Establishing an ethical and socially responsible business and structuring an entrepreneurial

venture

CHAPTER 8

Explain the role of ethics in entrepreneurship.

Discuss how entrepreneurs can demonstrate social responsibility.

Describe how an entrepreneur’s vision and values contribute to the culture of the new venture.

Discuss the relationship of core values to success.

Learning Objectives

Learning ObjectivesDescribe how businesses are organized.Discuss the role of strategic alliances in a

new organization. Explain how to identify the appropriate

business site.Discuss the most critical issues related to

organizing people.

The moral code by which we live and conduct business.

Derives from the cultural, social, political, and ethnic norms with which we were raised as children.

Ethics

Ethical decision making, 4 categories:1. Individual values2. Organizational values3. Customer satisfaction4. External accountability

Ethics (cont’d)

Categories of perspectives about ethical dilemma:Ideals

Looking at the dilemma from an Aristotelian perspective about one’s virtues, integrity, and values

Obligations One’s duty, rights, or what is lawful or just

Utility Analyzes costs and benefits of potential

alternative consequences of action or inaction

Ethics (cont’d)

Approaches to avoiding ethical issues:1. Dogmatism: “I simply will never

lie or cheat or steal.”2. Egoism: “Everyone needs to

lookout for himself.”3. Relativism or Situational: “When

in Rome, do what the Romans do.”

4. Subjectivism: “Ethics is a point of view.”

Ethics (cont’d)

Four most common types of ethical dilemmas:Conflicts of interest: Occurs when a person’s

private or personal interests clash with professional obligations.

Survival tactics: What an entrepreneur does today out of desperation will follow him for the rest of his business career.

Stakeholder pressure: All stakeholders want what is owed them when it is owed them.

Pushing the legal limit: Entrepreneurs who regularly play too close to the edge of legality eventually get caught and the price is often their businesses and their reputations.

Ethics (cont’d)

There is no better way to understand the role of ethics in any business than to encounter real-world dilemmas and determine how they might be resolved.

Small businesses are as guilty as multinational corporations when it comes to ethical missteps.

Learning from Real-Life Dilemmas

Code of ethics: Set of ethical standards by which a company functions.

When a code of ethics is spelled out and written down, people in the organization take it more seriously.

The Importance of Developing a Code of Ethics

Guidelines from The Josephson Institute of Ethics:TrustworthinessRespectResponsibilityFairnessCaringCitizenship

The Process of Developing a Code of Ethics

Clear and easy to understandMake all employees awareShare with customersClear channel for reporting unethical

behaviorMeans for rewarding ethical behavior

Characteristics of an Effective Code

Social responsibility is operating a business in a way that exceeds the ethical, legal, commercial and public expectations that society has of the business.

Socially responsible businesses start with a social mission, which must be achievable.

Majority of social ventures are nonprofits that must seek their funding from philanthropists or grants.

Social Responsibility

First, company must set a goal.Second, company must get employees

and customers (if appropriate) involved.

Ways to establish positive relationships in the community:Donate products, services, or revenuesDonate expertiseContribute to the community

Effective Ways to Become Socially Responsible

Core values:The fundamental beliefs that a company holds

about what is important in business and in life in general.

Based on the founder’s personal values and beliefs.

They tell the world who the company is and what it stands for.

Vision and Values

Purpose The company’s fundamental reason to be in

businessMission

The company’s mission brings everyone together to achieve a common objective.

The mission statement communicates the mission.

Vision and Values (cont’d)

Strategies: Plans for achieving company goals and

accomplishing the missionTactics:

The means to execute the strategies

Strategies and Tactics

The Components of VisionFigure 11.2

Constants of success:PurposeFailureSense of satisfaction with workNo free lunch

Core Values and Success

Design: Understanding the Way the Business WorksOrganizational structure

Finding the best fit, given the existing:Contextual factors (environment, technology,

market)Design factors (strategy and models)Structural factors (complexity, formalization)

Building Blocks of an Entrepreneurial Organization

Figure 12.1

Design: Understanding the Way the Business Works (cont’d)

Distributed forms of organizationsCompanies generally distributed on four levels:

1. Geographically (locally or across continents)

2. Organizationally by department or project group

3. Temporally by time zone4. By stakeholder groups

Identifying Business ProcessesDesign the process map/flowchart that traces

how information flows through the business.Mapping leads to better decisions

Number of people to hireAmount of equipment to purchaseType of facility for workingType of organizational structure to employ

The Virtual EnterpriseA virtual enterprise is a “business

without walls.”A temporary network of independent

companies, suppliers, customers, even erstwhile rivals—linked by information technology to share skills, cost, and access to one another’s markets

The Virtual Enterprise (cont’d)

Its goal is to deliver highest-quality product at the lowest possible cost in a timely manner.Outsources in a virtual worldForms a network of strategic alliancesKeeps distributed employees and strategic

partners linked

Location Strategy: Finding the Appropriate Business Site

Site decisions begin at macro levelChoosing the region, state, and community

Economic baseFinancial incentives

Population demographics

Location Strategy: Finding the Appropriate Business Site (cont’d)

Choosing a retail siteThe trade areaCompetition and characterAccessibility

Choosing the service/wholesale siteSome of same considerations as retail site

(accessibility, attractiveness, trade area of sufficient size, etc.)

No need for upscale version

Location Strategy: Finding the Appropriate Business Site (cont’d)

Choosing the manufacturing siteAccess to suppliersCost of laborAccess to transportationCost of utilities

The Lease–Build–Buy decisionAsk the right questions at each stage

StartupRapid growthStable growth

Location Strategy: Finding the Appropriate Business Site (cont’d)

Alternatives to conventional facilities:IncubatorsShared spaceMobile locationsTemporary tenant agreements

People Strategy: Organizing Startup Human ResourcesStartup operations

Organization chart tends to be flatMuch work accomplished through informal

organization or network of relationshipsNew ventures adopt team-based approach

rather than formal “departments”Often employ independent contractors

Simple Organizational Chart for a Growing Business

Figure 12.3

People Strategy: Organizing Startup Human Resources (cont’d)

Common leadership traps:Isolating themselves from the rest of the

startup team Always having the one “right” answer Keeping people on board who are not up to

the needs of the companyTaking on too much too soonSetting unrealistic expectations Not building support

Creating the Company CultureThe personality of the company, that

intangible set of values that determines how and why the people in the organization respond to their business environment the way they do

Culture of startup derives from vision and values of founding team

Aligning Culture and StrategyFigure 12.4

Hiring the Right PeopleImportant for an entrepreneur to

understand how to hireFunctions to fillThe employee searchInterviews

Human resource leasingProfessional employer organization (PEO)

Managing Employee Risk Risk management is a set of policies and

their associated decision-making processes that reduce or eliminate risks associated with having employees.

Financial risks Obey all rules and regulations

Planning for Ownership and Compensation

The major issues:How much of the company to sell to

potential stockholders?How much to pay key managers?

Compensating with stockAn investor does not need to be an equal

partner.Hire talent rather than give away

ownership.Use cash for bonuses rather than stock.

Founder’s StockKnown as “144 stock”Payoff comes with liquidity event such as IPO

or acquisition by another companyStock is issued to the first shareholders of the

corporationRestricted by SEC rules

Alternatives to Equity IncentivesDeferred compensation plansBonus plansCapital appreciation rightsProfit-sharing plans