Download Slide 1

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 wrong used 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
Stakeholder
Ethical Principle
Application
Family
Create balance between Establish a more moderate
work demands and family financial growth goal to
time.
allow for time with family.
Investors
Deal with all investors
openly and honestly.
Develop a financial
reporting system that
provides full and accurate
historical information as
well as realistic forecasts.
Employees
Share financial success
with those that helped
create it.
Profit sharing, stock option
plans, phantom stock,
ESOP, etc. while still
meeting goals of
entrepreneur.
Example of Stakeholder Analysis (continued)
Stakeholder
Ethical Principle
Application
Customers
Fair pricing
Establish revenue forecasts that
are realistic given this pricing
principle.
Suppliers
Prompt payment for
money owed.
Establish cash forecasts that are
based on an assumption of
prompt payment of all invoices
submitted by suppliers/vendors.
Banker
Honest disclosure of
information
Assure timely and accurate
financial reporting and
reasonable financial forecasting.
Community
Reliable employment
for the community.
Manage cash flow to allow for
stable employment even during
times of temporary slowdowns
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: The Road to Good Ends
Exit/Succession
Transition
Growth
Start-up
Pre-launch
Road to Good Ends
Ditch: Succumbing to Fear
Ditch: Excess
Good Ends:
Wealth Virtuously Produced
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.
Venture
Industry
Environment
Goals &
Values
Resources &
Capabilities
Structure &
Systems
STRATEGY
STRATEGY
Competitors
Customers
Suppliers

“Fustest with the Mostest”

“Hit ‘em where they Ain’t”

The Niche

Changing Values & Characteristics

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.

“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)

“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)

“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

“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 . . . )

“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)

“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)