Ethics and Values

Ethics and Values Mark T. Schenkel, Ph.D.

Ethical Challenges Facing Today’s Entrepreneurs . . . ? • Decades of erosion of general ethical standards in society • No pre-existing code of conduct or company culture (e.g., basic fairness norms, honesty in communications) • Time pressures work against focusing on ethical reflection (e.g., distraction increases risk by threatening stewardship responsibility(ies) to investors) • “Promoters dilemma”: Growth of entrepreneurship as primary driving force in our economy” (i.e., managing perceptions of risk, uncertainty, and novelty for others)

What Are “Ethics”? . . . moral principles that derive from beliefs about right and wrongused to judge concrete actions . . . Ethical Perspectives e.g., • Utilitarian • Moral rights • Justice • Others . . . ? “The owner’s value system is critical to the ethical considerations that surround a business decision” (Hornsby et al., 1994: 14)

Ethics at What Level . . . ? The Entrepreneur & Society: central theme focuses on entrepreneurship and economic advancement • Creative destruction (Schumpeter, 1934): implies entrepreneurship occupies a central role in markets in that performs a necessary and often indispensable simultaneously creates and destroys economic sources of value for society. • “High” versus “low” order entrepreneurship: implications . . . • in developing countries there is "an abundance of opportunity for low-order entrepreneuring because so many basic needs are unsatisfied • competition that varies in scope (e.g., international) brings the potential for differing value to be placed upon the ethical perspective adopted by entrepreneurs • Potential exists for conflict over ethical concerns across borders – must be cognizant of implications if we are interested in international expansion

Ethics at What Level . . . ? The Individual Entrepreneur • Cognition: Differences in reason about ethical problems? . . . Evidence suggests more similar than different, but . . . • some evidence to suggest that independent-thinking entrepreneurs may exhibit slightly higher levels of moral reasoning skill compared to corporate middle level managers or the general public (Teal & Carroll) • while entrepreneurs and managers are in general agreement on many ethical issues, in some areas "entrepreneurs consistently placed a greater emphasis on ethical behavior”

Ethics at What Level . . . ? The Individual Entrepreneur (cont.) • Decision making • Influence of personal relationships: family, friends, employees, previous business associates, investors, etc. • KEY ISSUE: Entrepreneurs are required to manage many changing personal relationships essential to their new ventures, and these changes may also lead to potential conflicts of interest (e.g., financing challenges get complicated over time and growth).

A Key Debate: Shareholders Vs. Stakeholders How can the “needs” of the public be balanced with the requirement to compensate corporations (through profits) for investing in innovation? (Miles et al., 2004). • Shareholders perspective: owners should be able to use proceeds to support social consumption as they see fit. • Stakeholder perspective: owners’ agents should consider the legitimacy and power of all parties who claim to be impacted by the venture.

Reminder of a Key Connection . . . Values are the foundation for how entrepreneurial success is defined . . . • Revenue/Market Share Growth? • Growth in Profits? • Number of Employees? • Cash taken out of Business? • Something Higher Ordered . . . Propose?

The Importance of Virtue in Defining Entrepreneurial Success • Virtue: • Helps move beyond narrow focus on technical competence and financial goals – these are fundamentally important, but not sufficient • Helps resist self-centered approaches • Helps define the importance of stakeholders of entrepreneurial process

Why Do Stakeholders Matter? • Social nature of the person: Right relationship with others • Community of work • Social nature of property

Stakeholder Analysis • Who are stakeholders? • How critical are they to the venture? • How does the economic context and timing affect the influence of stakeholders?

Integrating Personal Values and Ethics:Example of Stakeholder Analysis

Example of Stakeholder Analysis (continued)

Entrepreneurial Virtues • Aristotle – every virtue is a mean between two vices (e.g., kindness a mean between cruelty and softness) . . . has become a basis for Christian moral theology. • Courage – cowardice and foolhardiness • Justice – less than “fair share” and greediness • Temperance – self-indulgence and insensibility • Prudence – The “mother” of all virtues . . . concerns knowledge and regulation of others.

Courage: Risk and the Dimensions of Work Courage: The Road to Good Ends

So Who is the Good Entrepreneur? • The good entrepreneur is technically competent: Stewardship and the virtue of Prudence • The good of community: Justice toward stakeholders • The good of the person: The Courage to do the right thing, but understanding the importance of Temperance in what we do and pursue

Tools for Managing Ethical Dilemmas • Power • Compensation incentives • Culture • Consensus building • Incorporating ethical criteria into growth management decisions • e.g., Choosing customers • e.g., Choosing funding sources

Key Takeaways . . . • Ethics in entrepreneurship is increasingly important for two reasons: • Entrepreneurial ventures are increasingly becoming a larger portion of businesses in general. • Large firms are increasingly focusing on developing entrepreneurial competencies (i.e., becoming increasingly entrepreneurial in nature)

Key Takeaways . . . • Examining the various ethical perspectives (i.e., utilitarian, moral rights, justice) helps us to understand a) how to identify and define moral issues, b) make moral judgments, and c) engage in moral behavior.

Entry Strategies

A Basic Conceptual Framework Venture Goals & Values Resources & Capabilities Structure & Systems Industry Environment Competitors Customers Suppliers STRATEGY STRATEGY

Competitive Entrepreneurial Strategies (Peter Drucker) • “Fustest with the Mostest” • “Hit ‘em where they Ain’t” • The Niche • Changing Values & Characteristics

Competitive Entrepreneurial Strategies (Peter Drucker) • Argues 4 entrepreneurial strategies are conceptually distinct in nature, yet not mutually exclusive. Entrepreneurs often combine 2 or more into 1. However, each: • Has its aims and prerequisites. • Fits certain kinds of innovation, but not others. • Requires its own behaviors. • Has its own limitations and carries its own risks.

Competitive Entrepreneurial Strategies (Peter Drucker) • “Fustest with the Mostest” • Primary Aim: establish permanent leadership position in large market or industry; always requires creating a new industry, or a new market, via a new product or process. • Risk/Reward: high/high . . . allows for no mistakes nor second chances (i.e., small “launch window”, rifle shot accuracy) • Innovation type as ‘best fit’: Radical with large markets • Behavioral requirements: very careful analysis, substantial resources, extreme concentration of implementation effort, substantial and continuing efforts to retain leadership position, systematic effort to cut own price. • Limitations & Risks: size and effort requirements open door to creative imitation more often than not (i.e., “Hit Them Where They Ain’t”)! • Examples: Dupont (nylon vs. silk) . . . required research and development of product, building of plant, and development of industry (Apple, 3M)

Competitive Entrepreneurial Strategies (Peter Drucker) • “Hit ‘em where they Ain’t”: Creative imitation • Primary Aim: establish permanent leadership position in large market or industry by taking the substance of an invention (i.e., imitation), and creatively improving upon it in a way that the developer wasn’t able to understand (i.e., “perfecting & positioning”) • Risk/Reward: much less/high . . . Consumer acceptance, and hence markets become more known, or at least knowable • Innovation type as ‘best fit’: Hi-tech . . . consumers tend to focused on products and technologies at market level. • Requirements: • rapid market growth (is about serving segments, not taking away from existing competitors) • alertness, flexibility, willingness to accept market verdict, and massive efforts • Limitations & Risks: temptation to splinter efforts to “hedge” bets, misreading trend(s) that ultimately wins • Examples: Apple  IBM; Swiss watchmakers  Seiko; Aspirin  Tylenol (Acetaminophen)

Competitive Entrepreneurial Strategies (Peter Drucker) • “Hit ‘em where they Ain’t”: Entrepreneurial judo • Primary Aim: establish permanent leadership position in large market or industry by taking the advantage of the inventing firm’s bad habits • Not invented here syndrome (arrogance) • “Creaming” (over focusing on high profit segments) • The belief in “quality” (it only matters what customer thinks, not what producers put in!) • The delusion of the “premium” price (lower costs is the only way to long term profit sustainability) • Maximizing versus optimizing (optimize for the bulk of customers versus trying to satisfy all) • Risk/Reward: least of all/high . . . Consumer acceptance, and hence markets become more known, or at least knowable

Competitive Entrepreneurial Strategies (Peter Drucker) • “Hit ‘em where they Ain’t”: Entrepreneurial judo • Innovation type as ‘best fit’: when established leaders fail to capitalize on unexpected success, work as monopolists trying to “cream” and get “premium” prices, and when market or industry structure changes fast • Behavioral requirements: industry analysis, particularly competitive “bad” habits, and identifying market areas where great success is likely to meet least competitive resistance • Limitations & Risks: temptation to splinter efforts to “hedge” bets, misreading trend(s) that ultimately wins • Examples: Americans invent transistors, but Japanese license it from them and ultimately replace vacuum tubes (radios, TVs, calculators . . . )

Competitive Entrepreneurial Strategies (Peter Drucker) • “Ecological Niches” • Primary Aim: establish market control (practical monopoly in a small area). Seek to wallow in competitive anonymity . . . take cash and let credit go. Small market revenue potential makes alternative development minimally profitable. 3 distinct versions: • Toll-gate strategy – barriers to entry (e.g., patents, license) • Specialty skill strategy – learning curve as BTE, or specific product or service knowledge (e.g., automobile wiring harness – timing of market entry is key) • Specialty market strategy – same as above, but with specific market knowledge (e.g., traveler’s checks) • Risk/Reward: low/moderate–high . . . small absolute investment, high return potential • Behavioral requirements: systematic analysis of new trend, industry or markets; specific innovative “twist”, and substantial and continuing efforts to retain leadership position. • Limitations & Risks: success is greatest risk (niche  mass)

Competitive Entrepreneurial Strategies (Peter Drucker) • “Fustest with the Mostest” • Primary Aim: establish innovation itself as a strategy, versus introducing innovation. Goal is to economic utility w/o physical change in on of the following ways . . . • By creating utility (i.e., “what is it that people really need?”) • By pricing (e.g., Gillette razor model; copies versus copiers) • By adaptation to the customer’s social and economic reality (e.g., GE selling part w/consulting where selling consulting per se deemed illegal) • By delivering what represents true value to the customer (e.g., selling “up-time” insurance via maintenance contracts with guarantees to heavy equipment users rather than lubricants)

Ethics and Values