Chapter 1: Entrepreneurship

Entrepreneurs: Identify business opportunities and make new technologies and

concepts commercially viable.
The entrepreneur risks the capital they have invested into their company.

Business Owner: The activity as an entrepreneur often takes a back seat to securing
and increasing efficiency, especially in later phases of a company.

Eenterprise: As it typically is in management, as encompassing the narrower

“company.”
It can be said that the entirety of what the entrepreneur undertakes in order to
pursue their goals is their enterprise.

Company on the other hand: Is the concrete organizational unit that implements
these goals.

According to German civil law, a founder of a business is a natural person who

takes up a commercial or self-employed professional activity.

The Global Entrepreneurship Monitor (GEM): has been in existence for 20 years and
annually collects the number of founders worldwide. A global research consortium
and
national GEM teams publish the GEM Global Report every year. Based on the surveys,
the GEM researchers make well-founded recommendations to political decision maker.

In the GEM, early-stage entrepreneurs are those adults who are in the process of
starting their own business or have been running their own business for no more
than 42
months. In the GEM, all types of self-employment are considered to be business
start#ups.

The early stage Total Entrepreneurial Activity Index (TEA) indicates the proportion
of the target group of early stage founders in the population.

The “Nascent Entrepreneurs” (future founders) are busy with their foundation but
have not yet completely established the business.

Critical voices comment on the GEM monitor that, for example, “hobby start-ups”
with low added value for the overall economy are also included in the statistics,
believing
that entrepreneurship should be limited to innovative ventures in which new
products, ideas, and processes are created and achieve growth. The question also
arises as to
why 42 months should be the cut-off date for measuring early stage entrepreneurial
activity, while the GEM cannot paint an all-encompassing picture of global
entrepreneurship,
it does provide an excellent overview of global entrepreneurial activity.

Small- and Medium-Sized Enterprises:

SMEs have to be differentiated from large companies, although no universal

demarcation exists. The line is typically drawn at 500 employees in the United
States and 250
employees in Europe. The European Union uses a classification that combines the
number of employees, the turnover, and balance sheet total of the company in
question.
It thus differentiates SMEs further into micro, small, and medium enterprises as
follows.
Micro = 9 Employee, Turnover= Upto 2 Million/year, Balance Sheet Total/year=
Upto 2 Million
Small = 49 Employee, Turnover= Upto 10 Million/year, Balance Sheet Total/year=
Upto 10 Million
Medium= 249 Employee, Turnover= Upto 50 Million/year, Balance Sheet Total/year=
Upto 43 Million

Mittelstand= These SMEs are typical for the German economy and are characterized by
the unity of ownership and management.

It is commonly understood that the success of German business is driven by its

Mittelstand companies, which account for most of the country’s economic output and
are considered
its strongest drivers of innovation and technology. It is a medium-sized enterprise
that is crucial for the German economy.
While there is no universally accepted definition of the term, a qualitative
element is typically added to the strictly quantitative definition we have seen
above:
There is a special bond between the entrepreneur and the enterprise as a
consequence of the business owner being also in charge of managing the company.
Mittelstand companies are often family firms. They are often very successful
internationally, yet usually keen to retain strong local roots.

It is important to note that the terms “Entrepreneurship” and “SMEs” are not
identical.
Clearly, and as we have seen, some of the world’s largest companies are
entrepreneurial ventures, and not all SMEs are truly innovative.

Differentiation:
There are further differentiations, which we can make within the term
entrepreneurship:
• “Serial entrepreneurs” found various companies sequentially, sometimes in
different industries, and often exit one as they move to the next.
• “Portfolio entrepreneurs” manage an entire portfolio of firms, i.e., several
companies in parallel.

Theories of Entrepreneurship:
Fueglistaller:
Entrepreneurship is a process initiated and carried out by individuals, which
serves to identify, evaluate, and exploit entrepreneurial opportunities.

Cantillon (1755):
Described him as an individual driven by the pursuit of profit: The entrepreneur
acquires goods at a fixed price to sell them later at an undetermined price.
Hoping to make a profit, the entrepreneur is characterized by the Assumption of
Risk.

In 1828: However, the entrepreneurial function is characterized by the organization

of the production process.
To this end, the entrepreneur uses a combination of the three production factors:
Land, Capital, and Employment

Knight (1921) describes the Entrepreneur as a carrier of Uncertainty.

There is no exact probability of occurrence for this uncertainty, as there may be
for risk. A true entrepreneur has the will to face this incalculable uncertainty.

Schumpeter (1934, 1939): An entrepreneur is characterized by his Innovative

Behavior.
He famously coined the term “Creative Destruction” to describe the nature of that
behavior. With the help of innovation, the entrepreneur destroys an existing
venture
thereby replacing the old with the new.

Kirzner (1973) is similar to that of Cantillon:

An entrepreneur primarily uses Arbitrage Opportunities by generating an
entrepreneurial advantage from incomplete information on the market. This creates a
new market equilibrium.

Lazear (2012):
Entrepreneurs as a subset of leaders because they have a Vision of how to offer
valuable goods or cost-effective services, and are capable of communicating this
vision to others.

Today, entrepreneurs are commonly described the following roles, which draw from
all the above theories:
Entrepreneurs typically are bearers of risk who make decisions on the procurement
and use of resources and thus deal with uncertainty;
Arbitrageurs, who expose and exploit price differences and market opportunities;
Innovators, who introduce new technologies or products, discover new markets, or
create new types of institutions; and coordinators of scarce resources
who collect various resources to set up new companies.

The Significance of Entrepreneurship for the Economy:

Relevance of SMEs:
All over the globe, SMEs contribute significantly to the creation of economic
value, and are credited with providing more than half of all jobs.
The exact number varies across regions, because employment conditions vary by
country.
In Mediterranean countries, for example, employment is dominated by micro-
enterprises, while in the USA and Germany, most people work in medium-sized and
large companies.

Start-Up Patterns in Germany:

Unfortunately, not all business start-ups are economically successful and a new
venture may be abandoned even after a short time. One survey found that the main
reasons for ending
an entrepreneurial venture within the first five years of its founding are
unsatisfactory levels of income or stress together with health and family reasons.
Another important cause are disagreements between the founders, which resulted in
the cessation of business activities in 34% of the cases.
Most closures of new companies occur between the second and fifth year of their
existence.
Companies may also exit the market after that point for a variety of reasons, such
as bankruptcy or challenges associated with family firm succession.
For those companies that were closed without having gone bankrupt (insolvent), the
main reasons were personal.rather than business-related and financial.
Among the companies that had filed for insolvency, the majority ceased operations
after the completion of these proceedings.

===================================================================================
===================================================================================
=====================

Chapter 2: Strategy for Starting a Business

Opportunities for Business Start-Ups:

In order to establish a company, a business idea is needed that appears, after a
thorough examination, to be feasible and economically viable.
Such an idea captures an entrepreneurial opportunity.
Entrepreneurial opportunities are situations in which a new relationship between
means and purposes can be established in order to sell goods or services.

Two competing approaches to entrepreneurial opportunities can be found in

literature: Discovery & Creation (emergence)
Both approaches assume that the identification and exploitation of opportunities
are what the entrepreneur aims at.
Moreover, both approaches assume that imperfect markets allow entrepreneurial
opportunities to emerge.

The Discovery Approach:

The “discovery approach” assumes that the opportunity already exists and merely
needs to be discovered by the entrepreneur.
Entrepreneurs, in this view, are the special people who recognize and take
advantage of business opportunities. The opportunities are just waiting to be
recognized and realized.
Detailed data collection and market research are therefore imperative—and it is
equally important for the entrepreneur to act quickly before someone else takes
advantage of the opportunity.

According to the “discovery approach,” opportunities are caused by changes in

markets or industries, for instance because of changes in the laws, regulations,
or the demographics governing a market, thereby leading to changes in customer
demands.
Entrepreneurs who discover these opportunities systematically search for these
changes—and exploit the opportunities that they find.
They therefore differ from other people mainly by having the special skills that
help them identify and seize opportunities.
They are particularly vigilant to changes in the market environment. Once they have
discovered an opportunity they may pursue it through the use of capital investment,
creating prototypes, and eventually establishing a company. Sales within the market
provide the necessary feedback as to whether the demand is being met; if not,
adjustments are made.

The Creation Approach:

The “creation approach” is different from the discovery approach. In this view it
is entrepreneurs’ activity that causes an opportunity to emerge.
The opportunity is created, not discovered. However, this creation is not entirely
constructive.
Instead, it of takes the form of creative destruction (the idea for which
Schumpeter, as we saw, is famous).
The entrepreneur creates an innovation that allows them to pursue the opportunity—
and it thereby often makes existing opportunities redundant.

The decision logic (“effectuation process”) is structured as follows:

The given possibilities lead to actions. Questions along this discovery path may
include: Who am I? What do I know? Whom do I know to discover new possibilities?
The first step is the connection to others. This may then result in new project
participants joining, who in turnbring in new possibilities and goals themselves,
so that an expanding and converging cycle is set into motion.

The following principles often guide the process of opportunity creation.

• Sparrow-in-the-hand: Here, something new is created only with existing
possibilities, no new paths are taken.
• Affordable-loss: The alignment is made according to what one is prepared to
lose, instead of calculating possible returns.
• Patchwork: Negotiations are conducted with all persons who are willing
to make a contribution. The goals of the company determine who will come on board.
• Making lemonade from lemons: Unexpected coincidences and circumstances are
acknowledged and actively used instead of causing alarm.
• Pilot-in-control: Human action is the primary driver of new opportunities,
rather than relying on the exploitation of technological or socio-economic changes.

Assessing Opportunities:
Whether an opportunity is “created” or “discovered,” the entrepreneur must evaluate
it:
In order to determine whether an opportunity represents a business idea that can be
pursued for broader benefit, the entrepreneur has to answer the following
questions:

• Market Feasibility
• Economic Feasibility
• Technical Feasibility

Technical Feasibility:
In the first step, the degree of technical possibility, innovation, patentability,
and general intellectual protection are examined.
Approximately 50% of ideas drop out at this phase, e.g., because an invention is
available that has already been patented.
For the remaining ideas, it is determined whether they are technically possible.
This can be done by interviewing experts,
For example. At the end of this phase, a prototype may be developed, as it may
offer useful hints for later production.

Market Feasibility:
The second step is to determine whether it is possible to bring the service or
product to market. This usually requires it to offer an advantage over existing
solutions.
Approximately 30% of ideas are not pursued further after this step. Expert
interviews are also useful in this phase of decision-making, as well as thorough
internet research.
The entrepreneur will look for similar products or services, and offers that serve
the same needs.
An evaluation is then carried out to determine whether additional benefits can be
offered to customers—and whether they would be willing to pay for them.
Finally, it must be determined whether the necessary resources are available for
the entrepreneur to pursue the opportunity, for instance, by carrying out the
needed development
and marketing of products or services.

Economic Feasibility:
Equally important is to calculate the expected return, price, market volume, and
market, as these are all estimated—as well the anticipated costs of pursuing the
opportunity.
The market is examined in detail, potential segments are identified, and suitable
entry strategies and sales plans are formulated.
If economic feasibility can be established, the results are typically documented in
a business plan.

Barriers to Establishing a New Venture:

Barriers may be, for example, a lack of resources (e.g., lack of marketing and
management skills, compounded by a lack of information and the problems of finding
funding).
Compliance costs, such as high taxes and other fees, also play a major role.
Finally, facing reality during start-up often proves to be challenging.
If the project turns out to be more difficult and riskier than originally expected
and the future is uncertain, fear of failure quickly arises and may lead to the
abandonment of the project.

Goals and Motives of Entrepreneurs:

Entrepreneurship can reasonably be viewed as a link between a person and an
opportunity. Entrepreneurs decide to take advantage of an opportunity if they
expect a high chance of success.
If there is a profit potential that compensates the opportunity costs, the project
is considered attractive Both monetary and non-monetary factors were identified as
motives of entrepreneurs.

• Self-Realization: Many founders want to realize their goals and dreams, and
are looking for a challenge.
• Material Remuneration: Many entrepreneurs would like to be paid according to
their efforts. The financial incentives of pursuing their own venture
• Innovation: Entrepreneurs often want to create something new, to
develop innovative products or services. They bring both the desire and the ability
to create something unique.
• Striving for independence: Many entrepreneurs want to be independent and their
“own boss.” They often relish the ability to determine the location and schedule of
their work.

Characteristics of Entrepreneurs:
Research literature considers three characteristics to be particularly relevant to
an entrepreneurial personality.

• Performance Motivation: This refers to the will to perform and to deal with tasks
that are both challenging and feasible.
Entrepreneurs often want to show excellence and have the
need to succeed in competitive situations.

• High Self-Efficacy: This describes the belief that one is responsible for one’s
own fate and the results of one's actions, and that one can actively influence this
outcome.
Above all, events represent the results of one's own actions.

• Attitude Towards Risk: Entrepreneurs often show a tendency to voluntarily expose

themselves to situations with an uncertain outcome.
They often take calculated risks and are willing to
develop the ability to manage such situations appropriately.

In addition, there are often other significant factors in the decision to become an
entrepreneur:
• The pursuit of independence: It is often seen as positive to become independent
from authority and to realize one's potential.
• Problem orientation: Rather than ruminating about negatives, cultivating
a proactive mindset often allows entrepreneurs to focus on the possible solutions
to a problem.
• Resilience: This refers to physical stamina and the mental
ability to perform under pressure
• Emotional stability: This represents the ability to overcome frustration
more easily.
• Assertiveness: This is the will to pursue one’s interest, often
including the willing#ness to lead others.
• Social adaptability: This describes flexibility to adjust to the often
changing requirements, especially towards customers and suppliers.

Business Model and Strategy:

In order to be successful in competition, every company needs a viable business
model and a subsequent strategy, thus building the necessary and sustainable
competitive advantages.
The connection between strategy and business model is that the business model is
developed via the founding idea, and then the strategy of the new company is
formulated based on
the business model.

Development of the Business Model:

Founders can develop their business idea with the help of the "COSTAR" framework.
Its letters stand for the six core elements of a business idea.
• Customer: Who is the customer? What are their interests, characteristics, needs?
• Opportunity: Where is the market opportunity? How big is the potential? Which
trends, technologies, and market changes are relevant?
• Solution: What exactly does the solution look like? How does it meet customer
needs and how are identified market opportunities exploited?
• Team: Who is needed to develop the solution successfully?
• Advantage: What are the advantages over other options? What is unique about them?
• Result: What results are expected? What does market success look like?

In this regard, the founder should describe the so-called "Value Proposition" of
the company.
The value of its product, or service, to the customer. It can be formulated with
the help of four criteria.

• Value Proposition: These are the factors that should inspire customers. For this
purpose, the customer segment is described as precisely as possible,
as well as the task that is solved for the customer. The
benefits must be clearly defined.

• Business Structure: Ideally, the way the business is structured conveys

enthusiasm to those who work there. How is the promise of the value proposition
convincingly fulfilled by the
product, service, or combination there of? This requires suitable sales channels,
production or service processes, core capabilities, and business partners.

• Profit Model: This answers the question of how the money is earned. The
description of costs and revenues and their influencing factors leads to the
determination of the profit.
Questions such as “make or buy” lead to the analysis of cost drivers. Different
sources of income (product sales, licensing, rents, fees for services, subscription
fees, etc.)
should be examined and compared with the rules of the industry. This allows for
assessing how long-term survival can be achieved.

• Entrepreneurial Spirit (Team and Values): In order to achieve the desired spirit
of enterprise, team and values must be united.
All desired professional and social skills should be present in the team. The team
should embody the values of the value proposition on a daily basis—and manage
customer complaints appropriately.

These factors represent the main components of the business model. With this in
mind, the founder fulfills four duties.
• Customer understanding: The founder must understand the customers in order to be
able to offer them something inspiring.
• Business architect: The founder develops and implements his business structure.
• Basic economist: The founder understands the basic financial mechanisms of the
company.
• Team builder: The founder builds a team that shares and lives the desired values.

A useful method for visualizing the business model is the Business Model Canvas:

The Customer Segments, Value Propositions, Sales Channels, Customer Relationships,

Revenue Streams, Key Resources, Activities, Partners, and The Cost Structure can be
mapped.
The discussion process associated with the entries in the canvas leads to the
involvement of the stakeholders and to a common understanding of the business
model.

In order to stand out from existing providers, it is advantageous for founders to

have a business model innovation. A maritime metaphor is useful to imagine the
aspired-to
market environment: Since products are becoming increasingly similar worldwide, it
can be beneficial to create so-called “Blue Oceans” through benefit innovations.
In contrast to the “Red Oceans,” which are the highly competitive markets, a real
advantage can be created in the Blue Oceans by solving customer problems.

The following procedure helps to find “Blue Oceans”:

• First, the rules of the game in an industry are analyzed via the so-called
strategic contour.
The typical factors that determine competition are entered into a graph on the
horizontal axis. Vertically, the level at which the factors are currently met is
noted.

• A new benefit curve is then plotted, showing how the customer obtains a new
benefit through a transformation, i.e., a deliberately different approach by the
founder
than that of the established competitors.

• A “four-action format” can be used to develop the new benefit curve, in which the
following four key questions are answered:
◦ Which elements were previously taken for granted and can be deleted?
◦ Which factors can be reduced far below the industry standard?
◦ Which factors far exceed the standard?
◦ What new factors should be created for the industry?

Derivation of the Strategy:

If a business model exists, the strategic planning can begin. By developing the
corporate strategy based on vision and mission, the founder can consciously plan to
navigate
the future step-by-step. This process is usually not linear, but iterative.
In the following, the ideal-typical, multi-stage, linear process for developing a
strategic plan is described.

The First Step starts with the development of the "Vision". This describes a
desirable corporate image for the next three or more years.
Future products, markets, customers, and processes—as well as company location and
personnel structures are taken into account.

The Second Step, the purpose and nature of the company are formulated in a
"Mission".

The Third Step then includes the definition of the "Strategic Corporate Goals".
This is where the question is answered what the company wants to achieve in the
medium and long term. It also shows in which area the company should become
active.

The Fourth Step is to define "Operational Objectives & Metrics" for achieving these
objectives.
Operational targets relate, for example, to market share, the quantity of a product
sold, key financial figures, and profitability.

The situation is then examined and assessed using a SWOT analysis. Based on the
strengths and weaknesses of the envisioned company, as well as the opportunities
and
threats of the environment including the competition, the strategy can be derived
using generic standard strategies.

Founders should position themselves by building on their identified strengths in

order to be successful.
This means that expansion is the most favorable strategy. This can be pursued in
three strategic variants.

• Cost leadership: A price advantage sets you apart from the competition; cost
reductions and cost control are essential for this.
• Differentiation: At least one unique advantage is offered, through which a higher
price can be achieved.
• Concentration on focal points: Concentrating on targeted niches can result in
greater customer benefit or a better cost situation in the segments, thereby
increasing customer loyalty.

The strategy must then be implemented and critically reviewed on a regular basis.

Founders face special challenges in their start-up strategy. Seven success factors
have proven to be crucial:
Market Positioning, Innovation, Uniqueness Of Offerings, Structure Of Sales
Channels, Management Experience, Ability To Meet Demand, and The Market
Environment.

The following four-phase approach is therefore recommended:

The First phase, quality should generally take priority over cash flow, as should
market share over profit.
The Second phase should focus on rapid growth, with aggressive marketing used to
gain and defend market share.
The Third phase should be characterized by high productivity, with a particular
emphasis on experience and learning curve effects.
The Fourth and final phase, the profit for which the prerequisites were created can
finally be gained.

===================================================================================
===================================================================================
=====================

Chapter 3: Innovation and Innovation Management

Innovations by companies are, essentially, about something new. This can be new
products or new processes.
Innovations are considered the basis for sustainable corporate success. Therefore,
decision-makers should focus on a good understanding of innovations and their
regular development.

Dimensions of Innovations
For a better understanding of innovations in general, and of the term “noticeable”
in particular, various dimensions can be consulted, such as:
Content, Intensity#Degree, Subjective, Actor, Process and Normative.

Content (What is new?):

Business innovations can be classified into product, process, market, structural,
and cultural innovations. Product and process innovations are most frequently found
in companies.

Intensity (How new is new?)

The term Innovation is sometimes used in an inflationary way and ranges from new
designs to those that make only minimal changes to groundbreaking innovations.

Subjective (New for whom?)

The concept of innovation can also be clarified by focusing on different target
groups.
For example, an innovation may be new for an individual, e.g., an expert or a
manager of a company, but it can also be new for all managers of a company

Actor (New by whom?)

A large number of different actors are often involved in the creation of
innovation. Within the company,

Process (Where does the innovation begin, where does it end?)

An invention is often the first step, which becomes an innovation through a
systematic process.

Normative (New = successful)

There is an approach that only takes the existence of an innovation seriously if it
is economically successful.

Innovation Management:
Innovations are considered a prerequisite for sustainable corporate success. The
targeted creation of innovations requires a conscious design of an innovation
system.
In order to generate new ideas, it is important that employees show a willingness
to act innovatively.
This is promoted by company management setting clear goals and strategies that
include room for innovations.

Innovation Strategies:

The design of the innovation strategy is an important management task and is done
in relation to the overall corporate strategy.
Four Strategic Options: “First-To-Market”,“Follow-The-Leader”,"Application
Engineering", and “Me-Too"

First-to-Market: Refers to the intention of a company to always be the

first innovator in a market.
Follow-the-Leader: Is when a company waits for another company to build
up the market.
This company is then simply and quickly followed,even
though this results in a less favorable innovation image.
In Application Engineering: Already existing product or process innovations are
adopted by a company and possibly improved.
Me-Too: Is when a copy of the competitor is brought to market.
This saves development costs and thus exploits cost advantages.

Maidique and Patch (1980) have developed a similar typology:

• First-to-market: is based on intensive research and development and aims to set
entry barriers against latecomers.
• Second-to-market: (also: fast follower) corresponds to the “follow-the-leader”
option, where a user-oriented optimization of the pioneer product is carried out.
• Late-to-market: (also: cost minimization) tends to correspond to the “me-too”
strategy. In this case, one waits until a dominant design has developed,
then quantity digression effects are achieved through standardization. The cost
side is thus explicitly considered here.
• Market segmentation: (also: specialist) means focusing on intensive processing of
one or fewer market segments so that benefits can be achieved.

In 1999, Pepels developed the typologies known as “Pioneer,” “Early Follower,”

“Modifier,” and “Latecomer,” which Disselkamp later expanded to include “Persister”

Pioneers: are the innovation leaders. They are constantly looking for new products,
processes, markets, etc. The focus is on technical progress with the option of
competitive
advantages, so that dominant standards and an image as a benefit leader can be
established. The advantage is that there is the chance of a rapid increase in
volume,
and thus cost digression. The danger lies in the high risks, as demand is not
secure and large investments are necessary.

Early followers: Adapt the innovations of the pioneers, bring out new products,
optimize existing products, and thus achieve benefits for the customers. The
advantage of this
strategy is that it involves fewer risks than the pioneer strategy since the demand
is already known, and the investments are lower.
Risks may lie in the pioneer’s intellectual property rights or in the standards
they have introduced.
The image of the innova#ion leader and cost digression can no longer be achieved,
and other competitors can soon be expected.

Modifiers: Only incorporate innovations at a later stage. Experiences of pioneers

and early followers are pending, with the focus on improvements of existing
solutions.
A favorable aspect is that competitive advantages are created by the customer-
specific orientation, with the company acting as a progressive supplier. This
generates customer
loyalty and often good prices, as the low development costs lead to higher returns
with reduced risks. The disadvantage is that the established providers overcome the
barriers to entry.

Latecomers: only bring a copy of the innovations of established users to the

market. Their advantage is that development costs are saved and risks are avoided.
The danger lies in the fact that the products do not have any unique selling
points, and they can even be confused with the original products.
Only the lower price is ultimately the selling point. In this respect, the company
must be the cost leader.
Since this role requires process, structural, or market innovations, the latecomer
becomes a pioneer in this sense.

Persister: Those who persist within an existing range of products with existing
processes and structures will remain within this existing range. They continue to
operate in the familiar
markets with familiar cultures. This means that the persister does not incur any
investments or risks, but they cannot, for example, gain any image or competitive
advantage through innovation

Achieving innovation requires not only clear objectives and an innovation strategy,
but also employees who want to produce innovations.
The following characteristics are considered a prerequisite for innovative
employees:

• Willingness to learn, curiosity, and flexibility: The joy of lifelong learning

requires that employees develop improvements for what exists now.
• Sensitivity: When employees perceive trends, customer needs, or even internal
problems, they also recognize opportunities for change.
• Confidence: Standing up for one’s own ideas requires strength generated by
self#confidence.
• Decision-making ability: In order for innovations to emerge, one's own decisions
are just as relevant as the path through superiors.
• A sense of purpose and loyalty to goals: For innovations to become reality, hard
work is usually necessary. This is supported by clear objectives and adherence to
targets.
• Enthusiasm: Resistance and difficult phases often occur in innovation projects.
The ability to be enthusiastic helps to carry one through tougher times.
• Communication skills: If one’s own ideas are well communicated, others are more
quickly convinced and can be more involved

Design of the Innovation Processes:

Innovation management focuses on the innovation processes. For this purpose a
three#phase model was developed by Thom in the 1980s.

Thom (1980) distinguishes the following three phases: Idea generation, Acceptance,
and Realization.

Idea Generation: Begins with the selection of a search field. On the one hand, this
should be broad enough to allow a sufficient number of ideas to be generated.
On the other hand, it also needs a clear boundary, after which no more searches for
innovations are made. To determine the search field, for example, the strategic
guidelines of the company can be used, or a look can be taken at business areas in
which a sales increase through new offers appear possible.
Ideas are then developed in the search field and these are combined into proposals.

Idea Acceptance: The review of proposals is part of the Idea Acceptance process. If
a proposal is deemed realistically feasible, a realization or business plan is
created.
This describes the technical feasibility and the way in which economic success is
to be achieved. If it turns out to be possible, the idea is pursued further.

Realization of Ideas: Prototypes are created for this purpose. The production is
prepared and begins, and marketing takes place.
We speak of realization when the product innovation is introduced to the market or
the process innovation is introduced to the company.
Afterward, the target figures are regularly compared with the actual values in
order to check the planned profitability against what has actually been achieved.
In case of deviations, corrective measures are taken immediately.

Development of Product Innovations:

Stage-Gate Approach:
Stage-Gate Approach,” a term coined by Robert Cooper, has also gained acceptance
internationally:
In his model, Cooper describes a standardized multi-stage procedure with a series
of work phases (stages) and decisions (gates).
The aim is to ensure process quality in the development of product innovations. The
approach is supported by various studies which found process to be a determining
factor in
the successful development of product innovations. The process-related influencing
factors turned out to be decisive for economic success.
By alternating the stages and the gates, the process is defined in detail and by
small steps. Each stage contains cross-divisional activities by different
functional areas or departments.

The team or individual in question pursues the work phases in sequence. The results
of each phase are presented to the decision-making body or to the decision-maker.
A milestone analysis with predefined criteria is used to decide whether the next
work phase should begin. If a project does not achieve its objectives or is not
expected to be
commercially successful, the project is terminated.

The procedure has various advantages:

• Risk reduction: The process is divided into a number of work phases, between
which “go-” and “no-go” decisions are made.
In this way, less-promising projects are terminated earlier, which reduces bad
investments.
• Simplicity: The decision phases are linked to clearly defined criteria and pre-
estimated services, on the basis of which the gatekeepers from management make
decisions on further action
• Transparency: Everyone can see that investments in good ideas and projects with
good progress are made on the basis of defined criteria, and by whom the decisions
are made.
• Support: There is a set of methods, tools, and templates for each work and
decision phase.
In addition to scoring approaches, portfolio management also integrates, for e.g
NPV (net present value), IRR (internal rate of return), and PI (productivity
index).
• Experience: The procedure is tested and has been used for approximately 25 years;
company results prove the success.

In 2016, due to the changed requirements resulting from digitization as an agile

stage gate, Vedsmand and colleagues published a hybrid approach that takes into
account
the identified uncertainties and ambiguity in the early stages.

The new approach is said to have great potential for increasing the success rates
of new products,
because the model provides for the interaction of the project team with users and
customers in the early phases.
This ensures fast feedback and rapid market validation. The advantage of the new
approach is that the process is accelerated by “time-boxed iterations.”
It consistently focuses on the results through tangible product gains as a
benchmark for progress. This approach can be used in all phases of the previous
stage-gate process.

The Division of the Innovation Process into two parts to promote the success of the
Project: “Cloud Phase” and a “Building Block Phase”

The division of the innovation process into a “cloud phase” and a “building block
phase” takes into account the differences between the two phases.
In the cloud phase, which contains the idea generation, the first step is the
search field analysis to identify the right innovation areas.
Here, the market, technology trends, and the competition are systematically
examined.
The result of this sub-phase is the business idea, which is designed to ensure that
values are created and secured. Benefits and price expectations are calculated for
this

The Protection of Intellectual Property:

If, in the case of a Start-up Project or other Entrepreneurial Situations,
There is a chance that the products or technologies will lead to a technological
lead or a significant competitive advantage, a protection strategy should be
developed.
Industrial property rights can be used to achieve long-term freedom of action and
block competitors so that the danger of imitations can be reduced quickly and
inexpensively.

Patent Strategy:
The patent strategy must always be coordinated with the corporate strategy.
According to the patent management benchmark studies 75% of all companies pursue
legal protection strategies and have a fully formulated patent strategy.

A patent strategy has three core dimensions:

• Freedom of action: These are preventive measures taken before or during the
development of products or technologies.
These can be patent searches and their analysis, as well as the proactive in-
licensing the acquisition of rights by third parties on the basis of a license
agreement.

• Protection against imitation/blocking of competitors:

This requires the company to be willing to enforce the property rights. If patent
infringements are tolerated, the deterrent effect of patents is reduced.

• Commercialization through licensing: Every second company in market rent its

intellectual property rights externally, and the volume of license payments
worldwide is estimated at 100 billion US
dollars. The granting of licenses requires consideration from a profit-loss
perspective. A distinction is made between exclusivity of own use and the granting
of a license for patent use.
The reputation in terms of technical, financial, and procedural experience with
licenses plays a role in the degree of enforcement.

Patent Management: Based on the external strategic importance, as well as the

internal resource strength, the procedure is divided into five phases.

1. Exploration: In the first phase, potentials are identified. Broadly based cross-
industry searches are carried out in order to detect any existing earlier
inventions (patent
scanning). Broad, conceptual patents should be applied for to support the
company’s own developments, but the inventions should still be continuously
developed.

2. Set-up: If topic and competence fields with growing strategic importance exist,
focused patent searches are carried out (patent monitoring). Patent searches are
used to monitor further developments in specific fields of technology and
selected competitors.
If patents are applied for, these are grouped into patent families in order to
specifically block competitors.

3. Lock up: If own resources of strategic importance have been built up, the risk
of conflict with patents from competitors increases.
 Patent clusters can be established to secure competitive advantages, and out-
licensing in other areas can be examined

4. Optimization: If a company possesses a high level of expertise but its strategic

importance is declining, the existing patent clusters should be reviewed in terms
of
costs and benefits. Blocking patents can help before the development of
substitution technologies. Out-licensing in one’s own field can bring a short-term
return on investment.

5. Dismantling: If the strategic importance of a project decreases significantly,

It should be further reviewed and reassessed.
Surrendering patents, selling them, and donating them are further possible
measures.
In the case of a joint innovation project with partners, the distribution of
profits and benefits should be determined early on, even if the actual amounts are
not yet known.
The intellectual property regulation should be combined here with the joint
definition of an exit strategy.

The BMW Empathic Design

Ethnographic Market Research:

The established industries no longer achieve good results with their previous
broad#based instruments of classical market research, such as test studios or
surveys.
Although these approaches are still well-suited for later phases of product
development, they are not very suitable for the early phases of the product
development process.
In the early phases, it is important to gain a precise understanding of the
customer’s needs through direct interaction with the customer, especially if a
higher degree of innovation
is desired. Suitable methods are ethnographic market research and the lead user
approach.
Ethnographic market research focuses on the Identification of Needs, while the
lead user approach is designed to develop a specific Solution to a Problem.

An important basic assumption of ethnographic field research is “everything is

context.” This means that human action can always be understood in terms of
context, such as
place, time, conflicts, and social conventions. Further basic assumptions are that
verbal and non-verbal communication should always be taken into account.
Human bias also affects the researchers themselves, who must be aware of their own
prejudices. Empathy and understanding include the desire to truly understand the
other.

Empathic Design:
Empathic design is an approach in which the design of a new product is user-
centered; the user is consistently at the center of attention.
Empathy is two fold: on the one hand, it is about empathy between users and
developers; on the other hand, it is about building empathy between users and the
product.
Empathic design involves both an observation process and the development of
emotional ties. The procedure is as follows:
First, the users are observed and data are collected. The observations are then
analyzed. On this basis, solutions are found and prototypes developed by using
creativity techniques.

An Emotional Benefit generated by a brand, on the other hand, represents a success

factor.
BMW has taken advantage of this in order to get to know the needs of customers in
detail, and to translate them into products as part of its niche strategy.
The use of ethnographic field research has proven its worth in this respect. BMW
has the following objectives with the use of empathic design.

• User impulses: Testing what makes people want to use a

product and whether they do so in the anticipated ways.
• Interactions with the user context: Determining how the product fits into the
user's unique context.
• Unplanned product change by the user:Checking whether the user might change the
product in an unplanned way in order to optimize its use.
• Intangible product characteristics: Analyzing whether there are immaterial
attributes for the product, which have an influence on the overall perception.
• Unarticulated customer needs: Ensuring that any problems that may arise
while using the product are easily circumvented. This can happen unconsciously
without the user’s awareness.

Empathic Design at BMW:

For the translation of the findings at BMW into a concept encompassing technology,
market, design, and an environment was chosen that corresponded to the living
environment of the customers
This was found in Malibu, California. A small team of engineers and designers had
access via IT to the resources at the company's headquarters in Munich.
The results of the concept phase were incorporated into the product development
process. It became apparent that for an efficient transfer of new know-how into the
organization,
all departments should be involved as early as possible. In addition, regular
interim reports helped transfer knowledge gained. All team members should have the
necessary openness
to question existing knowledge and to accept new perspectives. The decision-makers
should be involved in the empathic design at an early stage, oth#erwise the results
will not be taken into account.

Positive results were also shown from this approach at Rolls-Royce, which was taken
over by BMW in 1998. Since BMW had had no previous experience with Rolls-Royce
customers, empathic design was used.

===================================================================================
===================================================================================
=====================

Chapter 4: Legal Structures in International Comparison

What are typical selection criteria that founders use to make their decision?

Selection criteria
Founders use various criteria in order to choose the legal structure that is most
favorable for them —or atleast appears to be:
• Legal Structure that is customary in the trade
• Liability, Risk Distribution, Credit Worthiness
• Capital Investment and Asset Protection
• Management, Decision Making Authority (Corporate Governance)
• Formation Costs and Current Expenses
• Tax Burden
• Legal Requirements, Trade Conditions
• Business Volume

Overview of legal structures:

From the point of view of the founders, easy-to-establish, cost-effective legal
formations are attractive. However, it is highly advisable to consult with an
expert on the pros and cons.
Boundaries, conditions, and options are determined by the legal system in question,
and therefore vary greatly country by county.
Nevertheless, legal structures often are similar even across global systems.

Below we present an overview of the situation in Germany:

The Merchant (Kaufmann): A person who carries on a commercial business.

Legal relations between economic operators, whether individuals or companies, are
governed by civil law. This is often referred to as “private law” or “civil law”
and is distinguished from “public law,” which deals with the activities of state
authorities. The basic provisions of civil law can be found in the Civil Code BGB.
It regulates, for example, the formation and termination of contracts. These
general rules apply to all participants in economic life within the scope of the
BGB.

The German Commercial Code (Civil Law or HGB): Now sets out special rules for the
majority of entrepreneurs.
These rules are always applied if at least one of the persons involved in the
business has the status of a merchant (Kaufmann).
This is the central term of the German Commerical Code. Section 1 of the Code
states that “A merchant within the meaning of this Code is a person who carries on
a commercial business.

Sole Proprietorship:
1. Small Business Owner
2. Sole Proprietor
3. Freelancer

Small Business Owners — Here the law assumes that their business is easily
manageable and that their activities are uncomplicated. The Code therefore
clarifies, in Section 1, the following:
A commercial business is any commercial enterprise unless, by reason of its nature
or size, the enterprise does not require a commercially organized business
operation.
As a welcome consequence, they are neither required to conduct double-entry
bookkeeping, nor to prepare financial reports in the form of a balance sheet.
Likewise,
no inventory is taken, no annual accruals are made, and no annual accounts are
published for those who are commercially active only as small business owner.
Since they are not a merchant, the small business owner is not allowed to run a
company, but must appear with their full name (first and last name) publicly for
the customers.
However, they may voluntarily register in the commercial register and acquire the
status of a merchant.

Sole Proprietor if the owner is simultaneously in charge of the company and

personally liable with their assets for the company's liabilities.
Most companies in Germany are run as sole proprietorships.

Freelance Work: Activities of Farmers and Foresters.

In principle, this is the case for any self-reliant entrepreneurial activity, with
the exception of freelance work and the activities of farmers and foresters.
Certain occupational groups, as has been pointed out, do not carry on commercial
activities according to German law, namely the German Civil Code (BGB) in
accordance with Section 18 (1)
No. 1 of the German Income Tax Act (EStG). Rather, they pursue freelancing and thus
constitute the category of freelancers.

"Partnerships": GbR, OHG, KG, Partnership Company:

A distinction must be made between partnerships and sole proprietorships. If not

only one person, but several persons work together to achieve a common purpose, a
partnership is formed.
A distinction is made between different types.

GbR:
For the establishment of a GbR, the pursuit of a common purpose by at least two
persons is sufficient. This is concluded rather informally, which is not always
clear to the parties involved.
All partners have the right to manage the company and must agree to all
transactions. However, the partners can determine the rules that govern the GbR’s
roles and responsibilities,
including the authority to lead the company, in the articles of association. Even
though these may be concluded verbally, it is highly advisable to conclude a
written contract.

OHG:
A general partnership OHG is a partnership in which the partners jointly operate a
commercial business under a joint company name (§ 105 (1) HGB).
In this respect, the OHG is a form of GbR— namely one to which the provisions of
the HGB apply. The HGB code states otherwise, the general rules governing the GbR
also apply to the OHG
All partners have unlimited personal and direct liability for the acts or omissions
of the OHG. Just like the OHG is a form of GbR, so is the limited partnership.

KG:
Just like the OHG is a form of GbR, so is the limited partnership KG a form of OHG.
In the case of a KG, liability is limited to the capital contribution of one or
more partners with the other partners being limited in their liability.

Corporations: GmbH Public Limited Company, UG, AG, English Limited Liability, SE
Corporations are to be distinguished from sole proprietorships and partnerships.
They are independent legal entities with their own legal capacity and fixed nominal
capital.

For the limited liability company (Gesellschaft mit beschränkter Haftung or GmbH),
there is a separate law, the GmbHG. According to GmbHG, such companies can be
founded for any
legal purpose. The biggest advantage of the GmbH for the entrepreneur is, quite
obviously, that their liability is limited to the company’s assets .

The GmbH is a commercial company with its own legal personality according to the
German Commercial Code (HGB) and can have one or more members.
The GmbH itself is a merchant in the legal sense, and the company’s assets belong
to the GmbH as legal entity.
The GmbH consists of the managing director and the general assembly of its members;
it may also have a supervisory board. The general assembly of members has ultimate
control on GmbH.
The competences of the members are regulated in a separate agreement.
The managing directors are always natural persons who manage the business
internally and externally, and they are appointed by the members.
In addition, a supervisory board can be formed if the company is subject to co-
determination and Works Constitution Act.
The entrepreneurial company (UG) is a limited liability company and does not
represent a legal form of its own, but is a variety of the GmbH,
namely one with lower capital requirements; however, it also has a low level of
liability which is made clear to business partners by noting the limited liability.
All that is required to form this establishment is the contribution of capital of
at least one euro. Initial registration with the local court currently costs 150
euros, and
notary fees are charged according to the notary’s fee range (roughly 150 to 200
euros).

The corporation based on Joint Stock (AG) is another type of corporation:

The relevant regulations can be found in the German Stock Corporation Act. The AG
is a commercial company with its own legal personality and it is a merchant
according to the HGB.
According to German Stock Corporation Act, the share capital amounts to at least
50,000 euros and the shares can be issued as nominal value or no#par value shares.
The partners participate in the share capital of the company with their capital
contributions and are not personally liable. The company assets belong exclusively
to the corporation.

"The English limited (Ltd.)" is a corporation with limited liability on a share

basis. There is no minimum nominal capital requirement.
It is founded quickly, with little bureaucracy and expense in England and
registered in the English commercial register. Based on the memorandum of
association,
the declaration of incorporation, the application for registration, and a
declaration by the directors, approval is granted in the form of the “Certificate
of Incorporation.”
A notarial authentication is not required.

"Societas Europaea (SE)", the EU has created an EU-wide legal entity which is an
alternative to the national company forms. A share capital of 120,000 euros is
required.
To establish an SE, which is then entered in the register of the relevant EU member
state. As with the AG, the SE has a limitation of liability to the capital of the
SE.
The management can either be managed by the executive board and the supervisory
board or solely by the administrative board.

"Special cases": GmbH & Co. KG, silent partnership

The special form of a GmbH & Co. KG is created by forming a KG in which the only
(fully liable) general partner consists of a GmbH. Partnership and corporation are
thus mixed here.
A silent partnership is created when one partner participates in a commercial
enterprise as a silent partner only through a capital contribution.
They participate in the profits but do not appear externally.

USA-
In the USA, too, there are several legal structures to choose from, with both
unlimited and limited liability possibilities.
A minimum capital, such as in the German GmbH, does not exist in most American
states.

Legal Structures With Unlimited Liability: Sole Proprietorship, Partnerships In the

USA, company law is a law that is regulated differently in the individual fifty
states.
There are model laws, but the laws of the individual states sometimes differ
considerably. In this respect, only a few generally applicable aspects are
described below:

To establish a company in the USA, a Certificate of Assumed Name (also DBA) is

required, unless the company chooses its own name for the business activity.
Before starting business, the form must be filled out with the desired business
name. After checking that the name does not already exist, the business can then be
started.

Sole proprietorship: Is the simplest form of business activity and does not
represent a corporate form.
The business activity is carried out by a single person as sole proprietor who has
complete control over the activity, but also has personal and unlimited liability.

Partnerships: are formed when several people jointly found a company with the aim
of making a profit. A contract (partnership agreement) is required, but it does not
have to
have a specific form and is also valid and binding in verbal form. The agreement
contains the name, purpose, distribution of profits and losses, name and address of
the
person authorized to receive services, as well as the rights and obligations of the
partners. The name is freely selectable.

Two different types can be selected:

• The General Partnership (GP) is similar to the German GbR or OHG. Several persons
run a company together, with all partners having unlimited personal liability both
for the mistakes of
the other partners and for those of employees. There are no special requirements
for the formation of a company, such as a minimum capital contribution, in the case
of general partnerships
• In the case of the limited partnership, the situation is comparable to that of
the German KG. The limited partner is not liable with his personal assets, but only
with his shares, while
the general partner has unlimited liability with his assets. For this purpose, a
memorandum of association must be prepared and submitted to the competent state
authority

Legal Structures With Limited Liability: Corporation, Limited Liability Company,

Limited Partnership:

In the USA, there are not different corporations as in Germany, but only gradations
of the basic form of a corporation.
In the USA, the founding documents must be submitted to the respective Secretary of
State. This confirms the registration by a certificate of incorporation.
However, this does not constitute a kind of entry in the commercial register, but
only the confirmation of the registration.
The presence of the shareholders or managing directors is not required for
registration. It is advisable to engage a lawyer admitted to practice in the USA
for the procedure

Corporation: The US Corporation (Corp., Inc., Ltd.) can be compared to the German
GmbH or AG, but without their minimum capital contribution. There is normally no
personal liability on
the part of the shareholders. However, this can be different if the corporation has
no assets of its own or very insufficient capital. A major disadvantage of the
corporation is the
double taxation of its profits, as both the legal entity and the owners are taxed.
There are three bodies: the shareholders, the board of directors (elected by the
share#holders),
and the executive officers. A special feature is the S-Corporation, which
eliminates double taxation. Only the shareholders are taxed, but not the legal
entity. Restrictions are that the
balance sheet year must be the calendar year, the number of shareholders is
limited, and only natural persons with American citizenship or permanent residence
permits can be shareholders.

The limited liability company (LLC, LC) is similar to the German GmbH; it combines
corporation and partnership. The partners are free from personal liability. The
company is
managed by the shareholders or by an external manager. There is an option to tax
the LLC either as a corporation or as a partnership. In most US states, one-person
LLCs can also be formed. For LLCs, articles of organization and an
operating agreement must be drawn up. The articles of organization must contain the
name, the corporate purpose, the registered agent, and the registered office.

The limited liability partnership (LLP) is similar in structure to the German

partnership company.
In American law or tax consulting firms, architectural firms, etc., the partners
are personally liable, even if they are limited partners.
However, if an LLP exists, each partner is only liable for their own activities.

===================================================================================
===================================================================================
=====================

Chapter 5: The Financing of Entrepreneurial Activity I: Sources of Funding

Incubators, Accelerators, and Crowdfunding:

Companies need different kinds of support at different stages of their development.

This concerns the receipt of outside capital, but also various other services.
Special facilities and financial assistance are available for this purpose.

Different Stages of Company Development:

The following forms of financing are typical for the different phases of a company:
• In the beginning, the capital is mainly contributed by the founder, as well as by
their family and friends. In addition, there is various external assistance from
institutions
offering advice, networking, etc. Support services from public programs and
investments from private persons as well as companies are also offered.
• In the start-up phase, the importance of the founder and the family decreases,
and the relative importance of public and private programs increases.
Corporate venturs capital is also already being awarded in this phase.
• The growth phase is dominated by entrepreneurial investments; however, there are
often still public programs in place. Private investments are already subordinate
here.
• In the case of established companies, bank loans and equity investments are the
first priority. Rarely is venture capital granted.

Incubators:
Incubators “institutions that set up and support companies on the path to setting
up a business”. They provide consulting and coaching services and make rental
space, office space,
and infrastructure available; they often provide support in the form of service
(e.g., help in drawing up the business plan). Start-ups originating from incubators
are attributed
a survival rate up to 85% higher than the average start-up. They are usually
financed in the form of economic development measures;in this respect, they are
financed by the taxpayer,
associations, and the private sector. A return flow occurs indirectly, e.g.,
through later tax payments

Accelerators:
An accelerator also supports founders in their plans, but this is an institution
“which helps start-ups to develop rapidly within a certain period of time through
coaching”.
The focus is, therefore, on coaching. This can be done through start-up boot camps,
where knowledge and resources are made available over a period of a few months.
Support can be provided here in the form of jobs, networks, strategic support, and
coaching. Participation in the boot camp often requires an application from the
founder, and usually
the selection of a few participants is made. At the end of the boot camp, the
results of the market-ready offers are partly presented to potential investors
during demo days.

Crowdfunding:
A completely different form of support is offered by crowdfunding. The special
thing about crowdfunding is: a large number of people support a project financially
and thus make it possible
For crowdfunding, people turn to the public with the aim of finding as many
interested parties as possible who will make a financial contribution.
Investors support a project directly and only on the basis of their personal
conviction. The main advantage of crowdfunding is that it is a fast and
uncomplicated way to get money.
A disadvantage for investors is that they have to expect a total loss of their
money if the project is not successful.

There are different forms of crowdfunding with different compensations for Investor
Engagement:

• Classic Crowdfunding: With this type of crowdfunding, no financial consideration

is paid, but there is a small prototype, sample or demo.
• Donation Based Crowdfunding: No consideration is given in return. These are, for
example, social or charitable projects where people only get involved in order to
do something good.
• Crowdinvesting: This variant is typical for start-ups. In this variant,
individuals invest in a project in an equity-like manner.
They receive a return for their investment, which can be fixed or performance-
based.
• Crowdlending: In this case, the persons grant a loan, i.e., they make debt
capital available and the interest rate is fixed in advance. This variant is also
typical for founders.

The Three forms of support described above can be allocated to the different phases
of business development as follows:

• The services of the incubators are geared toward the period up to market launch.
• The services offered by the accelerators range from the foundation to the
development phase.
• Crowdfunding typically takes place from the start-up phase through the
development phase and ends when the company enters the growth phase.

Business Angels:
Business angels are private individuals who participate with their own capital in
start#up projects of people they often did not know before.
They usually offer the founders additional support by passing on their own
professional experience and integrating the start-ups into their network.
Business angel engagements express themselves in services such as the provision of
infrastructure, and the assumption of an advisory or supervisory board function up
to the collaboration
in the company.
This activity distinguishes them from passive private investors. These are usually
found in family or among friends and have more of an idealistic motivation to
support the founder.

The engagement of a business angel takes place over a fixed period of time and is
contractually defined in advance. Business angels expect an above-average return
for their
commitment, so the motivation is financial. Business angels are particularly
helpful for founders with very innovative ideas and often rather low equity
capital,
especially in the early phase up to the growth phase, as there is a considerable
risk involved in these projects

This is the typical procedure when a business angel wants to get involved in a
start-up:

• The first contact is usually established via appropriate communities (deal

origination).
• Next, the founder is given the opportunity for a presentation or an elevator
pitch to potential business angels (initial screening).
• If the first impression was convincing, the founders can then usually submit
their business plan to one or more potential business angels.
They will then examine the plan critically and in detail (due diligence).
• If the result of the examination is positive, the founder and business angel
negotiate a contract.
If there is agreement on the modalities, the investment contract is signed
(negotiation and contracting). This is usually done with only one business angel.
• The business angel then provides the agreed support services such as Consulting,
Network Integration, Infrastructure, Cooperation, and much more (post-investment
support).
• At the contractually agreed upon point in time, the business angel will leave the
company (exit).

Private Equity and Venture Capital

Private Equity: Is the purchase and sale of shares in unlisted companies. A private
equity company analyzes established companies and then enters into
an investment if it expects the value of its shares to increase over the term of
the investment. The shares give the private equity company a say in the company’s
affairs.
This is usually enacted in such a way that the company is given advice, but the
investing entity is not involved in the day-to-day business.
There are various exit possibilities (exit strategies) for the private equity
company.

• IPO (Initial Public Offering): In the event of an IPO, the private equity company
withdraws from the company.
• Trade sale: The shares are sold to a strategic investor. This is typically a
company that wants to expand.
• Secondary purchase: The shares are sold to another financial investor.
• Buy-back: The shares are sold to the founders or owners of the company.
• Liquidation: The company is dissolved because it was not economically successful.
In this case, the private equity company does not get back the investment and takes
a loss.
Venture Capital: VC offer a form of private equity that is directed at
entrepreneurial ventures which are characterized by (actual or potential) high
growth opportunities.
Venture capital firms therefore can represent a source of financing for both young
companies (in the early stages) and established companies (in the expansion
stages).
Venture capitalists are often willing to take higher risks than other investors in
exchange for the promise of participating in higher than usual growth.
The decision process as to whether a VC company wants to get involved in a start-up
usually takes about six months.
The expected return on investment for VC companies is typically 20% or higher.
VC companies are primarily interested in complex and technically innovative
companies, which may operate in specific industries. Such companies often promise
above-average growth potential.

To this extent, they also offer consulting services to secure their goal of
achieving the greatest possible increase in the value of the company. On the basis
of their shares,
VC companies are granted participation, decision-making, and control rights,
whereby the founders remain majority shareholders.

Corporate Venture Capital (CVC):

Corporate venture capital is usually subsidiaries of corporation. It is these
corporations that provide the capital which the CVC invests.
CVC donors also seek to invest in innovative start-ups with very good growth
opportunities. CVC can be obtained directly or through investment funds by the
entrepreneur.
CVCs have two different approaches: They may invest internally in company
departments or projects, and they may invest externally in other companies.
The strategic objectives of CVC donors are different from those of VC companies.
CVC donors act as the innovation management of the company, as access to start-ups
provides them with additional expertise in new technologies and can thus achieve
competitive advantages.
In addition, they expand their business areas or product range through
complementary products, thereby increasing demand and enabling them to expand their
market share.

Public Support for Start-Ups:

In many countries around the world, there are special public subsidies for start-
ups. The type of support is always tailored to the local conditions.

Basic Possibilities
Founders can benefit from public funding programs in several ways:
• They become part of a high-ranking network of investors.
• They receive financial support from the public sector, either directly or via
professional investors.
• They use public support measures as excellent sources of information.

Support instruments for start-ups are typically found in the form of investment
grants, loans, guarantees, subordinated loans, and equity investments.

Support for Start-Ups in Germany:

In Germany, the pre-requisites for receiving public funding from the federal and
state governments are usually proven technical and commercial qualifications and
a convincing business plan, which must be submitted with the application. The
project must not have been started at the time of application.
In most cases, support is provided for investments in machinery and equipment,
vehicles, land, factories, and intangible investments. Some funding programs may
also include operating funds.

The funding programs change slightly from time to time, though these are currently
found in Germany:
• Special investment grants: These are, for example, from the federal employment
agency for recipients of unemployment benefits in the case of a start-up resulting
from unemployment.
The EXIST program provides scholarships for university founders.
• Start-up loans from the public sector: These usually run for long periods at a
fixed interest rate; redemption-free years are also possible.
• Loans: These can be secured by guarantees of the federal states. Deficiency
guarantees of up to 1 million euros are possible, so that even companies without
collateral
can obtain loans. Overdraft facilities and leasing contracts can also be
guaranteed up to 80%.
• Public development banks: These provide capital to improve the credit#worthiness
of companies. This is particularly beneficial for capital-intensive projects.
• Public-sector holdings: If there is a greater need for capital, public-sector
holdings in companies can be made.
For this purpose, the federal states have set up their own medium-sized holding
companies.
• Consultations: These are supported, e.g., by Founder Coaching Germany, a start-up
coaching organization.
The European Social Fund also supports workshops and information events for
founders in order to reduce failure due to information deficits.
• Technology companies: These are supported by the Federal Ministry of Economic
Affairs and Energy, e.g., through technology promotion and innovation consulting.

===================================================================================
===================================================================================
=====================

Chapter 6: The Financing of Entrepreneurial Activity II: Financing Processes

The Investor’s Perspective: Deal Sourcing and Deal Screening

The Principal-Agent Problem is always found in the economy where two business
partners with different levels of information are involved in a project:
(Asymmetrical Distribution of Info)

The founder (the agent) has a lot of information about their project, e.g., about
their experience, the technological state of developments, the status of
negotiations with
potential customers, and much more. Ultimately, only the founder can realistically
assess their personal abilities; this situation is known as “hidden
characteristics.” If the
founder does not present their abilities to the investor correctly, e.g.,
opportunistically or clearly too optimistically, this can lead to adverse
selection.

The investor (as principal) can only get a partial insight into the situation as an
outsider before the contract is concluded. This is not critical, as long as
investors and
founders have the same interests, and the agent (founder) acts in the interest of
the principal (investor). If, however, there are different interests, it can happen
that the
agent does not act in the way the principal thinks is best. In the case of a
foundation, the principal's interest is to achieve the highest possible increase in
value as an
investor, and to receive the highest possible return on their investment at the
time of the exit. However, the founder may be more interested in achieving long-
term success
and would like to achieve this by means of slow, continuous growth.

The investor wants to be a partner in the company without being involved in the
day#to-day business. To this extent, they try to minimize the following risks:
• Bad management decisions
• Lack of commitment of the founding team and key people
• Differences of opinion about the right timing to generate value
• Expansion to include new shareholders, as this may lead to conflicts

Strategy of Venture Capital Companies:

For VC companies, it is necessary to regularly conclude high-quality deals in order
to be successful in the long term. Thus, VCs have a clear investment strategy.
• Investment size: This initially defines the preferred size of the investment,
which depends on the volume of the fund, among other things.
• Diversification: In order to reduce the uncertainty inherent in start-ups,
diversification is usually carried out, investments are made in a number of
different areas to spread the risk.
• Industry: Most VC companies also specialize in some industries.
• Stage: The risk and the investment amount usually increase in the different
development phases of the companies.
Many VCs therefore restrict themselves to the early phases with small
investments.
• Geography: It is easier to provide support in projects that are located in close
proximity, so VCs usually have a defined catchment area.

The Entrepreneurial View: Negotiations With Investors:

For the founder, it is important to obtain the desired capital with the most
favorable conditions possible, achieved through skillful negotiation with the
investor.
The conditions and modalities are agreed upon in writing and then put into
practice.

Term Sheet:
Term sheet also called letter of intent LOI or memorandum of understanding MOU, the
investor and the founder define the key points of the planned cooperation at an
early stage.
The negotiations between the founder and the investor therefore have already begun.
The term sheet later leads to the final contract.
It is good practice for both parties to adhere to these agreements, which are not
legally binding in themselves.

The Term Sheet Contains: regulations on the essential financial aspects, as well as
a large number of other regulations such as the strategy, the financing or
distribution policy,
the employment contract of the management, put and call options, and much more.
Afterwards, the Economic and Legal circumstances are examined in detail during the
Due Diligence Process.

The Investment Documentation contains the description of the company and the
capital development, further information on the investment and the conditions,
the special rights of the investor, the liquidation preference, the rights and
obligations of co-sale, and the obligations of the founders.
In most cases, a period of three to six months can be assumed for the negotiations.
The negotiations focus on the type of investment, the use of funds, and the
regulations for the time after the investment.
Interests of the Founders:
Founders have a vision and a mission for their project; they put their heart and
soul into the planned business. Many of them would like to work in their company
for a long
time, or even pass it on to the next generation. In this respect, their interest is
to limit risks:
• The investor is not sufficiently committed and does not contribute enough of his
network and knowledge.
• New investors enter the company and upset the existing balance.
• The investor withdraws at the wrong time and therefore less capital is available.
• Surprises at the time of exit lead to the financing plan not being adhered to and
the planned increase in value not being achieved

Avoiding Negotiation Errors:

In the run-up to negotiations, it is important to clarify the interests of the
other business partners as far in advance as possible.
What do they absolutely want, and what else would they like? What possibilities
exist to generate the desired values? Where might they lack information?
This preparation helps to prevent problems in later negotiations. During the
negotiation, it is important to identify problems and react appropriately. One
should always expect the unexpected.
To do this, it is important to stay focused, have different types of descriptions
at hand, be as flexible as necessary, and adapt in an appropriate way without
bending too much.
Any tensions that occur should be reduced quickly; if necessary, one should
apologize for any misconduct. This provides a good basis for being successful in
negotiations.
After the negotiations, it is helpful to reflect on what one has experienced and
learn from it for the next negotiations. Lessons learned are a suitable method for
this.

The Evaluation of Business Start-Ups:

In order to obtain a realistic assessment of the investment and the profit to be
made, investors need a calculation of the company value and its expected future
development.

• Discounted Cash Flow (DCF) Method:

To calculate the value of a company using this method, one has to estimate all its
future cash flows and then calculate their present value by discounting them using
an
appropriate measure for the cost of capital of the company.
To estimate the first element, the future cash flows, we need to have information
regarding the past performance of the company, the evolution of the market, and
future investment plans.

The Disadvantage: of this method is that obtaining this information is often

difficult, or even impossible in the case of new ventures:
They often seek to disrupt the existing market, making it challenging to estimate
its further evolution.

The Advantage: of this method is that, if such information is available, it takes

the future cash flows of the company into account.
The discounted cash flow method offers a second advantage: It takes the company’s
cost of capital into account.

• Net Asset Value Method:

In the net asset value method all the company’s assets are estimated at their
current market value. Then all debts of the company such as accounts payable and
all other
liabilities are subtracted from the total value of the assets.
The resulting amount shows the equity value of the company – essentially what the
company’s assets are worth after deducting its liabilities (net of its
liabilities).

The Advantage: of this method is that it is simple and straightforward.

The Disadvantage: It is not very insightful when it comes to new companies and
start-ups.
Such companies have not been in business long and have typically not been able to
acquire many tangible assets.

• Market Value Method:

The market value method does not focus on internal circumstances, but on the
price that can be achieved for the company on the market.
In the case of a company's stock, this is the value of the shares at the current
price. In the case of non-listed companies, the comparison with companies of the
same type is
made by means of benchmarking. For this purpose, the value of the benchmarking
company is taken as the share value of a listed company, or the value of an
unlisted
company that has already been determined once due to a transaction or
acquisition. Simplicity is an advantage if the company is listed on the stock
exchange.
In the case of comparable companies, there is always the risk of differences that
may play a role, such as culture, image, or age of machinery.

Other Approaches:
There are elaborate probability and simulation-oriented business valuation methods
in which simulations are carried out with assumptions based on the business
planning of the founders.

Factors Influencing the Enterprise Value:

In negotiations between investors and founders, a number of other influencing
factors play a role in addition to past values; these factors are either completely
absent in the
early phases or only available to a limited extent and are therefore not very
resilient. Typically, the quality and experience of the management/founding team,
the sales forcasts,
the risks, the financial market environment with supply and demand, the price
level, and the time factor via time-to-market/break-even/exit are added to the
valuation .

===================================================================================
===================================================================================
=====================

Chapter 7: The Business Plan

Purpose and Objectives of the Business Plan:

Business plans are a standard instrument in business life. They are written
(voluntarily) in two different situations:
By Established Companies wanting to carry out an extensive project or plan, and By
Founders who need support for their planned start-up.
In both cases, the business plan must convince the reader. The business plan must
therefore be written in a coherent and detailed way, and should also show the risks
of the project.
The “7 Cs” can be used to check whether the design has been successful.
Is the business plan clear, crisp, concise, consistent, coherent, credible, and
convincing? If a plan passes this review, the reader will understand the desired
positive impression.

In terms of content, the difference between business plans written in established

companies and those of start-ups is minimal.
The main difference is that the market position described for start-ups is a
planned one, i.e., for the future. In this respect, there is a high degree of
uncertainty.

The central objective of the business plan is therefore to obtain support for a
project. This can involve a variety of different pursuits.
e.g., a start-up project, the procurement of equity capital, or capital for
external financing.
It can also be support for a board decision, for a joint venture partner, for the
sale of the company, for expansion into new markets, the introduction of new
products, and for IPOs.

Expectations in Relation to the Business Plan:

Expectations of Different Target Groups:

From the founders’ point of view, the preparation of the business plan serves to
first sort out their thoughts and to present results of the research and
considerations in a structured way.
Weak points and know-how deficits also become clear and can be eliminated in a
timely manner. Blind spots in the considerations are recognized when writing and
gaps can be eliminated immediately.
The involvement of experts and institutions in this process is helpful, but should
not lead to completely handing over the preparation of the business plan.
The founders themselves should be viewed as the main target group for their own
business plan. Business plans are also the decisive document on the basis of which
an investor or supporter
makes his decision for or against a project.

Requirements for Business Plans:

As a general rule, a business plan should always be written in a reader-friendly
manner and its layout should be appealing. All technical terms and complicated
connections
should always be explained in a simplified way.The language must be objective;
emotional statements have no place in business plans.In terms of content, it is
important to ensure
traceability, consistency, objective foundation, and completeness. At the beginning
should be a clear objective, and the explanations should be consistently geared to
the selected readers.
Sufficient proof of entrepreneurial qualifications should also be included.
The typical size of a business plan for start-up projects is between 30 and 40
pages, though very small projects may be illustrated in 10 to 15 pages.
For projects in largecompanies, a business plan can reach several hundred pages.

Priority Setting Appropriate to the Addressees:

If potential equity investors represent the target readership, they should find
detailed information on the expected return on investment in the business plan.
Attention should be paid to the presentation of opportunities for value
enhancement, investment and financial policy, and management qualities.
It is important that a business plan should not be delegated, as it is a matter for
the boss and top performers who should be involved in its preparation.
The business plan should have its “own handwriting” and be honest and objective in
its presentation.
Structure and Content of the Business Plan:
Business plans typically contain comprehensive statements about the founder(s), the
business idea, the products and production, market and marketing, as well as
finances and financing.

•Executive Summary:
Although the executive summary is at the beginning of the business plan, it is
written last. Its aim is to inspire the reader with enthusiasm for the project and
to motivate
them to read the entire document. The summary should be easy to understand and
written in a style that appeals to the intended client.
It usually consists of one to two pages (max. three pages), represents the business
plan in short form, and presents the key statements.
In short, the executive summary provides the reader with an overview of all the key
facts of the project

•Company Presentation (Idea, Products/Services):

The company presentation explains the idea, the company and its development, the
products, and the industry. It starts with the presentation of the business model.
The customers’ needs and the benefits generated should be clearly recognizable,
with the uniqueness of the project made clear. The products or services are briefly
presented
and a description is given of how the revenues are achieved. Previous major
successes are presented, and overcoming of failures is also explained.
The development of the company, and the financial key figures of the last three
years; or in the case of start#ups, includes the founders’ advance contributions.
The strengths and weaknesses in products/services, marketing, manufacturing,
management, and finance are compiled. Then the vision, long-term goals, and the
strategy
with which the goals are to be achieved are presented.Finally, the report should
also include information on how research and development costs will be considered
over the next three-five years

•Markets, Marketing, and Sales:

The presentation of Market Potential and Market Volume should be substantiated.
Estimates must be explained how large the total market is, how it is segmented, and
which players- competitors, market leaders are to be found there.
The main success factors, special opportunities, risks, and special characteristics
of the market should be discussed.
The future developments such as possible mergers of competitors, the presence of
foreign competitors, or the appearance of alternative products should be explained.
Measures should be presented in order to maintain or expand one’s own position.
In the marketing presentation, the marketing strategy and the measures for
implementation are explained. This can be based on the marketing mix with the “4
Ps,” or in the
case of service companies, the “5 Ps” (the “4 Ps” plus personnel policy).

Management, Team, and Organization:

The competence and motivation of the founders and the management are crucial for
success—they should be made very clear and proven. Their experience and knowledge,
composition,
the distribution of skills, their greatest successes, industry-specific knowl#edge,
and customer relationships are all important aspects. The founders should
alsomention their motivation
for self-employment. If there are financial ties to each otheror to the company,
these should be disclosed. The aspects for which support is needed should also be
made clear.
Procurement, Suppliers, and Production:
It must be shown where production facilities are located or planned, what machinery
and equipment is available or required, what investments in production equipment
are planned in the next
few years, and how many production personnel will be needed. The production
processes are to be explained, critical factors and their monitoring are to be
presented, as well as the
dependence on key factors such as suppliers or materi#als and supplier
relationships. The production capacities, certifications/approvals, out#sourcing
possibilities, as well as the
opportunities and risks of the process should be given space in the explanations.
Finally, the costs and possible cooperation partners important, as is the question
of how the company
stands out from the competition.

Implementation Plan and Risk Assessment:

In a timeframe of a maximum of five years, the planning of the foundation and
expansion of the company is presented. The achievement of objectives in connection
with
milestones is included here. Typical milestones are, for example, the completion of
the prototype, the first production run, or the first paying customer.

•Finances and Financing:

Finally, it is important to provide comprehensive information on the financial
situation by presenting financial planning and financing details. Since this topic
is a very central
one in the business plan, all calculations must be comprehensible and transparent.
Usually, planning is carried out over a period of five years, with the first year
shown in
monthly increments, the second quarterly, the third half-yearly, and the last two
years annually. It should be evident that the business idea is financially viable
and profitable.
In order to improve credibility, a best-case and worst-case analysis should be
carried out in addition to the realistic scenario presented.

Supplementary documents and details such as patent and utility model information,
trademark searches, information on production processes, and much more are added as
an annex to the
business plan.

Guidelines for Creating a Business Plan:

Writing a business plan is a process that involves several steps, takes place over
a long period of time, and is sometimes iterative:

1. Before starting the plan, the potential recipients and their target information
profile must be defined. The exact content is then derived from this.
2. Then necessary basic data is determined, which either already exists or still
has to be procured. Figures, plans, competitive data, trend/market analyses,
capability profiles.
3. Then business plan can be drawn up, which should be optimally formulated and
comprehensibly designed. If necessary, it is advisable to involve a professional
consultant
who will also ask some critical questions.

The most common mistakes in business plans include:

• Lack of focus on needs and customers,
• Lack of receiver orientation,
• Incompleteness and contradiction,
• A mixture of hope and reality,
• The non-observance of risks,
• Misjudgments of time and money
• General phrases i.e we have no competitors

In most cases, the preparation of the business plan is done in such a way that
founders first work with the preliminary goals they have in mind, such as the
planned sales figures.
This is then followed by a market analysis based on secondary data. The results are
compared with the formulated goals and the goals are then confirmed or revised.
Next, The section on production and the management team is written and the
financial part is prepared.
The resulting first version of the business plan then requires a very critical
examination with regard to realism, consistency, meaningfulness, and
comprehensibility.
If the financial perspectives on the basis of the plan figures are not convincing,
a major revision of the business plan must be carried out.
Only when the business plan, with its explanations and budget figures, is
convincingly successful it is submitted to investors and other readers.

===================================================================================
===================================================================================
=====================

Chapter 8: Digital Business Models and Artificial Intelligence

E-Business:
The term electronic business refers to the initiation, partial or complete support,
handling, and maintenance of service exchange processes between economic partners
by
means of information technology (electronic networks).

Development Stages in E Business:

In its simplest form, electronic business (e-business) contains only static

presentations, e.g., information for customers or investors.
In the second stage of development,e-business already has personalized and
interactive internet offers, e.g., customer inquiries are answered by email.
In the third stage, online transactions are planned.
The fourth and highest stage of development involves the electronic integration of
all business partners in the value chain, i.e., goes beyond the customers.

The three central building blocks of e-business are Information, Communication, and
Transaction, which function via digital networks.
This has given rise to three central platforms with different objectives, namely,
platforms for procurement (e-procurement), sales (e-shop,) and trade (e-
marketplace).
A broader consideration also includes platforms for contact networks (e-community)
and cooperation (e-company).

Digital Business Models:

In the case of digital business models that go hand in hand with the digital
transformation, the creation of value or benefits in the company is purely digital,
essentially
on the basis of digital components or through an activity that is essentially based
on digital technologies.

The following six technologies are considered enablers:

• Internet of Things (IoT)/Smart Factory/Industry 4.0: Networking takes place
horizontally, vertically, and across company boundaries.
• Big data: This technology enables scalable integration, extraction, and
processing of large data sets.
• Cloud computing: The offer is made “as a service” via a server cloud from another
location.
• Artificial intelligence (AI), extended intelligence (EI)/machine learning (partly
used synonymously): Learning-capable algorithms analyze large data sets.
• Digital platforms: Transaction-centered platforms bring together supply and
demand (digital marketplaces);
• Block chain technologies: These link data records (blocks) by an algorithm
(cryptographic hash function) to a chain.

The following four aspects represent particular challenges in the transition to

digital business models, especially for medium-sized companies:

1. It is essential for managers to build up new skills, as the economic and

technical implementation requires an understanding of ICT technologies in terms of
their trends and potential.
One way to do this is to cooperate with digitally oriented start#ups.
2. External service providers or in-house ICT specialists with IT skills are
needed, but there is often a shortage of the required specialists.
The qualification of their own personnel or cooperation partners is therefore
important for SMEs.
3. There is considerable legal uncertainty. This concerns both data security and
questions of ownership of raw data.
There are also a number of liability issues and unresolved transfers of rights
and ownership in block chain technologies.
4. The digital infrastructure is becoming increasingly important; location
decisions are influenced by transmission rates, reliability, and security of data
networks.
The prices for ICT services are falling, solutions such as “cloud-as-a-service”
are inexpensive and allow decentralized.

An analysis of 380 business model transformations in a multi-year research project

identified four successful business model types for the digital age:
• Product business model: Here, the offer consists of standardized goods in large
quantities with little individualization, supplemented by simple services such as
maintenance.
• Platform business model: Different players jointly provide a service e.g.,
Amazon, Netflix, eBay.
• Project business model: These are highly individualized products where a project
is carried out once (e.g., consulting, construction companies).
• Solution business model: Highly individualized services are offered and also
completely implemented at the customer’s site.
e.g. landscape consisting of printers, copiers, scanners, or fax machines; the
customer pays for the number of pages copied

Swarm Intelligence:
Bionics is a science in which new solutions to technical problems are developed
from an understanding of nature.
A swarm is created when individuals interact with each other directly and without
central control. This leads to an overall increase in efficiency.

Ant Algorithms:
One application of Swarm Intelligence is found in so-called Ant Algorithms. For
example, in the routing of communication networks.
The underlying behavior in nature is as follows: Ants lay down a trail of
pheromones as they make their way from nest to food source.
The fastest way back to the nest is the ant that has taken the shortest route.
Since it has marked its route with pheromones both on the way there and back,
double the amount of pheromones
remain. The other ants learn from this and will also take this shortest route in
future.

Crowdsourcing:
Another application of Swarm Intelligence is Crowdsourcing. This refers to the
outsourcing of a task that is usually carried out within an organization.
The outsourcing is done to the crowd, i.e., to a group of volunteers on the Web.
The advantages of crowdsourcing are the use of the creativity and inventiveness of
many people.
Individuals are motivated to participate because their ideas are heard. In
addition, incentives may be provided through rewards and prizes.
The crowdsourcing platform is managed by artificial intelligence.

Artificial Intelligence: Artificial intelligence (AI) refers to computer systems

that imitate human intelligence.
However, this only applies if the following factors are also present: The Ability
to Learn, Deal with Uncertainty and Probabilities, and Solve Problems in an
abstract way.

There is already a wide range of application disciplines of AI:

• Computer vision: These extended possibilities of image recognition are used, for
example, in autonomous vehicles to evaluate camera images.
• Biometrics: This is the recognition of a person based on individual biological
characteristics.
• Speech recognition: This allows, for example, the ability to record texts on the
computer.
• Natural language processing: Text and language are interpreted and thus
translation programs are improved.
• Natural language generating: This enables independent writing of texts.
• Sentiment detection: In text and speech, feelings are recognized, which can be
used in customer service.
• Robots: The “Artificial Humans” represent the “royal road” of AI.

The term “Robot”: the three principles of robotics that are still valid today:
• A robot may not injure a human being or cause harm through inactivity.
• A robot must obey the orders of a human, unless such orders are contrary to the
first law.
• A robot must protect its own existence as long as this protection does not
conflict with the first or second law.

8.3 Globotics
Digitization and It's Impact on Work: A study showed what consequences of
digitization is likely to have for the USA.
While activities associated with interpersonal contacts are hardly digitized at
all, activities with a large repetitive share were predicted as highly likely to be
digitized.
However, these occupations represent a significant share of all activities in the
USA, especially for the low-skilled.
In this respect, a clear need for action was deduced, as it is important to find
new activities for people with low qualifications in a timely manner.

Economist coined the term “Globotics” to characterize globalization mixed with new
kinds of robotics, from artificial intelligence to technologies that make
it easier to outsource services jobs. These two major challenges can no longer be
viewed as independent from one another.
The service sector, previously largely untouched by globalization, is now also
exposed to worldwide competition as a result of digitization.
If activities are carried out “remotely,” i.e., from a distance, and if, for
example, cleaning robots are operated from abroad or inventory management can be
carried out,
the countries with lower wages will win and jobs will be lost in the industrial
nations. This is known as Telemigration.

In the age of Globotics, new rules for a successful professional life are emerging:
The previous way of thinking, which was characterized by “more skills, learning,
training,and experience” no longer applies. People should focus on areas that
cannot be replaced by AI.
For example, skills that are needed for activities with frequent interpersonal
contacts should be developed.
The training of those soft skills becomes essential, which promote the competences
for working in groups, as well as creativity and empathy.
In addition, it is beneficial to build up skills that are needed for developing
robots, e.g., for designing robots or for handling algorithms.

===================================================================================
===================================================================================
=====================

Chapter 9: Cooperative Strategy: Alliances and Joint Ventures

Cooperative Strategy:
Due to the increasing competitive pressure, cooperations have increased
significantly in recent years. In practice, strategic alliances and joint ventures
are often found.
Cooperative strategy is the process by which competing organizations work together
to achieve common goals. The focus is on the mutual benefits how the cooperation
can be developed.
The cooperation strategy must be clearly distinguished from the competitive
strategy, which is aimed at achieving advantages over the competition.

Cooperations:
Cooperation can be understood as a long-term collaboration with joint use of
resources between legally independent companies.
The important thing here is that the companies remain legally independent and have
equal rights, in contrast to the acquisition or merger of companies.
In most cases, the term Bilateral Cooperation is used when there are two partners,
whereas “network” is used when there are three or more partners.

The following three approaches are given as explanations for entering into
cooperation:

• Transaction Theory Explainations: That every exchange process between market

participants leads to transaction costs, and these should be minimized.
Cooperations are suitable for this purpose if the costs of in-house production
are higher than those of external procurement, the market partners have largely the
same information,
and the transaction-specific investments are not very high.
• Market-oriented Explanations: Argue that the success of companies is based on
positioning, building up, and defending competitive advantages in the market.
In highly competitive markets, this is easier through cooperation. In addition,
cooperations can also influence the market structure.
• Resource-oriented Declarations: Assume that if the partners have different
resource, the joint use of resources represents a significant advantage of a
cooperation.
This is especially true when resources are difficult to substitute or imitate.
Cooperations have increased significantly in recent years due to the often
saturated markets and the pressure to innovate. Decisive advantages attributed to
this include:

• Market entry or increased market power in existing markets.

• The transfer of skills to new activities or access to skills from another
company.
• The broadening of financial or human resources and better use of existing
capacities.
• Faster access to business if development times can be reduced by products,
know#how, or technologies of the cooperation partners.
• A much lower level of commitment to a new business segment than at the time of
acquisition.
• The distribution of costs and risk among the cooperation partners.

In particular, three disadvantages exist for cooperations:

• The company has less freedom or is dependent on the partners. It cannot fully
influence and monitor the cooperation. Each partner also tries to assert their own
interests.
• The division of the cooperation results represents a field of conflict,
especially if the partners are in a competitive relationship, are developing
separately, or the original
goals are reached at different speeds.
Cooperations are often unstable and change into organic developments or an
acquisition. As a result, employees find themselves in a situation where their jobs
are not very secure.
• In spite of common goals, existing differences can lead to a high level of
control and time-consuming coordination.
Internationally, language barriers or cultural differences also lead to problems.

Strategic Alliance:
A strategic alliance is a cooperation in which the legally independent companies
involved to pursue a common strategy to improve their competitive position.
The aim is to compensate for their own weaknesses with the strengths of other
partners. This involves entering into a formalized, longer-term relationship,
which is much less firm than a joint venture. Strategic alliances are characterized
by the fact that they often involve cooperation with competitors from the same
industry.
They represent a loose form of cooperation, but are based on agreements and
contracts.
Their behavior and strategy are coordinated. This form of cooperation has gained in
importance in times of globalization and more intense competition.

Joint Venture:
A joint venture is economic cooperation between companies in which a legally
independent company is jointly established or acquired.
For this purpose, parts of the cooperating companies can be spun off and
incorporated into the new, independent company.
To set up the enterprise, a new company can be founded, an investment in an
existing company or the joint takeover of another company can be carried out.
Often (but not always) a form is chosen where both partners own half of the shares
in the joint venture, so that hierarchical control is excluded.
In this case, the management is then carried out jointly. However, joint ventures
are not very successful. Conflicts of objectives often arise between the partners,
personnel policy inconsistencies occur, and problems with knowledge loss and
cultural integration development
MBA Matrix:
The following MBA matrix (Make, Buy, and Ally) provides assistance in selecting the
appropriate strategic approach. Here, the relative competence of the company is
compared with
the strategic relevance of the activity. From this, it can be derived when entering
into a cooperation (“ally”), when own doing (“make”) or an acquisition (“buy”)
makes sense.
If the relative competence is low, but the strategic relevance is medium or high, a
cooperation seems suitable.
The same applies if the relative competence and strategic relevance are in the
middle range.
In contrast, if the relative competence is high or the strategic relevance is low,
cooperations are not a suitable approach.

The Right Fit:

For a cooperation, it is necessary to find the right partners. In particular, the
strategy and the corporate culture must be taken into account.

The following six criteria can be used to consider the selection of potential
partners:
• The partner must have the necessary size, technology, market access, or other
contribution to give the cooperation a competitive advantage that none of the
partners has alone.
• The partners should complement each other in their contributions, but be of
similar size or strength, so that they meet on an equal footing without one
dominating the action.
• It must be acceptable to both sides if one of the partners wants to focus on a
specific market.
• There must be only a small risk that one of the partners will later become a
competitor.
• In addition, the cooperation was intended to limit the range of competitors
strategies.
• The compatibility of the two partner organizations must be so great that cultural
conflicts are unlikely.

The Strategic Fit:

The basic consideration should be whether the new common value chain leads to a
sustainable competitive advantage for the partners.
If the partners are indeed complementary in terms of resources and capacities, then
a partnership appears beneficial and entering into the partnership should not prove
too difficult.
If this is not the case, the future success of the cooperation may be doubted.

The Cultural Fit:

The existence of a similar corporate culture is not a necessary precondition for
cooperation.
Similar cultures are rarely found, and it might even be counter productive since a
learning opportunity would be lost.
However, it is important that negotiations show that the “chemistry” between the
partners is suitable for entering into a cooperation.

If there is not a sufficient match between the cultures, one of the following four
results can be expected in the future:
1. The two corporate cultures are lived side by side.
2. Over a period of time, a new, common culture develops.
3. The stronger culture of a partner, or the culture that is more appropriate to
the competitive environment, prevails.
4. Constant resistance leads to a permanent impairment of cooperation.
Strategy-Culture-Fit Matrix:
The following matrix, which summarizes the four strategic options, is suitable for
consideration:

If the strategic and cultural fit turns out to be unfavorable (Box 4), it is better
not to enter into cooperation.
If the cultural fit is high but the strategic fit low, the cooperation does not
create a competitive advantage and the cooperation can be classified as unfavorable
overall (Box 3).
If the cultural fit is low but the strategic fit is high (Box 1), the situation can
be improved by mutual openness to work on the existing cultural differences.
If this openness exists, there is a good chance of success.
The starting situation for cooperation is ideal when the strategic and cultural fit
is high (Box 2)

The Right “Form”:

There is a range of possibilities for a cooperation that goes beyond the division
into strategic alliance and joint venture. The spectrum ranges from a loose
cooperation to
the joint establishment of a company. Various criteria can be used for the
description. Very often, a distinction is made according to the direction of
cooperation (along the
value chain in vertical, horizontal, and conglomerate) or according to
institutionalization (from institutionless to joint venture).

These two approaches are presented below:

Vertical cooperations extend over various stages of the value chain and are formed
by partners who are related as suppliers or buyers.
This is based on the idea of optimizing the interfaces, e.g., between automobile
manufacturers and their suppliers in product development.

In Horizontal cooperation, companies at the same level of the value chain join
forces in order to pool their competitive strengths;
For example, the automobile manufacturers in the development of hybrid drive
systems.

A Conglomerate cooperation arises when companies work together that are neither in
a value-added relationship nor in competition with one another.
Complementary products are offered whose joint marketing or development makes
sense, e.g., for joint training and further education, or for the operation of
canteens.

Companies do not have to create new organizations to be able to work together.

Institutionless cooperation is easy to implement, but it can also quickly become
unstable.
It is secured by contracts, such as in the form of supply contracts for the
duration of a product life cycle.
A special, more intensified form is represented by license agreements, which grant
the use of certain property rights, patents, or trademarks for a fee.
Finally, a unilateral or reciprocal equity participation further increases the
institutional#ization, thereby increasing the influence on the partner and
stabilizing the cooperation.
The most intensive form is a joint venture. Here, parts of the company are spun off
and incorporated into a new independent company.
A complete institutionalization is an acquisition in the form of a takeover or
merger, but in this case, there is no longer any cooperation.
===================================================================================
===================================================================================
=====================

Chapter 10: Family Business

Family Business:
This states that family businesses are those “in which the ownership and management
rights are united in the person of the entrepreneur or the entrepreneur's family”

As long as the owner or the family is managing the business, the identity of
ownership and management is given and we speak of owner- or family-run businesses.
If the owning family is no longer directly involved in managing the company, but is
still intensively involved in the business, we speak of family-controlled
companies.
Here, the influence of the owners on the management behavior can be differently
pronounced. If a person or a family is still the owner, there is still an active
influence on
strategic decisions and the company is defined by medium-sized characteristics. The
larger the company and the more fragmented the ownership structure, the less
influence the owner has.
The IfM therefore classifies family-owned companies as all companies in which up to
two natural persons or members of their families hold at
least 50% of the shares and these natural persons are members of the management
(IfM, 2020).
Even though many SMEs are family businesses, these differ from SMEs in that family
businesses can employ more than 500 people or generate annual sales of more than 50
million euros.
In contrast, technology start-ups are often SMEs, but are mainly owned by
investors. In this respect, a clear distinction must be made between SMEs and
family businesses.

Zellweger’s definition, according to which a family business is a company, is

somewhat different:
“Dominantly controlled by a family with the vision to potentially sustain family
control across generations”. Here, the future situation is also part of the
assessment.

The European Commission considers EU companies to be family businesses if the

following four criteria are met (EU, 2020)
1. The majority of decision-making rights are in the possession of the natural
person(s) who established the firm, or in the possession of the natural person(s)
who
has/have acquired the share capital of the firm, or in the possession of their
spouses, parents, child, or children’s direct heirs.
2. The majority of decision-making rights are indirect or direct.
3. At least one representative of the family or kin is formally involved in the
governance of the firm.
4. Listed companies meet the definition of family enterprise if the person who
established or acquired the firm (share capital) or their families or descendants
possess
25% of the decision-making rights mandated by their share capital.

The following considerations are based on the definition of Zellweger. Family

Influence:
In the F-PEC model (for family, power, experience, and culture), the influence of
the family is represented by three dimensions:
• Power dimension: This indicates the extent of ownership, management control, and
influence in management bodies (e.g., board of directors) by the family.
• Experience dimension: This refers to the number of generations in which the
company has already been under family control.
• Cultural dimension: This describes the cultural overlap between the family and
business systems, i.e., the overlapping of values.

From this it is possible to differentiate more precisely between five dimensions of

family income:
1. Inclusion of family control in ownership, management, and leadership functions
2. Complexity of family control, which increases with the number of family members
involved
3. Set-up of the business activities, for example, by looking at the number of
companies in a family
4. Philosophy and the goals of the family owners, particularly the balancing
between economic and other family goals such as long-term orientation or reputation
5. Levels of control in the family history of the company, which, due to the
increasing commitment to the company roots, brings with it a stronger emotional
bond between the family
and the company.

Circular Models:

In circular models, the underlying logic can be mapped in family businesses. Here
it becomes clear which principles are used to understand roles, connections,
personal
expectations, and problem analysis. From this, the context in which argumentation,
communication, and decision making take place can then be better recognized.

The Two-Circle Model:

Describes the overlap between the family and the business system, and at the same
time points out the existing field of tension. This is where the traditional,
emotional, long-term, and non-material, values oriented family system and the
corporate system (which stands for renewal, rationality, meritocracy, short-
termism,
and financial values) meet. In this respect, the model helps to better understand
the underlying reasons for observed behavior of family members.
It shows that people do not always wear just one hat. Family systems are not always
traditional or emotional, and decision-making behavior in companies is not always
purely rational.
This black and white representation should therefore be viewed with a certain
amount of caution.

Three-Circle Model:
An alternative representation is provided by the three-circle model, which
considers Family, Ownership, and Management.
Here, the role-related complexity with which the individual persons in family
businesses are confronted becomes clear.
Circular models are particularly helpful because they make it clear at a glance
that the actors involved are subject to structurally contradictory demands on the
part of their respective roles.
For example, the entrepreneur may judge the question of his successor in his role
as a family member differently than in his role as managing director.
Such role conflicts are inherent in the nature of family businesses and are one
reason for the difficulties frequently encountered in business succession.

Economic Significance:
The number of family businesses is very large internationally and their influence
is considerable. This has not changed even in times of globalization,
digitalization, and
increased competitive pressure. For example, 37% of Fortune 500 companies are
family businesses, including the largest, Walmart.

The Situation in Germany:

In Germany, the share of family-owned enterprises according to the IfM definition
is very high, but decreased slightly for a while. The share had fallen from 94.8%
of all
companies in 1998 to 93.6% in 2014. The biggest change was among medium-sized stock
corporations

The Situation in Europe:

Looking at Europe as a whole, the proportion of family businesses ranges from 69%
in the Netherlands and the United Kingdom to 95% in Germany.
All legal structures are represented, from sole proprietorships to large
international companies.

The Global Situation:

In the USA, 74.9% of the 27.09 million companies are classified as family
businesses if an existing influence on ownership, leadership, and management is
taken as a basis. If
the company is managed by the family, the share is reduced to 45%. If the family is
also required to control the company over more than one generation, the share is
only
15.1%. Family businesses generate 64% of gross domestic product (GDP) and employ
62% of the workforce.

Strengths and Weaknesses:

Family businesses are attributed to some distinct strengths, but weaknesses as
well.
As we have seen from the overlapping life cycles shown above, the following
strengths and weaknesses are characteristic of family businesses:
• There are few principal-agent conflicts between owners and managers.
However, this is only the case if the owners are also active as managers
themselves and if there are few conflicts within the family itself.

• This also leads to reduced costs and efficient management if decisions can be
made quickly.

• Family businesses have resource advantages in competition. These stem from a deep
understanding of products, markets, and customers over a long period of time.

• Family businesses have very loyal (family) investors.

• There are very often strong networks with customers, suppliers, experts, and
investors who provide support.

• Strength is the long-term orientation of the goals of family businesses. This

manifests itself, for example, in the rare turnaround of top management and in
longer
investment periods, which also allow investments with longer ROI. They also
adhere to strategic decisions and implement them consistently.

• The commitment of the families leads to a special corporate culture.

Employees are often willing to make contributions above and beyond the usual
level, as they can expect to have secure jobs.

• Family-controlled companies are unique in that the owners give the company their
money, and often also their name and reputation.

But there are also well-known weaknesses of family businesses:

• Since the family is the key stakeholder, there is a great dependence on the
family and this ultimately determines what happens in the company.
This poses a risk in the event of any incompetence on the part of individuals or
morally dubious owners. Conflicts within the family can also burden the company.

• Positions are filled with people because they belong to the family, not
necessarily because they are particularly suited to the task.
This also sends a signal to employees that performance and competence are not
always the decisive criteria for promotion.
Children of the family working in the company are dependent on the loyalty of
their parents, e.g., in terms of salaries, options for projects, and innovations.

• Finally, as we have already seen, the problem of succession is a major weakness.

In order to remain a family-run business, someone from the family must want to
join the company, and this person should also be suitable.
If this is not the case, there will be a transition to a family-controlled
company.
If several families members own a business, this can also lead to frictional
losses due to power conflicts between the families.

• The resource advantages of family businesses can also lead to disadvantages. For
example, there are fewer incentives for external managers if there is a risk of a
family member being
placed in a management position. In addition, the willingness to invest one's own
assets in the company is limited.

• Over a longer period of time, it can be observed that “entrepreneurial drive,”

and with it the interest in growth and success, decreases.
A desire for harmony in the family can lead to a decrease in the entrepreneurial
spirit.

• Finally, actors in family businesses often play several roles, namely as

managers, owners, and family members. This can, as mentioned, lead to considerable
role conflicts.