Corporate Governance 2

Owners 2
Managers 3
Board of Directors 5
Governance Mechanisms as a Package 7
A comprehensive Model of Corporate Governance 11
Debates and Extensions 13
The Savvy Strategist 16

Corporate Social Responsibility 17

Primary and Secondary Stakeholder Groups 17
A Fundamental Debate 18
Industry-Based Considerations 19
Resource-Based Considerations 20
Institution-Based Considerations 21
Reactive Strategy 22
Defensive Strategy 22
Accommodative Strategy 23
Proactive Strategy 23
Debates and Extensions 23
The Savvy Strategist 24

The Entrepreneurial Firm 25

Entrepreneurship, Entrepreneurs, and Entrepreneurial Firms 25
Industry-based considerations 26
Resource-based considerations 26
Institution-based considerations 27
Five Entrepreneurial Strategies 28

Debates and Extensions 34

The Savvy Entrepreneur 35

Case Studies 36
The Murdochs 36
HP 36
TATA Group 36
Nissan 37
Facebook 37
Short case 1 - the plastic plant 38
Short case 2 - chemical waste 38
The Entrepreneurial Firm 39
Nearly Billionaires 39
Corporate Governance
Key Questions and Issues
● What is the optimal way to govern corporations so that investors will reap returns?
● What is the proper role of the Board of Directors?
● How should CEOs be properly motivated and compensated?
● Corporate governance:
○ “Relationship among various participants in determining the direction and
performance of corporations.”
● Primary participants in corporate governance are:
1. Owners,
2. Managers,
3. Board of Directors

Owners
● Owners:
1. Provide capital.
2. Bear risk.
3. Own the firm.
● Three broad patterns exist:
1. Concentrated versus Diffused ownership.
2. Family ownership.
3. State ownership.
Concentrated versus Diffused Ownership
● Founders usually start up firms and completely own and control them.
○ Concentrated ownership and control.
○ Growth and capital needs mandates arrival of other shareholders.
● Diffused ownership.
○ Approximately 80% of listed US firms and 90% of listed UK firms.
○ Separation of ownership (by dispersed shareholders).
○ Day-to-day control by managers.
● Power issue: managers vs. shareholders
○ Rise of institutional investors and activist investors has significantly changed this
picture.
■ Have both incentives and resources to closely monitor and control
managerial actions.
■ Drawback: limited ability to dump the stock. Why?
Family Ownership
● Vast majority of large firms:
○ Continental Europe, Asia, Latin America, and Africa.
● Advantage:
○ May provide better incentives for the firm to focus on long-term performance.
● Drawback:
 ○ May lead to the selection of less qualified managers (i. e. sons, daughters, and
relatives of founders).
○ The destruction of value because of family conflicts.
○ Expropriation of minority shareholders.
State Ownership
● 1980s and later:
○ Countries realized that their state-owned enterprises (SOEs) often perform
poorly.
○ Typically suffer from an incentive problem.
● In theory:
○ All citizens (including employees) are owners.
● In practice:
○ They have neither the rights to enjoy dividends generated from SOEs (as
shareholders would),
○ Nor the rights to transfer or sell “their” property.
● SOEs are de facto owned and controlled by government agencies.
○ Little motivation for SOE managers and employees to improve performance,
which they can hardly benefit from personally.
○ “They pretend to pay us and we pretend to work.”
● Privatization wave of the 1980s and nationalization wave of the 2008.
○ “Government motors” – GM; RBS.

Managers
● Principal-Agent Conflicts (agency relationship).
○ Principals: persons (such as owners) delegating authority.
○ Agents are persons (such as managers) to whom authority is delegated.
○ Agency theory: suggests a simple yet profound proposition:
■ To the extent that the interests of principals and agents do not completely
overlap, there will inherently be principal–agent conflicts.
■ Conflicts result in agency costs, including:
➢ The principals’ costs of monitoring and controlling the agents, and
➢ The agents’ costs of bonding (signaling their trustworthiness).
● Manifestations of agency problems:
1. Excessive executive compensation.
2. On-the-job consumption (corporate jets).
3. Low-risk short-term investments (maximizing current earnings while cutting long-
term R&D).
4. Empire-building (value-destroying acquisitions).
● What determines long-term wages?
○ 1980: the average US CEO earned approximately 40 times what the average
worker earned.
○ Today, the ratio is around 400 times.
● Why do agency problems persist?
 ○ Information asymmetries between principals and agents.
● Capital market curiosities:
○ What does CEO death/retirement have to do with the share price?
● Principal-Principal Conflicts.
○ Conflicts are between two classes of principals:
1. Controlling shareholders.
2. Minority shareholders.
○ One of the leading indicators of concentrated family ownership and control:
■ Appointment of family members as board chairman, CEO, and other TMT
members.
■ East Asia: approximately 57% of the corporations have board chairmen
and CEOs from the controlling families.
■ In continental Europe, the number is 68%.
○ Manifestation of principal–principal conflicts
1. Expropriation of minority shareholders - “Tunneling” – digging a tunnel to
sneak resources out.
2. Related transactions: owners buy firm assets from another firm they own
at above-market prices or spin off the most profitable part of a public firm
and merge it with another private firm of theirs
● Principal-Agent Conflicts versus Principal-Principal Conflicts

Principal-Agent Conflicts Principal-Principal Conflicts

Ownership Dispersed - shareholders holding Dominant - often greater than

pattern 5% of equity are regarded as 50% of equity is controlled by the
“blockholders”. largest shareholders.

Manifestations Strategies that benefit Strategies that benefit controlling

entrenched managers at the shareholders at the expense of
expense of shareholders (such minority shareholders (such as
as shrinking, excessive minority shareholder
compensation, empire-building). expropriation, cronyism).

Institutional Formal constraints (such as Formal institutional protection is

 protection of courts) are more protective of often lacking. Informal norms
minority shareholder rights. Informal typically in favor of controlling
shareholders norms adhere to shareholder shareholders.
wealth maximization.

Market for Active, at least in principle as the Inactive even in principle.

corporate “governance mechanism of last Concentrated ownership thwarts
control resort”. notions of takeover.

Board of Directors
● Board of Directors.
○ Intermediary between owners and managers.
○ Oversees and ratifies strategic decisions.
○ Evaluates, rewards, and if necessary penalizes top managers.
1. Board Composition (insider/outsider mix).
○ Inside directors: top executives of the firm.
○ Outside (independent) directors: non-management members of the board.
■ The trend around the world is to introduce more of them.
■ Belief: in favor of a higher proportion of outside directors.
■ Academic research: failed to empirically establish a link between the
outsider/insider ratio and firm performance.
■ In the world’s largest financial services firms: the more outside directors
on their boards, the worse their stock returns during the 2008 crisis.
■ Problem of affiliated directors may be present.
2. Leadership structure.
○ CEO duality: CEO who doubles as a chairman of the board.
■ Cons: how can the CEO be evaluated by the body that he/she chairs?
■ Pros: a corporation led by two top leaders (a board chairman and a CEO)
may lack a unity of command and experience top-level conflicts.
○ Significant divergence across countries: UK, US, ...
○ Academic research is inconclusive on whether CEO duality (or non-duality) is
more effective.
○ Pressures have arisen around the world for firms to split the two jobs.
■ At least to show seriousness about controlling the CEO.
3. Board Interlocks
○ Board directors: economic and social elites who share a sense of camaraderie
and reciprocity.
○ Interlocking directorate: one person affiliated with one firm sits on the board of
another firm.
● Firms often establish relationships through such board appointments.
○ Outside directors from financial institutions often facilitate financing.
○ Outside directors experienced in acquisitions may help the focal firms engage in
these practices.
 ○ Multiboard directors are unlikely to effectively monitor management.
○ In the post-Enron environment, such unusual practices are increasingly rare.
4. The Role of Boards of Directors.
○ Boards of directors perform: (1) Control, (2) Service, and (3) Resource
Acquisition Functions.
○ Boards’ effectiveness in serving the Control function stems from their (1)
Independence, (2) Deterrence, and (3) Norms.
■ The ability to effectively control managers boils down to how independent
directors are.
■ There is a lack of deterrence on the part of directors should they fail to
protect shareholder interests.
■ When challenging management, directors have few norms to draw on.
○ Service function: advising the CEO.
○ Resource acquisition: often through interlocking directorates.
○ Until recently, many boards of directors simply “rubber stamped” (approve
without scrutiny) managerial actions.
5. Directing Strategically.
○ Effective board functioning: “nose in, but hands off approach”.
○ Strategic prioritization: necessary given the comprehensive functions of control,
service, and resource acquisition and the limited time and resources directors
have.
■ How they do this differs significantly around the world.
○ US & UK: the traditional focus, stems from the separation of ownership and
control, is on the boards’ control function.
○ SOX Act of 2002: emphasize the control function almost to the exclusion of the
resource acquisition function.
■ RA function criticized: interlocking directorates are considered as
“collusive”.
○ Lack of firm knowledge (by outside directors) mandates focus on financial
control.
■ Financial control may encourage CEOs to focus on the short term vs.
longterm shareholder interests.
■ Inside directors (executives) can bring firsthand knowledge to board
deliberations.
➢ Allowing for a more sophisticated understanding of some
managerial actions
○ Outside Directors versus Inside Directors

PROS CONS

Outside ● Presumably more ● Independence may be illusory

directors independent from ● “Affiliated” outside directors may
management (especially have family or professional
the CEO) relationships with the firm or
 ● More capable of monitoring management
and controlling managers ● Not good at strategic control
● Good at financial control

Inside ● Firsthand knowledge about ● Non-CEO inside directors

directors the firm (executives) may not be able to
● Good at strategic control control and challenge the CEO

Governance Mechanisms as a Package

● Governance mechanisms can be classified as:
○ Internal ones (voice-based mechanisms).
○ External ones (exit-based mechanisms).
● Voice-based mechanisms.
○ Refer to shareholders’ willingness to work with managers.
○ Usually through the board, by “voicing” their concerns.
● Exit-based mechanisms.
○ Indicate that shareholders no longer have patience.
○ Willing to “exit” by selling their shares.
● Internal (Voice-Based) Governance Mechanisms.
● “Carrots”
○ In order to better motivate managers, increasing executive compensation as
“carrots” is often a must.
○ Stock options that help align the interests of managers and shareholders have
become increasingly popular.
○ Underlying idea: pay for performance.
■ Seeks to link executive compensation with firm performance.
■ In principle a good idea, in practice a number of drawbacks:
○ Accounting-based measures: (ROS): managers are often able to manipulate
numbers.
○ Market-based measures: (stock prices) subject to too many forces beyond
managers’ control.
○ Consequently: pay-for-performance link in executive compensation is usually not
very strong.
● “Sticks”
○ Boards are likely to use “carrots” before considering “sticks”.
○ When facing continued performance failures, boards may have to dismiss the
CEO.
○ World’s largest 2,500 listed firms:
■ CEO tenure has decreased from 8.1 years in 2000 to 6.3 years in 2012.
■ In 2010, 12% of these firms changed CEOs.
○ Boards seem to be more “trigger-happy” recently.
■ A fired CEO is extremely unlikely to run another publicly traded company.
 ■ A premium on the order of 30% or more—before taking on new CEO jobs
is required.
■ Case: Tata Group
● External (Exit-Based) Governance Mechanisms.
○ There are three external governance mechanisms:
1. Market for product competition,
2. Market for corporate control,
3. Market for private equity.
● Market for product competition.
○ Force compelling managers to maximize profits and, in turn, shareholder value.
○ From a corporate governance perspective, product for market competition
complements the market for corporate control and the market for private equity.
● Market for corporate control.
○ Main external governance mechanism,
○ A.k.a. the takeover market or the mergers and acquisitions (M&A) market.
○ An arena where different management teams contest for the control rights of
corporate assets.
● Market for corporate control.
○ Serves as a disciplining mechanism of last resort when internal governance
mechanisms fail.
○ Underlying logic is spelled out by agency theory.
■ When managers engage in self-interested actions and internal
governance mechanisms fail, firm stock will be undervalued by investors.
■ Under these circumstances, other management teams, which recognize
an opportunity to create new value, bid for the rights to manage the firm.
○ How effective is the market for corporate control?
■ On average, shareholders of target firms earn sizable acquisition
premiums.
■ Shareholders of acquiring firms experience slight but insignificant losses.
■ A substantially higher level of top management turnover occurs following
M&As.
○ Internal mechanisms: aim at “fine-tuning,”
○ The market for corporate control: enables the “wholesale” removal of entrenched
managers.
■ Costly to wage such financial battles (acquisition premium).
■ Long-term profitability of post-merger firms not particularly impressive
(hubris, EB).
■ Short-run: threat of takeovers does limit managers’ divergence from
shareholder wealth maximization.
● Market for private equity.
○ Private equity
■ Equity capital invested in private (non-public) companies. Primarily
invested through leveraged buyouts (LBOs).
○ Leveraged buyouts (LBOs).
 ■ Private investors, often in partnership with incumbent managers, issue
bonds and use the cash raised to buy the firm’s stock.
■ In essence replacing shareholders with bondholders and transforming the
firm from a public to a private entity.
■ Utilizes the bond market, as opposed to the stock market, to discipline
managers.
○ LBO-based private equity transactions are associated with three major changes
in corporate governance:
■ LBOs change the incentives of managers by providing them with
substantial equity stakes.
■ The high amount of debt imposes strong financial discipline.
■ LBO sponsors closely monitor the firms they have invested in.
○ Overall evidence:
■ Private equity results in relatively small job losses (about 1%–2%).
■ Improves efficiency by about 2%, at least in the short run.
■ Picture is less clear regarding the long run:
➢ LBOs may have forced managers to reduce investments in long-
term R&D.
➢ More recent research reports:
(1) Private equity-backed firms have more focused patents that
generate better economic returns.
(2) Such firms do not suffer from a reduction of R&D in the long
run.
● Internal Mechanisms + External Mechanisms = Governance Package.
● Thinking:
○ Failures of internal governance mechanisms in the 1970s activated the market
for corporate control in the 1980s.
○ The strengthened external mechanisms force firms to improve their internal
mechanisms.
● Result:
○ Since the 1980s, American managers have become much more focused on
stock prices.
○ Resulting in a new term, “shareholder capitalism”.
○ In Europe, executive stock options become popular and M&As more frequent.
● A Global Perspective on Internal and External Governance Mechanisms

External governance mechanisms

Weak Strong

Strong (Cell 1) (Cell 2)

Germany Canada
Internal Japan
governance
mechanisms Weak (Cell 3) (Cell 4)
 State-owned US
enterprises) UK

● Two Primary Families of Corporate Governance Systems

Corporations in the US and in the UK Corporations in continental Europe

and Japan

Anglo-American corporate governance German-Japanese corporate governance

models models

Market-oriented high-tension systems Bank-oriented network-based systems

Rely mostly on exit-based external Rely mostly on voice-based internal

mechanisms mechanisms

Shareholder capitalism Shareholder capitalism

A comprehensive Model of Corporate Governance

● Industry-based considerations (nature of the industry)

○ Outside directors on the board?
○ Link between inside management ownership and firm performance?
○ CEO duality?
● Resource-based considerations
○ Managerial human capital.
● Institution-based considerations
○ Formal institutional framework.
○ Informal institutional framework.
 ○ Foreign portfolio investment (FPI)—foreigners purchasing stocks and bonds.
Industry-Based Considerations
● More outside directors: Boosting performance?
○ In fast-moving industries requiring significant R&D (e.g., IT), outside directors are
found to have a negative impact on firm performance
○ Necessity for directors to have intimate knowledge about these industries
requires more strategic control.
○ Inexperienced outside directors often focus on financial control, inappropriate in
these industries.
● Inside management ownership: Better performance?
○ Only good in high-growth, turbulent industries.
○ No such link in low-growth, stable industries.
● CEO duality: Always bad?
○ In turbulent industries, CEO duality is good! a faster and more unified response
to changing events.
● Governance practices need to create a fit with the nature of the industry in which firms
are competing.
○ This cautions against universal prescriptions of certain “best” practices.
Resource-Based Considerations
● Managerial human capital: V, R, and I?
○ Skills and abilities of top managers and directors.
■ HP Case
○ Such as international experiences; social networks of these executives, often
through board interlocks.
● Ability to successfully list on a high-profile exchange.
○ In 1997: valuations of foreign firms listed in NY were 17% higher than their
domestic counterparts in the same country that were either unable or unwilling to
list abroad.
○ Today: the select few that are able to list in NY (SOX) are rewarded more
handsomely: Their valuations are now 37% higher than comparable groups of
domestic firms in the same country.
● Top management team (TMT) and board function within an organizational setting (the O
in VRIO).
○ Few people at the top of an organization can make a world of difference (Steve
Jobs at Apple).
Institution-Based Considerations
● Formal institutional framework
○ Fundamental difference: between the separation of ownership and control in
(most) Anglo-American firms and the concentration of ownership and control in
the rest of the world.
■ Why is there such a difference? Leading answer is an institution-based
one.
○ Formal legal protection encourages founding families and their heirs to dilute
their equity.
 ■ Large shareholders in emerging economies usually need to have a higher
percentage of shares to ensure control.
○ Strong evidence exists:
■ The weaker the formal legal and regulatory institutions protecting
shareholders,
■ The more concentrated ownership and control rights become.
○ Common-law countries generally have the strongest legal protection of investors
and the lowest concentration of corporate ownership.
■ Higher concentration for firms in emerging economies (such as Hong
Kong, India, and Israel).
■ Lower concentration for developed economies (such as Australia,
Canada, Ireland, and New Zealand).
○ In short: concentrated ownership and control is an answer to potentially rampant
principal–agent conflicts in the absence of sufficient legal protection of
shareholder rights.
○ But, what is good for controlling shareholders is not necessarily good for minority
shareholders and for an economy.
■ Minimization of principal–agent conflicts through concentration of
ownership and control, unfortunately, introduces more principal–principal
conflicts.
○ Principal–principal conflicts can result in:
■ Lower valuations, fewer publicly traded firms, inactive and smaller capital
markets, and, in turn, lower levels of economic development in general.
○ At its core, corporate governance ultimately is a choice about political
governance.
■ German practice of “codetermination”.
■ If German firms had US/UK-style dispersed ownership and still allowed
employees to control 50% of the votes on supervisory boards, these firms
would end up becoming employee-dominated firms.
■ Thus, concentrated ownership and control become a natural response.
○ Changing political choices will encounter significant resistance, especially from
incumbents.
■ German labor unions or Asian families.
■ Only when extraordinary events erupt would some politicians muster
sufficient political will to initiate major corporate governance reforms.
● Informal institutional framework:
○ Why and how have informal norms and values concerning corporate governance
changed to such a great extent?
1. The rise of capitalism has affected governance.
■ The triumph of capitalism naturally boils down to the triumph of capitalists
(shareholders).
2. Three aspects of globalization:
■ Contact with different governance norms.
■ FPI investors demand more protection.
 ■ The thirst for global capital requires adherence to listing requirements.
3. The global diffusion of “best practices” by various organizations including the
OECD.
■ A lot of codes are advisory and not legally binding.
■ OECD Principles of Corporate Governance (1999).
■ In Russia: adopting the 2002 Code of Corporate Conduct is voluntary,
firms not adopting it have to publicly explain why (essentially naming and
shaming themselves.).

Debates and Extensions

- Opportunistic Agents versus Managerial Stewards -
● Critics of agency theory:
○ Contend that most managers are likely to be honest and trustworthy.
○ Managerial mistakes may be due to a lack of competence, information, or luck,
and not necessarily due to self-serving motives.
○ Agency theory has been criticized as an “anti-management theory of
management.”
● A self-fulfilling prophecy.
○ Control mechanisms put managers on a “tight leash”.
○ Frustrated they end up engaging in the very self-serving behavior.
○ Agency theory may induce opportunistic behavior.
● Stewardship theory has emerged recently.
○ “pro-management” theory.
○ Safeguarding shareholders’ interests and advancing organizational goals will
maximize (most) managers’ own utility functions.
- Global Convergence versus Divergence -
● Is corporate governance converging or diverging globally?
● Convergence advocates:
○ Globalization will unleash a “survival-of-the-fittest” process by which firms will be
forced to adopt globally the best practices.
○ Global investors are willing to pay a premium for stock in firms with
AngloAmerican-style governance, prompting other firms to follow.
○ Cross-listing:
■ Primarily driven by the desire to tap into larger pools of capital.
● Convergence critics:
○ Governance practices will continue to diverge throughout the world.
○ Promoting more concentrated ownership and control is often recommended as a
solution to combat principal–agent conflicts in US and UK firms.
○ Making the same recommendation to reform firms in the rest of the world may be
counterproductive or even disastrous.
■ Main problem there is that controlling shareholders typically already have
too much ownership and control.
● “Cross-vergence”
 ○ Balancing the expectations of global investors and those of local stakeholders.
- State Ownership versus Private Ownership -
● Private ownership is good vs. State ownership is bad.
○ Intellectual and political reasoning behind three decades of privatization around
the world between 1980 and 2008.
○ Debate on private versus state ownership underpins much of the global
economic evolution in the 20th century.
● Experience throughout the former Eastern bloc and Western Europe:
○ SOEs typically suffer from a lack of accountability and a lack of economic
efficiency.
● In 2008, the pendulum suddenly swung back.
○ US government has refused to acknowledge that it has SOEs.
○ Instead, referred to them as “government-sponsored enterprises” (GSEs).
● Despite noble goals to rescue the economy, protect jobs, and fight recession,
government bailouts serve to heighten moral hazard.
○ Recklessness when people and organizations (including firms and governments)
do not have to face the full consequences of their actions.
○ Capitalism without the risk of failure becomes socialism.
● Table 11.4 Private ownership vs. State ownership

Private Ownership State Ownership

Objective of Maximize profits for private
the firm owners who are capitalists (and
maximize shareholder value for
shareholders if the firm is
publicly listed).
Optimal balance for a “fair” deal for
all stakeholders. Maximizing profits
is not the sole objective of the firm.
Protecting and minimizing social
unrest are legitimate goals.

Establishment Entry is determined by Entry is determined by government

of the firm entrepreneurs, owners, and officials.
investors.

Financing of Financing is from private Financing is from state sources

the firm sources (and public (such as direct subsidiaries or
shareholders if the firm is banks owned or controlled by
publicly traded). governments).

Liquidation of Exit is forced by competition. A Exit is determined by government

the firm firm has to declare bankruptcy officials. Firms deemed “too big to
or be acquired if it becomes fail” may be supported by taxpayer
financially insolvent. dollars indefinitely.

Appointment Management appointments are Management appointments are

and dismissal made by owners and investors made by government officials who
of largely based on merit. may also use noneconomic
management criteria.

Compensation Managers’ compensation is Managers’ compensation is

 of determined by competitive determined politically with some
management market forces. Managers tend consideration given to a sense of
to be paid more under private fairness and legitimacy in the eyes
ownership. of the public. Managers tend to be
paid less under state ownership.

● Anchored by SOEs, China over the past 30 years has grown its GDP by 9.5% a year
and its international trade volume by 18% a year.
○ SOEs represent 80% of China’s stock market capitalization.
○ In Russia, the figure is 62%, and in Brazil 38%.
● How to view the incoming investments from state-owned entities such as sovereign
wealth funds (SWFs) from emerging economies?
Introduction to Corporate Social Responsibility: https://www.youtube.com/watch?v=qY1ZsTA-
w7A

The Savvy Strategist

● Understand the nature of principal–agent and principal–principal conflicts to create better
governance mechanisms
● Develop firm-specific capabilities to differentiate a firm on corporate governance
dimensions
● Master the rules affecting corporate governance, and anticipate changes
Corporate Social Responsibility
● Consideration of, and response to, issues beyond the narrow economic, technical, and
legal requirements of the firm to accomplish social benefits along with the traditional
economic gains which the firm seeks.
● At the heart of CSR is the concept of stakeholder.
○ Any group or individual who can affect or is affected by the achievement of the
organization’s objectives.
○ Managers, non-managerial employees (hereafter “employees”), suppliers,
customers, communities, governments, and social and environmental groups.
○ Are Shareholders Stakeholders?
● Leading debate on CSR is:
○ Whether managers’ efforts to promote the interests of these stakeholders are at
odds with their fiduciary duty (required by law) to safeguard shareholder
interests.
● The question is: How to strategize with CSR?
A Stakeholder View of the Firm
● A stakeholder view of the firm, with a quest for global sustainability, represents a “big
picture.”
● A key goal for CSR is global sustainability:
○ Which is defined as the ability “to meet the needs of the present without
compromising the ability of future generations to meet their needs.”
○ Sustainable social and natural environment, but also sustainable capitalism (the
firm).
● Globally, at least three sets of drivers are related to the urgency of sustainability:
1. Rising levels of population, poverty, and inequity associated with globalization.
2. NGOs and other civil society stakeholders have increasingly assumed the role of
monitor and in some cases enforcer of standards.
3. Industrialization has created irreversible effects on the environment.
● Drivers underpinning global sustainability are complex and multidimensional.

Primary and Secondary Stakeholder Groups

● Primary stakeholder groups.
○ Constituents the firm relies on for its continuous survival and prosperity.
○ Shareholders, managers, employees, suppliers, customers—together with
governments and communities.
● Secondary stakeholder groups.
○ “those who influence or affect, or are influenced or affected by, the corporation,
but they are not engaged in transactions with the corporation and are not
essential for its survival.
 ○ While the firm does not depend on secondary stakeholder groups for its survival,
such groups may have the potential to cause significant embarrassment and
damage.
○ Environmental groups, Fair labor practice groups.
● A key proposition of the stakeholder view of the firm:
○ Instead of only pursuing the economic bottom line, such as profits and
shareholder returns, firms should pursue a more balanced set, called the triple
bottom line.
○ Economic, social, and environmental performance.
● A Stakeholder View of the Firm

A Fundamental Debate
● CSR debate centers on the nature of the firm in society.
○ Why does the firm exist?
○ Intuitive answer: “To make money.”
○ MF: “The social responsibility of business is to increase its profits.”
○ Shareholder capitalism.
■ Since the 1980s, a term that explicitly places shareholders as the single
most important stakeholder group.
■ Adam Smith’s idea that pursuit of economic self-interest (within legal and
ethical bounds) leads to efficient markets.
● Free market advocates argue:
○ If firms attempt to attain social goals (providing employment and social welfare),
managers will lose their focus on profit maximization (and its derivative,
shareholder value maximization).
○ Firms may lose their character as capitalistic enterprises and become socialist
organizations.
■ An accurate characterization of numerous state-owned enterprises
(SOEs).
● Privatization
○ In essence, is to remove the social function of these firms and restore their
economic focus through private ownership.
● CSR movement has emerged against such a formidable and influential school of
thought.
 ● CSR advocates argue:
○ A free market system that takes the pursuit of self-interest and profit may in
practice fail to constrain itself, thus often breeding greed, excesses, and abuses.
○ Firms and managers, if left to their own devices, may choose self-interest over
public interest.
○ “…all stakeholders have an equal right to bargain for a fair deal.”
○ The very purpose of the firm, instead of being a profit-maximizing entity, is
argued to serve as a vehicle for coordinating their interests.
● The CSR school has two driving forces:
1. Even as free markets march around the world, the gap between the haves and
have-nots has widened.
○ 2% of the world’s children living in America enjoy 50% of the world’s toys, one-
quarter of the children in Bangladesh and Nigeria are in their countries’ work
force.
2. Waves of disasters and scandals.
○ 1989, the oil tanker Exxon Valdez spilled a tanker-load of oil in the pristine waters
of Alaska.
○ In 2002, scandals of Enron, WorldCom, Royal Ahold, and Parmalat rocked the
world.
○ In 2011, a Japanese earthquake triggered the meltdown of the Fukushima
nuclear power station.
● A Comprehensive Model of Corporate Social Responsibility

Industry-Based Considerations
● Rivalry Among Competitors.
○ The more concentrated an industry is, the more likely competitors will recognize
their mutual interdependence – easier to resist change for incumbents.
○ Facing mounting pressures to reduce emission levels, the automobile industry
lobbied politicians, challenged the science of global climatic change, and pointed
to the high costs of reducing emissions.
 ○ Until some first-mover firms deviated from such norms in order to score
competitive points with game. Case: Tesla
● Threat of Potential Entry.
○ Experience accumulated from being first movers in pollution control technologies
can create entry barriers that favor incumbents.
○ The two major types of pollution control technologies:
■ Pollution prevention.
■ Pollution reduction.
● Bargaining Power of Suppliers.
○ If socially and environmentally conscious suppliers provide unique differentiated
products with few or no substitutes, their bargaining power is likely to be
substantial.
○ Coca-Cola is able to assert its bargaining power by requiring that all its bottlers
certify that their social and environmental practices are responsible. WHY?
○ Coca-Cola also encourages its bottlers to support social programs.
● Bargaining Power of Buyers.
○ Individual and corporate buyers interested in CSR may extract substantial
concessions from the focal firm.
○ Shell’s 1995 decision to sink an oil platform in the North Sea.
○ Nike is able to enact a worldwide monitoring program for all supplier factories.
○ Walmart „...has the potential to impact sustainability at every level of the supply
chain.”
○ 70 million acres committed to fertilizer optimization.
○ 50% of China-sourced factories participate in an energy efficiency program.
● Threat of Substitutes.
○ If substitutes are superior to existing products and costs are reasonable, they
may attract more customers.
○ The possible threat of substitutes requires firms to vigilantly scan the larger
environment, instead of narrowly focusing on the focal industry.
○ Ex. Wind power, LED...
● The five forces framework suggests two lessons:
1. It reinforces the important point that not all industries are equal in terms of their
exposure to CSR challenges. No industry may be completely immune from CSR.
2. Industries and firms may want to selectively but proactively turn some of these
threats into opportunities. Instead of treating NGOs as threats, Dow Chemical,
Home Depot, Lowe’s, and Unilever work with them.
○ Making their CSR activities as a source of differentiation, as opposed to an
additional item of cost.

Resource-Based Considerations
● Value: Some CSR policies may not add to the firm’s value
○ Firms can choose to appease environmental groups by purchasing energy only
from power plants utilizing green sources, such as wind-generated power.
 ○ Social issue participation: refers to a firm’s participation in social causes not
directly related to the management of its primary stakeholders.
■ Social issue participation may create some remote social and
environmental value.
■ Does not satisfy the economic leg of the triple bottom line.
● Rarity:
○ CSR-related resources are not always rare.
○ Since both competitors possess capabilities to manage these processes, they
are common (not rare) resources.
○ Both Home Depot and Lowe’s have/work with NGOs.
● Imitability:
○ CSR that is embedded in people is harder to imitate (idiosyncratic managerial
and employee skills, attitudes, and interpretations).
○ Socially complex way of channeling their energy and conviction toward CSR at
Whole Foods cannot be easily imitated.
● Organization: A firm needs to tie together CSR activities
○ These complementary assets are not developed as part of new environmental
strategies; rather, they are grown from more general business strategies, such as
differentiation
CSR Economic Performance Puzzle
● “CSR does not hurt [economic] performance (?), but there is no concrete support to
believe that it leads to supranormal [economic] returns.”
● Why is there no conclusive evidence on a direct, positive link between CSR and
economic performance?
● Various studies produce different results.
○ All studies have some sampling bias.
○ Studies that over-sample firms not yet ready for a high level of CSR activities are
likely to report a negative relationship between CSR and economic performance.
○ Likewise, studies that over-sample firms ready for CSR may find a positive
relationship.
● Not every firm benefits from CSR.
○ Since each firm is different (a basic assumption of the resource-based view), not
every firm’s economic performance is likely to benefit from CSR.
○ Because of the capability constraints discussed above, many firms are not cut
out for a CSR-intensive (differentiation) strategy

Institution-Based Considerations
● Reactive strategy: Many cost-conscious manufacturers ignore CSR.
● Defensive strategy: Argue against costs.
● Accommodative strategy: CSR as a worthwhile endeavor.
● Proactive strategy: Actively participate in policy discussions, build alliances with
stakeholders and voluntarily go beyond what the regulations require.
 ● Making strategic choices: A strategic menu of choices among reactive, defensive,
accommodative, and proactive strategies.
● Table 12.3 The US Chemical Industry Responds to Environmental Pressures

Phase Strategic Representative statements from the industry’s trade

Response journal, chemical week

1962-70 Reactive Denied the severity of environmental problems and

argued that these problems could be solved
independently through the industry’s technological
prowess.

1971-82 Defensive “Congress seems determined to add one more regulation

to the early 27 health and safety regulations we must
answer to. This will make the EPA (environmental
protection agency) a chemical czar. No agency in a
democracy should have that authority” (1975).

1983-88 Accommodative “The EPA has been criticized for going too slow… Still,
we think that it is doing a good job” (1982). “Critics expect
and overnight fix. The EPA deserves credit for its pace
and accomplishments” (1982).

1989- Proactive “Green line equals bottom line - The Clean Air Act (CAA)
equals efficiency. Everything you hear about the ‘costs’ of
complying with the CAA is probably wrong… Wiser
competitors will rush to exploit the Green Revolution”
(1990).

Reactive Strategy
● Characterized by a lack of support by top management for CSR causes.
● The need to accept CSR:
○ Neither internalized through cognitive beliefs,
○ Nor does it result in any norms in practice,
○ Leaving only formal regulatory pressures to compel firms into compliance.
● CSR Movement.
○ Emerged in response to the blatant lack of responsiveness toward CSR.

Defensive Strategy
● Focuses on regulatory compliance with only piecemeal involvement by top management.
○ CSR issues are regarded as an added cost or nuisance.
○ Firms admit responsibility, but often fight it.
● In the absence of informal normative and cognitive beliefs, it seems that formal
regulatory pressures are the only feasible way to push firms ahead.
 ○ The regulatory requirements are at significant odds with the norms and cognitive
beliefs held by the industry.
○ “internalizing an externality.”
○ Stringent environmental regulation may force firms to innovate, however
reluctantly, thus benefiting the competitiveness of both the industry and country.

Accommodative Strategy
● From both normative and cognitive standpoints, it may become a legitimate social
obligation to accept responsibility and do all that is required.
● Adopting a code of conduct is a tangible indication of a firm’s willingness to accept CSR.
○ A negative view: Window dressing?
○ An instrumental view: Another plot to make money?
○ A positive view: Doing the right thing?
● Institution-based answer: All of the above
○ From window dressing to self-motivated, better corporate citizens.
● The fact that firms are practicing CSR is indicative of the rising legitimacy of CSR on the
management agenda.

Proactive Strategy
● Views CSR as a source of differentiation that permeates throughout the corporate DNA.
● Proactive participation in regional, national, and international policy discussions.
● Alliances with stakeholder groups (e.g., NGOs).
○ Alliances with NGOs: The key lies in identifying short-term, manageable projects
of mutual interests.
● Voluntary activities beyond what is legally required.

Debates and Extensions

- domestic versus overseas social responsibility -
● Debate is heated between two views:
○ Stakeholder capitalism (Chapter 12).
○ Shareholder capitalism (Chapter 11).
● Expanding overseas:
○ Potentially increases corporate profits,
○ Provides employment to host countries and increases standards of living there;
■ Both noble CSR dimensions.
○ This is often done at the expense of domestic employees and communities.
○ DaimlerChrysler’s German unions: scrap 3% pay rise, 11% increase in work
hours.
● One may argue that MNEs shrink their CSR by increasing the social burdens of their
home countries.
○ Executives of these companies are heavily criticized.
○ Are they doing anything wrong?
- active versus inactive engagement overseas -
● To what extent should an MNE use threats or its power to impose its values in a
country?
● Long standing principle governing the relationship between MNEs and host countries:
○ Non-intervention in local affairs.
○ Originates from concerns that MNEs may engage in political activities against the
national interests of the host country.
● Should foreign MNEs spearhead efforts to remove some discriminatory practices or
should they remain neutral by conforming to current host country laws and norms.
○ Shell in Nigeria.
○ BP in South Africa.
- race to the bottom (“pollution haven”) versus race to the top -
● Some companies may move to a country to escape environmental regulations.
○ To attract investments, developing countries may enter a “race to the bottom” by
lowering, or at least not tightening, environmental standards.
○ Subsequently they may become “pollution havens”.
● Counterarguments.
○ Many MNEs’ voluntary adhere to environmental standards higher than those
required by host countries.
○ Most MNEs’ reportedly outperform local firms in environmental practices.
○ Some MNEs’ such as Dow may facilitate the diffusion of better environmental
technologies to these countries.

The Savvy Strategist

● Managers may want to integrate CSR as part of the core activities of the firm—instead of
“faking it” and making cosmetic changes
● Managers need to pick CSR battles carefully
● Strategists need to understand the formal and informal rules of the game, anticipate
changes, and seek to shape such changes
● From a CSR perspective, we can revisit the four fundamental questions
● The globally ambiguous and different CSR standards, norms, and expectations cause
many managers to relegate CSR to the “backburner,” but they have responsibility to
safeguard and advance capitalism by building more humane, more inclusive, and fairer
firms
The Entrepreneurial Firm

Entrepreneurship, Entrepreneurs, and Entrepreneurial Firms

● Entrepreneurship
○ Identification and exploitation of previously unexplored opportunities.
○ There is no “rule” banning larger and older firms from being “entrepreneurial.”
● Small and medium-sized enterprises (SMEs).
○ Fewer than 500 employees in the United States.
○ Fewer than 250 employees in the European Union.
○ Most students will join SMEs for employment.
○ Firm size and age are NOT defining characteristics of entrepreneurship.
● It is concerned with the „opportunities”:
○ Sources of opportunities;
○ Processes of discovery, evaluation, and exploitation of opportunities; and
○ Individuals who discover, evaluate, and exploit them.
● Entrepreneurs.
○ “Entrepreneurs” traditionally means intermediaries connecting others.
○ Today, the word mostly refers to founders and owners of new businesses or
managers of existing firms.
○ International entrepreneurship: “a combination of innovative, proactive, and risk-
seeking behavior that crosses national borders and is intended to create wealth
in organizations.”
● SMEs are not the exclusive domain of entrepreneurship.
○ The convention that many people use is to associate entrepreneurship with
SMEs.
○ Because, on average, SMEs tend to be more entrepreneurial than large firms.
● SMEs are important.
○ Worldwide, they account for over 95% of the number of firms.
○ Create approximately 50% of total value added.
○ Generate 60%–90% of employment (depending on the country).
● A comprehensive model of entrepreneurship
Industry-based considerations
● Intensity of inter-firm rivalry.
○ The fewer the number of incumbent firms, the more likely they will form some
sort of collusion to prevent newcomers from gaining market shares.
○ Worst-case scenario: monopoly incumbent, such as Microsoft, may become so
dominant that it may potentially stifle new innovation by SMEs.
■ The key reason why Microsoft was prosecuted by the US and EU
● Bargaining power of suppliers: how to reduce it?
○ Entrepreneurial solutions can reduce such bargaining power.
○ Ex. Microsoft is the monopoly supplier of operating systems to a majority of
personal computer (PC) makers in the world, which feel uncomfortable about
being compelled to purchase Microsoft products.
○ As a result, LINUX has become more popular as an emerging alternative.
● Bargaining power of buyers: how to reduce it?
○ Amazon in the United States and Ozon in Russia, have provided more outlets for
publishers, thereby reducing the bargaining power of traditional bookstores as
buyers.
● Threat of substitute products/services.
○ Entrepreneurs can bring in substitute products that can redefine the game.
○ Ex. e-mails and online payments.
● Entry barriers: capital intensive.
○ New firm entries cluster around low entry-barrier industries, such as restaurants.
○ Capital-intensive industries hinder the chances of entrepreneurial success.

Resource-based considerations
● Entrepreneurial resources must create VRIO.
○ By offering cheap fares, convenient schedules, and Wi-Fi and a power port on
every seat, Megabus offers superb value.
 ○ “If everybody has it, you can’t make money from it.”
■ Ex. Wahaha.
○ The ability to do the “dirtiest job on the Internet” as online moderators are very
hard to imitate.
■ Ex. eModeration and ICUC Moderation.
○ Entrepreneurial resources must be organizationally embedded.
■ Private military companies (PMCs) become a global industry, thanks to
the superb organizational capabilities of entrepreneurial firms such as
Blackwater.

Institution-based considerations
● Entrepreneurship is thriving around the globe in general, its development is however
uneven.
○ Whether entrepreneurship is facilitated or retarded significantly depends on
formal institutions governing how entrepreneurs start up new firms.
● Governments in developed economies impose fewer procedures and a lower total cost.
○ An average of 4.6 procedures for OECD high-income countries; lower cost – free
in Japan and 5.1% of per capita GDP in Germany.
○ Harsher hurdles in poor countries.
■ Burundi imposes a total cost of 430 times of its per capita GDP for
entrepreneurs to obtain electricity.
■ Sierra Leone leads the world in requiring entrepreneurs to spend 441
days to obtain electricity.
● The more entrepreneur-friendly these formal institutional requirements are, the more
flourishing entrepreneurship is, and the more developed the economies become—and
vice versa.
○ As a result, more countries are now reforming their formal institutions in order to
become more entrepreneur-friendly.
● Figure 6.2 Average Ranking on the Ease of Doing Businessž

● Informal institutions such as cultural values and norms also affect entrepreneurship.
○ Individualistic and low uncertainty avoidance societies tend to foster relatively
more entrepreneurs.
○ Collectivistic and high uncertainty avoidance societies may result in relatively
fewer entrepreneurs.
 ○ Japan has the lowest rate of start-ups, one-third of America’s rate and half of
Europe’s.

Five Entrepreneurial Strategies

● Growth
○ The excitement of growing a new company is oftentimes what attracts
entrepreneurs in the first place.
○ The growth of an entrepreneurial firm can be viewed as an attempt to more fully
use currently underutilized resources and capabilities.
○ Attempt to utilize resources and capabilities.
■ Entrepreneurial vision.
■ Entrepreneurial drive.
■ Entrepreneurial leadership.
● Innovation
○ An innovation strategy is a specialized form of differentiation strategy.
■ Firms first to introduce new goods or services are likely to earn (quasi)
“monopoly profits” until competitors emerge.
○ Advantages of an innovation strategy.
■ Creates a more sustainable competitive advantage.
■ Innovation should be regarded broadly.
➢ Technological breakthroughs and organizational innovations (new
ways of doing business).
➢ Most start-ups reproduce existing organizational routines, but
recombine them to create some novel product/service offerings.
➢ Product vs. process. vs. business model innovation
➢ Case: Swatch
■ Owners, managers, and employees at entrepreneurial firms are more
innovative and risk-taking than those at large firms.
➢ Many SMEs are founded by former employees of large firms who
were frustrated by their inability to translate innovative ideas into
realities at the large firms.
➢ Ex. SAP; Amazon
○ The Disruptive cloud
Japanese computer giant Fujitsu plots a roadmap to navigate the transition to cloud computing.
Fujitsu is the world’s third-largest information technology services company, after IBM and Hewlett
Packard. It offers a range of products and services in the areas of computing, telecommunications
and microelectronics.

In 2010, it launched a new cloud computing business to take advantage of the transition from the
traditional model of in-house business computing. David Gentle, Director of Foresight at Fujitsu’s
Cloud and Strategic Service Offerings business, describes the transition as a disruptive innovation:
‘It’s a bit like a salmon that is swimming upstream and then has to make a leap to get to the next
smooth stretch of water.’

Cloud computing relies on the internet to deliver computer services from external suppliers direct to
users. Dropbox and Apple’s iCloud are consumer cloud services. For business, the cloud comes in
 three main forms:
➢ ‘Software as a Service’ (SaaS), such as Microsoft Office via the internet;
➢ ‘Infrastructure as a Service’ (IaaS), such as Amazon’s EC2 virtual computer capacity; and
➢ ‘Platform as a Service’ (PaaS), which provides a computing platform with operating system, web server
and database, such as Google’s App Engine.

Fujitsu describes the transition from the traditional model to the Cloud Computing Era in a
technology ‘roadmap’ titled ‘The Cloud Paradigm Shift’. The road-map describes the traditional
client–server model, where the computing power is supplied by in-house servers, as offering a
trajectory of steadily improving technology efficiency. This culminates in the so-called Private
Cloud, cloud services provided by the business itself. The shift to the ‘Public Cloud’ (with full
adoption of SaaS, IaaS and PaaS) brings a leap in value.

By tapping into the shared resources of external suppliers, a business gains access to huge
economies of scale and the innovations possible by specialist suppliers. The new trajectory
increases value by improving business efficiency.

The shift is disruptive, though. Purchasers in IT functions will no longer need such large
investments in physical servers and staff. As traditional server products and related services
decline, Fujitsu is transitioning its business to meet the demands of the new market. David Gentle
explains the function of the roadmap in this context: ‘This roadmap is the first slide in any
conversation with customers, partners and staff internally. It shows the future, as well as anchoring
on the past. It helps get everyone on the same page.’
● Network
○ Intentionally constructing and tapping into relationships, connections, and ties
that individuals and organizations have developed.
■ Two kinds of networks: personal and organizational.
■ Translate personal networks into value-adding organizational networks.
○ Three attributes distinguish entrepreneurial networking:
■ Urgency, intensity, and impact
○ Distinguishing characteristics:
■ Entrepreneurial firms have a high degree of urgency to develop and
leverage networks.
➢ Needed to overcome liability of newness; legitimacy of start-ups.
■ Intensity of relationships is important.
➢ Strong ties are more durable, reliable, and trustworthy
relationships,
➢ Weak ties are less durable, reliable, and trustworthy.
■ Contributions of entrepreneurs’ personal networks tend to have a strong
impact on firm performance.
➢ Networks represent significant resources and opportunities.
➢ May lead to successful entrepreneurial performance.
○ Often entrepreneurs have worked for large companies beforehand.
■ Continue to use relationships afterwards.
■ (HP) Hewlett came fairly directly out of Stanford University’s laboratories,
while Packard worked at General Electric and Litton Industries.
■ The HP company used Litton Industries’ foundries early on, and later
used relationships at General Electric to recruit experienced managers.
 ■ Steve Jobs worked for William Hewlett for a summer job aged 12, and
later was the 40th employee at video games company Atari.
○ Corporate venturing.
■ Many large corporations have developed corporate venture units that
invest externally in new ventures.
■ Safeguards against disruptive innovations and potential drivers of future
growth.
○ Spin-offs (or spin-outs)
■ Go in the opposite direction to corporate venturing: generation of small
innovative units from larger organizations.
■ Fairchild Semiconductor is famous for generating many successful spin-
offs, including Intel, AMD and LSI Logic.
■ Spin-off relationships can be mutually supportive, with the larger parent
organization offering the new venture seed capital and access to its
marketing or technological resources.
○ Ecosystems.
■ Communities of connected suppliers, agents, distributors, franchisees,
technology entrepreneurs and makers of complementary products.
■ High-technology companies such as Cisco, IBM and Intel often foster
‘ecosystems’ of smaller companies.
■ Apple has created an ecosystem of apps around its iPhone: app writers
get the benefit of a large and lucrative market.
○ Hewlett Packard
■ The entrepreneurial team William Hewlett and David Packard, founders of
the famous computing and printer company HP, are oft-quoted examples
of the garage stereotype.
■ But digging beneath the stereotype soon reveals a more complex story, in
which relationships with large companies can be important right from the
start. Often entrepreneurs have worked for large companies beforehand,
and continue to use relationships (network) afterwards.
■ While Hewlett came fairly directly out of Stanford University’s laboratories,
Packard worked at General Electric and Litton Industries. They built
extensively on their previous social relationships and ties when setting up
HP. The company used Litton Industries’ foundries early on, and later
used relationships at General Electric to recruit experienced managers.
○ Apple
■ Steve Jobs has often been celebrated as the heroic innovator and
entrepreneur behind Apple, but he too relied heavily on external
relationships.
■ From the very beginning Apple computer did not only involve Jobs, but
his founding partner Steve Wozniak. They too started in a garage, but
similar to HP built heavily on their experiences with more established
organizations.
■ Wozniak worked at HP and Jobs at Atari and this helped them gain
 access to crucial knowledge and contacts for the development of the
start-up. When their venture had become more established they left their
employers and incorporated Apple Computer.
■ Apple’s much later successes with the iPod and later the iPhone and iPad
have also relied on important external relationships.
■ The music player application SoundJam MP was externally acquired early
on and an external entrepreneur was vital for developing iTunes. Apple
also initially worked with the then leading mobile telephone maker
Motorola to develop a smart phone.
○ Facebook
■ One of today’s most successful and well known entrepreneurs is Mark
Zuckerberg who started a photo-rating site called Facemash from his
dorm room by using Harvard’s online student photographs.
■ Zuckerberg did not rely on previous organizational experiences, but built
on his programming skills and involved others with complementary skills
early on. Based on his previous experience with Facemash, he founded
the social networking website Facebook together with other fellow
Harvard students to develop and grow the site.
■ The team (Dustin Moskovitz, Chris Hughes and Eduardo Saverin) brought
various skills including programming, promotion, graphics, financing and
other business expertise. To focus entirely on Facebook and attract
further talent and financing to their team, Zuckerberg and Moskovitz
abandoned their education at Harvard and moved to Silicon Valley
(California).
■ There Zuckerberg continued to build on external business expertise
together with venture capitalist investors to further grow the company.
● Financing/governance
○ The “4F” sources of entrepreneurial financing.
○ Outside investors usually demand collateral or some other assurance, next to:
■ Examining business plans, requiring a strong management team, and
scrutinizing financial reviews and analysis.
■ Angels (wealthy individual investors), venture capitalists (VCs), banks,
foreign entrants, and government agencies.
○ Growth matters!
■ Odds for survival during crucial early years are significantly correlated
with firm size.
■ Faster a new start-up can reach a certain size, the more likely it will
survive.
■ Entrepreneurs often choose to accept more outside investment in order to
reach a large size.
○ Internationally, the extent to which entrepreneurs draw on resources of family
and friends vis-à-vis formal outside investors (such as VCs) is different.
■ Sweden, South Africa, Belgium, and the United States lead the world in
VC investment as a percentage of GDP.
 ■ Greece and China have the lowest level of VC investment.
■ China leads the world with the highest level of informal investment from
family and friends as a percentage of GDP.
■ Brazil and Hungary, on the other hand, have the lowest level of informal
investment.
■ Microfinance, has emerged in response to the lack of financing for
entrepreneurial opportunities in many countries.
○ Startup Financing Cycle

○ One- and Four-Year Survival Rates by Firm Size

Firm Size Chances Of Surviving Firm Size Chances Of Surviving
(employees) after 1 year (employees) after 4 years

0-9 78% 0-19 50%

10-19 86% 20-49 67%
20-99 95% 50-99 67%
100-249 95% 100-499 70%
250+ 100%

● Harvest/exit
○ Routes for entrepreneurial harvest and exit:
1. Selling an equity stake
➢ Can substantially increase the value of the firm.
➢ Entrepreneurs must be willing to give up some ownership and
control rights.
2. Selling the business.
➢ Painful discount if the business is failing, or it may carry a happy
premium if the business is booming.
➢ Typically one of the most significant and emotionally charged
events entrepreneurs confront.
3. Merging with another firm.
➢ Firm may lose its independence.
➢ Some entrepreneurs may have to personally exit the firm.
4. Going public with an initial public offering (IPO).
➢ The goal of many entrepreneurs.
 ➢ An IPO has several advantages and disadvantages:

Advantages Disadvantages

● Improved financial condition ● Subject to the whims of financial market

● Diversification of shareholder base
● Ability to cash out
● Management and employee incentives
● Enhanced corporate reputation
● Greater opportunity for future acquisition
● Forced to focus on the short term
● Loss of entrepreneurial control
● New fiduciary responsibilities for
shareholders
● Loss of privacy
● Limits on management’s freedom of
action
● Demands of periodic reporting

5. Declaring bankruptcy.
● Internationalization (covered in the previous sections)
○ A myth:
■ Only large MNEs do business abroad and that SMEs mostly operate
domestically.
■ This myth, based on historical stereotypes, is being increasingly
challenged.
■ Some start-ups attempt to do business abroad from inception: born global
firms (or international new ventures).
○ Transaction Costs and Entrepreneurial Opportunities.
■ International transaction costs are qualitatively higher.
■ Costs can be high due to numerous innocent differences in formal
institutions and informal norms.
■ Or, may be due to a high level of deliberate opportunism that is hard to
detect and remedy.
■ Entrepreneurial opportunities exist to lower transaction costs and bring
distant groups of people, firms, and countries together.
○ International Strategies for entering foreign markets:
■ Direct exporting.
■ Licensing or franchising.
■ Foreign direct investment (FDI).
○ International strategies for staying in domestic markets:
■ Indirect exporting through domestic - based export intermediaries.
■ Become suppliers of foreign firms doing business in one’s home country.
■ Become licensees or franchisees of foreign brands.
■ Become alliance partners of foreign direct investors.
■ Harvest and exit through sell-offs to foreign firms
○ Internationalization Strategies for Entrepreneurial Firms

Entering foreign markets Staying in domestic markets

 ● Direct exports
● Franchising/licensing
● Foreign direct investment (through
gree-field wholly owned subsidiaries,
strategic alliances, and/or foreign
acquisitions)
● Indirect exports (through domestic export
intermediaries)
● Supplier of foreign firms
● Franchisee/licensee of foreign brands
● Alliance partner of foreign direct investors
● Harvest and exit (through sell-off to and
acquisition by foreign entrants)

Debates and Extensions

- traits versus institutions -
● What motivates entrepreneurs to establish new firms, while most others are simply
content to work for bosses?
○ Probably the oldest debate on entrepreneurship.
○ “traits” school of thought argues that it is personal traits that matter.
○ A stronger desire for achievement and are more willing to take risks and tolerate
ambiguities.
○ Serial entrepreneurs
■ People who start, grow, and sell several businesses throughout their
career.
○ Diversity among entrepreneurs makes any attempt to develop a standard
psychological or personality profile futile.
○ Critics suggest what matters is institutions.
■ The environments that set formal and informal rules of the game.
○ Ethnic Chinese have exhibited a high degree of entrepreneurship throughout
Southeast Asia.
■ As a minority group (usually less than 10% of the population in countries
such as Indonesia and Thailand), ethnic Chinese control 70%–80% of the
wealth.
■ The case of Baidu.
○ Micro institutions also matter.
■ Family background and educational attainment.
- slow internationalizers versus born global start-ups -
● Can SMEs internationalize faster than what has been suggested by traditional stage
models?
○ Models that portray SME internationalization as a slow, stage-by-stage process.
○ Should they rapidly internationalize?
● It is possible for some (but not all) SMEs to make very rapid progress in
internationalization.
○ Ex. Logitech.
● Firms following the prescription of stage models:
○ When eventually internationalizing, must overcome substantial inertia because of
their domestic orientation.
 ○ In contrast, firms that internationalize earlier need to overcome fewer of these
barriers.
● In conclusion:
○ The teachings of stage models are still relevant.
○ Consequently, indiscriminate advice to “go global” may not be warranted
- anti-failure biases versus entrepreneur-friendly bankruptcy laws -
● How to treat failed entrepreneurs who file for bankruptcy?
● Historically, entrepreneur-friendliness and bankruptcy laws are like an “oxymoron,”
○ Bankruptcy laws are usually harsh and even cruel.
○ Term “bankruptcy” is derived from a harsh practice:
■ In medieval Italy, if bankrupt entrepreneurs did not pay their debt, debtors
would destroy the trading bench (booth).
■ The Italian word for broken bench, “banca rotta,” has evolved into the
English word “bankruptcy.”
■ The world’s first bankruptcy law, passed in England in 1542, considered a
bankrupt individual a criminal and penalties ranged from incarceration to
death sentence.
○ Recently, many governments have realized that entrepreneur-friendly bankruptcy
laws can not only lower exit barriers, but also lower entry barriers.
■ Approximately 50% of US entrepreneurs who filed bankruptcy resumed a
new venture in four years.

The Savvy Entrepreneur

● Entrepreneurs are engines of creative destruction.
● Insights on entrepreneurship by the three leading perspectives on strategy: Industry,
Resource, and Institution views.
● Four fundamental questions in strategy provide insight.
Case Studies

The Murdochs
Overview:
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Notes:
● What kind of a conflict, do you identify here?
● PRINCIPAL- PRINCIPAL CONFLICT (between controlling and minority shareholders)
● Manifestation of this?
● related transaction
● Why related transactions?
● Not a pure market-based transaction. Their relationships here between are among the family
members. That's what makes it to relate your transaction
● Why is this related transaction problem in this case?
● Because they are overpaying for a particular asset and they are channeling money and
Channeling capital assets from Company A (News Corp )to (Shine), which is essentially 100%
owned by Murdoch.
● This benefits the interests of the majority of shareholders. The Murdoch's at the expense of the
interest of the minority shareholders this price would never be paid.
● If there was no family relationship here.

HP
Overview:
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Notes:
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TATA Group
Overview:
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Notes:
● a corporation
● strategy - corporate level strategy
● this strategy answers to the question Where to compete?
● TATA group competes in IT, automobiles, Hotels, Salt, Steel...
● TATA is product unrelated group - a conglomerate, very different industries
● TAT Group is corporate HQ (capital G in Group)
● reforms=restructuring (2 main were: downsizing, downscoping)
 ● type of conglomerate: a classical conglomerate with focus on southeast asia
● an option to step down - face saving/keep one's reputation
● first glimpse of conflict: Cyrus was a chairman, kicked out by the BoD, BoD did not want
restructuring, chairman did
● companies in corporate portfolio are called business units
● how to compete
● competitive strategy, compete in the same industry as their rivals
● superior resources and capabilities are a source of competitive advantage and ultimately
a superiority in the industry
● tough love - for the sake of long term sustainability of the business
● ethics before profits -
● Mistry's family owns a lot of the parent company
● conflict: principal-principal (he is a chairman, CEO family owns shares), principal-agent
conflict (
● the conflict will continue on general assembly and other such events

Nissan
Overview:
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Notes:
● relation - cross-shareholding alliance
● this is an equity-based alliance (each company has a shares of the other)
● Renalut owns 43 % of nissan
● nissan owns 15% of Renault
● options related to the risk - real options (enable a low amount of involvement, gradually
increase the amount of equity as risk decreases)
● BoD made a strategic decision to merge
● ideally both BoDs should agree on the decision, in this case Nissan was not too much
into the idea
● strategies to avoid the merger
● Ghosn arrested after internal investigation started by the whistleblower
● BoD is responsible for a CEO, they should be informed on his actions, but BoD assigned
him at this position
● they should confront the CEO on the issue, offer him to step down (especially in Japan)
● key goal was to stop the merger - remove the person from the decision making authority
with the highest power
● essentially, this would lead to renegotiation of the alliance

Facebook
Overview:
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Notes:
● difference between primary and secondary stakeholders
● all users are in transactional relationship with facebook
● triple bottom line: social, economic(profit=max shareholder wealth), environmental; case
doesn't provide data for environmental; FB satisfies which one completely
● provides the network, the content is not their responsibility
● pros for BoD of taking action to eliminate spread of disinformation (if you don't take care
of it yourself someone else will do it for you, keep the reputation at bay, major
advertisers will switch platforms, huge investment)

Short case 1 - the plastic plant

Overview:
● George moved to Hondo, Texas and is now a manager of Ardank Plastic Inc.
● The company is manufacturing plastic parts for small equipment
● Smokestack emissions were above EPA guidelines
● Contacted by EPA - there will be fines if they don’t fix it
● HQ would not invest in new smokestack scrubbers
● George contacted Bill (his boss) who said the margins were at their limits and there is no
money for new scrubbers
● George found out they were scheduling heavy emissions work at night so that during the
day they would be within EPA guidelines, George didn’t like this
● A month later Bill calls displeased about new fines, he said to move plants to mexico
where there are no clean air restrictions (this would eliminate EPA problems)
● If they relocate
- The air would still travel to US side
- Their friends and family would lose their jobs
- No EPA
- The infrastructure of city of Hondo would be devastated
Notes:
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Short case 2 - chemical waste

Overview:
● Bryan was recently hired to oversee the construction of production facilities for a new
product
● The plant is close to a river and the company received permit to dump waste in it
(several nearby plants also do the same)
● The government agency allowed more waste to be released then previously anticipated -
a recycling process is thus not needed
● Mediocre performance of the company for several quarters - new product will save it,
employees are looking forward to bonuses
 ● Bryan is upset that recycling process will not be implemented, and fears the excess
waste will be a problem in the future - contacts the plant supervisor John
● John says this is the governments’ problem, the agency said this amount of waste is not
a threat to the environment, the recycling can be added later if needed, can’t lose
customers, don’t draw unwanted attention from environmental groups, stop being a
troublemaker or you will get fired
● Bryan is sure the company is making a short-sighted decision that will hurt them in the
long run
● Bryan is considering approaching the Vice President of Operations with the problem,
and to contact the government agency to review the permit
Notes:
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Nearly Billionaires
Overview:
● Goldberg and Ting - engineering students at Columbia university
● Goldberg of them wanted to boost community spirit in their uni so they designed a social
network (first it was only for engineers)
● The first network which overlaid a virtual community on a real community
● Improved the network, opened it for all university’s students (most signed up in 1 month)
● Facebook only allowed friend and poke options, CU Community also allowed blogging,
sharing, cross-profile commenting
● They didn’t worry about facebook as they had more functionalities
● Goldberg and Ting join forces when FB is launched across universities and they launch
in elite american unis as well
● They were too late, FB took over their uni as well
● The two didn’t give up, they were homeless, they turned down funding from VCs and
large advertisers (MTV) - how stupid is
Notes:
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