries that have the shortest take-off time. ESBM | Tutorial 8 5. Product development  It is the late growth and mature phases

of the life cycle that product/service innovation generally takes place; can take four forms, reflecting increasing degrees of innovation: Product modification Product expansion Product extension Completely new products      Changes are small and evolutionary Modified in terms of quality, function or style Service levels might be improved Usually necessary when competition increases Product variations that meet the needs of different market segments  Brand is extended to similar but different products or services that might be purchased by the same customers Completely new products because you spot new market opportunities Replace or sell along side your existing product range Most useful when having a loyal customer base and close relationships with them    3 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 8 In contrast to market development, product development might be more cost-effective to increase the

volume of business with existing customers than it is to go out looking for new ones; risks can be mitigated by prototyping on computers in earlier stages (still need to be physical later on). 6. Developing a product portfolio  The added complexity of having a portfolio of product/market offerings, each at a different stage of its life, can be handled using a technique adapted from the Growth Share Matrix.  Management imperatives change: entrepreneurial skills are needed in the Problem Child phase; in the mature phase it needs to be managed as a Cash Cow (high levels of efficiency needed, probably achieved through a high degree of control and direction, e.g accountant); marketing for the Star is appropriate  The downside of the matrix is that measurement of the product situation is not easy. 7. Marketing strategy and product portfolios  The Growth Share Matrix allows us to make some broad generalizations about marketing strategy for product/service offerings in the

different quadrant; if you can place the product/market offering within its life cycle on the matrix, these would be the elements of marketing strategy you would, a priori expect to see.  The Growth Share Matrix also allows us to present complex information more understandably, particularly when linked to forecasting future market positions and strategies involved in getting there. 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 8. Cash flow and product portfolios  Implications of the different types of products:      Problem Child: consumes cash for development and promotional costs at a rate of knots, without generating much cash by way of revenues. Star: might start to generate revenues but will still be facing high costs, particularly in marketing to establish its market position against new entry competitors. Cash cow: revenues are likely to outstrip costs and cash flow is likely to be positive. Dog 1 and 2:

1. Covers cost, may be worth keeping (eg brings cust for other products, shares overheads) 2. Losing money and should be scrapped Ideally, the portfolio should be balanced so that the surplus cash from Cash Cows can be used to invest in the Problem Children; the problem arising with an unbalanced portfolio is either a surplus of cash (no new products) or a deficit (too many new products). 9. Profit and product portfolios  ABC analysis measures success in terms of the total contribution a product makes towards your fixed costs in relation to its sales value within the context of your overall product portfolio.  The diagonal line from bottom left to top right should represent your average contribution margin and therefore the margin achieved by your various product/market offerings should fall either side. 5 Source: http://www.doksinet Daniel Schemmert  ESBM | Tutorial 8 The analysis can be combined with the Growth Share Matrix to give an insight into how your

portfolio might affect profitability: A1 products A2 products B1 products B2 products C1 products C2 products  Maastricht University Combining high sales and high contribution, are really successful and are vitally important to the business; should be your Stars, but may be moving towards becoming Cash Cows. Are probably your cash Cows; important because of the value of sales they generate, despite their lower contribution. Should also be your Stars, with high sales generating both profit and cash, and should have further growth potential; might become cash cows if sales do not increase. Are probably stars that have waned, with sales and contribution lower than other products; if they are not Cash Cows, then they are Dogs. Are probably Problem Children that could become Stars in the future unless the increase in expected sales does not materialize. Are either Problem Children or Dogs and, unless there are sound commercial reasons for keeping them, are candidates for axing. This

analysis highlights attractive products, but it can also be used to identify attractive or vulnerable customers or markets. 9. Diversification  Diversification: moving away from core areas of activity into completely new and unrelated product/market areas; high risk; firms that are focused on their core business perform better than diversified ones; diversification is associated with improved performance up to a point, after which continued diversification is associated with declining performance.  Conglomerates are diversified companies with interests in a range of different industries.  Diversification does not reduce systematic risk which is that part of the risk associated with how the share price performs compared to the overall market (measured by the company’s beta coefficient); SHs could easily diversify and spread the risk by buying shares of undiversified companies. 10. Why growing firms diversify 10.1 Market dominance  One reason is to gain market

dominance in newly emerging markets or industries; a way of defining the scope of any newly emerging industry; risk reduction through incremental moves, generally into related areas; three types of related diversification: 1. Horizontal integration: moving into complementary or competitive areas 2. Backwards vertical integration: moving into the supply chain, eg becoming the manufacturer 3. Forwards vertical integration: moving into the distribution chain  There is an era in the centre of the product/matrix (see p. 350) where many growing entrepreneurial businesses may have a competitive advantage – facing lower risks than larger, more bureaucratic competitors because they are able to handle continuous market-related changes.  The twilight zone of risk is often the way new industries or markets are created – by bundling new combinations of products with markets. 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 8 10.2 Risk

reduction in privately owned businesses  The second reason for diversification is to reduce risk in privately owned businesses; by having business interests in a range of different markets or industries you spread the risk of a business down-turn in any one.  Only works in companies that are owned by individuals or families where the main wealth of the individual or family is tied up in the business; otherwise the public can spread the risk if it is quoted on a stock market. 11. Using acquisition for market and product development  Acquiring rivals is a way of consolidating your market position at home and buying market share in foreign markets; costly, risky (high failure rate) and only an option for high-growth firms businesses that have proved their business model and where economies of scale and scope are vital.  Economies of scope is the term used when less of a resource is used because it is spread across multiple activities, also called synergy.  When

large companies ‘buy-in’ product development by acquiring smaller companies it is called ‘corporate venturing’.  An alternative to acquisition is strategic alliance and joint venture; sharing risks but also profits. 7 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 9 Chapter 14 – Financing the Business 1. Selecting the right sort of finance  The more fixed assets you need, the higher stock holding, and the longer debtors take to pay, the greater your need for finance.  Different sorts of money ought to be used for different purposes and not all types of money are available to all new ventures; many entrepreneurs try to avoid using money at all by borrowing money or using people’s assets (bootstrapping).  Bankers often ask for security of assets to act as collateral against any loan; if they cannot get this, they may ask for personal guarantees (may come from friends and family); two other ways of financing: 

  Lease: allows the firm to use the asset without owning it by making regular lease payments. Hire purchase: allows the firm to purchase the asset over a period of time, again, by making regular payments with the asset acting as security in the event of default. The main practical difference between the two methods is their tax treatment; interest rates on lease and hire purchase schemes may be higher than on loans; may be the only way for SMEs to get finance. 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 9  Most suppliers of goods and services offer trade credit terms, e.g payment in 30 days; important source of finance for most established firms and its free; may have to establish a payment history to be offered credit; factoring and invoice discounting is also only available once you established a trading history.  All providers of funds rely on legal contracts to them security over their loan or investment; developing

countries, where legal mechanisms tend to be less important than relationships, are therefore at a disadvantage when it comes to the provision of funds; rather make use of informal sources. 2. Sources of finance in the UK  The main sources of finance in the UK in descending order for start-ups under two years of age: 1. 2.  Internal finance (used by 85 %, of which:) a. Personal savings (91%) b. Loans or gifts from family or friends (13%) c. Home mortgages (4%) d. Personal credit cards (4%) External finance (used by 13%, of which:) a. Bank loans (94%) b. Grants or subsidies (7%) Increasing use of credit card finance, where balances might be paid off and recycled month-to-month; low use of equity finance, particularly from external sources. 3. Social investment  There are no legal reasons why most social enterprises should be unable to apply for commercial sources of finance; social enterprises also have access to a number of sources of finance available exclusively to

them, e.g in the UK, Big Society Capital is a wholesale investor for social investment investing in intermediaries  Ethical banks lend only to registered charities, social enterprises and community organizations; commercial organizations also invest in social enterprises, using funds invested by the general public for that specific purpose. 4. Loan finance: banks  Banks are the main source of loan finance to small firms; as long as the return you make on the total assets in the business exceeds the current rate of interest, you benefit by getting an extra return on the loan.  Banks can be reluctant to lend to small firm and new ventures in particular, because they view them as risky propositions.  Entrepreneurs seem naturally drawn to overdraft finance; major source of finance for small firms; flexible: once you agreed you can dip into it when you need it and you will only pay interest when you use it; can be expensive when you’re in permanent overdraft. 

Term loans are loans for a fixed period of time; usually not repayable on bank demand; capital repayments are fixed and known in advance; fixed or varying rate; lower interest rate than for overdrafts.  Collateral is the additional security demanded in case there is a default on a loan; in valuing business collateral the bank assumes that the assets will be sold on a second-hand basis markets and this typically leads to far lower values being put on assets than you might expect. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 9 5. Agency theory and information asymmetry and banking relationship  Agency theory is about the behaviour of different parties to an agreement who have different goals and different divisions of labour; asymmetric information favours the entrepreneur, who should have more or better information than the provider of finance; provider must incur extra costs in obtaining information.  Agency theory suggests

that the natural response of a bank to these problems is to charge higher rates of interest, to impose conditions in the loan agreement and/or ask for business or personal collateral; agency theory also explains why the bank will want to be kept up to date on the progress of the business.  Equity investors might also expect the entrepreneur to maintain a controlling interest in the business so that, in the event of failure, they have more to lose than the other investors; often not the case for larger providers since the fixed costs to getting involved in the business(es) is too high.  Even after the loan is granted banks will continue to monitor the financial performance of the business; a close relationship has the potential to provide them with the information they need about your firm and thus avoid the problem of information asymmetry. 6. Is there gender discrimination in lending?  Women owned business tend to attract less outside funding than men-owned businesses;

women-owned business not only are reluctant to apply for finance but start with significantly less financial capital than men-owned start-ups; rather borrow from their families and friends or use their own savings.  Access to social, human and financial capital seems to be poorer for women; more often part-timers; more likely to have family responsibilities; often work less hours; these factors may impact the lending decision.  Studies could not find evidence of actual discrimination of any form by financial institutions; studies indicate the reasons are many and varied, ranging from risk aversion to perceived obstacles and from lack of social capital, skills and a growth orientation to an aversion to potential loss of control. 7. Is there ethnic discrimination in lending?  Turning to ethnic minority businesses, researchers found striking differences between ethnic groups in terms of loan rejection rates; most differences could be explained by a lack of collateral and

poor credit histories and there was weak evidence of systematic discrimination on grounds of ethnicity or gender.  Specialist banks have grown up to cater for the needs of different ethnic groups; also strong preference for informal sources of finance (friends, ethnic community) by ethnic minorities (most prevalent in South Asian-owned businesses, less to white entrepreneurs). 8. Equity finance: business angels and venture capitalists  Equity funding is not available to sole traders or partnerships; equity investment involves giving up a percentage of the ownership of the business, and potentially some of the control, in exchange for cash; longterm, risk finance.  Both business angels (private individuals) and venture capital institutions might expect dividends, but more importantly they hope to see the value of their shares increase; business angel investment helps take the investee business to a point at which it is attractive for a venture capital firm. 3 Source:

http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 9  Business angles invest smaller amount of money than venture capital institutions (10k to 1 mio. British pounds) and operate in less formal ways; usually ‘high net worth individuals’ with a successful entrepreneurial background themselves).  Venture capitalist invest in larger amount than business angels (>2 mio. BP), mainly investing in established businesses, management buy-outs (management of a firm buying it), and management buy-ins (external managers buying a firm and usually replacing the management), although they can invest in larger start-ups.  Capital investment tend to be seen in countries with strong legal systems (reduced agency costs), placing developing countries at a disadvantage; venture capitalist investment decisions are based very much on the entrepreneur’s preparedness and financial criteria rather than the passion of their presentation.  Both business

angels and venture capitalists usually don’t want to take control and invest less than 50% of the share capital; venture capitalists often put together funding deals that involve ordinary shares, preference shares (to gain back investment in case of liquidation) and loan finance as they invest larger amounts. 9. Crowdfunding and peer-to-peer lending  Crowdfunding is a form of peer-to-peer (P2P) funding which connects companies looking for finance directly with potential private lenders and equity investors.  P2P lending offers advantages to both lenders and borrowers: lenders generally earn far more than they would if they put the money in a savings account; borrowers may not necessarily be approved for a bank loan might find it easier to borrow, albeit at a higher interest rate if their credit rating is low.  Some platforms also accept a slice of the equity rather than a flat fee.  Equity investment is inherently risker than loans, and crowdfunding investors

probably have less expertise than business angels in making this sort of investment; the issue of how and when their investment will be realized in the form of a capital gain is even more unclear; it’s mostly about many small investors.  The crowdfunding industry, sometimes called ‘fintech’ is in its infancy internationally but it is growing quickly, and it is currently unregulated, but industry bodies are now beginning to be set up.  There are also platforms that facilitate crowdfunding of loans managed by microcredit organizations in developing countries. 10. The funding ladder  For any start-up deciding assets are needed, when to acquire them and how this is to be financed are important strategic decisions; once you use external funds you start to limit your flexibility and lose control.  A good business idea will always eventually find backing, particularly if you have a good business plan to explain it. And a good plan will help give you credibility and

help you gain investees trust and respect 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 9 11. Is there a finance gap for small firms in the UK?  Both loan acceptance and application rates have fallen since 2008; small firms have been discouraged; UK loan rejection rates are high by international standards.  Financing gap is defined as an unwillingness on the part of financiers to supply finance on terms that owner-managers need.  Economist would criticize the use of the word ‘gap’ and prefer the to use the term ‘market failure’ or ‘credit rationing’ because there may be a ‘gap’ even in a perfect market, e.g because an owner-manager is unwilling to pay higher rates of interest or investors judge a project to be too risky.  ‘Gaps’ can easily arise, largely as a result of information asymmetry, the fixed costs of providing small amounts of capital (project assessment and monitoring), and the requirement

to provide collateral.  Numerous survey in the UK have been unable to establish objectively that a ‘gap’ exists in systematic ways. 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 9 Chapter 15 – From Business Model to Business Plan 1. Why you need a business plan  You need to develop a business model before you can draw up a business plan; some start-ups need a business plan because they need external finance to enable this; evidence for the positive effects of business plans is mixed, particularly for early stage businesses where markets and products are uncertain.  Having an (in)formal and detailed business plan is a matter of scale and stakeholders; as the business and need to communicate with more people (investors, suppliers, etc.) grows, the need for formal documentation increases; entrepreneurs become both causal as well as effectual thinkers as the business grows.  The process of thinking through how to go

about setting up the business and the development of a business model that can be used to strategize is far more important than any formal business plan.  Social enterprises often need to draw up a business plan before they launch; this is because of the large and varied number of stakeholders often involved in a social enterprise, e.g the government approving grants 2. Purpose of a business plan  The business plan is a formal written document; should set out what your venture seeks to achieve and how it will achieve it; no set rules that can be used to create a ‘perfect’ business plan.  The complexity and length of the plan will vary with the scale of the start-up and the purpose and audience for which the plan was written.  Internally, shorter business plans can be used to provide guidance but should not be too rigid; for external use, it will need to be through, better presented, and longer.  If you are developing a completely new product or service,

your business plan will need to explain what stage the development is at, and what further development is needed to take it to market; the earlier the stage, the more difficult it is to convince financiers. 3. Structure and content of a business 1 Source: http://www.doksinet Daniel Schemmert Maastricht University Cover - Table of Content - Business details (1-2 p.) Industry and market analysis (1-2 p.) - Industry size, growth, structure - Industry and market trends - Market segments and reasons for target market(s) selection - Buyer behaviour across segments - Competitor analysis - Market share - Key industry success factors Operations plan (2-3 p.) Description of product/service Mission and vision statement aims and objectives Name, address, legal form (Business history if existent) - Marketing strategy (3-4 p.) Price, promotion, distribution Launch strategy Sales tactics Brand development Competitive reaction Product and market development Growth potential - Resources

(1-2 p.) - Premises and facilities Machinery and equipment Staff Risk and strategic options (1 p.) - Identified risks Risk monitoring and mitigation Critical success factors Strategic options - How your business will be run - How your product/service will be produced - Key operating activities - Partnerships - Business controls - IP issues - Scalability Financing (1-2 p.) - Founders’ contribution - Loan and/or equity finance requirements - Gearing/leverage - Timescale and exit routes for equity investors Key milestones (1 p.) - Progress needed to launch and grow the business - Might include: prototype completion, formalization of partnerships etc. 2 ESBM | Tutorial 9 Executive Summary (1-2 pages) - nature of your product/service, - target customers, - value proposition - competitive advantage - estimation of financial return - deal offer (e.g 20% for 100k) Customer and value proposition (2-3 p.) - outline target market and value proposition - Set sales target Management team

and company structure (1-3 p.) - Key people, their function and background - Business organization or structure - Directors, advisors and other key partners - Skills gaps and plans for filling them Financial projection (1 p. summary, plus appendices) - Income projections - Cash flow projections - Balance sheet projections - Key ratios - The assumptions on which your financial projections are based, particularly the basis for your sales projections Appendices - Detailed financial projections - Financial assumptions - Background information on key people - Location information - Operations information - Details of market research - Details of IP protection - Website screen shots - (historic financial statements, brochures etc.) Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 9 3. A social enterprise plan  A social enterprise plan need to reflect the social goals and must also be commercially realistic; usually longer than a normal commercial

plan; might be easier to write two reports – one commercial, one social and then combine them.  There are some important additions or changes that are need for a social enterprise: Executive summary Achievement of social rather commercial objectives Industry and market analysis Demonstrate the gap in social provision Customer and value proposition Marketing strategy Operations plan Financing Financial projections Needs to cover those who benefit from the provision you are offering Target markets still needs to be communicated Needs to show how your social objectives will be met Funders will want to see the social and not only commercial use Need to demonstrate commercial viability 4. Using the business plan to obtain loan or equity finance  External funders will expect you to have contributed some capital yourself; banks and equity investors ultimately invest in individuals, not in businesses or plans.  Before letting anybody see your business plan you need to

consider whether they should be asked to sign a non-disclosure agreement, which binds the reader to confidentiality. 4.1 Banks  Banks are not in the risk business; they are looking to obtain a certain rate of interest over a specified period of time and see their capital repaid.  The plan needs to demonstrate how the interest on the loan can be paid, even in the worst possible set of circumstances, and how the capital can be repaid on the due date; e.g through cash flow forecasts, low break-even and gearing ratios.  Bank managers are employees, not independent professionals, and lend only within very strict, centrally dictated guidelines; however good the business plan, bankers are still likely to ask for a personal guarantee. 4.2 Equity investors  The plan tends to be longer than for banks; equity investors share the risk of failure; the plan needs to emphasize the strengths of the business, particularly compared to the competition.  You need to find out how

the investor operates (hands-on or not); equity investors want to realize their investment within 5-10 years; whereas a bank loan will probably take weeks to arrange, an equity investment will take month; investors will undertake own investigations, called due diligence.  The business plans should never be set in ‘concrete’; depends on changes in the organization and the environment. 3 Source: http://www.doksinet Daniel Schemmert 1. Exit routes Maastricht University ESBM | Tutorial 11 Chapter 16 – Maturity - The Exit  Most small firms are born to stagnate or die; the younger and smaller the business, the more likely it is to cease trading; half of the firms that disappear from the market are voluntary closures; if there are surplus assets after liquidation, the company is not considered insolvent.  Entrepreneurs might leave the firm bc see better opportunities, or their personal circumstances change; they can sell the assets of the business as a going

concern which is one that functions without the threat of liquidation for the foreseeable future.  Insolvency is term used when an individual or company cannot pay its debts; might lead to the personal bankruptcy of a sole trader or partnership as creditors pursue their debts by claiming the personal assets of the entrepreneur; total insolvencies is the total of personal bankruptcies plus corporate liquidations. 2. Reasons for business failure  The reasons for business failure are manifested as weaknesses but only become threats when they combine and interact.  Weaknesses come from many bad business decisions that stem from a lack of managerial capabilities, but they also originate from the entrepreneurial character; the crisis that triggers the decline into failure is often brought about by external factors such as an unexpected change in the economy or the marketplace.  The paradox is that the asset of the entrepreneurial character can become a liability in

certain circumstances. 3. External influences on failure The economy Luck Market or industry structure Other opportunities SMEs have less financial ‘fat’; economy as the major external influence on closure (30-50% of SME failures); changes in overall consumer demand, interest rates and inflation can have a disproportionate effect on small firms. Strike, fire, loss of major customers or personal issues; smaller firms with fewer resources cannot weather these events; gambler ruin: the entrepreneur as the roulette-wheel gambler betting resources on the outcome of each business decision they make (implies that the gambler with the lest resources is least likely to weather a period of bad luck). The effect of the environment depends on the time period, geographic area and market sector in which the firm operates; the second most significant influence (just ahead of customer difficulties) on SME failure is the structure of the market or industry in which they operate, called the

population ecology, e.g the degree of competition in the industry Personal circumstances and aspirations of individuals change; other opportunities offering an attractive income, either from employment or from another business opportunity, can also persuade the entrepreneur to close the business; difficult to predict at individual level. 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 4. Internal influences on failure Personal character Certain character traits of entrepreneurs can have very negative effects, e.g strong locus of control (‘control freak’: mistrust, inability to delegate), strong need for public achievement (overspending and risky investments) or excessive optimism.       Managerial capabilities Inability to delegate, reluctance to seek help, inability to adapt to changes or unawareness of the environment may lead to business failure; bad decision can also stem from poor information by inadequate

systems or an unwillingness or inability to understand the information; evidence that entrepreneurs learn from failure is weak as emotions can interfere with the learning process; frequently cited managerial deficiencies and/or business weaknesses that have not changed over the years despite the advent of the internet are:    Financial resources Exaggerated opinion of business competency based upon knowledge of some skill. Use of own personal tastes and opinions as the standard to follow. Decisions based upon intuition, emotion and non-objective factors. Past (not future) orientation, inflexibility and not being sufficiently innovative. Limited formal education and reading in literature associated with the business. Resistance to advice from qualified sources but accepting it from less qualified. Poor financial control, e.g poor cash-flow planning Poor marketing, e.g lack of understanding of customer needs Lack of planning, e.g poor strategies or business plans Failing

firms often have inadequate finance, e.g poor cashflow; further funding may be unavailable; usually a symptom of the problem rather a root cause (managerial capability); mostly bc of undercapitalization at start-up and subsequent overtrading/too rapid expansion. 5. Predicting failure  Forecasts of business distress or difficulty are widely used the monitoring of business solvency, assessment of loan security, and going concern evaluation of auditors.  Financial information in SMEs tends to be less reliable, with the profit figure more easy to manipulate, less complete, since they do not have to disclose the same amount of information as public companies, and less timely, since they do not face stock market pressure.  Step-wise multiple discriminant analysis is a statistical technique which uses a sample of failed and nonfailed firms to select financial ratios that best discriminate between the two groups and then combine them into a simple number, or ‘Z score’, which

indicates the likelihood of failure.  Critics of the step-wise multiple discriminant analysis argue that it looks at the symptoms rather than the root cause; timeliness: by the time these symptoms manifested, the company is most likely out of business; self-fulfilling prophecy: profit margins decline during recessions, banks don’t give loans (amplification).  Banks have an immediate insight into what is happening within the firm through the firm’s bank account; banks can monitor cash inflows and outflows as well as balances; can give them invaluable information about current performance long before it finds its ways into published financial information. 6. Personal insolvency  Insolvency is the term used when an individual or company cannot pay its debts; as a sole trader, partner, or director of a limited liability company who has personally guaranteed the debts, you have several options: 2 Source: http://www.doksinet Daniel Schemmert Informal ‘family’

arrangements Formal voluntary arrangements Partnerships voluntary arrangements Bankruptcy Maastricht University ESBM | Tutorial 11 Family or friends agree to provide funds on a short-term basis and creditors agree not to take action. All creditors agree to a proposal you and your advisors (incl. licensed insolvency practitioner) put forward; specifies amount of debt to be repaid and timescale; if accepted, the creditors are bound by the proposal. Similar to the individual arrangement above, but to remove the individual partners’ joint and several liability to meet the partnerships debt, the partners will either have to pay off the whole partnership debt or propose an individual voluntary arrangement. If you are unable to pay your debts you can be made personally bankrupt; you or your creditors can apply to the courts which will appoint an official receiver to take over your affairs and sell of your assets, to discharge your personal and business assets; gains control of your

finances; affects personal credit rating. 7. Company insolvency  For a limited liability company struggling to pay its debt and facing possible failure, there are a number of courses of action open which can differ from country to country: Refinancing Pre-packaged sale Company voluntary arrangement (CVA) Administration Creditors voluntary liquidation (CVL) Compulsory liquidation Bringing in new debt and/or equity finance to support the business; usually requires the company to be restructured and may involve a pre-packaged sale of the business. Allows the profitable part of the business to restart without being weighed down by the company’s existing debts; pre-packaged sale refers to the process of buying the assets of a business from the old failing company; new company takes over assets but not the debts; allows a new business to rise from the remains of the old, often referred to as ‘phoenix-like’ with the effect that the business and jobs are saved. Best suited to

companies which are fundamentally profitable, or which have the potential to be profitable, but which have serious cash-flow problems; all creditors must agree to either accept a longer payment term or a reduced amount or both. Appropriate for companies that urgently need protection from creditors; creditors approval not needed (unlike CVA); instant protection from creditors and pending legal action for a limited time in which the business is restructured and rescued. Directors and SHs decide to liquidate the company; process is regulated by the courts; insolvency practitioner sells off assets and pays off creditors with remaining funds; can be quick and shields directors from the pressure of a failing company. At the request of a creditor; most commonly a result of action taken by government agencies to recover taxes; assets or the company will be sold off. 8. Harvesting your investment  Only a small percentage of growth firms reach maturity with the founder in place; often,

serial entrepreneurs gain capital from a business they sell off early just to start another one.  For the entrepreneur to be able to harvest their investment, the business must be of value to somebody else; it must have good potential and a good financial track record that demonstrates success so far.  If the entrepreneur intents to leave the business, then they must be able to demonstrate that it can function effectively without them; departure can infuse cash and new resources but also disrupt routines, lines of command, increase employee insecurity or generally lead to declining performance.  The founders of entrepreneurial firms are more likely to develop an exit strategy than founders of lifestyle or income substitute firms as they are more likely to develop strategy generally; also depends on equity ownership, psychological commitment to the firm and other external influences.  The timing of any sale can make an enormous difference to the price paid for the

business. 3 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 9. Harvest options Trade sale Management buyout (MBO) Management buyin (MBI) Floating the company and selling shares Most attractive harvest option: find a trade buyer – another company in the industry that understands the business and wants to run it as going concern or simply consolidate its market share; likely to place a higher value on the business than other because they can see ways of ‘adding value’ through the purchase, e.g by synergy; larger firms often buy smaller high-growth firms which bring in innovation; other equity investors must agree. If there is a strong management team in the firm they might be interested in bidding for the firm if they can arrange funding; managers are likely to know as much about the firm as the founder and can negotiate a tough deal. An external management team, often with experience in the industry, might be persuaded to bid for the

firm, again as a going concern; difficult to know where to run to find managers interested in this sort of option. Owner-managers of sizeable companies can unlock personal liquidity and raise additional capital by selling shares by going public (Off exchange (OFEX), Alternative Investment Market (AIM) before listing on the Stock Exchange Main Market); best for the entrepreneur who want to take some money out of the firm but wishes to continue running it and seeing it grow as stock price would drop if (s)he simply lists to gain and retire. 10. Valuing the business  Valuing a start-up is even more difficult than valuing an established business because of the uncertainties involved and the lack of any track record on which to evaluate forecasts of future income.  The value of the business is primarily based on expectations about the future, and those are uncertain; investors take information asymmetry into account and therefore place a lower value on the business.  There

are two widely used ways of valuing a business; can also be valued by using a mix of both:   Market value of assets: Business that are asset-rich are often valued in this way; tangible assets are valued at their market rate (still not objective); always provides a minimum valuation. Multiple of profits: Many firms, particularly those with few tangible assets, are valued based upon some multiple of net profit; the price-earnings (PE) ratio refers to the multiple of net profits from the previous year and the current share price.  Goodwill describes the difference between (net) asset values and the perceived or stock market value of the business, e.g based on intangible assets such as the brand or popularity  While the PE ratio in the financial press is based on actual reported profits, start-ups only have forecast profits to work on; not an issue because buyers of shares are interested in the future profits of the business and only use actual profits as a proxy measure.

 Start-ups with no track tend to have a lower multiple than established firms; other factors may increase the multiple, e.g experience of the management team or the existence of pre-launch orders; different industries have different multiples that reflect the underlying risks (the lower the risk, the higher the multiple).  There is no straight answer to which multiple of profits to use; in any given industry, the longer the business has been in existence and able to demonstrate consistency of earnings, the higher the multiple is likely to be; also depends on strategic importance to the buyer.  External factors (no control) are important in company valuations (state of economy, interest rates (higher interest rates imply lower multiples/valutions since an investment is competing against the market), etc.)  One way of dealing with the problem of early valuation – part. for fast, high-growth businesses - is to delay valuation but set out the details of how it will be

determined at some point in the future; initial investor then receives equity based on a discount of that future valuation; esp. useful when investment is in tranches 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 11. Planning for exit  The business will be worth most when profits are at their highest and can be seen to be growing; the exit of the founder needs to be planned at least three to five years ahead.  The never-ending cycle of start-up and exit is part of the dynamic of the small firm sector as firms respond to the ever-changing marketplace. 12. Beyond business – entrepreneurial philanthropy  Many entrepreneurs turn to philanthropy before they retire; entrepreneurial philanthropy tends to be something altogether more powerful than just charitable giving.  The distinction between charitable giving and entrepreneurial philanthropy is that it involves more than giving money – it provides an opportunity to

bring their skills, passion, networks, creativity and leadership to bear in a more productive way.  Alto proposes a six-step approach to entrepreneurial philanthropy that you may say can be applied to most social enterprise projects: 1. 2. 3. 4. 5. 6.  Research social issues and decide on underlying causes of a problem. Decide upon the nature of your involvement (time, money, etc.) Assess the time needed to make an impact and whether this acceptable. Decide on the tipping point when making timely and targeted philanthropic interventions, which can have an outsized impact beyond traditional giving methods. Decide on and assemble resources. Track progress. Setting up separate trusts or foundations bring tax advantages to these separate legal entities; can also make commercial sense, creating a win-win situation for both the business and the philanthropic cause. 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 Chapter 19 –

Corporate Entrepreneurship 1. The challenge facing large firms  Corporate entrepreneurship describes entrepreneurial behaviour in an established, larger organization; objective: gain competitive advantage by encouraging innovation at all levels in the organization – corporate, division, business unit, functional and project team.  Larger companies have some significant financial resources, credibility with stakeholders, established routes to market, trusted brands and most valuable of all, large work forces; inflexible procedures and control are optimizing efficiency but do not necessarily support innovation and empowerment. 2. Defining corporate entrepreneurship  The premise behind the overarching approach to corporate entrepreneurship is that large firms need to adapt to an ever-changing environment if they are to survive, and to do so they need to adapt their strategies, structure and cultures so as to encourage entrepreneurial activity in individual employees. 

Process is called strategic renewal, entrepreneurial transformation or strategic entrepreneurship; to start this process of a sustained pattern of entrepreneurial behaviour, organizations use entrepreneurial orientation (EO); incl. innovation, risk-raking, pro-activeness, compet aggressiveness, internal autonomy  The architecture needed to encourage entrepreneurial behavior comprises four elements – leadership, culture, structures (including systems) and strategies – and has been called entrepreneurial architecture.  In the overarching view of corporate entrepreneurship, the activity of corporate venturing is just one of the tools that can be used to achieve this strategic renewal or corporate transformation; it is one of the structures that can be used in the entrepreneurial architecture and can be used in two contexts: Internal corporate venturing External corporate venturing  Concerned with organizational structures larger businesses need to encourage new

businesses to develop internally while aligning them to the company’s existing activities; about how companies can manage disruptive innovation; intrapreneurship is concerned with individual employees; rarely the inventor of the product, intrapreneurs work with venture teams to cut through bureaucracy to develop the product as quickly as possible. Concerned with investment and acquisitions by larger firms in strategically important smaller firm and the corporate venturing units needed to undertake this role; have firstmover advantages or critical innovations; strategic alliances and JVs to access new markets or to acquire new technologies and knowledge. Both help to bring the market inside: structural changes needed to encourage entrepr. behavior; market approach to resource allocation using market-based techniques, e.g spin-offs and venture capital operations 1 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 3. Entrepreneurial

architecture  Organizational architecture is a metaphor used to describe the infrastructure an organization needs in order to build business processes that deliver its vision.  Embeds entrepreneurial characteristics into the organization allowing it to adapt, respond flexibily and compete in a changing environment by creating knowledge and routines; encourages entrepreneurial orientation (EO); may lead to sustained competetitive advantage.  Complex adaptive systems that result from multiple independent actions are unpredictable; three main requirements for ‘self-organization’ in complex systems according to Grant (2010): 1. Identity that permits a common sense-making within the organization 2. Information that provides the possibility of synchronized behavior 3. Relationships as pathways through which information is transformed into intelligent, coordinated action  Handy’s Gods of Management (see next page); Handy sees leadership as getting the balance right

between:      Group size – Large: Apollo; small: Athena. Work patterns – Repetitive and routine (Apollo) vs. continuously changing (Zeus, Dionysus) Life cycle – Short life cycle, new product development is important: Athena; if long: Apollo. People – Conformists and high collectivism: Apollo; individualism: Zeus or Dionysus. Handy’s typologies illustrate how combinations of different cultures and structures support or result from different leaders; entrepreneurial leader as mix of Zeus, Athena and Dionysus but not Apollo. 2 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 4. Building an entrepreneurial architecture  There are three key characteristics in an entrepreneur’s approach to managing an organization:    Ability to develop strong networks of relationships within and outside the organization; The way they develop strategy and make decisions; The way they mitigate risk through knowledge,

partnerships and structures. 4.1 Leadership  Leadership should be visionary, transformational but distributed (team based); although effective leadership depends upon a range of contextual factors including group task and situation, leaders need to have good emotional intelligence – self and social awareness and social skills; shared cognitions and mutual trust. 4.2 Culture  The culture needed to form an entrepreneurial architecture should:       See change as the norm, not something to be feared and value creativity and innovation; Value strong personal and group relationships and generate a strong sense of group identity. Encourage empowerment and motivation to make decisions for the good of the organization. Encourage measured risk-taking through experimentation, tolerating mistake but encouraging to learning from them. Be egalitarian but slightly anti-authoritarian – always daring to be different. Four different cultures:    Hierarchy

culture – the traditional organizational structure with hierarchical controls that respect position and power, emphasizing efficiency and stability. Market culture – controls through trying to minimize costs and moving towards market efficiency by looking outward at the cost of transactions, achievement and results orientated. Clan culture – less focused on structure and control through rules and regulations, with greater emphasis on flexibility, driving direction through vision, shared goals a sense of family, loyalty, mentoring and nurturing, often with flat structures using team working. 3 Source: http://www.doksinet Daniel Schemmert  Maastricht University ESBM | Tutorial 11 Adhocracy culture – even more independence and flexibility with greatest speed of response to change, more entrepreneurial with greater risk-taking, using ad hoc teams to address new challenges. 4.3 Structure  The most appropriate culture depends on the nature of the organization, the

strategies it employs, the tasks it undertakes, the culture it wished to encourage, the environment it operates in and its size, e.g if the tasks are complex, an organic organizational structure that may evolve in different directions might be the solution.  Hybrid-structures are also possible; while control should be loose, there needs to be tight accountability; strong organizational culture needed for this informal organizational structure and loose control. 4.4 Strategies  The strategies that an organization pursues are particularly to its situation and the markets within which it operates; strategy development might be a combination of emergent and deliberate; should be characterized by continuous strategizing at all levels in the organization, underpinned by strong vision and direction.  Decision-making will tend to be decentralized, incremental and adaptive, so as to maintain maximum flexibility 5. Matching architecture and environment  An entrepreneurial

architecture may not be appropriate for all organizations, e.g for a benign, unchanging environment in which simple tasks are undertaken with a view to achieving maximum efficiency.  The environment which attracts entrepreneurial activity:  Interconnectedness of markets and economies tends to amplify small initial changes; instability and unpredictability means that traditional form of strategic planning no longer work.  Markets might be highly price sensitive, with low barriers to entry and high economies of scale.  New markets could be emerging and the whole structure of the market might be changing, with many mergers or takeovers.  As product life cycle shorten, it can lead to unbalanced product/service portfolios that require rapid rebalancing through product/service innovation. 4 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11  Adding to all these problems might be rapid economic and social change, pressure

for greater corporate social responsibility, and problems in attracting suitable staff; single divisions and subsidiaries may have different architectures that is more appropriate to their operating needs.  Since there is no one-size fits all blueprint for an entrepreneurial architecture the exact form it takes also depends on the economic, technological and social environment in which the organization operates; can also be sectorally and geographically dependent. 6. Using relationships to develop competitive advantage  Just as entrepreneurship use networks of relationships to help them operate in a way that allows them to seize opportunities quickly, architecture should allow the entrepreneurial firm to respond quickly and effectively to change and opportunity; architecture builds dynamic capabilities that are difficult to copy.  Relationships have a high but structured degree of informality, however not chaotic which doesn’t lead to good performance; architecture is

difficult to copy because individuals only know or understand a small part of the overall structure; generally difficult to create in the first place; can be an entry barrier. 7. Building a learning organization  A learning organization is one that facilitates the learning of all its members and continuously transforms itself; adapting, developing and transforming themselves in response to the needs of insiders and outsiders; requires a more collectivist culture.      Encouraging systematic problem-solving Encouraging experimentation and new approaches Learning from past experience and history Learning from best practice and outside experience; Being skilled at transforming knowledge in the organization  Kim (1993) suggested that effective learning can be considered to be a revolving wheel – the wheel of learning; first half: testing concepts and learn from experience (know-how); second half: reflecting on the observations and forming new concepts

(know-why); called double-loop learning.  Particularly in the 2nd half, the root causes of problems are diagnosed while questioning dominant logics; as dominant logic is a social construct, it can be influenced and changed by the organizational architecture. 5 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 8. Intrapreneurs and venture teams  Intrapreneurship can be undertaken at many different levels of the organization – corporate, divisional, functional or project level; advantage: helps organizations to compartmentalize the change agent(s) and reduce risk, while still pursuing commercial opportunities.  Intrapreneurs need a high-level sponsor to gain authority while securing resources, advice and contacts; sponsors need to manage and control them as they are breaking the rules; four most significant enablers of intrapreneurship:       Senior management support Organizational structure (corporate

venturing, cross-functional venture teams, internationalization) Resources Rewards (Other than pay and job security: promotion, expanded responsibility, autonomy, etc.) (Tolerance) (Risk-taking)  Venture teams are ad hoc; they form and reform to tackle different projects; collective entrepreneurship where individual skills are integrated into a group and the team’s capacity to innovate then becomes greater than the sum of individuals.  Whatever form a venture team takes, the rules under which it operates are the same as for the intrapreneur. 9. Organizing the new venture developments  Two factors that help to determine if a new venture is kept in house or should be spun off (Bergelman):    How strategically important the development is for the future of the company; How operationally related it is to the core technology and capabilities of the firm. Using Burgelman’s typologies there are nine organizational options: 1. Direct integration – recommended

where development is both strategically important and operationally related, e.g when a new product is integrated into a product range 2. New product or business department – Remain in-house bc of their importance but for some operational reason a new department needs to be established, e.g product extension 3. Micro new business departments – Strategic importance is uncertain; situation needs to be clarified before a final decision is made; kept in-house within a department bc of strong operational relatedness. 4. Special business unit – Operational relatedness is minimal, new staff with different skills may have to be recruited and the unit given greater independence and operational freedom, while the company still retains ownership until decisions are made about its future; strong top-down management supervision. 6 Source: http://www.doksinet Daniel Schemmert Maastricht University ESBM | Tutorial 11 5. New venture division – Used to deal with developments that

require further investment before their final fate is decided; uncertainty of strategic importance implies strong top-management supervision 6. Spin-offs – If there is little or no operational relatedness and the development has little or no strategic importance to the existing business, then it should be completely spun off, with no ownership retained; most important condition: core competencies being embodied in skilled labor rather than physical assets 7. Independent business unit – Greater independence than other formats; often joint ventures with other strategic partners with different degrees of ownership ranging from subsidiary to minority interest and being spun off completely as factors become more certain; separate legal form mitigates risk. 8. Contracting – Appropriate where the core competencies are embodied in some physical assets or process that are owned by the company but they are of little strategic importance. 9. Nurturing and contracting (nurtured

divestment) – Development has commercial value but is not critical to the mainstream business; might need to nurtured prior to being offered to other firms under contract or license. 10. New venture divisions  A new venture division is a permanent division set up for the purpose of developing innovations, when it is not clear whether the development might be integrated into the core business or spun out.  May operate at corporate or other operating levels within the organization; by separating the development of innovation, the organization hopes that the division will be able to establish its own leadership, management, structures and culture that encourage and facilitate innovation as a continuous process.  The scale of each innovation is likely to be grater than for an ad hoc venture team; new product/market offerings may need entrepreneurial approaches to management; those at the mature stage require a secure guiding hand of a strong financial director.  The

new venture division is an attempt to institutionalize the continuous flow of innovations within a large and complex organization that has a diverse portfolio to manage. 11. Successful corporate venturing  Corporate venturing is essentially about regenerating an organization by giving it new competencies; less risky for diversification than M&A strategies.  Tidd and Bessant suggest four characteristics of firms which are continuously successful at internal corporate venturing:      View venturing as a learning process, learning from both success and failure. Distinguish between bad decisions and bad luck in failed ventures. Set agreed milestones in advance and check progress regularly, redirecting as necessary. Willing to terminate the venture when necessary, rather than making further investments. Two main reasons for failure; can be mitigate risk by having a clear purpose and time for delivering against agreed milestones. 1. Strategic reversal –

Timescales for the new venture conflict with those of the existing business 2. Emergency trap – Internal politicking undermines the venture  Alternatives to internal venturing for corporate renewal: strategic alliances/partnership, JVs, acquisitions; depends on the proximity to core competencies, markets and products. 7 Source: http://www.doksinet Daniel Schemmert Maastricht University Good luck with the exams! Have a great summer! Daniel 8 ESBM | Tutorial 11