Adaptive strategies of business incubators during economic crises in Russia
The definition of the business process-incubator and incubation. Strategic management in nonprofit organizations. Measuring the effectiveness of business incubators, their development and especially in Russia. The incubation process and its elements.
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Правительство Российской Федерации
Федеральное государственное автономное образовательное учреждение высшегопрофессиональногообразования
Факультет бизнеса и менеджмента
кафедра общего и стратегического менеджмента
Натему: «Adaptive Strategies of Business Incubators during Economic Crises in Russia».
TABLE OF CONTENTS
- LITERATURE REVIEW
- Evolution of Business Incubation concept
- Defining a business incubator and incubation process
- Measuring the performance of business incubators
- Screening Practices
- Quality of Management
- Incubation process and its elements
- Strategic management in non-profit organizations
- Impact of economic recession on SMEs and NPOs
- Adaptive strategies in response to economic downturn
- CASE STUDY
- Peculiarities of Business Incubators in Russia
- State of affairs in the business incubator in 2014
- Crisis effects on the incubator
- Adaptation strategies of the BI HSE during the crisis
- DISCUSSION AND CONCLUSIONS
Many studies have considered business incubators regarding their role in supporting small innovative companies, however, despite this attention, previous research has insufficiently covered the issue of incubating process and business incubator strategy. This study attempts to empirically provide insights into the nature of patterns and strategies of adaptation that business incubators in Russia initiate during economic downturns. The problem of incubator strategy adaptation during recessions has been totally neglected in prior studies. This research uses the method of a case study and argues that business incubators are highly dependent on external environment, and its strategy should be coherent with theeconomic situation in the country and government policy to meet expectations of stakeholders. Results from a case study of the HSE business incubator illustrate that the incubator employs certain patterns of strategy adaptation to the present economic recession in Russia particularly taking a pro-active position in fighting the crisis and focusing on elaborating more flexible incubation model with shorter incubation programs and less rigorous screening practices.
This study aims at revealing the empirical evidence of adaptation patterns and strategies that business incubators in Russia undertake during economic crises.
Within this general purpose of the research, the following questions will be addressed:
· Challenges in measurement of incubator-incubatee success
· The impact of economic downturns on non-profit and for-profit organizations
· Existing incubation models and their features
· The development of strategic management in NPOs
· Adaptation strategies of business incubators in hostile economic environment
As only one BI is considered in the empirical part of this investigation, the generalization of the revealed adaptation practices to other Russian BIs is beyond the scope of the present research. This paper is, for the most part, a case study, which intends to evaluate the ascertained problem empirically under specific conditions of the HSE BI. Another serious limitation deals with the developing stage in incubation industry in Russia. There does not exist a commonly accepted theoretical framework on how the incubation process should be performed. This deficiency also provides some serious difficulties that cannot be overcome in this study. However, both limitations mentioned seem possible to combat in the future research.
This study might significantly contribute to the understanding of the nature of business incubation industry and identify its blind spots. As this research puts a greater emphasis on the strategy of BIs during economic crises, its findings might be of practical value for anyone who is involved in managing a BI. This practical impact is one of the main goals of the study since BIs' activities rely heavily on the economic situation in the country. Additional knowledge on how to adapt BI's strategy to economic crises could raise a particular interest to this issue within the business incubation society and stay relevant for another 3-5 years.
The present research contains parts in the literature review section from the previous paper called `Analysis of Business Incubators Role in Developing, Sustaining and Motivation of Start-ups' written by the author.
Evolution of Business Incubation concept
It is accepted that the first incubator was created in New York in 1959 and was called the Batavia Industrial Centre (Theodorakopoulos et al., 2014). After that several papers were published which proclaimed business incubators as a vehicle for economic development. This significantly increased its popularity, and business incubators started to appear in America. However, the diffusion was slow during the 60s and 70s. People did not still understand why they might need an incubator. However, there were the 80s and there came crucial changes in the U.S. legal system regarding intellectual property rights protection and understanding the importance of innovation (Hackett and Dilts, 2004). Since this raised the popularity of business incubators, there appeared a need for an official organization that would be a representative of all incubators. At that time, NBIA was created in the early 80s and the incubation industry started racing. The most significant period in incubation development took place during the late 90s, the era of dot-coms. There was a high demand for technology incubators because the media at that time convinced people that incubators were “capable of incubating and taking public infinitely scaleable, dot-com e-business start-ups less than a year after entering the incubator” (Hackett and Dilts, 2004, p. 58). However, those dreams never came true and the dot-com collapseof the year of 2000 seriously damaged the incubation industry. Europe, for example, was in such a condition of “frustration” for a long time after the crisis of 2000. By 2007, there were only 7% of existing incubators that were founded after 2000 (Hackett and Dilts, 2004). This situation is quite understandable as incubators were seen to be an instrument of entrepreneurship development, and when an instrument shows its uselessness,it is not easy to fix it. However, we can state that “rumors of the demise of the incubator-incubation concept are greatly exaggerated” (Hackett and Dilts, 2004, p. 59). The idea of a business incubator, as the history showed,can survive in economic crises and effectively adapt to the new after-recession business environment which is proved by the growing popularity of business incubators worldwide. Today there are more than 2000 incubators in Europe and America (Bruneel et al., 2014) and more than 200 in Russia (Ernst & Young, 2014). Then why do incubators appeal to the stakeholders of innovation, such as entrepreneurs, venture capital funds, governments and universities? From my point of view, this question has a strong psychological aspect. Both fledgling companies, governments and other stakeholders of innovation seek to find something that would make their lives easier and their work more efficient. Incubator in this situation represents a place which accumulates resources including knowledge, people, anatmosphere that might come in very handy for those who are to develop entrepreneurship in the region. That is why if there is even a vague chance for help many people and organizationswill use the opportunity especially in times of a recession.
What were the early incubators like and how did they change over the years? The answer depends on the side which we look at the issue from. We consider types of services that incubators provided at certain periods of time as a proxy for thedevelopment of business incubation concept.
There's a widely spread opinion that the evolution of business incubators can be divided into three stages on the basis of time periods. The first period took place in 1980-1990, the second term - 1991-2000 and the third one is 2001 - to date. These periods are characterized by different sets of services that most of the incubators offered their tenants to use. The first generation of incubators represented a rather simple system that put an emphasis only on cheap office space and shared facilities like aphotocopier, meeting rooms, kitchen and other things. In the 1990s there came an understanding that incubators had a greater potential than being just a shared office space. Various advisory and support services, and early stage networking were introduced to the industry of incubation. The beginning of the 21st century was marked by deepening and developing those non-trivial services that appeared in the 1990s: the institution of mentoring and different educational programs started to play a more important role in incubator activities. Regarding services available to tenants, we know much about certain services they get but there's no data about what quality these services are (Allen and McCluskey, 1990). We have empirical evidence for European incubators in 2007 and we can say that more than 80% of surveyed incubators offered only four types of services (Aerts, Matthyssens and Vandenbempt, 2007). These were conference facilities (96%), networking (88%), business planning (86%) and Internet (85%) despite the fact that it is commonly accepted today that business incubator is not just a co-working where marketing advice, assistance in raising capital, pre-incubation, managerial training are left apart. This fact might seem quite surprising and, to some extent, illogical, though to grasp the whole picture and get a balanced understanding of the topic, we have to distinguish between different types of incubators that aim at various missions and have to considerdifferent stakeholders. We will soon discuss this matter in detail. However, at this point it is reasonable to bring up a connection between the evolution of business incubators in time and their strategic responses to challenges posed by theexternal environment and the major objective of the present research. The process of development of business incubator concept represents its flexible nature and a strong ability to change to be more efficient.One of the widely spread opinions about crises is that they are times that create opportunities for creative destruction (Schumpeter, 1943) which mean that crises force organizations to adjust.Business incubators are of particular academic and practical interest because they cannot be unequivocally classified as commercial or non-profit organizations and, therefore, it is not clear which methods, techniques and ploys incubators employ to adapt their strategy to the changing environments. Consequently, the central point of the study is to empirically elucidate patterns of strategic movements of business incubators during economic crises. In order to do this, first of all, we have to understand what business incubator is like from a variety of angles.
Defining a business incubator and incubation process
If we consider literature concerning business incubators we will see that many authors discussed this concept and tried to find out the nature of business incubators and whether this institution can be useful in entrepreneurship development.
However, we also find quite a number of contradictions and differences in understanding that make the analysis more complicated and topic blurred. The fundamental thing here which is worth discussing and taking into consideration is the definition of thebusiness incubator as a term. There is no commonly accepted definition of a business incubator. Nicholas Theodorakopoulos with colleagues made an effort to track how the term “business incubator” was understood in the period from 1985 to 2014 (Theodorakopoulos et al., 2014). Differences are so significant that truly it will not be a mistake to call those definitions totally different names. Experts call incubators a “facility”, “environment”, “shared office-space”, “organization” and other names. We have chosen two definitions that seem adequate to the present study andmy personal understanding of this term. The first one was proposed by Allen D. and Bazan E. (1990) where they see an incubator as a “network or organization providing skills, knowledge and motivation, real estate experience, provision of business and shared services”. The other one is suggested by Hughes et al. (2007): “A business incubator is a facility that houses young, small firms to help them develop quickly into competitive business”. These two definitions are quite different in their emphasis. Allen and Bazan see the main goal of incubators in providing services while Hughes with colleagues highlights the broader mission of a business incubator which revolves around various business support processes and management activities. The situation like this only proves that the incubating issue is still underdeveloped and quite controversial. Every researcher has to choose or create an appropriate definition of a business incubator that would suit the goals of the study. These differences in understanding of the concept create the heterogeneity in the literature and hinder the researchers from a holistic view of the problems pertaining to the topic of business incubation.
A possible reason for such a controversymight lie within classification problems related to business incubators. These organizations can be for-profit or non-profit, funded by thegovernment, university or commercial organization, provide different services for tenants and can be mixed. It is reasonable to consider the origins of these classifications and what they depend on. Aerts K., Matthyssens P., Vandenbempt K. (2007) distinguish three groups of stakeholders that are connected with business incubation. These are incubators, innovators and governments. Depending on the group of stakeholders that is prevailing within a certain incubator goals and structure will differ significantly. Incubator can financially benefit from the success of its tenants. In this case we are talking about afor-profit organization which has its share in startups. Innovators can be both fledgling entrepreneurs and investors who seek for new ideas. On the part of entrepreneurs they look for quality services provided by incubator and they also demand as much freedom as they can get. Investors are interested in reducing their risks. Consequently, they wish to cooperate with incubators and assess this cooperation according to clear criteria of effectiveness. Finally, thegovernmentaims at entirely different things. Government's missions in thecapitalist world are to develop entrepreneurship in the country, create jobs and improve its regional economies. Practically, thegovernment takes on investing duties. However, unlike other investors, thegovernment expects to get something more than simply money in return, some more long-term issues including increasing budget revenues, creating a free economy, raising the quality of life of its citizens. It is quite clear that since there are different stakeholders then there should be different types of incubators in order to meet expectations of their beneficiaries. Since most of the business incubators are not entirely commercial or non-profit the proportion of stakeholders' influence varies considerably from one incubator to another. If put under scrutiny almost any business incubator can represent a unique type because it contains an idiosyncratic mixture of stakeholders, facilities, tenants, local peculiarities and many other things.
Another deficiency in the extant literature deals with ways of putting incubation into practice or organizing the incubating process. In other words, there is limited research on business incubation models that would describe and assess methods that could be employedto develop, sustain and motivate a startup, which is a final product of business incubation.
Hackett and Dilts (2004) remark that a certain paradox exists in the literature because official organizations like NBIA proclaim that the incubation process is much greater than the incubation facility (Adkins, 2001) while most of the studies related to business incubators are confined to simply facilities that are provided for the tenants. The present research is largely focused on the incubation process rather than services provided for tenants since my particular interest lies in incubators' strategies and methods for reaching their goals. This reveals one of the central problems of the research that deals with the measurement of incubators success.
Measuring the performance of business incubators
Since business incubators often have more than one group of stakeholders the problem of evaluating incubator's success becomes significantly more complex.
Since we have already discussed the existing controversies in the definition of a business incubator and its variability in the situation of different stakeholders it is evident that success factors of incubators will also be different. However, there were efforts to create a universal list of criteria that should be taken into consideration when assessing business incubators. For example, Smilor R. and Gill M. (1986) made up a list of ten business incubator success factors. The list is: “on-site business expertise, access to financing and capitalization, in-kind financial support, community support, entrepreneurial networks, entrepreneurial education, perception of success, selection process for tenants, ties with a university and a concise programme with clear policies, procedures and milestones” (Theodorakopoulos et al., 2014, p.608). This list of criteria is more than innovative among other papers that deal with incubation criteria of effectiveness. Smilor and Gill tried to abstract away from “the numbers” like survival rate, thenumber of tenants, investors and experts, thenumber of jobs created and so on. These figures seem to be more illustrative at first view, but they miss on the dynamic nature of business incubators and the startups located in them (Phan et al, 2005) and neglect soft value-added contributions like psychological support, educational seminars and so on (Mian, 1996). However, you cannot see real problems and advantages of incubators behind those figures. A little example might help here. Discussing a survival rate of incubator graduates we can operate, for instance, with the statistics that were collected by NBIA in their report “Business Incubation Works” in 1997. The statistics say that 87 percent of all graduates of all incubators that are members of NBIA are still in business. First of all, what does it mean? Practically nothing if not compared with other figures. It would be kind of interesting to see what the numbers among non-incubated startups are. However, in real life it is almost impossible to get these figures compared due to different time periods, different methodology and different scale. However, we do have some statistics on thesurvival rate of non-incubated firms. U.S. Small Business Administration's Office of Advocacy has these statistics that say that “about half of all new establishments survive five years or more and about one-third survives ten years or more”
Figure 1. Survival of startups in the USA. Source: sba.gov
Suppose we manage to compare these sets of statistics. However, there is no practical use in this. At least the present research is aimed at those factors that can be considered as the components of business incubator's long-run strategy and that can be reconsidered, changed, improved, repositioned in order to meet the expectations of stakeholders. I believe that quantitative indicators can only be seen as the secondary goals that an incubator is pursuing. Any number needs to be compared to be admitted as the ultimate aim, and the latter example of survival rate shows that it is almost impossible to reason one or another desired level because the fundamental factors of comparison differ. That is why I decided to use the Smilor and Gill list as a basis for understanding the business incubation process, and I chose three factors that seem to be the most important in a long-range incubator development. Iwill talk about screening practices, networking, and quality of management in incubators.
Any incubator has to decide what kind of startups it is aimed at. It has to develop criteria which have to be met by entrepreneurs. Moreover, that is not an easy task if an incubator wants to follow a certain developed strategy. There are two important reasons for using screening procedures. The first one is that by introducing harsh screening methods you raise the average level of startups, make potential incubatees prepare more carefully for admission procedures and you also improve chances for creating a highly productive atmosphere in the incubator. The second reason deals with thepsychology of entrepreneurs. The screening practices should be aimed at creating “a membership structure that is not too heterogeneous” (Theodorakopoulos et al., 2014, p.616). That means startups and entrepreneurs should have something in common. Otherwise, it will not be possible to create a good network and community. Let's now have a look at what the real life is and how screening practices are performed. Aerts K., Matthyssens P. and Vandenbempt K. (2007) by researching almost a hundred business incubators in Europe found out that potential tenants are usually screened by three global criteria: financial ratios, personal characteristic of entrepreneurs and market factors. It is more than important to develop a balanced approach to screening practiceswhich means that youdo not concentrate on a single parameter. The authors use Herfindahl-Hirschman index to explore screening practice among those one hundred respondents. The results were as follows: 97% of observed incubators use screening practices; 61% see themarket as a major screening factor, 27% put an emphasis on personal characteristics of the team and entrepreneurs. Only 6% of incubators use a balanced screening strategy.
Networks are a crucial part of incubation process regardless of types of incubators. If an incubator manages to organize an effective network it can be considered as a great success. There's hardly any paper about business incubators that would not mention the role of networks in incubation process. Moreover, it is easily understood. There is a theory which is called Situated Learning Theory (SLT). It was introduced by Jean Lave and Etienne Wenger and it states that “what is needed is not to create learning, but rather to create the circumstances that make learning empowering and productive” (Wenger, 1998, p. 22). Effective incubation is all about creating anatmosphere of learning. It even can be explained from the position that you cannot deliberately teach someone to do business. However, you definitely can place him in circumstances that would make it easier for him to progress in understanding and doing business. That is why I consider networking as probably the most important success factor of incubators. On the other hand, creating a fertile entrepreneurial atmosphere is quite a difficult thing to perform, and it requires much knowledge, experience, dedication, time and qualification. All these have to be possessed by themanagement of a business incubator.
Quality of Management
When you have everything to perform well but you do not know how to put it together and use it you evidently will not be a success. The same thing exists when we deal with incubators. If you perform balanced screening practices aimed at creating a homogeneous structure of membership and you manage to organize a good network but you cannot lead, sustain, control, plan, organize and motivate this network your success will not last for long. That is why devoted and qualified incubator managers in conjunction with a well-elaborated and coordinated strategy are a critical part of incubator's good performance and ability to adjust itself to recessions and other problems coming from the external environment. Moreover, it has to be said why a good incubator manager is harder to find than a manager, for example, for a venture capital company. VC operates a transparent business model which is aimed at pleasing its shareholders. On the other hand, most of thebusiness incubators do not have shareholders. They have plenty of stakeholders whose interests do not always rest upon getting money which makes it harder for managers to make decisions, to develop strategy and to set priorities (Dee et al., 2011). A good example concerns “living dead policy”. A VC will not even think about trying to reanimate a startup because the criterion is clear - money. An incubator manager finds himself in a more complicated position. Since the main goal is not always money he has to build his decisions on various factors.Moreover, there is a significantly higher chance to expel “dying” startups which could be useful for an incubator and vice versa.
In the following part I will provide a closer look at the extant literature on the topic of business incubator management and the influence that an economic downturn has on it.I will cover existing incubation models and speculate on their components tofigure out how business incubator organizations can be classifiedregarding their strategy.After that, I will discuss strategic management issues in business incubators and other similar non-profit organizations. Then I will describe how organizations can be influenced by the recession and introduce the present economic crisis in Russia.As a final point in the review of the literature possible adaptive strategies that such organizations as business incubators can employ in times of crises will be examined.
Incubation process and its elements
I start the discussion of business incubator management from the lower operational level where incubator's employees deal with routine problems of creating conditions for tenants in which they can successfully develop their businesses. This level of management is of particular importance for the present research since the elements of anoperational level including services provided, human resources policy, premises, regional and academic synergies can be easily transformed in thecase of economic downturn.
Apart from services, which can vary significantly from one business incubator to another there are a lot more important components that make up incubation process and, consequently, influence the final product of incubation. There exist several guides explaining what the incubation process should be based on. One of such was published in 2010 by the EBN team, an international community of innovative organizations and entrepreneurs. The authors propose six aspects that have to be considered when putting incubation process into practice. These factors are (1) budget, (2) regional synergies, (3) the board of directors, (4) premises and infrastructure, (5) branding and visibility, and (6) human resources (Dichter et al., 2010). It would be useful to describe each of these elements in terms of possible metamorphoses during a recession as the overall success of the incubator regarding stakeholders' interests heavily depends on these items.
Notwithstanding that there exist totally for-profit business incubators owned by private individuals and commercial organizations, the present research is largely focused on university business incubators which are federally funded and their budgets are set by government institutions according to thegovernmental vision of incubator's goals, abilities and scales.There emerges a problem of financial dependency of university business incubators. This bondage forces incubators to act in `a politically charged environment' (Hackett and Dilts, 2004, p. 73) where they must permanently show their effectiveness to justify federal funding. It is evident that more nascent companies fail during theeconomic downturn and there comes a controversial question of appropriate criteria of effectiveness that can be applied to incubators during recessions. Since the government does not know and cannot know for sure whether a certain incubator is effective or not, it has to consider collateral factors when setting incubator's budget that may lead to ambiguous results.
Obviously, governments can additionally regulate incubation process using various non-financial instruments applied to entrepreneurs and business incubators themselves. These instruments can be grouped into two blocks: regulations and policies (Janssen, 2013). Policies include, for example, award programs and seed capital programs, while regulations can be represented by intellectual property regimes and bankruptcy laws and others. Business incubator themselves can also be exposed to serious regulations and constraints. For example, in Belgium incubators are subject to a sophisticated `certification procedure introduced by the regulation in order to rationalize and professionalize business support structures' (Janssen, 2013, p. 503).
Regional synergies are a significant part of the incubation process since all incubators are embedded in the local context (Dichter et al., 2010) and have to consider a particular external environment specific to a certain place. Regional synergies may include various joint arrangements with local public agencies, venture companies, entrepreneurs who operate on the local market. All this is necessary in order to provide nascent incubatees with a coherent understanding of the rules and patterns of behavior that proved to be successful. Crisis places serious limitations to apply this practically since neither public agencies nor local entrepreneurs can tell how the crisis will influence existing rules and patterns.
Premises and infrastructure, branding and visibility are both components of the operational factors of incubation process that can be easily modifiedto adapt to crisis conditions.A business incubator can change premises when facing the problem of reducing costs and can elaborate new branding and visibility when dealing with slumping demand, which are both possible consequences of theeconomic downturn in the country.There also can be certain government demands in terms of premises and infrastructure that can come from political rather than economic considerations.
Probably the most significant part of incubation process is incubator managers who are responsible for fulfilling the goals set by stakeholders.I will cover in detail the peculiarities of thebusiness incubator as an organization in the next part of the paper, however, it should be said now that an incubator has some unconventional characteristics that demand a special qualification from the managers. Economic downturn or any other reason for thechange of the incubation process first has to be realized by the managers, and will probably require a decision making process that is not based on well-known cause-effect relationships and well-organized data on the problem. All this makes incubator managers' skills quite a valuable and unique asset for such organizations because hardly anyone can argue that there is a well-defined organizational framework that each and every incubator employs. Quite the contrary, as we can see in most of the studies devoted to business incubation model evaluations. The majority of such papers is designed as case studies and provides a detailed analysis of specific business incubators considering services they provide for tenants, business processes they put into practice, challenges posed by theinternal and external environment they have to face, and other factors that can seriously influence the whole incubation process.
Autio E. and Klofsten M. (1998) published an article that focused on identifying management practices in two European business incubators located in Sweden and Finland. The authors divided management practices into two groups: the first includes practices that are applicable in business incubators, and the other includes only those that are locally reasoned and hence cannot be employed by any incubator in the world. This division of management practices in incubators was probably the first step towards admitting that incubator managers cannot act according to commonly accepted rules even if there were any. Moreover, the authors came to a conclusion that the majority of management practices on the operational level of business incubators are heavily embedded in the local context. The following elements of incubation model can vary because of local context: the number of interest groups involved, feedback mechanisms between incubator and startup, a particular emphasis on thetype of assistance provided and other factors. The authors also highlight a point that generally accepted practices deal only with the internal organization of business incubator.For example, full-time project coordinator, `exploitation of synergies between firms and academia', `enrollment fees imposed on participants' (AutioE.andKlofsten M., 1998, p. 39) are the practices that were met in both incubators located in very different environments.
Other authors in their works try to systemize all small aspects of business incubation process into several general models of business incubation.Grimaldi R. and Grandi A. (2005) base their arguments on the data retrieved from case studies of eight Italian business incubators.In order toelaborate two general models of incubation authors introduce prerequisites that explain where these models come from. First of all, the researchers justify four existing types of business incubators and assert that services provided by incubators and their business models are totally dependent on the requirements and needs of potential incubatees. After that, the authors design business incubator variables in order to illustrate main differences between incubator types. Finally, two incubation models are proposed. Model 1 is characterized by incubateeswho are more involved in a traditional economy that target local markets and that value the `provision of logistical assets' (Grimaldi and Grandi, 2005, p. 118). Services provided are mostly related to technical and economic skills. Such a model is widely spread among private business incubators.
Model 2 is common for incubators which target innovative entrepreneurship; startups involved in technological processes and that potentially can be highly promising and attractive for venture investors. Peculiar aspects of this model are ashort-term period of incubation program and much attention to networking within the incubator and building partnerships with external communities and organizations. The authors put forward an idea that university incubators model is located somewhere in between two general models. Their main distinctive feature is that they can reduce costs for promising knowledge-based startups to encourage nascent entrepreneurs to do business.In order to dothis, they can adopt features of both models because you never know exactly what kind of services and assistance inexperienced entrepreneurs with academic background might need in order to out their ideas into practice.
The studies devoted to incubation process very often concentrate on certain factors that might influence the incubation model and neglect situational and more strategic factors. Evidently, needs and demands of startups is not the only factor influencing incubation process as nascent entrepreneurs represent only one group of business incubator stakeholders. Possibly other factors can seriously affect processes going on in the incubator. The present research is focusing on one of such possible factors as theeconomic crisis in the country. In order to find out the nature of incubation process it is reasonable to movefrom operational level to a strategic one and discuss the peculiarities of business incubators global strategies and how they are adjusted to hostile economic environments.
Strategic management in non-profit organizations
A serious issue has to be dealt with when discussing strategic management in business incubators. What business model do business incubators adhere to? A question arises because in the majority of cases business incubators as organizations have certain features from both for-profit and non-profit sector. Moreover, there are quite some private for-profit business incubators worldwide which set a goal of making aprofit in the first place. That means that business model of incubation canearn money. On the other hand, the overwhelming majority of business incubators is formally non-profit and financed by government (Hackett and Dilts, 2004), and their main goal is other than making money.Before proceeding to the consequences of recession impact on business incubators' strategy it is necessary to understand the fundamentals of ageneral strategy of business incubators.
In the present research non-profit incubators financed by thegovernment but also able to earn money themselves are considered.I chose this type of business incubators since they are widely spread in Russia. Since 2005 business incubators started to be federally funded, and by 2012 there were 123 business incubators created under the sponsorship of the Ministry of Economic Development of the Russian Federation (Седаков, 2014, p. 2). Only 5% of business incubators in Russia as of 2014 were owned by private individuals or commercial companies (Ernst & Young, 2014). State subsidies despite being the key element of incubators funding, are not the only source of financing(Autio and Klofsten, 1998, p. 39). I will discuss this matter in detail in the empirical part of the research.
According to the facts about business incubators as discussed earlier in the paper, these organizations can only be seen somewhere in-between non-profit and for-profit sector.What are the peculiarities of such organizations' strategic management?
A general question about the strategic management in non-profit organizations is whether it differs from the management in commercial organizations. All further problems have their roots in this general question.Anheier (2001) sees the historical relevance in non-profit management. He claims that many years NPOs worked in a very stable environment where they were not subject to business cycles and external hostilities. However, times are changing and non-profits start experiencing what they are not used to: uncertainty. Especially, this acute uncertainty comes from the financial field as the governments cut budget spending and in today's world more responsibility is resting upon NPOs (Deakin, 1995).
Since the major difficulties come from the financial field, it is reasonable to seek the solution to the problem in the for-profit sector though this approachis often criticized (Chetkovich and Frumkin, 2003) because the main objective of NPOs cannot be money. What is then the main goal of a non-profit organization? Peter Drucker (1990) said that because of a missing bottom line in NPOs there is even greater need for management than in for-profit companies. Another wide-spread opinion is that NPOs have multiple objectives that come from `dual management structure', `complex motivational structure', `complex organizational environment', undefined needs and preferences of clients and thefrequent importance of valuepropositions and guarding (Anheier, 2001, p. 6-7).
Anheier H.K. puts forth several recommendations for building a non-profit strategy. Since NPOs frequently don't get any signals from the market they have to take up a pro-active position in order to locate the organization within the global `non-profit market'. Another important idea is that it is necessary to divide a non-profit organization into several components, one group of which will be for-profit and the other totally non-profit. As practice shows, almost any NPO has its for-profit components which have to be treated as separate organizations.
One more problem concerning strategies of non-profit organizations that I am going to give an extended thought is performance management and planning in NPOs.Non-profit organizations in theknowledge-based economy today operate in a highly competitive environment which is characterized by `growing demand for services', `losing commitment of non-profit employees', `tighter government funding' (Kong, 2008, p. 282). Some researchers believe that non-profit management is more complex than that in for-profit organizations because NPOs lack following factors that reduce complexity of management: primacy of owners, homogeneity and measurability of owner's interests, and common currency for assessment and delegation (Speckbacher, 2003)
The possibility of applying for-profit strategic methods to non-profit organizations has been of particular interest to researchers. Kong E. (2008) investigated the problem of relevance of such techniques as SWOT-analysis, resource-based view, Balanced Scorecard, intellectual capital for NPOs. He came to the conclusion that only techniques that are evaluating processes rather than the results are appropriate for using in thenon-profit strategic management framework. The author suggests that the concept of Intellectual Capital (IC) fits in non-profit concept. This framework allows NPOs to reach social goals while improving the efficiency and effectiveness of using their capital.
On the other hand, Kaplan R. (2001) argues that methods of strategic planning and performance evaluation that deal with processes rather than results of the work are disputable and often lead to common mistakes in managing a non-profit organization. When an organization does not have acertain limited number of objectives and at the same time has multiple stakeholders and constituencies, which is a common situation for NPOs, `attempting to be everything for everyone virtually guarantees organizational ineffectiveness' (Kaplan, 2001, p. 359). Hence, the author proposes an idea of bridging the gap between operational and strategic levels using the Balanced Scorecard which appears to be an effective tool for accumulating various resources and put them into theprocess of achieving major objectives. Kaplan R. claims that this approach can be of particular viability for a non-profit sector since it is often hard to realize what goal organization is trying to achieve and how the result is going to be measured.
Another issue concerning the strategic planning in NPOs that has to be taken into consideration deals with the academic background of the NPO strategies. For example, Nutt P.C. (1986) claims that non-profit strategies vary in three dimensions: quality, acceptance and innovation. Quality deals with thecomprehensiveness of strategy formulation; acceptance is after stakeholders' opinion about strategic plans; and innovation has to decide whether the strategy employs methods that have never been used before or not. Depending on the `yes' or `no' answer the author elaborates six archetypes of non-profit strategies. Regardless of the archetype any strategy design ideally undergoes two stages: formulation of the strategy and conception stage where `the strategic options are explored for their feasibility' (Nutt, 1986, p. 62). This is one of the academic approaches to non-profit strategies though also helpful for clarifying the topic.
The practicalproblem of strategic planning and performance management in NPOs is experiencing a very active discussion in the scientific community and still there is no commonly accepted idea of how to solve these problems. However, several things are certainly evident that multiple stakeholders hinder organizations from clearly defining their goals, numerous bottom lines create additional obstacles for elaborating an effective non-profit strategy, and that in most of the cases NPOs try to employ for-profit strategic methods, though realizing that this approach has serious limitations that have to be considered.
Impact of economic recession on SMEs and NPOs
Business incubators represent quite a complicated and idiographic type of organizations. On the one hand, it has a lot in common with non-profit organizations including its federal funding, aparticular social mission to pursue, multiple stakeholders and bottom lines. On the other hand, there are also more characteristics of for-profit organization than it might seem to be. There are nearly no volunteers in business incubators, quite a number ofsecondary sources of funding, which in sum can constitute a significant part of the budget and for the most part incubators do not practice non-profit distribution. All this implies that it is reasonable to use both for-profit and non-profit experience surviving through the crisis as a proxy of that of business incubators.This certainly imposes serious limitations on the research, however, offers opportunities for further studies.
The idea that economic recession influences different types of organizations is evident, however, the issue remains open when considering such unconventional types of organizations as business incubators and most of the non-profit organizations. Since the present research sees business incubators as a certain mix of for-profit and non-profit characteristics it is reasonable to discuss thepossible impact of recessions on both of these types of organizations.I'll discuss the extant literature on this topic and then cover questions which will be analyzed in the empirical part of this study since there is no answer to them in the existing research.
Talking about SMEs during thecrisis of 2009 and right after the peak of this economic downturn, there are plenty of studies covering particular aspects of commercial companies that were heavily struck by crisis. The general idea of a recession can be describedwith the word slowdown and reduction. Demand is getting weak, profit margins experience pressure, staff is being cut, available cash is being reduced (ACCA and IMA, 2011).Another pack of problems posed by economic crisis concerns company's customers and suppliers, as it becomes harder to secure prompt payments and procurement. One more interesting thing is that companies often recognize `a loss of focus' (Lowth, 2010, p. 9)
However, ACCA-IMA team claims that SMEs often see a recession as an excellent opportunity to improve their position in the market. The crisis is theperfect time to explore new markets; it provides opportunities to easily benefitfrom innovation, and to build strong relationships with customers and suppliers. These factors seem to influence both for-profit and non-profit organizations because it deals with the whole economy rather than with particular companies.
However, there are certain effects posed by theeconomic recession that may have opposite consequences on for-profit and non-profit organizations, which I am going to find out through the case study method in the empirical part of the paper. For example, during the recession in 2009 many companies suffered reductions in orders (Lowth, 2010). Non-profit sector, on the other hand, might be of particular value and popularity exactly in times of crises. Concerning business incubators, this hypothesis works just fine because common sense dictates that the worse the recession the more need for support on the part of nascent entrepreneurs.
ResearchQuestion 1a: How has the demand for incubator services changed since the start of the crisis in Russia in 2014?
Another controversial impact of economic downturn deals with investments. The researchers claim that companies undertake more robust business investmentsduring crisesby putting the potential projects under more scrutiny (Lowth, 2010). What is the reality concerning business incubators? Do they perform more rigid screening practices to obtain only strong startups?
ResearchQuestion1b: What are the changes in screening practices that the business incubator performs? What are the main reasons?
Regarding non-profit organizations, they are `not immune to the implications of troubling economic times' (Kuna and Nadiv, 2013, p. 63). It happens because of numerous intrinsic factors characterizing non-profits. For example, a typical thing for a non-profit organization is extremely high turnover rates of executive directors, especially in times of crises (Adams, 1998).
ResearchQuestion1c: What are the changes in HR policy in the incubator caused by the crisis, and how do employees treat these changes?
One more important problem resting at the executive level is anunclear and ineffective division of labor between theboard of directors and top-management of a non-profit organization. Marx and Davis (2012) propose three models of division of responsibilities between theboard of directors and CEOs: `hierarchy', `policy governance', and `partnership'. The idea is that in hierarchy model board of directors sets goals and tells directors how they should achieve it; the policy governance is the model where the board of directors sets goals and lets directors decide how to achieve it; and the raison d'etre of a partnership is close collaboration between the board of directors and managers. Russian style of corporate governance is historically very hierarchical and mostly depends on one person (Долгопятова et al, 2009).
ResearchQuestion1d: How does the system of division of labor in the incubator react to the economic crisis?...
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