Complete Reading Business and Society PDF

Chapter 01 What is Business Administration? 1.1 Three perspectives that complement each other The following section presents three essential perspectives on (business) economics. None of these three perspectives is correct alone. Rather, the three perspectives complement each other by each highlighting different aspects of the economy and economic activity. The three perspectives will be presented in more detail below. 1.1.1 Decision-making: Describing decision situations, optimizing trade-offs, and making better decisions Scarcity of resources means that one has to make decisions about what the resources are best used for. Under scarcity, a decision for a particular use means a decision against another use. If we spend our scarce money on a large apartment, then we can afford fewer theater visits, if we spend our scarce time reading, then we cannot go to the gym at the same time. So we have to decide what to do best with the scarce resources (in the example: money, time). The foregone benefit - in the above examples the benefit of the missed theater visits or the missed fitness session - is referred to as opportunity cost. If the foregone benefit can be measured in money, then opportunity costs can be expressed as a monetary amount. For example, a lawyer could argue that if he had not prepared and baked a chocolate cake, he could have answered legal questions for money on an online platform during this time and earned 300 EUR. Instead of investing his scarce time in the production of a cake, he could have produced and sold legal advice. The opportunity cost of the time invested in baking the cake in the example was therefore 300 EUR. Perhaps, however, he simply enjoyed baking cakes more than answering legal questions and that was worth the foregone money to him. Closely linked to the above calculation of opportunity costs is the concept of tradeoff, which refers to a balancing decision between different goals, purposes or desirable results when everything is not possible at the same time. With scarce time resources, it is necessary to weigh up whether it is better to use the available time to read a book or go to the gym, where reading the book provides further education and sport improves health. Therefore, this decision is about the personal optimization of the tradeoff between further education and health. When deciding whether to spend scarce money or save it, it is about the tradeoff between the benefit of today's use of the money and its future use. Sometimes it is possible to partially overcome tradeoffs through creativity and innovation. For example, modern training methods can achieve the same effects in less time and then still have some time to read. Or you can listen to a podcast or an audiobook while training. Often, however, we have no choice but to accept tradeoffs and try to make the best possible balancing decision under the given conditions. 1.1.2 The Behavioral Approach: Limited Rationality and Balancing Stakeholder Interests The decision-making approach aims to make rational decisions with the help of established procedures. However, in practice, it is often not possible to make decisions strictly rationally after collecting all relevant information and evaluating all possible alternatives based on clearly defined goals. Even with seemingly simple decisions, a goal is often not defined, nor is it clear how the alternatives differ. Take the example of designing the packaging of a product. Should the packaging be elaborate and support the value of the product or should costs be saved or waste avoided? How do different packaging appeal to which customers? Also in other everyday business decisions, such as filling a management position in the company, it is difficult to name goals and even more so to measure goal achievement. Even in retrospect, it is hardly possible to assess whether a decision about a job placement was right and whether the selected executive was actually better than other people who would have been considered. Nobel laureate Herbert A. Simon is known for his theories on Bounded Rationality and Satisficing Behavior, according to which it is often not possible to make optimal decisions in companies because information is missing or the search for information would be too expensive. Rather, one often has to be content with making decisions that meet certain minimum requirements. An example is that the extensive search process for filling a leadership position is ended as soon as a person has been found who meets certain requirements to a sufficient extent. Generally, minimum goals (targets) are very often set in a business context, for example in quality management (maximum permissible scrap in production) or in sales (minimum sales). Because the indeterminacy of goals and the uncertainty about the effects of decisions are often very high and therefore it is unclear which decisions are optimal to what extent, it is expected that factors such as power, persuasion, social skills, emotions, networks and willingness to compromise and the like play an important role in decision-making processes. Based on the fundamental work of Richard M. Cyert and James G. March, a variety of behavior-oriented approaches in business administration have developed. These approaches have in common that decisions in companies are seen as the result of a complex decision-making process involving different groups with sometimes conflicting interests. In addition to the insight that decisions in companies can often only be made rationally to a limited extent (Bounded Rationality) and thus often simplified decision rules are used, a second essential insight of the Behavioral Theory of the Firm is that companies typically encounter different interest groups with sometimes contradictory objectives, which must be constantly renegotiated and balanced. For example, a company's workforce is interested in better working conditions (e.g. more flexible working hours, better job protection, higher safety standards), where more flexible working hours and better job protection may limit the power of their executives, and higher safety standards could potentially increase the production costs and thus reduce the company's profits from the owner's perspective. To better assert their interests, the interest groups, similar to politics, form coalitions. For example, easier layoffs and longer working hours could be desirable from both the owner's and the executive's perspective, so that both stakeholder groups form a coalition. When it comes to higher job safety, on the other hand, workers and executives could jointly try to enforce better standards. In science and business practice, the term stakeholder has been established for the interest groups in companies. Originally, the term stakeholder was coined in business administration as an extension of the term shareholder (shareholder, stockholder). Since the 1980s, the stakeholder approach has increasingly been seen as an approach to corporate management. Accordingly, the central task of corporate management is to recognize which stakeholders are important for value creation in the company and how the company in turn creates value for its stakeholders. The stakeholder approach thus distinguishes itself from the shareholder value approach, which demands a focus of corporate management primarily on shareholder goals. In addition to the shareholders of a company, the company's workforce and executives are usually referred to as stakeholders, as well as banks that lend money to the company, supplier of raw materials or preliminary products, partner companies, and of course all customers. Stakeholders are therefore all those groups of people who have something "at stake" in the activities of a company and have an interest in the company's activities. In many cases, the relationship of stakeholders to the company goes in two directions. Stakeholders contribute to the company's value creation process (e.g., by bringing financial capital or their labor into the company, supplying raw materials or paying for purchased products) and they benefit in turn from the value creation process in the company (e.g., by participating in the profit, receiving a wage, getting money for delivered raw materials or getting a product whose value is higher than the purchase price). In addition, groups of people are also referred to as stakeholders who do not make a direct contribution to the company's activities, but are (negatively) affected by the company's activities, for example in the form of environmental damage. The incentive-contribution theory, developed primarily by Chester Barnard in the 1930s, emphasizes that workers and other stakeholders will only be willing to make significant contributions to the company's continued existence and success if these contributions are matched by appropriate incentives. Therefore, for the company to exist in the long term, there must be a sustainable balance between the services provided by the stakeholders to the company, and the services provided by the company to the stakeholders. The services that a company can provide in return for the contributions of a certain stakeholder group (e.g., workers) depend on the contributions made by all stakeholders together to the company's success. For example, a company can offer its workers more attractive salaries and training opportunities the more is generated in the company due to the contributions of all stakeholders. This view of the behavior-oriented approach is of fundamental importance for the modern, stakeholder-oriented view of business administration. Overall, the behavior-oriented approach to business administration thus makes clear that companies often do not pursue a uniform set of objectives. They continually try to find solutions and make decisions in a complex negotiation process that appropriately balances the different interests of stakeholders. Stakeholders who expect to receive better services for their contributions outside the company (for example, in other companies) will not support the company with their contributions in the long term, which endangers the continued existence of the company. The following section introduces the concept of stakeholder rent (consumer rent, producer rent, worker rent etc), i.e., the value creation of stakeholders within a cooperative relationship. The need for a balance between services and counter-services for the sustainable existence of a company also applies to stakeholders who do not make direct contributions to the company (i.e., do not make an "investment" in the economic sense), but who are negatively affected by the company's activities, for example, through environmental damage. An imbalance here can lead to the company losing its societal acceptance and legitimacy. From an economic perspective, one can argue similarly that, for example, environmental damage can lead to reputational losses for a company, which in the long term can affect consumers’ willingness to purchase the firm’s products, as well as the attractiveness of the company for workers and executives, and even the attractiveness for investment funds. As described in the following section, from an innovation perspective, scarcity and existing trade-offs can be seen as the starting point for innovation. Innovation is the implementation of new ideas to (partially) overcome trade-offs. Building on the behavioral approach, innovations can be seen as the implementation of new ideas for win-win situations between multiple stakeholders. In this sense, innovations are implemented creative ideas that create value for stakeholders and thus make the company permanently more attractive to its stakeholders, thereby promoting its sustainable existence. 1.1.3 Doing Business as Entrepreneurial Implementation of Novel Value Creation Opportunities for Stakeholders Which mobile phone model has been sold the most so far? It is the Nokia 1100, which came onto the market in 2003, cost about 50 euros at the time, and of which well over 200 million units were sold, more than any iPhone or Samsung Galaxy model to date. For several years, the Nokia 1100 and its successor models were bestsellers, until the first iPhone came onto the market in 2007, initially for just under 400 euros. Why do people buy a mobile phone for 400 euros and spurn a proven mobile phone for 50 euros? The reason lies in new product features that create additional customer benefits. An additional customer benefit arises, for example, through better technology, completely new application possibilities, a more beautiful design, more environmentally friendly production, or whatever is considered "valuable" from the subjective customer's point of view. What does value creation mean? Producer Surplus and Consumer Surplus In 2017, ten years after the first iPhone, the iPhone X came onto the market for about 1000 euros. The production costs for an iPhone X were estimated to be around 350 euros for Apple. With a selling price of, depending on the equipment, about 1,000 euros, Apple therefore made about 650 euros per unit sold. However, the rush in front of Apple stores at the start of sales clearly showed that many would have been willing to pay significantly more than 1,000 euros. In general, it can be assumed that a person only buys a product if it is subjectively worth more to them than the price paid for it. Let's assume a buyer would have been willing to pay a maximum of 1,500 euros for an iPhone X. If this buyer was actually able to buy the iPhone for 1,000 euros, then she has a "value advantage" that can be quantified as 500 euros, because the iPhone would have been worth 1,500 euros to her. At the given selling price of 1,000 euros, Apple as a producer then made a monetary profit of 650 euros per smartphone sold, while this buyer had a benefit gain that can be quantified as 500 euros. In reference to a concept dating back to Alfred Marshall (1842-1924), one can refer to the advantage of Apple, i.e., the profit per smartphone sold in the example, as producer surplus, the advantage of the buyer as consumer surplus. The fact that Apple developed the iPhone X and brought it onto the market, therefore, created value for Apple and the buyer of altogether 650+500=1,150 Euros for this one additional sold phone. Of course, there may also be buyers, for example, who would have paid a maximum of just over 1,000 Euros for a new iPhone X, while others might have paid even more than 1,500 Euros. If you calculate with an estimated number of 50 million pieces of sold iPhone X, a producer surplus per piece of 650 Euros would result in a total producer surplus of 32.5 billion Euros. If you estimate that on average the buyers would have been willing to pay 1,250 Euros, such that on average per sold iPhone X a consumer surplus of 250 Euros was created, then a total consumer surplus of 12.5 billion Euros would result from 50 million sold pieces. Therefore, not only did Apple earn 32.5 billion Euros from the sale of 50 million iPhones X, but also the 50 million buyers would have gained a total of 12.5 billion Euros in utility according to the above calculation through this new product, and a total value of 45 billion Euros would have been created through the production and sale of the 50 million iPhones X for Apple and all customers.1 The above example clearly shows that the economic core of an innovation lies in the value creation it generates. A product innovation, i.e., an idea for a new product, creates value for those who buy and use the product in the form of consumer surplus, and for the producing company in the form of producer surplus. It is important to note that a product that does not create additional customer benefit compared to previous products cannot create producer surplus. Put more simply: A company can only earn money with an innovation by creating additional customer benefit. For each individual iPhone sold, an increase in selling price increases producer surplus while decreasing consumer surplus. However, Apple has no incentive to set the price so high that only a few particularly affluent people buy the smartphone, because the total producer surplus grows when the price is lower and therefore many people buy a smartphone. The higher the price, the more Apple can earn per sold smartphone but the fewer smartphones are sold. While the producer surplus per sold smartphone in the example corresponds to the difference between price and production costs, the consumer surplus is defined by the difference between the buyer's subjectively perceived value of the smartphone and the purchase price. The subjectively perceived value of the smartphone for the buyer can be expressed in money by asking her what price she would have paid at most (willingness-to- pay, WTP). The example also shows that while the value creation for both parties is realized through the exchange of "smartphone for money", the actual cause of this value creation is the innovation. Product innovations, Process innovations and Business model innovations An innovation does not necessarily have to be a product innovation. If, for example, a company that produces cars has a new idea on how to improve the production process so that the cars can be produced more cost-effectively or with better quality than so far, then this is called a process innovation. Just like product innovations, process innovations also enable both a producer surplus and a consumer surplus. A process innovation can, for example, lead to a reduction in manufacturing costs, which allows the company to slightly lower prices and thereby sell more cars profitably. A process innovation can also increase the quality of the cars produced without incurring additional production costs, which can lead to more cars being sold. This increases the producer surplus. The consumer surplus increases when manufacturing costs are saved through the process innovation and the selling price is lowered, or when the process innovation increases the quality and thus the value of the product. Large parts of the business innovation literature are devoted to the question of how additional customer benefits and at the same time profit opportunities for the producing company can be created through product innovations and process innovations. In the newer innovation literature, the importance of business model innovations is emphasized, where it is not primarily about novel products, but more generally about novel ways in which companies can profitably create customer benefits. Examples often given are new business models like Uber or Airbnb. The underlying services (passenger transport, apartment brokerage) are not new in these two examples, but the way in which money is made from them is new. New business models often take advantage of the opportunities arising from digitization. Both with Uber and with Airbnb, the processing via an app is a core aspect of the business model. Traditional taxis were usually ordered by phone from a taxi center, where you were given the information about when the taxi would be there, and you could rely on being driven by trustworthy, officially registered people. With Uber, however, the ordering process is done via an app that works internationally, you can track where the taxi is currently located and when it will arrive, and a rating system serves as a trust-building measure, through which you learn more about the person who will drive you to your destination. In a similar way, personal brokerage services are replaced at Airbnb by a digital platform in the form of an app. In contrast, the business models of Facebook or Google not only employed a new revenue model by offering the services for free and, instead of selling the services, making money through the collection and exploitation of user data and online advertising. The actual service did not exist before in this form. This makes them both product innovations and business model innovations. Both with product innovations and business model innovations, innovation is mainly seen from the customer or user perspective. Innovation is therefore seen as the profitable creation of customer benefits, i.e. as the simultaneous generation of a consumer surplus and a producer surplus. Innovation as the implementation of creative ideas for value creation for stakeholders In this book, however, I define the concept of innovation more broadly: Innovation is understood in the following as the implementation of creative ideas for the simultaneous creation of value for stakeholders of a company. For example, the production and sale of the iPhone X not only created a producer surplus and a consumer surplus. The production also benefited suppliers, and also benefited the providers of apps that are used with the smartphone. On the other hand, environmental damage also occurred, non-renewable resources were consumed, and perhaps some parts of the iPhone were produced under morally unacceptable conditions, such as child labor. For a holistic view of value creation through innovations, their effects on all stakeholders must be taken into account. As a simple example of how value creation through innovation can relate to different stakeholders, consider a process innovation in the form of implementing a creative idea to improve workplace safety, which also saves costs. This gives the company's employees an advantage. In reference to the terms producer surplus and consumer surplus, one could say that the innovation creates a worker surplus or employee surplus, where this surplus refers to the advantage gained by the company's workforce from this idea. If this also saves costs for the company, for example by avoiding loss of working time due to accidents at work, or if better qualified and more efficient workers are attracted, then the innovation in workplace safety also creates a producer surplus. If costs are saved, then part of the saved costs may be passed on in the form of lower product prices as additional consumer surplus. It is also conceivable that a customer benefit is created without lowering the product prices. Perhaps the product is more attractive from the customer's perspective if it was produced under better working conditions and with higher workplace safety. This example firstly makes clear that the value creation resulting from innovations can be redistributed among stakeholders, so that ideally all stakeholders can benefit in the end. Secondly, the example makes clear that the value creation resulting from innovations does not necessarily have to involve money. Value creation for employees in a company can also arise from better working conditions at the same wages, and additional value creation from the customer's perspective can arise solely from the feeling of having bought a socially or environmentally friendly product. An innovation does not necessarily have to result in a producer surplus or a higher company profit, it can also be exclusively other stakeholders who benefit from the innovation. The term value creation used here refers to subjectively perceived values or subjective increases in value and is not limited to profit, higher wages or other monetary benefits of stakeholders. However, one can of course try to express the benefits of the stakeholders in money, for example by considering how much more one would pay for a product if it is produced in a more environmentally friendly way or how much wage someone would forego if workplace safety was improved. Central to the value creation process in companies is the following insight, illustrated by the above examples: Innovation is the implementation of new ideas for joint value creation for stakeholders. Only by potentially improving the well-being of stakeholders does an innovation create a producer surplus (company profit). In the case of product innovation, the path to producer surplus is through additional customer benefit. The producer surplus (profit) is thus made possible by creating additional customer benefit through product innovation. A process innovation, for example, improves working conditions or reduces resource consumption, and a business model innovation usually creates additional value for several stakeholders at the same time. The starting point for financial value creation from the producer's perspective through innovation is usually a creative idea of how to create value from the customer's perspective, from the employee's perspective or from the perspective of other stakeholders. Sustainability of Value Creation Let's imagine a businesswoman who has developed a new idea of how to sell and deliver environmentally friendly food via an internet platform at regional, ecological and fair producer prices. If this idea works, then not only does the businesswoman benefit in the form of profit (producer surplus) and the customers in the form of healthy, affordable food (consumer surplus). Obviously, those working in agriculture who supply the food to the company at fair prices (supplier surplus) also benefit, as do the employees in the company, who have a good job in a responsible company (employee surplus), and perhaps an ecologically oriented transport company that takes over all transport services in cooperation with the entrepreneur also benefits. Ideally, the region in which the company is located also benefits. The longer all stakeholders benefit from the value created by an innovation, the more sustainable the innovation is. Any possible negative effect of the innovation on stakeholders, on the other hand, is a risk to the long-term functioning of the innovation and the entrepreneur's business idea. Negative effects on stakeholders, whose contributions are necessary for the functioning of the business model (e.g. labor) are a particularly high risk. If from the perspective of a stakeholder no value is created in the context of a cooperation relationship, then this stakeholder will not be willing to contribute to the functioning of the cooperation relationship in the long term and will instead look for other opportunities where their own contributions can create a positive value. A business model describes the fundamental logic of how an organization creates value for its stakeholders and how the stakeholders benefit from this value creation sustainably, i.e., permanently. A business model innovation is accordingly a new idea, the implementation of which changes the logic of value creation by and for the organization's stakeholders. 1.2 Summary and Outlook The decision-making view of doing business examines how companies and the people acting in companies make decisions under scarcity and how the available scarce resources (financial resources, personnel, know-how, etc.) can be used so that nothing is wasted and goals are achieved as well as possible. The main subject is thus the specification of trade- offs in resource scarcity and the optimization of these trade-offs. Behavioral approaches describe corporate management as interaction and balancing of the contrary interests of different interest groups (stakeholders). This makes particularly trade-offs between stakeholder interests the subject of corporate management. In addition, these approaches emphasize that decisions in companies are often not purely rational, but are made through political negotiation processes under incomplete and unevenly distributed information. While the decision-making view of management has the scarcity of resources as a starting point, as well as the recognition and optimization of resulting trade-offs, the innovation view of management focuses on innovations as the implementation of new ideas to overcome scarcity and to overcome trade-offs. Recognizing trade-offs is always the first step. Not all trade-offs can be partially overcome or even completely eliminated by innovations. At least in the short term, many trade-offs have to be accepted as they are and an attempt must be made to deal with them as best as possible. In some cases, however, it is possible to implement new ideas of joint value creation that did not exist before - thus overcoming scarcity and trade-offs. Scarcity and trade-offs provide a starting point for creative ideas for value-creating innovations. Particularly significant are trade-offs between stakeholder interests. Innovations are new ideas to overcome trade-offs between stakeholder interests, i.e., new ideas for the joint value creation for stakeholders. Such ideas improve and secure the long-term survival of companies. 1. Of course, the above calculation must take into account that Apple has invested a lot of money in the development of the iPhone X, which has not yet been taken into account in the calculation of the producer surplus, because only the direct production costs per iPhone were set here (Chapter 4 is dedicated extensively to the calculation of the producer surplus). In the case of the consumer surplus, it should be noted that other manufacturers (e.g. Samsung) also offered smartphones that were comparable to the iPhone X. One could then argue that the consumer surplus should actually be measured as the additional benefit that the purchase of the iPhone brings compared to the purchase of comparable competitive products. ↩ Chapter 02 Entrepreneurial Perspective 2.1 Examples Henry Ford (1863-1947) The Otto engine, named after Nikolaus August Otto, had already been developed in 1862, but it was Gottlieb Daimler and Carl Benz who succeeded in developing smaller and lighter internal combustion engines suitable for driving a vehicle. In 1886, Carl Benz patented the first functional automobile. Until then, the only engines available, apart from the steam engine significantly co-developed by James Watt almost 100 years earlier, were early electric motors, which initially played hardly any role in industry and for cars. There was no suitable power grid for electric motors and no powerful batteries for mobile use. Henry Ford had been interested in technical devices since his childhood and had skillfully repaired pocket watches, among other things. At the age of 15, he even built a functional internal combustion engine. In 1896, just 10 years after Carl Benz, he built his first car. Two years later, Henry Ford founded the Detroit Automobile Company, which, however, was insolvent two years later. With new investors, Ford made a second attempt with the Henry Ford Company. Henry Ford left this company after only one year and the company was renamed Cadillac Motor Company. Henry Ford then founded the Ford Motor Company in 1903. Cars were not only very expensive at that time, but also unreliable and only a few cars were sold. After the company had produced some very successful racing cars and thus became known, Henry Ford, who also drove car races himself, implemented his vision of a "cheap car for everyone" in 1908. The Model T, designed by Hungarian mechanical engineer József Galamb on behalf of Henry Ford (Ford had named his car models, starting with Model A, each with letters - an idea later picked up by Elon Musk), was so simple, so reliable and so inexpensive that it became a mass product. In 1918, every second car in the USA was a Model T and by 1927, 15 million units of this car had been sold. Before Henry Ford introduced assembly line production and mass production in car manufacturing with his Model T, cars were manufactured in teams in individual production, with one team performing all manufacturing steps. The basic principle of assembly line production had been known for several years and was used in slaughterhouses in Detroit. Through assembly line production, the average manufacturing time for a car could be reduced from previously 12 hours to one and a half hours, which enabled a massive reduction in manufacturing costs, and a Model T could be offered for only 295 dollars. However, this only worked through massive standardization. Unlike the previously common team production, where different teams could easily produce different types of cars, assembly line production worked best when every car produced was the same. Henry Ford introduced the eight-hour day as early as 1914, when much longer working hours were common, and he paid double the wages common at that time for such activities, at 5 dollars per day. At 5 dollars per day, the price for a Model T was only 59 days of work. The eight-hour day allowed Ford to run his production in three shifts per 24 hours around the clock. The German entrepreneur Robert Bosch had introduced the eight-hour day with three work shifts already in 1906, which helped him to achieve significant productivity increases. Robert Bosch had also introduced company doctors, a company pension plan, as well as promotion of young, particularly talented workers. With his refined idea of manufacturing cars in assembly line production, Henry Ford managed to produce a car that was of very high quality for the technology of the time and also extremely affordable. Through the process innovation of assembly line production of cars, he was able to "shift" the trade-off between quality and price and offer higher quality at a lower price. This simultaneously enabled a consumer surplus and a producer surplus. In addition, Ford created many jobs with very high wages for unskilled workers and reasonably good working conditions. This also meant high value creation for workers. Henry Ford's stubbornness, which was partly responsible for his not giving up despite the many obstacles he faced at the beginning of his career as an entrepreneur, almost became his downfall later when he clung to the Model T for too long, even though the competition was now producing cheaper and better cars, and his sales figures were steadily declining. Although he had resisted for a very long time, he finally gave in to the urging of his son Edsel Ford and brought a new car model (which was again referred to as Model A) onto the market. Ray Kroc (1902-1984) As a moderately successful salesman of mixers for milkshakes, Ray Kroc became aware in 1954 of a restaurant in San Bernardino, California, not far from Los Angeles, which had already ordered two mixers and was now reordering six of his multimixers. These mixers cost $150 each and could be used to make up to five milkshakes at the same time. Ray Kroc wondered what a single restaurant was doing with so many mixers. So he drove to San Bernardino, where he met the brothers Richard (Dick) and Maurice (Mac) McDonald, who ran a hamburger restaurant. The two brothers had actually moved to California to make a career as actors in Hollywood, but when this did not work out, they founded a snack bar in a parking lot. The fast food restaurant initially did very well and became a popular meeting place for teenagers. You could order in the car and service staff on roller skates brought the food directly to the car. But when more and more fast food providers started to compete with the brothers in the late 1940s, business started to decline and the McDonald brothers had to come up with something new. The service staff were dismissed and the burgers were now freshly prepared by trained workers in a sophisticated division of labor production process and sold for only 15 cents. From ordering to sale, it took only about 60 seconds. Similar to Henry Ford, the product range was greatly reduced to very few burgers and drinks, which were then prepared in a standardized way almost like in an assembly line production. There were no more special requests for preparation. The process innovation of the McDonald brothers had redefined the trade-off between time and freshness by being able to get freshly prepared food with an extremely short waiting time of 60 seconds. This process innovation had simultaneously created a product innovation: Freshly prepared fast food. When Ray Kroc arrived in San Bernardino, he was surprised at the great activity in front of the McDonald brothers' restaurant and when he saw how the production worked, he was immediately enthusiastic about this business idea. He finally convinced the McDonald brothers to transfer the franchising rights to him for the opening of a McDonald's restaurant in Des Plaines, a suburb of Chicago. In this restaurant, he did everything the same as in the first restaurant in San Bernardino, same production, same products, same prices. The restaurant was just as big a success as in San Bernardino, after one year Ray Kroc had already opened 12 restaurants in the USA according to the same principle. By 1959 there were already 100 restaurants and a year later more than 200. In 1961, Ray Kroc bought the company of the McDonald brothers including the trademark rights for 2.7 million US dollars with the money of various investors. The two founders kept only their restaurant in San Bernardino. In 1965, McDonald's was then taken public to raise fresh capital to expand its international activities. In the 1980s, there was very tough competition between McDonald’s and other fast food chains in the USA, especially Burger King and Wendy’s. McDonald's tried to fend off the competition through expensive marketing campaigns and price reductions. This led to declining profits for both McDonald's and the competition, but McDonald's was ultimately able to defend its leading position. After a phase of enormous growth and international expansion during the 1980s and 1990s, the beginning of the 2000s saw mainly young customers turning away from McDonald's, due to changing eating habits and the trend towards healthier and fresh products. This led to declines in sales, and in 2003 to the first loss in McDonald’s history. The stock price collapsed. In 2010 McDonald’s was overtaken by Subway in the worldwide number of branches. With the motto "Eat Fresh", Subway had picked up on the trend towards healthier eating and also offered the possibility to assemble a Subway sandwich yourself. A few years later, starting in 2015, the McDonald's Digital Boards (kiosks) introduced a new technology that made it possible to assemble products yourself. This new digital technology allowed McDonald's to innovate, overcoming the previous tradeoff between production efficiency through standardization and customization of products to special requests (customization). Now it was possible to respond to customer special requests without causing long waiting times. From 2017, a geofencing technology was tested in selected markets with the McDonald's app and later introduced nationwide. This made it possible to conveniently specify individual special requests when ordering via an app. As soon as you approach a McDonald's restaurant within 200 meters, you receive a prompt to confirm the order finally. Upon arrival at the restaurant you then get the freshly prepared food. Since the breakfast business was doing particularly well, all-day breakfast was introduced. McDonald's had also observed that another chain, Starbucks, expanded enormously between 1990 and 2010 with the concept of cozy and relaxed coffee houses for a young target group. McDonald's now tried to emulate this successful idea (McCafe) and combine it with its own fast food business. Dietrich Mateschitz (1944-2022) After studying at the Vienna University of Economics, Dietrich Mateschitz worked as a marketing expert for Jacobs Coffee and for the toothpaste manufacturer Blendax. In the early 1980s, during a trip to Thailand, he came across a taurine- and caffeine-containing syrupy stimulant drink called Krating Daeng, which could be translated into English as Red Bull. This energy drink had been quite widespread and successful in Thailand for some time. At almost 40 years old, Mateschitz was considering whether he wanted to continue his life as a marketing manager in an international corporation, constantly traveling and in hotels, or whether he should follow his desire for independence and freedom and become self- employed. Mateschitz saw the great potential in this energy drink and eventually founded Red Bull GmbH together with the owner of the manufacturing company and inventor of the drink, the Thai entrepreneur Chaleo Yoovidhya, and his son. While the drink continued to be successfully sold in Asia with the old recipe, Mateschitz slightly changed the recipe. He made a carbonated drink out of it, hoping that it would better suit the European customer taste (local adaptation). After lengthy approval processes, especially regarding the ingredient taurine, the energy drink was first introduced in Austria in 1987, in Germany and Switzerland in 1994, and in the USA in 1997. Today, Red Bull is the world market leader in energy drinks and sells annually over 10 billion cans worldwide. With an estimated fortune of 15-20 billion euros, Mateschitz became the richest Austrian and was one of the hundred richest people in the world at the time of his death in 2022. The few known interviews with the Red Bull founder suggest that independence and entrepreneurial freedom were always more important to him and motivated him more than the prospect of becoming one of the 100 richest people. The great worldwide success of Red Bull attracted far more than a hundred imitators and competitors, such as Rockstar, Monster or Flying Horse. While competing companies can easily use the essentially same ingredients and thus relatively easily produce a similar drink, the name Red Bull and the design of the can with the color combination of blue and silver are protected, as well as the slogan "...gives you wings". At least in the case of all too easily confusable imitations of the product name, Red Bull was able to successfully take action against imitator products, such as the very similarly looking cans sold by the Swedish company Red Bat. Rockstar became very successful with an energy drink that is offered in cans twice as large as Red Bull, and the small energy shots from 5-hour ENERGY also became quite successful. Red Bull then tried to establish energy shots on the market from 2009 onwards, but with limited success. From 2008 onwards, Red Bull Cola was also launched on the market, where the trend towards natural ingredients was picked up by a drink made from plant extracts. After years of gigantic growth rates in sales, Red Bull experienced a temporary decline in sales for the first time in 2009. Since 2016, there has been a Summer Edition with additional flavors, and since 2017 there has been a new product variant called "Organics by Red Bull". Red Bull is a rather unusual example of a product innovation because no previously recognizable trade-off is resolved or a problem or customer need is addressed. Rather, a market for energy drinks was first created in Europe and the USA. Therefore, it is also more difficult to describe exactly what the customer value creation consists of. At the same time, Red Bull illustrates that customer value creation is very subjective and does not always have to mean satisfying a need or eliminating a deficiency. More on this in Chapter 5 on the customer perspective. Steve Jobs (1955-2011) Steve Jobs founded the Apple Computer Company in 1976 at the age of 21 in the garage of his parents' house, together with Steve Wozniak and Ronald Wayne. Wayne left Apple shortly after its founding. Steve Jobs was fascinated by the opportunities offered by new technologies, but was not actually a computer specialist. Steve Wozniak was a brilliant computer freak. As their first product, Apple manufactured and sold the Apple I, a personal computer developed by Steve Wozniak even before the founding of Apple, which is often referred to as the first PC in the world today. The Apple I, sold for 666.66 USD, used a typewriter keyboard and a repurposed television as a screen. Data could be stored and reloaded on a cassette recorder using audio cassettes. The Apple II, sold from 1977 as a successor model, already looked almost like a modern PC, with a case, keyboard, monitor and even a mouse. The Apple II was sold over 2 million times and was a great success. When the successor models Apple III and Apple Lisa sold comparatively poorly, Steve Jobs was increasingly under internal pressure at Apple. In early 1983, Jobs got together with some of Apple's best engineers and they brought the Macintosh to market in 1984. Among other things, it was the first commercially successful microcomputer with a graphical user interface, where you no longer had to enter commands with the keyboard, but controlled the computer by clicking on icons with the mouse, as we know it today. Jobs took the idea for this mouse-controlled graphical user interface, among other ideas, from the "Xerox Alto" computer developed for research 10 years earlier. The company Xerox is known today for printers and copiers. The copying and new combination of other people’s ideas, often from very different areas, is typical for Steve Jobs. Already at university, Jobs had attended courses from very different scientific fields, including a course on calligraphy, which later inspired him in his development of computer fonts. "It comes down to trying to expose yourself to the best things that humans have done and then try to bring those things into what you’re doing. I mean Picasso had a saying he said good artists copy, great artists steal. And we have always been shameless about stealing great ideas.” 1 In the same year that Apple finally brought the Macintosh to market, there were disputes between Steve Jobs and John Sculley, whom he himself had brought to Apple as CEO from Pepsi a year earlier. As a result, Steve Jobs had to leave Apple, the company he co-founded. In 1986, Steve Jobs founded the company NeXT, which initially produced computers and later focused on software development. In addition, Jobs invested in a team of specialists for computer-animated films, which eventually led to the creation of the company Pixar, of which Jobs became CEO and which was bought by the Walt Disney Company in 2004 for over 7 billion USD. In 1996, ten years after its founding, NeXT was bought by Apple and Steve Jobs became CEO of Apple again in 1997. After successful years, Apple had now made high losses. The operating system developed by NeXT is now the basis of the operating systems of many Apple products, e.g. macOS and iOS. After Steve Jobs returned to Apple, the company focused on relatively few core products and thus managed to make profits again. In 1998, the iMac was introduced and finally in 2001 the commercially very successful iPod. Technically, the iPod was nothing new. The MP3 technology developed by the Frauenhofer Institute in Germany had long been available and since 1998 there had been a variety of different MP3 players for sale. The iPod, introduced three years after the first MP3 player, became the world's best-selling MP3 player. The key to this success was the then very futuristic design of the iPod, but also the comfortable options for downloading and managing music in combination with the iTunes software and the iTunes Store. Today, hardly any MP3 players are bought because smartphones have the corresponding functions for downloading and listening to music. Music for download is now also offered by providers such as Google Play or Amazon. Streaming services like Spotify are increasingly displacing music downloads. In 2022, about 24 years after its market launch, the production of iPods was finally discontinued. However, the biggest commercial success of Apple was the iPhone, which was launched in 2007. Time Magazine chose the iPhone as the "Invention of the Year 2007" and practically all smartphones available today are strongly oriented towards the original iPhone from 2007. At first glance, this product innovation resolved the trade-off between convenient internet access and a small device that you could take anywhere. Before the iPhone, a laptop as access to the internet on the go was much too large, while internet access via mobile phone or Blackberry did not work well and many functions lacked the necessary screen. With the iPhone, Apple brought a "mini-pad" to the market for the first time with a sufficiently large, very good screen and integrated keyboard, with which one could write messages and surf the internet very comfortably with some practice. The iPhone, however, also resolved more trade-offs. A brilliant idea behind the iPhone is that it not only combined the functions of smartphones that were possible up to that point in a more user-friendly way, but also offered a platform for apps of all kinds. This meant that the smartphone combined many functions for which several different devices or tools had previously been needed - from taking photos, listening to music, making phone calls, surfing the internet to digital payment. The combination of these functions also opened up completely new possibilities, such as being able to share photos or audio files very easily via WhatsApp or on social media. The iPhone resolved countless previous trade-offs, thereby creating not only a consumer surplus and a producer surplus, but also value for an entire ecosystem of other stakeholders, such as app developers, payment providers, social networks, and countless other stakeholders. While the leading smartphone manufacturers at the time, such as Blackberry or Nokia, initially gave the iPhone and its touchscreen technology little chance of market success, manufacturers such as Samsung, LG, and HTC soon came onto the market with products similar to the iPhone, with the Android operating system playing a crucial role and allowing similar functionalities as the iPhone operating system. Steve Jobs referred to Android as a "stolen system" and Apple also waged a patent dispute against Samsung for seven years. Samsung responded with counterclaims and ultimately it became apparent that patents can only offer limited protection in an area with such rapid and permanent technological changes. Ultimately, constant innovation is the only way to avoid being displaced by imitators. Apple's successes can of course be partly attributed to technical innovations, which however only provided a lead over competitors for a relatively short time. More crucial for success seems to be Apple's competence in making new technologies appealing to customers through special design and user-friendliness, thereby emotionally binding them to Apple products and above all creating an ecosystem of interconnected products (Apple Watch, iPhone, iPad, Appstore) whose joint use is particularly easy, while the combination with non-Apple products is deliberately made more difficult. 2.2 Entrepreneurship is more than success stories The four entrepreneurial stories of Henry Ford, Ray Kroc, Dietrich Mateschitz, and Steve Jobs provide a first insight into what entrepreneurial spirit means, what characteristics distinguish founder personalities, despite their differences, and what matters in start-ups. The four individuals were not chosen at random. Henry Ford and Steve Jobs represent the technological side of innovation and business founding, Ray Kroc and Dietrich Mateschitz, on the other hand, represent a focus on the sales market and on marketing. Henry Ford is considered the outstanding entrepreneurial personality of his time, his car company had more than 50% market share in the early years (i.e., more than every second car was a Ford), rose to become the world's largest family business. Even in 2020, over 100 years after its founding, Ford still sold about half as many cars worldwide as market leaders VW or Toyota, but still 10 times as many cars as Tesla, for example, and twice as many as Mercedes or BMW. Steve Jobs is not only one of the most famous founder personalities, but later was considered the "CEO of the Decade", his company Apple was named "the world’s most admired company" and in 2021 became the most valuable company in the world on the stock market. Ray Kroc built the world's largest franchise system and Dietrich Mateschitz managed to build the second most famous and valuable soft drink brand worldwide after Coca Cola in an incredibly short time. It is especially no coincidence that all four are men, three Americans, one European. The four entrepreneurs are representative of the founding and business world as it has been over the past 100 years and largely still is today. Whether you look at rankings of the greatest founder personalities in history or the ten most powerful founder personalities according to the current Forbes list, they are always men, usually white Americans, occasionally a Chinese, Japanese or European. 2.2.1 Why is there so little diversity in the most successful business start-ups? With regard to the striking gender imbalance in the company start-ups, it should be borne in mind that at the time of the company start-ups by Henry Ford, Ray Kroq, Dietrich Mateschitz and Steve Jobs' women could not found companies in the same way as men. To illustrate this vividly: Until 1958, for example, wives in the Federal Republic of Germany were only allowed to pursue their own profession if the husband agreed, and until 1977, less than 50 years ago, a woman was only allowed to work without the husband's consent "as far as this is compatible with her duties in marriage and family" (Federal Law Gazette No. 26, 1957 § 1356). Until 1958, the husband managed by law the assets brought into the marriage by the wife, who was not entitled to run her own account independently of the husband. Not too long ago, there was therefore also legally prescribed gender discrimination in seemingly progressive Europe, and women had only limited access to business start-ups and the economy in general. Even though this type of discrimination no longer exists today, it is likely that these and other long-practiced attributions of gender roles are a major reason why, according to a BCG study (BCG, 2019), only 4% of all business start-ups in Germany in 2019 were by women or purely female founding teams, while 86% had purely male founding teams (14% start-ups with the participation of women). According to a survey by the Austrian Federal Ministry of Labor and Economy (BMAW, 2022), the proportion of business start-ups with female participation in the EU increased from 13% in 2010 to 21% in 2021, with start-ups founded by women also differing in their orientation, for example by more often pursuing the goal of solving social or ecological problems. The latter could also be an indication that the lower number of female business start-ups is not exclusively due to discrimination, but at least to some extent also due to different preferences. Starting a business is a career choice and in all decision-making there can be gender-specific differences in preference, which as such are not yet an indication of discrimination. Of course, preference differences are again influenced by socially shaped gender roles, expectations and also prejudices, for example by attributing less social orientation to men or less assertiveness to women. Although it was almost impossible for women to start businesses in the 20th century, there were a number of business start-ups by women who have become legendary. A great entrepreneur and personality was undoubtedly Coco Chanel, who not only founded fashion houses, but also shaped a new style of clothing. In the cosmetics industry, the American entrepreneur Estée Lauder was enormously successful. She built her company into an international cosmetics group and also became famous for establishing a new marketing tool by distributing free samples of her products. A globally known founder from Germany was Margarete Steiff, who founded and built up the toy factory "Steiff" named after her. Especially against the background of the social conditions at the time, it is instructive to be inspired by the lives of these pioneers and their fight against the discrimination of women as business founders (there are films and interesting documentaries about the mentioned business founders). Just as with gender, people are often systematically discriminated against based on their skin color and ethnic origin. This affects, among other things, access to education or access to capital, so that fair access conditions and rules of the game for the economic process are by no means prevalent everywhere today. However, discrimination is not limited to these explicit dimensions, but can also occur more implicitly and less openly according to social origin, sexual orientation, cultural imprint and much more. Implicit discrimination based on outwardly not clearly recognizable characteristics, such as social origin, dialect or cultural imprint, can under certain circumstances be even worse for those affected, because they can defend themselves even less against it, because these are not "recognized" as discrimination, and because it is hardly combatable through equality and anti- discrimination measures. Regardless of the moral and socio-political condemnation of discrimination, from a business perspective, discrimination and disadvantage in access to economic activity are a waste of creative and innovative potential and thus harmful to business. Interestingly in this context, it is apparent that people who immigrate to a country are particularly entrepreneurial and successful. Perhaps because one must dare to immigrate, or perhaps because one must be active in a new environment. According to a study from 2022, more than half (55%) of American startups valued at one billion dollars or more (so- called unicorns) were founded by people who had immigrated to the USA. If you include second-generation immigrants, it's even 64% of unicorns. Among them are some famous founders, such as Sherry Wei, born in China, founder and Chief Technology Officer of Aviatrix, a cloud network platform, who earned her Ph.D. in electrical engineering at Purdue University, or Rihanna, who immigrated from Barbados to the USA and founded Savage X Fenty there, a fashion company valued at 1 billion USD (Anderson, 2022). 2.2.2 It all begins with Entrepreneurial Spirit All the company founding stories described above are characterized by a founder wanting to do something better, perhaps even wanting to improve the world in some way. Henry Ford wanted to create mobility for all, especially for less affluent people in remote areas. Steve Jobs was fascinated by computer technology and had the vision that everyone could use this technology in everyday life. Entrepreneurial spirit means not settling for the status quo and complaining about poor conditions, bureaucracy, injustices, and problems, but thinking creatively about how to make more of a situation, taking action, trying to improve the world, actively shaping and following one's passion. Entrepreneurial spirit is a positive, active attitude towards life. Of course, very different goals can be pursued with an entrepreneurial spirit. In addition to goals that involve substantive solutions for customers, such as "building good and cheap cars" or "making computer technology usable for everyone in everyday life", the goal of making a profit, building wealth, and becoming rich often plays an important role in company foundations. Surveys on the motives for starting a business show that in addition to a higher income, independence and the implementation of a concrete business idea, as well as finding a solution to existing problems, are the most important founding motives (Statista 2023). The biographies of the entrepreneurs described above also suggest that the main drive for starting a business was to change something, to build and shape something. Steve Jobs' pitch to the then CEO of Pepsi Cola, John Sculley, in 1983, with which he allegedly wanted to win him over for Apple, has become legendary: "Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?" Sometimes entrepreneurial spirit is not about money at all. When people, for example, start a charity to help the socially disadvantaged, this is an example of entrepreneurial spirit that clearly focuses on nonmonetary goals. Of course, money also plays a significant role in a charity, for example when collecting donations to buy aid goods. But money is only a means to an end here. Those who start a charity do not intend to make a profit, but to do good and improve the world. That's why such organizations are also called nonprofit organizations, which means that profits cannot be distributed to those who founded the organization or finance it. Profits can be made, but these are exclusively reinvested for the good cause of the organization. Entrepreneurial action that primarily pursues social goals, such as poverty reduction, environmental protection, or the enforcement of human rights, is also referred to as Social Entrepreneurship. A significant motive for founding is both in profit-oriented companies and in nonprofit organizations the prospect of becoming famous or finding a purpose in life for which one is happy to get up early every day. As a founding personality, one can become famous with an idea or receive high social recognition and admiration for the founding of a relief organization. However, if an engineer in an existing company has a brilliant idea, she may get a pay raise for the idea and possibly recognition, but it might also be said that it's just her job. Therefore, people who work in large companies are often less motivated to give everything to implement new ideas and often the bureaucracy of a large company prevents them from going new ways. Nevertheless, one can also show entrepreneurial spirit within an existing company. If, for example, the HR manager, the marketing boss, or the finance expert of an existing company proactively tackles a problem or fundamentally improves work processes with creative ideas, instead of just getting annoyed and putting up with problems, then that is also Entrepreneurial Spirit. Because the Entrepreneurial Spirit in this case refers to the implementation of creative ideas within (Latin: intra) companies, this is often referred to as Intrapreneurship. Again, Steve Jobs is a good, if perhaps somewhat extreme example. Although he co-founded Apple at the time, the investors considered him too young and inexperienced to run the now strongly grown company himself. Therefore, Steve Jobs had won the experienced John Scully for Apple, because he believed he could work well with him. Scully was previously CEO (Chief Executive Officer – CEO) of Pepsi. However, Jobs struggled very much to come to terms with the increasingly bureaucratic rules at Apple due to the company's strong growth. He missed the Entrepreneurial Spirit. He felt increasingly uncomfortable in his own company because he felt that the daring entrepreneurial-creative spirit from the founding years was increasingly lost with the growing size of the company. In early 1983, Jobs got together with some of Apple's best engineers and they founded a team that called themselves the "Pirates", in contrast to the bureaucratic structures at Apple, which they referred to as "Navy". The Pirate team worked on the development of the next groundbreaking PC, the Apple Macintosh. Being a pirate was supposed to symbolize that one takes high risks without regard for political and bureaucratic obstacles, is agile, improvises and rebels as an underdog against prevailing opinions and against established norms. The result was indeed revolutionary with the Macintosh launched in 1984. It is one of the most difficult challenges for large, established companies to maintain the entrepreneurial spirit of their employees despite the necessary bureaucratic structures and to promote innovations. In addition to bureaucracy, which can stifle the spirit of innovation in large companies, another problem is that innovative ideas in large companies are often not adequately rewarded. In your own company, you can not only turn great ideas into money, but the idea is also attributed to you and you receive personal recognition as an entrepreneur or member of a founding team. In large companies, individuals or teams who have big new ideas often get neither an appropriate financial reward nor the appropriate recognition. Innovations in large, established companies do not necessarily have to be developed in- house, but these can also be purchased. There are many examples where large, established companies buy smaller, innovative companies and thus their ideas and innovations. For example, Microsoft bought Skype in 2011 and LinkedIn in 2016, Google bought YouTube in 2006 and Facebook bought WhatsApp in 2014. Another option is for established companies to participate in startups or even start new companies themselves to develop creative ideas in a flexible and agile organizational structure (see also 6.3). 2.2.3 What else characterizes entrepreneurs, what must they be able to do? Entrepreneurs are not only characterized by entrepreneurial spirit. Henry Ford, like Steve Jobs and other entrepreneurs, was known for not being easily influenced by others or dissuaded from ideas, one could call this persistence, perhaps even stubbornness. The biographies of the four founders described show a strong desire for autonomy, i.e. self- determination and independence. Many people become self-employed precisely because they do not want to be dependent on superiors and want to be free from the bureaucracy in companies. Starting a business is usually a strenuous effort, and one must be willing to work very hard. Starting and running your own business is not for people who want to have their peace and quiet after work and on weekends. Separating work and private life is often difficult. But you can work independently and implement your own ideas, instead of working for others. Above all, entrepreneurs must be creative and capable of implementing their creative ideas. This does not mean that entrepreneurs have to invent something or make a scientific discovery. Henry Ford did not invent the automobile. But he made cars a mass product. Ray Kroc adopted the McDonald's brothers' business idea and implemented it on a larger scale. Dietrich Mateschitz made the idea of Thai entrepreneur Chaleo Yoovidhya for an energy drink a worldwide success through a clever marketing strategy. Often entrepreneurs build on the ideas of others, but are simply more consistent in implementing these ideas. Often entrepreneurs team up with engineers, technicians or other professionals, use their expertise and focus on the business aspects, such as developing a strategy, marketing and the financial side. In the founding of Apple, Steve Jobs took on the role of the entrepreneur, while Steve Wozniak was the "inventor". Entrepreneurs must be attractive in the sense that they attract resources. In the founding phase, it is about entrepreneurs attracting investors with their ideas, who support the business idea with money, i.e. venture capitalists, banks and other financiers. But of course it is just as important to attract suitable business partners and excellent workers, and of course customers for the products. A successful business start-up is never a solo event, but always involves a whole "ecosystem" of stakeholders who contribute to success. At the beginning of a business start-up, the question must be answered: "What makes my idea and me attractive to those who are supposed to finance my ideas, buy my products and work with me on the implementation?" It is very difficult to find the right balance between persistence and ability to take criticism. If you are convinced of an idea, then you are susceptible to confirmation bias, i.e., you see and hear only things that confirm your preconceived opinion. Criticism is often dismissed without careful consideration. You should always carefully consider the assumptions underlying a business idea and under what conditions these assumptions are false. One should approach a business idea like a scientific theory. You must be able to formulate conditions under which the theory proves to be false. If such conditions are not clearly formulable, then it is not a well-developed business idea. 2 As already mentioned above, failure is part of entrepreneurship. Just as you can't usually expect gain or success without painful effort (no pain, no glory!), another basic rule of economics is that there is usually no gain without risks. But this does not mean that entrepreneurs recklessly gamble their own money and other people's money. On the contrary, entrepreneurs must be particularly good at assessing risks. As an entrepreneur, one must be willing to take risks, but also capable of distinguishing between calculable and incalculable risks and only take incalculable risks where absolutely necessary. This requires first and foremost good business acumen or common sense, even better a solid business education. The more one understands about finance, strategy, marketing, production and human resources, the better one can avoid unnecessary mistakes, recognize and calculate risks, and the more likely one will be successful in starting a business. 2.2.4 No startup without a Business Plan: From the Customer Value Proposition to the financial plan, and the choice of legal form Relevant market, Customer Value Proposition and Profit Formula A business plan is a common tool with which entrepreneurs describe their business model. The starting point is the specification of which potential customers the business idea is aimed at and why this idea creates customer value (Customer Value Proposition), what price can be enforced on the market for it, and how the product or service can be provided at costs that are below this price (Profit Formula). In addition, a business plan outlines which resources are needed and how they will be procured. Particular importance is given to the financial plan. This plans for the first years of business activity the expected revenues from sales (sales planning), all expected ongoing disbursements and investments and it specifies how much capital is needed when and how this is to be procured. For all information, it is necessary to clearly demonstrate for others which assumptions are made here and which risks may occur. Furthermore, a business plan clarifies which persons with which qualifications form the founding team, who is responsible for which areas, and which other key positions will be filled in what way. As already described above, starting a business is not a solo event, but it is always about a cooperation of stakeholders who contribute to success and therefore also expect a share in the success of the company. The choice of legal form The legal form of a company regulates fundamental aspects of the relationships between stakeholders. Therefore, the choice of legal form is also an important part of the business plan. The legal form determines, among other things, who in the company has the right to make decisions, to lead the company, to represent it externally and who receives the firm’s profits. It also regulates who is liable for the activities of the company, especially for its debt. In a sole proprietorship, all rights and obligations lie solely with one person and this person is also liable with all their private assets. In a general partnership several people usually join together, who then jointly own the company and have a joint claim to the profits, but are also jointly and unrestrictedly liable with their private assets. In contrast, in a limited liability partnership (LLP) each partner's liabilities are limited to the amount they put into the business. A limited company (Ltd) or corporation (Corp, Inc) is an own legal entity which is separated from assets and income of its investors or owners. The legal act of establishing a firm as an own legal entity is called incorporation. It is not necessarily positive to limit liability. When entrepreneurs dare to be liable with their entire private assets, it is a strong signal that they believe in the success of their business idea and, of course, capital providers, such as banks, will be more willing to give money to a company if there are people behind the company who are liable with their private assets. In addition to capital providers, liability issues also play a role with other stakeholders. For example, think of a property developer who builds houses as a Limited Company and subsequent damages for customers or environmental damages are discovered. Or think of invoices from suppliers and partners that are not paid, even though their services (e.g., heating) are "installed" in the finished house, therefore cannot be returned, and have been resold to the end customer. In such cases, it can easily happen that the capital contributions are not sufficient to cover damages and legitimate monetary claims from suppliers and partners. Therefore, stakeholders will carefully consider to what extent they do business with companies that are only liable with relatively small deposits. Ensuring Rationality in High Uncertainty To create a business plan, you need sufficient basic knowledge, especially in accounting and finance (more on this in the financial perspective) and in strategy and marketing (strategic perspective and customer perspective). A business plan serves, on the one hand, to thoroughly think through your own business idea and to recognize and calculate the risks that arise, as well as to discover deviations from the plan and react quickly. On the other hand, the business plan provides information that facilitates the decision for others (especially money lenders) and to convince them of the success of the business idea. Precisely because the success of new business ideas often involves entrepreneurial intuition and sometimes even seemingly irrational ideas and expectations, a business plan that carefully and rationally explores the opportunities and risks of a business idea is so important. However, this is easier said than done. The more creative an innovation is, the more it differs from already existing ideas, the harder it is to make forecasts, for example forecasts about possible sales figures and revenues. Forecasts usually build on past experiences, which are projected into the future taking into account assumed changes. The fewer experiences there are to build on, the more difficult forecasts are. The economist Frank Knight distinguished between risk and uncertainty in his 1921 classic "Risk, Uncertainty, and Profit". Creative entrepreneurship must not only deal with situations where various, more or less probable developments or scenarios can occur (risk), but also with situations where not even all possible scenarios can be foreseen (uncertainty). 2.2.5 Some Highlights from Science and Research on Entrepreneurship Joseph Schumpeter (1883-1950) is today considered the greatest thinker and pioneer of entrepreneurship theory. Schumpeter was a native Austrian and was a professor in Graz, Bonn, and at Harvard University. His works including "Theory of Economic Development", "Business Cycles", "Capitalism, Socialism and Democracy" and "History of Economic Analysis" made him one of the greatest economists of the 20th century. Schumpeter primarily deals with creative entrepreneurship, through which new ideas are developed and implemented in the market. He distinguishes creative entrepreneurship from entrepreneurship that is limited to the use of known technologies and merely exploits price differences. For example, a fruit vendor can buy fruit at wholesale markets relatively cheaply and then sell it at a sales stand with a slight markup (so that the costs for the sales stand and any personnel costs are covered). Or a restaurant makes a profit by producing known dishes with known production methods and selling them at a price that slightly exceeds the production costs. In both cases, well-known procedures are used to exploit the fact that by combining raw materials (e.g., fruit, ingredients) and other production factors (e.g., personnel) a service can be offered for which one can get a slightly higher price than the raw materials and the other production factors have cost. This is called arbitrage. In contrast to such arbitrage, a restaurant owner, would be a creative entrepreneur if she introduces and implements completely new production methods (think of the first "assembly line production" of hamburgers at McDonald's) or establishes a new electronic delivery service in the market. Sometimes it is also the everyday orientation towards innovation, the constant search for how things can be improved, that makes a company a creative company, rather than being just an arbitrage company. In contrast to arbitrage, creative entrepreneurship is characterized by the generation and implementation of novel ideas. Creative entrepreneurship, according to Schumpeter, is associated with creative destruction. In his 1942 work "Capitalism, Socialism and Democracy", Schumpeter refers to creative destruction as the essential fact about capitalism. The process of creative destruction means that old production methods and production structures are destroyed as new methods and structures prevail. Similar to how in biological systems death is the price for progress through mutation and evolution, so too in the economy the destruction of the old is necessary for the new to arise. Through creative destruction, the economic structure is revolutionized from within, old things are destroyed and new things are created. Creative entrepreneurship is the engine that drives this process by discovering new product ideas, new production methods, and new markets. A major incentive to constantly search for new ideas is the prospect of profit. Through new ideas, the pioneers (one could also call these "first movers") who first implement a new idea as creative entrepreneurs, initially make a monopoly profit, because there is initially no competition. This monopoly profit, however, attracts imitators who try to appropriate part of the pioneer's monopoly profit through imitation. The initial monopoly profits of Ford attracted General Motors and other car companies that produced cars using similar production methods, just as Red Bull as a pioneer for energy drinks attracted well over 100 imitation products, from Flying Horse to Monster and Rockstar. Building on Schumpeter's idea of creative destruction, Clayton M. Christensen of Harvard Business School coined the term disruptive innovation. According to him, established companies (incumbents) often limit their innovations to improving their existing products and serving existing customer groups and markets better. While they serve existing customer needs ever better, they neglect the possible needs of other, not yet tapped customer groups. In contrast, new startups (entrants) specifically try with "niche products" to address customer groups and customer needs that are not yet served by established companies. Initially, the established companies only react weakly to this, because the ideas of the startups are not considered suitable for the mass market anyway. The problem for the established companies arises when the young companies manage to penetrate into the mass markets served by the established companies. A typical example of a disruptive innovation is digital cameras, which were initially used only in niches (cameras for children) due to the significantly poorer quality of images compared to analog film cameras. Then the technology advanced and digital images and films became increasingly better in quality, thereby destroying the business foundation of companies like Kodak, which were leading in analog technology. However, the process described by Christensen does not always have to proceed exactly in the form described, as the example of Tesla shows. Shortly after Tesla's market entry it was expected that electric cars would not only become a mass product from a niche product, but would completely replace combustion engines. Many expected that established car manufacturers (incumbents) who did not react in time would disappear from the market. However, apparently the customer group addressed by Tesla was by no means considered an uninteresting niche by the established car companies. The incumbents did not react weakly, but very massively, and they are increasingly spreading in the market for electric mobility. Electric mobility can certainly be described as a disruptive technology. However, it is not yet foreseeable whether the car market will actually change disruptively in such a way that the incumbents disappear from the market. It seems quite possible that the previously existing car manufacturers will largely maintain their market shares and only change their products technologically. An interesting example is the iPhone. Initially, the iPhone was an innovation within the established market for mobile phones, which could perhaps be classified as a radical innovation. However, this innovation was not initially disruptive because existing customer groups were simply supplied with a (radically) better product. The smartphones from Apple, Samsung and other manufacturers eventually led to classic personal computers, especially laptops and notebooks, losing their function as the main access medium to the internet and as carriers of application programs (apps). Smartphones, unlike previous mobile phones, allow very easy access to the internet and also application programs, especially social network programs, such as Facebook, WhatsApp, Instagram or Snapchat, could be operated much more conveniently via the smartphone than via personal computers and linked with other functions (e.g. camera). Smartphones have not (yet) completely displaced personal computers, but have significantly pushed back their importance as an access medium to the internet. The above example also reveals an interesting insight about major technological innovations, such as the invention of combustion engines or digitization. Innovations often initially replace previous technologies. Only in the long term do fundamentally new ideas emerge from this. Initially, combustion engines simply replaced steam engines, for example in industrial production. Only in the long term did revolutionary products such as automobiles emerge, which would not have been possible with steam technology. The same applies, for example, to digitization in the teaching of universities and other educational institutions. Initially, lectures were simply offered digitally or videos were made that replaced parts of a lecture or took over the function of books to some extent. The value created for teachers and students is limited. The future will show whether educational institutions succeed in revolutionizing the entire process of teaching and learning and the teaching content with the help of digitization. Only then can we speak of a digital revolution in university teaching and of a disruption. Perhaps ChatGPT will become a vehicle that accelerates a digital disruption in teaching. 2.3 Value creation for stakeholders through innovation: Expansion of the concept of consumer/producer surplus to all stakeholders The following fictional example explains what is meant by value creation for stakeholders in the context of entrepreneurial activity. Moreover, the relationship between value creation and value distribution is further explored. 2.3.1 Calculation of value creation from a subjective stakeholder perspective Sarah Smart Ltd is a company founded and owned by Dr. Sarah Smart. The company offers state-of-the-art data analysis services using artificial intelligence (AI) technology. Dr. Smart landed a contract for a market data analysis with a customer who agreed to pay 10.000 € for the ready-made analysis. Dr. Smart decides to commission a freelance worker to complete the market analysis for a payment of 4.000 €. Since the freelancer was a fellow student of hers and has been working for her on a fee basis for many years, she knows how to tell him what the customer expects, and she knows that he is able to do the analysis in a week of working time at the required quality using an AI software. Sarah Smart rents a fully equipped office including office equipment, PC, printer, etc. from the Office Space Inc for 1.100 € for the required week to provide the freelancer with this office. Moreover, Sarah Smart provides the freelancer with an AI software, for which 800 € are paid to the Think Soft Inc as part of a software as-a-service contract. The analysis is created, the customer pays the agreed €10,000 and is highly satisfied with the insights from the analysis. What value creation has been created for whom through this? Value creation for the customer (consumer surplus). The long-standing customer has paid €10,000 to Sarah Smart Ltd for the analysis. To determine the value creation for the customer, one must know how much the report is worth to him, i.e., how much the customer would have been willing to pay for the report at most (maximum willingness to pay). This can depend on many different things and therefore be difficult to quantify. Let's assume that the customer could quantify the value of the report from his subjective perspective at €15,000. Then a value for the customer (consumer surplus) of €5,000 has been created. Value creation for the employee (employee surplus). The freelancer received €4,000 for carrying out the analysis. What is the value of the service he provided from the employee's perspective? To this end, one could ask the employee (similar to the customer above) what remuneration he would have been just willing to accept to carry out the data analysis. Since it might be difficult for the employee to estimate this, he could consider what he would have done with his time if he had not been working for Sarah Smart Ltd. Let's assume that at another company he would have been paid €2,500 for comparable work in this week. Then he would have foregone €2,500 to be able to accept Sarah Smart’s assignment. With these opportunity costs of €2,500, he can then set the value of his work performance. Under the assumptions made, the data expert has therefore received €1,500 more because of the opportunity to create an analysis for Sarah Smart Ltd than he would have otherwise received, so this amount can be set as the value creation for him resulting from the company's activity. Value creation for Office Space Inc (supplier surplus). Office Space Inc has received €1,100 for providing the office for a week. To quantify the value created for Office Space Inc as a result, one must again estimate what they would have received in the next best alternative for providing the office (opportunity costs). Let's assume that Office Space Inc could have rented the office for the same price to someone else. In this case, no value creation for Office Space Inc has occurred. Of course, Office Space Inc may still have made a profit from the rental, but if they had made the same profit by renting to another customer, then the stakeholder relationship with Sarah Smart Ltd (i.e., the rental to Sarah Smart Ltd) has not created any additional value for Office Space Inc. Strictly speaking, Office Space Inc is then not a stakeholder of Sarah Smart Ltd, because Office Space Inc has nothing at stake in the cooperative relationship with Sarah Smart Ltd – they could switch at any time to the same conditions to another tenant, i.e., into another cooperative relationship. Value creation for Think Soft Inc (supplier rent). ThinkSoft Inc has billed €800 for the use of their software. However, no costs have been incurred for Think Soft Inc as a result (Sarah Smart Ltd only accessed their server and used the program, which did not cause any costs). Unlike in the case of the office, which can only be rented once, software can in principle be rented out as often as desired. A typical characteristic of digital goods. Therefore, the opportunity costs for Think Soft Inc are zero. By paying for the software, a value creation of €800 for Think Soft Inc has occurred. Value creation for the founder and managing director (producer rent). Sarah Smart founded and built up Sarah Smart Ltd. For the market data analysis, the customer paid Sarah Smart Ltd €10,000. On the other hand, Sarah Smart Ltd had to pay €4,000 to the employee as wages, €1,100 to Office Space Inc for the use of the office and €800 for the use of the software. In total €5,900. The financial profit that Sarah Smart has made by having the innovative business idea of creating data analyses with the help of AI software (part of this business idea are of course also her excellent contacts to good data analysts, like the study colleague who created the analysis in the example), is therefore 10,000 - 5,900 = €4,100. However, this does not yet take into account that Sarah Smart has also invested her own time in these activities and that she carries the entire business risk. In the present example, this risk consists in the fact that the data analyst sometimes does not come to any meaningful analysis results with the help of the software. In this case, the customer does not have to pay, and Sarah Smart is left with all the costs for the analyst, for the office and the software. Let's assume that Sarah Smart has spent about three hours of her working time on this, then one can set the usual salary for a comparable management activity for her time spent (opportunity costs). We assume this is €200 per hour, and the opportunity costs for the services provided by Sarah Smart are therefore €600. The value creation for her is therefore 4,100 - 600 = €3,500. The business risk is not yet taken into account in the producer rent calculated in this way. Table 2.1 lists the value creation for all stakeholders, with cash flows between the company and its stakeholders highlighted in bold. The company receives €10,000 from the customer for the data analysis and it pays out 4,000+1,100+800 € for the payment of the resources used to create the analysis (employee's labor, room rent, software rent). The difference of these payment flows is the financial surplus that the company achieved by selling the created service or product (data analysis) at a higher price than the production factors for the production of the service or product cost in total. The difference between the selling price for the created service and the purchase price of the resources consumed for the service creation is referred to as the financial profit of the company. 3 Tab. 2.1 Value creation from the subjective perspective of stakeholders (own representation) Value exchange Value received by the Value contributed by the Value created for the Stakeholder stakeholder stakeholder stakeholder (stakeholder surplus) Customer 15,000 -10.000 5,000 Employee 4,000 -2,500 1,500 Office Space 1,100 -1,100 0 Think Soft 800 -0 800 Founder/Managing Director 10,000-4,000-1,100-800 -600 3,500 Total 15,000 -2,500-1,100-0-600 = 10,800 The profit measures the entrepreneurial performance of the founder and managing director of the company. The more innovative the business idea, the higher the profit tends to be. However, a creative business idea alone is not enough to make a profit. The entrepreneur also had to negotiate with the customer, the employee and the suppliers of the office space and the software in such a way that a financial surplus was created in the end. The profit goes to the founder and managing director as a reward for her entrepreneurial activity, especially as a reward for her innovative business idea, which consists of having brought all relevant stakeholders together, and having created value for all through data analysis based on artificial intelligence. Without the entrepreneur's business idea, this value creation for all stakeholders would not have been possible. The prospect of profit was also a decisive incentive for the entrepreneur to invest time and effort to develop and successfully implement the business idea for the benefit of all stakeholders who benefit from it. However, the value creation for the entrepreneur can also include non-financial aspects, such as enjoyment of her work, the independence as an entrepreneur, and much more. Perhaps she prefers to work as an independent entrepreneur rather than in an existing company as an employed managing director. While profit measures (and rewards) the entrepreneur's performance, profit says very little about the overall value creation of the company, because profit exclusively measures the financial value creation for the entrepreneur. The above example illustrates that all cash flows are merely cash flows between stakeholders, which naturally add up to zero. In other words: Every Euro that flows into the company from the sale of the service (data analysis), flows (sooner or later) on to other stakeholders of the company, who were needed to create this service. The customer pays the purchase price (10,000), and this purchase price flows to the employee (4,000), the office rental company (1,100) and the software company (800), and the remaining rest (profit) flows to the founder (4,100). The total value creation, i.e., the sum of the benefits of all stakeholders due to the company's activity (10,800) in the example corresponds to the value of the service produced from the customer's perspective (15,000) minus the value of the resources contributed by the stakeholders from the perspective of the respective stakeholders. However, this calculation does not take into account that, for example, for the freelance employee, a non-financial value creation may have occurred. Perhaps, because he particularly enjoys working with Sarah Smart, feels valued by her and constantly gets inspired with new ideas from her. Also, for example, Sarah Smart herself could, as already mentioned, enjoy her independent activity and therefore perceive a subjective value creation from this activity that goes beyond the 4,100 € profit (minus the 600 € opportunity costs). Assuming that, as in the above example, only the financially assessable services that the stakeholders receive within the framework of the cooperation relationship are taken into account, the following applies: The total value creation for its stakeholders resulting from the activity of a company is derived from the value of the products produced by the company from the customer's perspective, minus the values of all services required for production from the perspective of the respective stakeholders who provide these services. The value of the products produced from the customer's perspective can be determined in monetary terms by the maximum willingness to pay for the purchase of the respective product. The values of the services required for production from the stakeholders can be determined from what the respective stakeholders could have achieved in monetary value for these services in their second-best use (opportunity costs). The value creation and value distribution between the stakeholders, viewed from the subjective perspective of the respective stakeholders, can also be illustrated graphically, as shown in Figure 2.1. The value creation that occurred in the Sarah Smart Ltd company is a "cake" to be distributed among the stakeholders, which in this example is quite asymmetrical, because the customer benefits the most, and the owner and the employee still significantly more than the suppliers of software and office space (the latter does not benefit at all). The cash flows between the Companies and all stakeholders, who ultimately define the owner's profit, are not a measure of value creation in the company, but they influence the distribution of the overall value creation among the stakeholders, i.e., the distribution of the "cake". In Chapter 4, which deals with the financial perspective, the determination of financial profit in the income statement (P&L) is discussed in general terms. The higher the selling price for the product (data analysis), the lower the value creation for the customer, but the higher the possible value creation for all other stakeholders. A higher selling price could pay more for the employee's work, for the office space or the software, or the profit for the entrepreneur could be increased. Similarly, one could set the selling price lower, which would create even greater value for the customer, but there would be less left for all other stakeholders. However, it should be noted that payments between the company and stakeholders are not the only lever for distributing the cake of the company's total value creation. The value of the product for the customer can also be increased at the same selling price by, for example, improving the quality of the product itself, improving services (personal customer care) or providing additional warranty services (e.g., money back if dissatisfied). In the above example, all of this was greatly simplified. Similarly, for example, the value creation for the employee could be increased by offering him further training, offering him more flexible working hours, or reducing the time pressure under which the work must be done. More on this in the next section. Value generated Opportunity cost (next best alternative) Owners of business Partner Firms Employees Suppliers Customers Fig. 2.1 Value creation and value distribution among stakeholders from their respective subjective perspective (Source: Own illustration) 2.3.2 The relationship between value creation and value distribution The above example illustrated what value creation means for stakeholders and how it can be determined. However, the distribution of value creation among stakeholders is obviously not predetermined, but is "negotiated" among stakeholders. If Sarah Smart knew about the value of the market data analysis for the customer, she would of course know that she could have charged a higher price, in the extreme case even €15,000 (the customer's maximum willingness to pay). However, as a provider, she usually does not know exactly what the customer would be willing to pay at most. It is very similar with the other stakeholders considered. The freelance employee in our example could have offered his services to another company, but he would have only been paid €2,500. Therefore, he would have probably accepted the job at Sarah Smart Ltd for any compensation above €2,500. If Sarah Smart had known this, she could have negotiated him down to nearly €2,500. Think Soft even had opportunity costs of zero and therefore could have provided the software much cheaper. Only with the office space there would have been no room for negotiation in our example. Could Sarah Smart as managing director and owner have significantly increased her profit and would a profi

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