Chapter 8 2) Social Capital - Strategic alliances can

provide a key avenue for growth by

Entrepreneurship
 the creation of new value by an existing
organization or new venture that involves the
assumption of risk.
Three Factors must be present to create new value
1) Entrepreneurial Opportunity
2) The Resources
3) An Entrepreneurial Team
Entrepreneurial Business Opportunity Sources
1. Current or past work experiences
2. Hobbies that grow into business or to
inventions
3. Suggestions by friends or family
4. Chance event
Opportunity Recognition
 the process of discovering and evaluating
changes in the business environment, such as a
new technology, sociocultural trends, or shifts
in consumer demand, that can be exploited.
entrepreneurial firms. By partnering with other
companies, young or small firms can expand or
give the appearance of entering numerous
markets or handling a range of operations.
a) Technology Alliances
b) Manufacturing Alliances
c) Retail Alliances
3) Human capital - New ventures that are started
by teams of three, four, or five entrepreneurs
are more likely to succeed in the long run than
are ventures launched by “lone wolf”
entrepreneurs.
4) Government Resources
a) Underwriting loans
b) Training and counselling
c) Government Contracting

For an opportunity to be viable, it needs to have

four qualities:
1. Attractive - there is market demand
2. Achievable - practical and physically possible
3. Durable - open long enough to be worthwhile
4. Value creating - potentially profitable; cost
benefit

Entrepreneurial Resources
1) Financial resources Chapter 9
a) Investment by family and friends
b) Private investors Strategic control involves monitoring performance
c) Personal savings toward strategic goals and taking corrective action
when needed via effective systems.
Angel Investors
 private individuals who provide equity  Informational-control systems - the ability to
investments for seed capital during the early respond effectively to environmental change.
stages of a new venture.  Behavioral-control systems - makes sure that
there is an appropriate balance and alignment
Venture Capitalists among the companies culture, rewards and
 companies organized to place their investors’ boundaries.
funds in lucrative business opportunities.  Corporate Governance

The traditional approach to strategic control is

Crowdfunding sequential
 funding a venture by pooling small investments
from a large number of investors; often raised
on the Internet  Strategies are formulated, goals are set
 Strategies are implemented
 Performance is measured against
predetermined goals
Traditional approach to strategic control - feedback
loop from performance measurement to strategy
formulation
Involves lengthy time lags, “single-loop” learning
Traditional Approach is most appropriate when:
 Environment is stable and relatively simple
 Objectives can be measured with high level of
certainty
 There is little need for complex measures of
performance
Contemporary Approach Model - relationships
between strategy formulation, implementation, and
control are highly interactive, utilizing: (a)
informational control; and (b) behavioral control. It
primarily rely on double-loop learning.
 Informational control - a method of
organizational control in which a firm gathers
and analyzes information from the internal and
external environment in order to obtain the best
fit between the organization’s goals and
strategies and the strategic environment.
 It is primarily concerned with whether or
not the organization is doing the right
things.
 Behavioral control - a method or
organizational control in which a firm
influences the actions of employees through
culture, rewards and boundaries.
Effectiveness of Contemporary Control Systems
1. Focus on constantly changing information that
has potential strategic importance
2. The information is important enough to
demand frequent and regular attention from all
levels of the organization
3. The data and information generated are best
interpreted and discussed in face-to-face
meetings
4. The control system is a key catalyst for an
ongoing debate about underlying data,
assumptions, and action plans.
Behavioral Control is focused on implementation-
doing things right
 The 3 key control levers: (a) culture; (b)
rewards; and (c) boundaries
Reasons for an increased emphasis on culture and
rewards
1. The competitive environment is increasingly
complex and unpredictable, demanding both
flexibility and quick response to its challenges.
2. The implicit long-term contract between the
organization and its key employees has been
eroded.
Building a Strong and effective Culture
Organization culture - a system of shared values
and beliefs that shape a company’s people,
organizational structures and control systems to
produce behavioral norms.
Culture sets implicit boundaries (unwritten
standards of acceptable behavior)
 Dress
 Ethical matters
 The way an organization conducts its
business
Sustaining an Effective Culture
 Effective culture must be:
 Cultivated
 Encouraged]
 Fertilized
 Maintaining an effective culture
 Storytelling
 Rallies or pep-talks by top executives
Motivating with rewards and incentives
 Rewards and incentives
 Are powerful means of influencing an
organization’s culture
 Focuses efforts on high-priority tasks
  Motivates individual and collective task
performance
 Can be an effective motivator and control
mechanism
 Potential Downside
 Subcultures may arise in different business
units with multiple reward systems
 May reflect differences among functional
areas, products, services and divisions
Characteristics of Effective Reward and Evaluation
Systems
 Objectives are clear, well-understood, and
broadly accepted
 Rewards are clearly linked to performance and
desired behaviors
 Performance measures are clear and highly
visible
 Feedback is prompt, clear and unambiguous
 The compensation system is perceived as fair
and equitable
 The structure is flexible; it can adapt to
changing circumstances
Setting Boundaries and Constraints
 Focus efforts on strategic priorities
 Provide short-term objectives and action plans
 Specific and measurable
 Specific time horizon for attainment
 Achievable, but challenging
 Improve operational efficiency and
effectiveness
 Minimize improper and unethical conduct
Organizational Control: Alternative Approaches
 Culture - a system of unwritten rules that
forms an internalized influence over behavior
 Often found in professional organizations
 Associated with high autonomy
 Norms are the basis for behavior
 Rules - Written and explicit guidelines that
provide external constraints on behavior
 Associated with standardized output
 Tasks are generally repetitive & routine
 Little need for innovation or creative
activity
 Rewards - the use of performance-based
incentive systems to motivate
 Measurement of output and performance is
rather straightforward
 Most appropriate in organizations pursuing
unrelated diversification strategies
 Rewards may be used to reinforce other
means of control
Evolving from Boundaries to Rewards and Culture
System of rewards and incentives coupled with a
strong culture
 Hire the right people
 Training plays a key role
 Managerial role models are vital
 Reward systems clearly aligned with
organizational goals and objectives
Role of Corporate Governance
Corporate Governance
 The relationship among various participants in
determining the direction and performance of
corporations
 Primary participants are the shareholders, the
management, and the board of directors
Corporation
 A mechanism created to allow different parties
to contribute capital, expertise, and labor for
the maximum benefit of each party.
Agency Theory - deals with the relationship
between the principals who are the owners of the
firm (stockholders); and agents who are the people
paid by the principals to perform a job on their
behalf (management)
Agency Theory: Two Problems
1. The conflicting goals of principals and agents,
along with the difficulty of principals to
monitor the agents; and
2. The different attitudes and preferences towards
risk of principals and agents
Governance Mechanisms
Board of Directors
 A group that has a fiduciary duty to ensure that
the company is run consistently with the long-
term interest of the owners, or shareholders, of
 a corporation and that acts as an intermediary Expropriation of Minority Shareholders
between the shareholders and management.  activities that enrich the controlling
shareholders at the expense of the minority
shareholders.

Shareholder Activism
 Actions by large shareholders, both institutions
and individuals, to protect their interest when
they feel that managerial actions diverge from
shareholder value maximization Business Group
 a set of firms that, though legally independent,
CEO Duality - refers to the dual-leadership are bound together by a constellation of formal
structure wherein the CEO acts simultaneously as and informal ties and are accustomed to taking
the chair of the board of directors coordinated action.

 Unity of Command - when one person holds Sarbanes-Oxley Act

both roles, he or she is able to act more
efficiently and effectively. CEO duality  Auditors
provides firms with a clear focus on both  Barred from certain types of non-audit
objectives and operations as well as eliminates work
confusion and conflict between the CEO and  Not allowed to destroy records for five
the chairman years
 Lead partners auditing a firm should be
 Agency Theory - argue that the positions of changed at least five years
CEO and chairman should be separate. The
case for separation is based on the simple  CEOs and CFOs
principle of the separation of power.  Must fully reveal off-balance sheet
finances
External Governance Control Mechanisms  Vouch for the accuracy of information
 Methods that ensure that managerial actions
lead to shareholder value maximization and do  Executives
not harm other stakeholder groups and that are  Must promptly reveal the sale of shares in
outside the control of the corporate governance firms they manage
system.  Are not allowed to sell shares when other
 Market for corporate control employees cannot
 Auditors
 Banks and analysts
 Government Regulatory bodies
 Media and public activists

Corporate Governance: An International

Perspective

Principal-Principal Conflicts
 conflicts between two classes of principals—
controlling shareholders and minority
shareholders—within the context of a
corporate governance system.

Principal-Agent Conflicts
 Conflicts between shareholders and
professional managers who own a relatively
small portion of the firm’s equity.