Overcoming Liabilities

Question 1

What is Gibrat’s Law? (Lecture 2))

Answer 1

According to Gibrat, growth is random and independent of size

Question 2

What are the 4 reasons of liability of newness for an organization? (Stinchcombe, 1965)

Answer 2

1. Involve new roles that have to be learned
2. Do not yet have standard routines to solve problems
3. Rely on social relations with strangers
4. Do not have stable ties with those who use their service

Question 3

What are the 2 main liabilities for the libility of aging? (Stinchcombe, 1965)

Answer 3

1. Liability of senescence (getting stuck in routine and bureaucracy)
2. Liability of obsolescence (Stuck in strategy leading to mismatch with environment)

Question 4

What are the 3 key reasons for introducing the liability of adolescence? (Fichman and Levinthal, 1991)

Answer 4

1. Honeymoon effect
2. Depletion of initial resources
3. Rational investors will not pull the plug immediately

Question 5

What is the honeymoon effect in new ventures according to Fichman and Levinthal (1991)?

Answer 5

Refers to an initial period of higher survival or performance for new organizations due to factors like initial enthusiasm, strong founding teams, or favorable initial market conditions

Question 6

What are the 5 key points of prospect theory? (Lecture 2)

Answer 6

1. Loss aversion: people feel the pain of loss stronger than a gain
2. Reference point: evaluate outcomes relative to a reference point
3. Diminishing sensitivity: as the size increases, the impact of loss or gains decreases
4. Probability weighting: tend to overweight low probabilities and underweigh high one
5. Framing effect: how a choice is presented influences the decision

Question 7

What are the implications of behavioral theory in the sense of new venture creation? (Lecture 2)

Answer 7

When performance is above aspiration level this decreases risk

Performance is below aspiration level this increases risk

Question 8

How does limited and large resource size effect risky expansion? (Lecture 2)

Answer 8

Limited resources: leads to risk aversion

Large resource: lead to risk taking

Question 9

What are the causes for liability of smallness? (Stinchcombe, 1965)

Answer 9

1. Difficulties raising capital
2. Tax work against small firms
3. Goverment regulations weigh more heavily on small firms
4. Disadvantages when competing for labor

Question 10

What are the obstacles to survival for new firms? (Stinchcombe, 1965)

Answer 10

1. Product differentiation
2. Technological barriers
3. Licensing and regulatory barriers
4. Barriers to entry due to vertical integration
5. Illegitimate acts by competitors
6. Experiental entry barriers