Aalto University Mikkeli Week 1 Day 1 9

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Aalto University - Mikkeli Week 1 (Day 1): 9 -00 am – 11 -00

Aalto University - Mikkeli Week 1 (Day 1): 9 -00 am – 11 -00 am Theoretical Perspectives I Lecture Slides

What is entrepreneurship? Ø Entrepreneurship – Strategic thinking and risk-taking behavior that results in

What is entrepreneurship? Ø Entrepreneurship – Strategic thinking and risk-taking behavior that results in the creation of new opportunities for individuals and/or organizations. Ø Entrepreneurs – Risk-taking individuals who take actions to pursue opportunities and situations others may fail to recognize or may view as problems or threats.

What is entrepreneurship? Ø Typical characteristics of entrepreneurs: – – – – Internal locus

What is entrepreneurship? Ø Typical characteristics of entrepreneurs: – – – – Internal locus of control High energy level High need for achievement Tolerance for ambiguity Self-confidence Passion and action-orientation Self-reliance and desire for independence Flexibility

Personal traits and characteristics of entrepreneurs.

Personal traits and characteristics of entrepreneurs.

Eight reasons why many small businesses fail.

Eight reasons why many small businesses fail.

How does one start a new venture? Ø Important issues in new venture creation:

How does one start a new venture? Ø Important issues in new venture creation: – Does the entrepreneur have good ideas and the courage to give them a chance? – Is the entrepreneur prepared to meet and master the test of strategy and competitive advantage? – Can the entrepreneur identify a market niche that is being missed by other established firms? – Can the entrepreneur identify a new market that has not yet been discovered by existing firms? – Can the entrepreneur generate first-mover advantage by exploiting a niche or entering a market before competitors?

How does one start a new venture? Ø Questions that keep a new venture

How does one start a new venture? Ø Questions that keep a new venture focused on its customers … – Who is your customer? – How will you reach key customer market segments? – What determines customer choices to buy or not buy your product/service? – Why is your product/service a compelling choice for the customer? – How will you price your product/service for the customer? – How much does it cost to make and deliver your product/service? – How much does it cost to attract a customer? – How much does it cost to support and retain a customer?

How does one start a new venture? Ø Life cycle of entrepreneurial firms –

How does one start a new venture? Ø Life cycle of entrepreneurial firms – Birth stage – Breakthrough stage – Maturity stage Ø Each stage poses different managerial challenges and requires different managerial competencies.

Stages in the life cycle of an entrepreneurial firm.

Stages in the life cycle of an entrepreneurial firm.

How does one start a new venture? Ø Basic items that should be included

How does one start a new venture? Ø Basic items that should be included in a business plan: – – – Executive summary Industry analysis Company description Product and services description Marketing strategy Operations description Staffing description Financial projection Capital needs Milestones

How does one start a new venture? Ø Forms of legal ownership – Sole

How does one start a new venture? Ø Forms of legal ownership – Sole proprietorship – Partnership • General partnership • Limited liability partnership – Corporation – Limited liability corporation (LLC)

How does one start a new venture? Ø Financing the new venture – Sources

How does one start a new venture? Ø Financing the new venture – Sources of outside financing • Debt financing • Equity financing – Equity financing alternatives • Venture capitalists • Initial public offerings • Angel investors

What resources support entrepreneurship and business development? Ø Promoting entrepreneurship in large enterprises –

What resources support entrepreneurship and business development? Ø Promoting entrepreneurship in large enterprises – Intrapreneurship Ø Business incubators Ø Small Business Development Centers

Firm Lifecycle

Firm Lifecycle

Organization Life Cycle Large Streamlining Development of Teamwork Continued maturity Size Addition of Internal

Organization Life Cycle Large Streamlining Development of Teamwork Continued maturity Size Addition of Internal Systems Provision of Clear Direction Crisis: Too much red tape Creativity Crisis: Need for delegation with control Small Decline Crisis: Need for revitalization Crisis: Need for Leadership Entrepreneurial Collectivity Formalization Elaboration ? ? ? ? ?

Organizational Decline and Downsizing: The Causes • Organizational Atrophy – Loss of ability to

Organizational Decline and Downsizing: The Causes • Organizational Atrophy – Loss of ability to respond to changing environment – Inefficient, bureaucratic, fat, and happy • Organizational Vulnerability – Loss of resources – Loss of market share – Loss of legitimacy • Environmental decline – Stagnating economy – Flat/shrinking market – Increased competition

Stages of Decline Blinded Inaction E Reo ffectiv e rga niza tion Acknowledge Decline

Stages of Decline Blinded Inaction E Reo ffectiv e rga niza tion Acknowledge Decline Decli ning Orga niz Eff Ch ectiv an e ge s Good Information pt m o Pr tion Ac C or Ac rec tio tiv n e Successful Organizational Performance Major Changes Reorganization al Pe No choices rform ance Faulty Action Crisis Dissolution

Theoretical perspectives • Agency Theory (AT) • Stakeholder Theory • Transaction Cost Economics (TCE)

Theoretical perspectives • Agency Theory (AT) • Stakeholder Theory • Transaction Cost Economics (TCE) • Resource Dependency Theory

Agency Theory

Agency Theory

Some basics: - Human actors assumed to be myopic (self interested) Risk aversion Behavioural

Some basics: - Human actors assumed to be myopic (self interested) Risk aversion Behavioural patterns captured by utility-wealth differential ”Downside risk” to investors external to firm Firm is a ”nexus of contracts”

Corporate Governance Mechanisms Internal Governance Mechanisms Executive Compensation – use of salary, bonuses, and

Corporate Governance Mechanisms Internal Governance Mechanisms Executive Compensation – use of salary, bonuses, and long-term incentives to align managers’ interests with shareholders’ interests • Monitoring by top-level managers – they may obtain Board seats (not in financial institutions) – they may elect Board representatives

Governance Mechanisms Executive Compensation – one example of internal mechanism § Stock ownership (long-term

Governance Mechanisms Executive Compensation – one example of internal mechanism § Stock ownership (long-term incentive compensation) » managers more susceptible to market changes which are partially beyond their control § Incentive systems do not guarantee that managers make the “right” decisions, but do increase the likelihood that managers will do the things for which they are rewarded

Corporate Governance Mechanisms External Governance Mechanisms Market for Corporate Control – the purchase of

Corporate Governance Mechanisms External Governance Mechanisms Market for Corporate Control – the purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness

The Structure of Anglo-American Governance

The Structure of Anglo-American Governance

Stakeholder governance models

Stakeholder governance models

Market Stakeholder Map Market stakeholders are those that engage in economic transactions with the

Market Stakeholder Map Market stakeholders are those that engage in economic transactions with the company as it carries out its primary purpose of providing society with goods and services Sometimes referred to as primary stakeholders

Nonmarket Stakeholder Map Nonmarket stakeholders are people or groups who—although they do not engage

Nonmarket Stakeholder Map Nonmarket stakeholders are people or groups who—although they do not engage in direct economic exchange with the firm—are affected by or can affect its actions Sometimes called secondary stakeholders

Transaction Cost Economics (TCE)

Transaction Cost Economics (TCE)

Forms of Governance Oliver Williamson (1975, 1981) identified three fundamental forms of transaction governance

Forms of Governance Oliver Williamson (1975, 1981) identified three fundamental forms of transaction governance and the conditions when they’re likely to occur: Market: Autonomous parties’ exchanges are governed by prices in supply-demand equilibrium Hierarchy: (Formal org) Transactions among parties occur under a unified owner, who settles disputes by administrative fiat Hybrid: “Long-term contractual relations that preserve [parties’] autonomy, but provide added transaction-specific safeguards as compared with the market. ”

Behavioral Assumptions Transaction parties can never write completely detailed agreements covering all possible future

Behavioral Assumptions Transaction parties can never write completely detailed agreements covering all possible future contingencies (“incomplete contracting”) Williamson assumed transactors’ abilities & motives involve: Bounded rationality: Utility-maximizing, intendedly rational transactors are constrained by cognitive limits on their capacities to process information efficiently (contrast to neoclassical perfect info) Opportunism: “Self-interest with guile” could induce strategic behavior by transactors to lie to, cheat, confuse, mislead their exchange partners

Three Transaction Dimensions Transactions have three key dimensions that determine how their costs affect

Three Transaction Dimensions Transactions have three key dimensions that determine how their costs affect governance choice • Uncertainty about environments, other actors • Frequency of exchanges; one-off or recurrent? • Asset specificity: investments lacking alternative uses except at loss of productive value; asset specificities can be human skills, geographical sites, brand names, dedicated machinery

Incomplete Contracts Bounded rationality and opportunism imply: All feasible contracts are incomplete Given this,

Incomplete Contracts Bounded rationality and opportunism imply: All feasible contracts are incomplete Given this, structures that facilitate gap-filling, dispute settlement, adaptation, etc. , are part of the problem of economic organization Contracts are not guarantees Institutions that mitigate opportunism are important

Transactions • Generating testable implications from transaction cost economics requires that we describe features

Transactions • Generating testable implications from transaction cost economics requires that we describe features of transactions that affect transaction costs • According to Williamson, transactions differ along three dimensions: 1. The frequency with which they occur 2. The degree and type of uncertainty to which they are subject 3. Asset specificity – Asset specificity is the most critical attribute

Sources of Transaction Costs

Sources of Transaction Costs

A Transaction Cost Theory of Economic Organization Investment Characteristics (Asset Specificity) Nonspecific Mixed Trilateral

A Transaction Cost Theory of Economic Organization Investment Characteristics (Asset Specificity) Nonspecific Mixed Trilateral Governance Occasional Market Governance Frequency Recurrent Idiosyncratic Unified Governance Bilateral Governance Efficient Governance

Resource Dependency Theory

Resource Dependency Theory

What is the Organizational Environment? • • Environment: the set of forces surrounding an

What is the Organizational Environment? • • Environment: the set of forces surrounding an organization that have the potential to affect the way it operates and its access to scarce resources Organizational domain: the particular range of goods and services that the organization produces, and the customers and other stakeholders whom it serves

Inter-organizational Strategies for Managing Symbiotic Interdependencies • Developing a good reputation – Reputation: a

Inter-organizational Strategies for Managing Symbiotic Interdependencies • Developing a good reputation – Reputation: a state in which an organization is held in high regard and trusted by other parties because of its fair and honest business practices – Reputation and trust are the most common linkage mechanisms for managing symbiotic interdependencies

Strategies for Managing Symbiotic Resource Interdependencies (cont. ) • Co-optation: a strategy that manages

Strategies for Managing Symbiotic Resource Interdependencies (cont. ) • Co-optation: a strategy that manages symbiotic interdependencies by neutralizing problematic forces in the specific environment – Make outside stakeholders inside stakeholders – Interlocking directorate: a linkage that results when a director from one company sits on the board of another company • Strategic alliances: an agreement that commits two or more companies to share their resources to develop joint new business opportunities – An increasingly common mechanism for managing symbiotic (and competitive) interdependencies – The more formal the alliance, the stronger and more prescribed the linkage and tighter control of joint activities • Greater formality preferred with uncertainty

Types of Strategic Alliances • • Long-term contracts Networks: a cluster of different organizations

Types of Strategic Alliances • • Long-term contracts Networks: a cluster of different organizations whose actions are coordinated by contracts and agreements rather than through a formal hierarchy of authority • Minority ownership – Keiretsu: a group of organizations, each of which owns shares in the other organizations in the group, that work together to further the group’s interests