Group 20 - Balancing Bets & Losses, Exploration and Exploitation in the video...
Trust Drives Success of New Year's Eve Party
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Bocconi University - Milan
Bachelor in international economics,
management and finance
Creating value with near to 0 investment. The
role of trust in new business formation
Coordinating Professor: Student:
Nicola Misani Carstoiu Tudor
2012
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Table of content
1. Abstract
2. Importance of the paper
3. Findings in academic literature
3.1 Defining trust
3.2 Link between trust & performance
3.2.1. Effects of interorganizational and interpersonal trust on
performance
3.2.2. The relationship between trust and team performance
4. The business case
4.1. Event's history
4.2. The business model
4.2.1. Marketing strategy
4.2.2. Operations management
4.2.3. Financial analysis
4.3. Key success variables
4.4. The specifics of the market
5. Conclusions
6. Bibliography
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1. Abstract
This paper aims to highlight how a new business can create value having as
foundation strong relationships based on trust both within the management team and with
other stakeholders. Interpersonal and inter-organizational trust have been widely cited as
important components of economic exchanges.
More specifically, the paper reviews some of the literature connected to trust, at it's
different levels and typologies, and relates it to the subject of this thesis, a New Year's Eve
party that took place in Arad, Romania at the end of every of the last 6 years, with focus
on 2011-12 party. I create a picture of the situation by presenting a history of the event, the
business model and the market, concluding with analysing what are the key success
variables focusing on the role and kind of trust necessary for the creation of a large scale
New Year's Eve party. This is done by taking as an example how a small group of high
school students managed to transform a small closed party of 30-40 guests (2006-07) into
a local event, one of biggest New Year’s Eve party of the town, 530 guests (2011-2012).
No mathematical models are used, all the insights come from personal learnings obtained
organizing the event, from behaviours observed during the organization of the event and
while the event was unfolding and off course from feedbacks received after the event.
The conclusions show that it is difficult to prove that there exists a direct correlation
between trust and the successful creation of a new business but still trust remains a
necessary condition for the creation of value, especially when there is high risk of failure
coupled with high levels of asymmetric information, fierce competition and on top of
everything being in recession hit periods as the one we are experiencing.
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2. Importance of the paper
The economic crisis we are experiencing is first and foremost a crisis of trust, so I
think that writing a final paper on such a delicate, current and important subject is in itself
very relevant. Without trust at the basis of economic exchanges, sustained off course by
proper transparent control systems on which it can develop, I think long term value
creating becomes quite impossible.
Secondly, having this direct experience by seeing and feeling the role of trust in the
organization of a large scale new year's eve party I decided to use the knowledge
gathered and put it to good use.
The research question: "What is the role of trust in new business formation?" can
give many insights in why some people choose some products/services instead of others,
especially when the risk of failure is high as in the case of the event, reasons that many
times go beyond just considering the price and/or the perceived quality of that
product/service.
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3. Findings in the academic literature
I divided this section into two parts. In the first part trust is defined and in the second
it is analysed the relation between trust and performance. Being an empirical paper I will
dedicate more space to “Business case” chapter, while in this one I will present the general
concepts related to trust and the link between trust & performance. At the end of the paper,
in the “Conclusions” chapter, I link the findings in the academic literature with the findings
about trust described in the “Business case” chapter.
3.1. Defining trust
Trust as a concept has gained a firm foothold in management and marketing
research (Garbarino and Johnson, 1999; Schoorman et al. 2007). It is multidimensional
and can be applied across different levels of analysis (interpersonal, intergroup, or
interorganizational).Trust has been generally defined as the trustor’s expectation that the
trustee is willing to keep promises and to fulfill obligations (Rotter, 1971; Barber, 1983;
Dwyer et al., 1987; Hagen and Choe, 1998). The expectation is based on the level of
competencies, honesty, altruism, and goodwill of the trustee (Barber, 1983; Blomqvist,
1997) or another way of saying it: ability, benevolence and integrity(Schoorman et al.,
2007).
Many typologies of trust have been proposed in literature (Castaldo, 2007). They
are based on single dimensions of trust (e.g. cognitive, emotional, behavioral), on a variety
of contents (and different drivers), on different analytical levels (interpersonal,
interorganizational), and on various levels of consistency (e.g. thick vs. Thin), producing a
wide range of concepts.
Trust is especially important when the trustor is exposed to a risk. Indeed, trust can
also be defined as the willingness to take risks, or the willingness to be vulnerable to
another party. In any case, a typical aspect of trust is that it allows risk taking in a
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relationship (Mayer et al., 1995). Trust is considered crucial when there is perceived risk
and other control systems are lacking .
According to Schoorman et al..,2007, trust is an aspect of a relationship and not
dispositional and “trait-like”. The majority of literature that has followed accepted this view,
so we will also consider that trust is based in relationships.
The importance of multilevel and cross-level perspectives is gaining increasing
attention in organizational research. Just as perceptions about an individual’s ability,
benevolence, and integrity will have an impact on how much trust the individual can
garner, these perceptions also affect the extent to which an organization will be trusted.
At higher levels of analysis, such as between organizations, viewing the trustee in
terms of ability and integrity seems to be well accepted. Benevolence is defined as the
extent to which a party is believed to want to do good for the trusting party, aside from an
egocentric profit motive. At macro levels of analysis, however, benevolence has received
little attention. All three factors of ability, benevolence and integrity can contribute to trust in
a group or organization and both can garner trust from other parties and trust other
parties(Schoorman et al., 2007).
The important implication of the addition of ability to the antecedents of trust is that it
creates a framework of trust that is domain specific. Trust being domain specific allows for
the multifaceted and multiplex relationships about which Lewicki et al. (1998) raised
concerns. For example, it may be appropriate to trust a colleague to do a good job
collaborating on a research project but to not trust him/her to do a good job teaching your
class in your absence. The difference in the level of trust within the same relationship is a
function of the different abilities across different domains. The skills required to present
and interact effectively in class differ from those necessary to do research.
Williams (2001) has pointed out that affective responses influence how people
evaluate their level of trust in another party. Similarly, Jones and George (1998) have
argued that emotions and moods provide people with information on how they are
experiencing trust. Dunn and Schweitzer (2005) found that emotional states—even
unrelated to the trustee or the situation—have an effect on trust. Weber, Malhotra, and
Murnighan (2005) have shown that emotional attachments can cause a trustor to take a
sudden risk not warranted by the available evidence.
Trust is the “willingness to take risk,” and the level of trust is an indication of the
amount of risk that one is willing to take. Clearly, control systems are an alternate
mechanism for dealing with risk in relationships. Recently, several scholars have
speculated about the relationship between trust and control systems in dealing with risk
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(McEvily et al., 2003; Sitkin & George, 2005). Mayer, et. al.,2007, don't see this
relationship as mutually exclusive. On the contrary, when the risk in a situation is greater
than the trust (and, thus, the willingness to take risk), a control system can bridge the
difference by lowering the perceived risk to a level that can be managed by trust. For
example, in an organization that has a culture of “open book management” and
transparency in numbers (a control system), the levels of perceived risk may be lower.
There is a greater opportunity to empower employees by trusting them to manage larger
budgets and for employees to trust the supervisor that performance-based compensation
is fair.
However, there is an important caveat that must be noted. If there is a very strong
system of controls in an organization, it will inhibit the development of trust. Not only will
there be few situations where there is any remaining perceived risk but trustworthy actions
will be attributed to the existence of the control system rather than to the trustee (cf.
Strickland, 1958). Thus, a trustee’s actions that should be interpreted as driven by
benevolence or by integrity may be viewed simply as responses to the control systems.
The use of control systems is how agency theory proposes dealing with risk management,
and this does not foster the development of trust.
3.2Trust and performance
3.2.1.Effects of interorganizational and interpersonal trust on performance
According to Zaheer, et. All.,1998, eased negotiation and reduced conflict are
indeed outcomes of trust, yet the pattern of findings differs sharply across levels.
Interorganizational trust emerges as the ovverriding driver of exchange performance,
negotiation, and conflict, whereas interpersonal trust exerts little dirrect influence on those
outcomes.
The most striking finding is that interpersonal and interorganizational trust operate
quite differently within relational exchange. Interorganizational trust is associated strongly
with lowered cost of negotiation and conflict, but interpersonal trust is not related to conflict
and showed a seemingly anomalous positive association with negotiation costs.
Zaheer, et. all., 1998, don't want to suggest that the social component of exchange
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is unimportant. On the contrary, their data indicate that interpersonal trust, in conjunction
with interorganizational trust, plays a unique role in relational exchange, over and above
the effects of governance structure. However, they suggest that when exchange is carried
out between organizations with an institutionalized pattern of dealings, the
interorganizational context becomes more prominent.
3.2.2. The relationship between trust and team performance
Team performance(as a team, rather than as task-competing entity) can be
evaluated on basis criteria such as evidence of continuous problem solving, the continual
search for alternative solutions, continuous improvement of quality of outputs, error and
wastage rates, productivity improvement, etc. (Kirkman and Shapiro, 1997; Manz and
Neck, 1997). These high level and continuous goals require the intensive co-operation that
is produced by trust. Thus, trust becomes a kind of “hygiene factor” for team performance
– a necessary underpinning but not sufficient in itself. Team performance will not improve
simply because trusts exists, nor will it always improve when trust is present within team
relationships. There are situations, for example, where an excess of trust causes a lack of
questioning,of creative criticism(Manz and Neck, 1997). However, it is a hygiene factor in
that, in a collective effort that is not based on trust, team members will be unable to explain
their ideas fully and sincerely, unable to display their actions intimately and will refrain from
helping others willingly(Sitkin and Roth, 1993; Jones and George, 1998). Consequently,
the required synergy will not be generated and the performance will be less than desired.
According to Erdem, et. All. 2003, although there is a range of factors which
determine team success in terms of high levels of performance(training, technology,
motivation etc.) - trust can be seen as a necessary underpinning. Thus, infrastructure
components of policies and procedures relating to selection, training, development,
supervision, etc., should recognise that building trusting relationships is a key part of the
management agenda.
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4. The business case
I divided this chapter in four main parts. First, to better understand the entire
development of our model a short history is presented. Second, as the main part of this
chapter and thesis, I analyse the 2012 event business model going in debt in the
marketing, operations and financials aspects. Third, the key success variables are
presented and last but not least I look at the market in which our event operated.
4.1. Event's history
Everything started 6 years ago in high school when me and my high-school friends
wanted to celebrate New Year’s Eve together and decided to make our own party. Me and
other four close friends, namely Georgiana Burtea, Raluca Burtea, Radian Carp and Alin
Grelus(picture 1: from now, the organizing team) took initiative and organized our first
party together.
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For 2006-2007 New Year's Eve, after raising money from our group of friends, we
rented an empty apartment and with the rest we bought all other things needed for a
proper New Year's Eve party. Even though a small party(30-40 people, mainly because of
capacity constraints because demand still existed), it was a great success and made our
group even more cohesive. Through the year of 2007 our friendship ties became even
stronger and our group even larger, mainly thanks to the contest “Teenfest – Highschool of
the year” in which “Vasile Goldis” high school, our high school now national college,
became champion (picture 2&3).
Picture 2: 2007.Our fans and colleagues preparing for a competition
Picture 3: 2007.After winning our first “Teenfest – High School of the year” title
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At the end of 2007 we, the organizing team, managed to rent a pub called “My Way”
and reached maximum capacity (60-70 people) very fast. The model was the same: our
friends paid a fixed and equal fee in which everything was included (at least until we ran
out of some products). Anyway, the idea was that all money was invested in the
organization of the event and the atmosphere was very trustful. These were the sweet high
school years in which we gathered quite often, we had many parties and contests and we
loved to be in the spotlight. These were the years when strong friendship bonds were
created (picture 4).
Picture 4: 2008. After winning for the 2nd
time the “Teenfest – Highschool of the year”
competition
We were making us a reputation as the teenagers who know how to have a good
time, especially through dancing, so our parties started to became known by the high
quality of fun and by dancing all night long. Furthermore, many people admired us for the
cohesiveness of our group. At the end of 2008 we were lucky to be given a big empty
former shop right near the city hall. Now the capacity was around 120 but we didn't had
any problems to fill it. Still, the problems of rising demand started to show off, problems like
increased complexity with logistics (supply of beverages and food during the party) or
communication with our guests.
The end of 2009 brought something new, exactly what we needed to expand. An
acquaintance of ours asked us if we don't want to organize the 2009 in collaboration with
her. She recently opened a venue specially for the organization of events (weddings,
birthdays etc.). She knew that we had a great capacity to mobilise and gather people and
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she proposed us to do this for the 2009-2010 New Year's Eve party. Even though the
location of the venue was problematic because it was 15km outside Arad, in a village
called Sofronea, we accepted the challenge of organizing the party there. Our
responsibility as organizing team was limited to gathering the people and providing a DJ,
the rest being made by the venue's owner. We managed to gather a bit more that 300
people, which we considered to be a great success especially because the venue was
outside Arad. After this party we realised that we could create great parties and also earn
something for our effort.
We organized the 2010-2011 party in the same place, at the “Safir” venue in
Sofronea, the demand became again greater than the supply, making us to stretch the
capacity of the venue at maximum, making room for 470 people even though the entrance
fee raised from the previous year(from 100Ron to 120 Ron, from aprox. 23.3€ to 28€). This
time we couldn't say anymore that all the guests were our friends and acquaintances, but
still we managed to have a nucleus of friends of 100-150 people on which we could attract
also the others. Many people stayed until early in the morning, most feedbacks were
positive but still we encountered some problems that were exogenous to us. Firstly, our
party could not grow further because of the fixed capacity of the venue. Secondly there
were queues created at the bars, poor quality and limited quantity of food and some
alcoholic drinks. For the latter argument even though those problems did not depend on
us, asymmetric information made that in the eyes of the guests we were the ones
responsible for the problems because we were had the direct interaction with them.
The event was growing and changing along with us. Interesting dynamics were
unfolding because as we grew up, from high school to student period, and also our target
market changed accordingly.
During 2011 we, the organizing team, discussed several times how we can solve
the problems of the further year and what should be our next step. We reached to the
conclusion that, because of the reasons described above and because we wanted to take
full responsibility and control for the entire event, so we hoped to find a venue that could
meet our needs of big capacity and total freedom to organize the event as we want. This
was a sensitive issue because most of the owners of venues/restaurants/pubs don't just
rent you the place and give you total freedom, they usually rent it with specific
conditions(e.g.: they want to prepare the food and be paid for the food, limited amount of
alcohol can be brought from external suppliers etc.). Considering this, we had in mind only
one place that could meet our needs, and that place was the Expo Arad
International(picture 5, picture 6), the place where all kind of exhibitions are made during
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the entire year. This was the biggest event venue available in our city and we managed to
rent it. As a consequence of the great success of 2011-2012 party, in August 2012 we
signed the rental contract with Expo Arad International also for de 2012-2013 New Year's
Eve Party.
Further, I will go deeper in analysing the business model of the 2011-2012 event,
the first large scale event in which we took full responsibility for the all aspects related to
the creation of the party.
Picture 5: Expo Arad, outside view
Picture 6: Expo Arad, inside view. The way it was arranged for the 2011-2012 New Year's
Eve party
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4.2. The business model
The event I analyse was named "Revelionul Distractiei"(approximate translation:
New Years Eve Fun Party) and took place from 8pm of 31 December 2011 to 6am of 1
January 2012 (picture 7) at Expo Arad International. We consider that the event was a
success: our huge dance floor was always full of energetic people (picture 8), many group
dances were done (picture 8, picture 9), most verbal feedbacks were very positive, we
didn't run out of any critical items, no big queues on bars, we had a full house and profit
margin was satisfying. With a total of 530 guests (out of which 500 paid the entrance fee,
others being on protocol) we managed to create the biggest New Year's Eve party of our
town.
In a nutshell, the idea behind the 2012 business model was to create a New Year's
Eve party in which one finds all the key elements that a great ,large scale, party must
have: energetic people eager to have a great time, friends around at the table, music
equipment, spacious dance floor, a very good DJ that can feel what kind of music has to
be played at every stage of the party, good lights with different effects, food and drinks. All
this at a minimum cost and no initial investment from the organizing team's side.
Picture 7: Our commercial add
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Picture 8: A picture tells a thousand words:Dance floor full and guest having a great time
Picture 9: Our guests dancing on Romanian National Music
Further, I will separately analyse the marketing, operations and financial aspects of
our event.
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4.2.1 Marketing strategy
Organizing parties is not an easy task, especially when we are talking about 500+
people. There is a high variability in preferences (people listen to different kind of music,
eat different kind of food, consume different kinds of drinks, some prefer small others
prefer large parties etc.). A critical element is the existence of a high viral effect, meaning
that people usually go where their friends go so attracting groups of friends was one of our
main goals (friends of friends of friends). One advantage was exogenous and came from
the landscape of our city, Arad, which is a midsize city (170000 inhabitants) large enough
for making big parties but small enough for many people, especially those of the same
generation, to know each other thus creating a diffuse web of relationships. As mentioned
above, we focused in attracting groups of friends, making possible for different groups to
enjoy spending the New Year’s Eve together and also having fun with many others that
they probably didn't know. This has a twofold advantage: Firstly, when going to the last
party of the year almost anyone prefers to go together with some friends but still does not
want to know all the people. It can always be interesting talking and having fun also with
people you never knew before. Secondly, if one wants to organize a well done party only
with its close friends, besides the large amount of effort in gathering people and buying or
preparing everything needed, the costs are much higher because no economies of scale
can be achieved in small groups. We implemented this strategy by approaching friends
that have the potential to mobilize, asking them to give us a hand in persuading their group
of friends to come and party with us. We didn't want to simply create cost advantages for
groups because we considered it to be a weak approach and also one that could foster
perverse effects of creation of fake groups just for receiving the discount. Even though we
offered some non financial incentives to these persons, most of the time just the fact that
we asked them a favour was enough for them to help, this signalling strong trustful
relationships. This approach also helped us to save a lot of time because one person was
raising money for many others, thus making our work much simple. We had many
situations when one person payed for 20-30 of his friends. This also signalled the trustful
atmosphere in which the party was born.
Furthermore, our target - youth ranging from 18 to 30, mostly students - is quite
cost sensitive so since we aimed at a large party we also had to consider an entrance fee
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as small as possible betting our cards on economies of scale (the entrance was 100 Ron,
or approximately 23€, which was one of the lowest New Year's Eve party fee with all things
included). We used three complementary methods to reach the exact target we wanted,
both with no costs involved. Firstly, the old fashion, and I would add also most effective,
“mouth to mouth” advertising method. We told to almost anyone we encountered about our
event and asked them to spread the work. Secondly, we created a Facebook event, invited
all our friends (the biggest majority being in our target range) and encouraged others to
invite as well (picture 10). This event had two purposes: First, it was a complementary way
of spreading the word and second, it was our main communication platform. Thirdly, we
made some flyers and posters and gave/put them in some strategic points frequented
mainly by our target market ( e.g. universities, malls, clubs). We didn't spend any money
on marketing, except the marginal cost of printing. We done ourselves the flyers and
posters and also we spread them around. Moreover, even the name ( “Revelionul
distractiei = New Year's Eve Fun Party”) and the picture in the background with people
having fun helped us to target age range we were looking for.
Picture 10: 223 clicked “going” and 242 clicked “maybe”. Still, many people that actually
attended didn't see the facebook page and also many people that clicked "going" or
"maybe" on facebook didn't actually attend which can tell us that "mouth to mouth"
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recommendations were also extremely significant. Still, the facebook event remained our
platform for communication and a very good complement for the "mouth to mouth"
publicity.
4.2.2 Operations management
This area alone could easily create the difference between a great and a disastrous
party. Finding the right venue (capacity, location, conditions, rental price) was a critical
operations decision. Our capacity of mobilization, proven by our credentials for previous
parties done, counted a lot in the acceptance of the owner of the venue in collaborating
with us, because in the previous years there were various attempts by third parties to
organize the New Year's Eve there out of which one failed and another one had big
problems with customers satisfaction (food finished very early, beverages available were
not corresponding with those on the menu). Because of people's association of the place
of the event with previous years, this created some negative externalities for us and for the
owner, externalities which we managed to overcome. This time the location didn't create
problem anymore because Expo Arad International is located at 5 km distance from the
city centre, just at the periphery of Arad.
One of the operations issues was raising the money considering the fact that we
had to meet with almost every guest in person and take him his or her full name. We
managed this with the group marketing strategy described earlier, meaning that many of
our friends helped us by raising the money from all their friends and meeting with us just
when they had the group completed. Another approach was that we were organizing
meeting for money collection 2-3 times a week usually at a mall near the center of the city.
This two ways saved us a lot of very precious time and even money in terms of fuel
consumption because meeting individually with all would have been a mess.
Having in mind that we, the organizing team, are organizing the event once a year
we adopted a clear “buy” strategy, outsourcing most of the elements that were needed for
the party: renting the venue, buying the drinks and the food, renting the music instruments
and the decorations. One of the most encountered logistics problems in large scale parties
is how to find a balance between making sure that everyone has the chance to drink and
eat what he or she desires (and is on the menu) and keeping control of the money spend
on food and drinks to still be able to reach at least the break-even point. This doesn't count
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just for economic and equity reasons, but also for health and safety reasons. For example,
when giving free and unlimited access to alcohol, a small group will consume almost
without limits and this can create health and safety problems. Health problems, because
out of 530 people inevitably some of them will drink more than recommended and this can
led them to do stupid things and even become aggressive so, beside the very negative
picture, they could create safety issues inside the party. It's true that just one or few “black
sheep” can hinder or destroy the well being of many others. So it's clear that even though
we said everything is included there were some products who were more favoured (and
expensive) and we had to be careful with their distribution. Here is the package we offered:
“The package for New Year's Eve costs 100 Ron and contains the following:
Open Buffet + Drink ***further details below****
*As much as you desire:
Coca Cola/Fanta/Sprite
Normal and Mineral Water
Wine
Beer
Coffee
Champagne
+ Voucher of 50Ron value – included in the 100Ron entrance fee
*Price list of drinks: [not relevant for the purpose of the paper]
*Open buffet: [types of food in composition, not relevant]
*The number of people that can sit on a table varies from 4 to 12, according to your
prefereces
*500 parking places”
Our model was always based on self-service so we had to find a balance between
making almost everything readily available and distributing the product in an equitable and
economically sustainable manner. The principle beside this is that everyone is present
there to have a great time, so we didn't want anyone that was working all night long. We
solved this issue by creating clear responsibilities by doing the things that had to be done
on shifts. We had three girls that were at the reception in the first hours(picture 11), two
persons that from time to time would clear the rubbish off the tables, other two that on
rotation would help the bartenders(picture 12), other two that were responsible for
refreshing the open buffet(picture 13). The only fixed positions were those of the
bartenders but we gave also to the some freedom as the party approached the end.
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Picture 11: The reception, divided in 3 alfabetically ordered lists, which drastically reduced
bottleneck problems
To make our self-service model sustainable and efficient and also solve some of the
problems encountered in the previous year we proceded in the following way: On every
table for every 5 guest there was 2l of Cola, 2l Fanta, 2l Sprite, 2l Water, a Carafe of Wine.
If any of this drinks, or the Carafe of Wine, finished they could freely just ask for more at
the bars. If they wanted to drink other kind of drinks( like: natural juice, energizers, wisky,
votka) the value of the product taken was substracted from the voucher everyone had. In
order to evoit to many people in one place, we placed the open buffet on the other side of
the room. Each guest who wanted to eat just went there and served himself/herself. When
some food items were finished or finishing, we filled them with food that we kept in a
limited access, dry and cold room. As we expected, by the end of the party many food
items finished(some food is better or more consistent than other) but the important thing
was that until the end there always was some food still available.
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Picture 12: One of the bars
Picture 13: Part of the open buffet
We used only disposable tableware for two reasons. First, we wanted to reduce the
risk of paying for broken plates or missing forks/knifes etc. Second, we had to return the
venue in the exact way we found it so it was much more simple to throw away the plastic
dishes that to wash normal dishes on the 1st
of January.
In the previous year we had some problems with queues both at the entrace and
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the bar. We solved this issue by dividing the list of names in three alfabetically ordered
categories. This reduced drastically waiting times until our guest were find on the lists. For
the bars the main measure we used was the fact we created two of them and we reduced
the number of types of products offered. We restricted ourselvees to natural juices,
energizers, red demi sweet wine, wisky & votka. We also made a table only with coffee
and beers where our guests could freely go and take serve themselves(picture 14).
Picture 14: Beer and coffee table
In the last year the guests didn't drink to much beer so we didn't bought much for
this year also. But here we had a surprise because the beer finished quite early and we
had to go and buy other because some people where complaining. This probably
happened because anyone could have taken as much as he or she wanted so some
guests took much more than one beer. Lesson learned, the beer should have also been
distributed through the bars, in this way any guest could ask just for one beer at a time
thus making the distribution more smooth. We learned this lesson with wisky and votka.
We decided not to give more than 100ml of wisky or votka to any guest at a time thus
making him or her come again if he or she wanted more. Even though there were some
unhappy voices, we know that this smoothed the distribution process and also protected
people from drinking excesively. As a matter of fact, this year we didn't see or hear of
anyone that was drunk, and this happens often at New Year's Eve parties, especially when
there are more than 500 people.
At midnight at the crossroad of the years we prepared 2 tables full of champagne
glasses(picture 15), invited the guests to go outside and to take on their way a glass of
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champagne.
Picture 15: One of our friends helping us in filling all the plastic glasses with champagne
At the end of the party, we gave back all the drinks that were not opened, who
wanted took the food that remained. All in all, from the point of view of operations we think
the wast majority of processes went smooth and further changes would only be
incremental or “kaizen” ones, because our model is working. The focus is not on top
quality products and service, but on top quality fun affordable for almost anyone. Next, I
will go into the financials.
4.2.3 Financial analysis.
As stated even in the title, value was created with practically no investment beside
our time and dedication. We had no fixed assets or initial capital. We had to make four
down payments two weeks before the event: venue (2000RON), catering (4000RON),
sound (1000RON) and decorations (1000RON) but we already managed to collect enough
money from our future guests in order to cover for these payments. Drinks are easily
available in many deposits/supermarkets/speciality shops and so on so we didn't had to
give any assurance because it's could be bought with simple arm's length transactions on
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the market. The down payment for the venue on 15th
of December was practically our
signal of “full speed ahead”, because in the unlikely scenario of not having enough guests
at that time and not seeing too much potential demand that was the point where we could
still cancel everything without financial losses, but off course with huge losses in credibility.
The capital collected was used for the organization of event and the remaining profit was
distributed to the organizing team in equal share.
We don't have a balance sheet because we don't have any kind of assets or
liabilities, from a financial perspective every New Year's Eve party is an isolated project
with respect to the other. Here is a rough income statement of the event (1 Euro = 4.3
RON):
Revenues: 50600 RON (506 persons * 100 RON, 11750 EURO)
Costs: 42150 RON
Drinks (Alcohol+ Non alcohol): 15578 RON
Retour on drinks (drinks not consumed which were returned): (3663) RON
Catering (food) : 10500 RON
Renting of the venue: 10000 RON (5 Euro - 21.5 RON/Person, with a discount
of 200 EURO-879RON because of the high number of participants)
Sound & DJ: 3500 RON
Decorations: 1935 RON
Personnel: 1000 RON
Miscellaneous: 3300 RON
Profit: 8450 RON (1950 EURO)
In the majority of cases, when organizing any type of event the biggest majority of
capital inflow comes in the period prior to the event, in our case in the last two weeks. We
needed that capital outflow did not surpass capital inflow so we postponed payments as
much as we could. We did this also because we had to wait and understand what will be
our approximate final number of guests so we can order the drinks and food accordingly.
Another fact that decreased risk was that most of the cost items were variable,
depending on the number of persons we had: The rent of the venue, the drinks (what
remained could be returned), the food, and even the decorations. The only fixed costs
were the “sound and dj” and “personnel” items. As we can see from the income statement,
the biggest outflow was with drinks (15578 RON) so, besides the health and equity
aspects, it makes perfect economic sense that even though everyone had access to all the
kinds of drinks we included in the menu we distributed them with care. Let's look now at
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some measures of competitive advantage:
Return on investment:
ROI= EBIT / (Fixed Assets + Working Capital)
This could further be divided in value creation and value capture:
EBIT / SALES (Return on sales) * SALES / (Fixed assets + working capital)
Return on sales: ability to create profit. (Value captured)
Cap turnover: ability to generate sales. (Value created)
Calculating value capture is straight forward, our EBIT being the profit because we
considered our party private and didn't had to pay any additional taxes besides the ones
included in the prices we paid. Off course, there were no interest payments because all the
event sustained itself.
Value capture or return on sales= EBIT (profit) / SALES (revenues) → 8450 RON / 50600
RON = 16.7%
Considering the low cost of the entrance, the huge variability in demand and the
very strong competition this is a very good measure.
In our case is quite hard to obtain a real value for value creation because we didn't
have any fixed assets and our working capital was all obtained from the inflows. If we
consider that all capital inflow would have come just in the last weeks before the event
then we would have needed at least 2000Ron for renting the venue and another
1000RON/each for some down payments to the catering, sound and decorations firm. So,
we could estimate a working capital of 5000Ron. Then:
Value creation or capital turnover=SALES / WORKING CAPITAL → 50600 RON / 5000 =
1012%
This probably is a bit unrealistic and it is linked with the fact that our potential
business is still small and we don't need almost any initial investments.
Thus, the return on investment is equal to = 0.167 * 10.12 = 1.69(169%)
This, off course, is a very positive value for the return on investment that points out
the fact that, compared to it's small size as a potential business, our event has a strong
competitive advantage.
Next we will analyse the variables that determined the success of our event.
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4.3Key success variables
From my perspective, the key variables that brought success to our model are
relationships (network), trust, flexibility, efficiency and the unique style of our group of
friends.
First and foremost relationships because without knowing a lot of people (many of
which attended events from previous years) it is almost impossible to put the party
together because of asymmetric information and a lack of credentials.
Secondly, trust, which was built in time through the relationships and past
performances. The people that knew us well and were present also to past years parties
didn't ask to many quality-related questions. Furthermore, the people that were attending
didn't have any problem to give us the money without receiving any receipt in return. They
just knew that their money is safe with us and we will put it to good use. We also received
a lot of trust from the owner of the venue who understood that most of the capital is raised
just 2-3 weeks prior to the event and we didn't had any pressure of paying consistent
amounts prior to the event. We just had to make a down payment of 2000 RON 2 weeks
before the event in order to confirm that we are doing it, otherwise we could just leave
without penalties.
Third, flexibility, which played on different dimensions. On one hand, because of the
huge volatility in demand of this kind of events (the majority of people come in the last 2
weeks, with an exponential increase in demand as the event gets closer and closer) we
needed a lot of flexibility with the food and drinks providers but also with the owner of the
venue (number of chairs and tables needed). On the other hand, we granted a lot of
flexibility to our guests by customising their tables according to their will in order for them
to sit exactly with the persons they wanted to. This basically created the effect of party
within the larger party, because many groups of friends were alternating from having fun
together within their own group to also joining the others as a whole.
Last but not least, the unique style of our group of friends I think remains the engine
of our party or at least was the element that was mostly responsible for our party's
popularity. By this I mean the fact that our group at any party was always bringing a lot of
positive energy, ready to dance and have a good time, open to a variety of music genders,
basically anything on which one can dance. I think that the main reason why someone
wants to come to our parties is because we manage to create an environment where most
of the people dance until they run out of energy thus having a lot of fun. We also made this
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party so that anyone can have fun, even the organizers, so, as stated earlier, the event
was mainly based on self-service.
Causal ambiguity exists when it is difficult to understand perfectly how resources
lead to advantage and makes it difficult to duplicate even if one can identify the resources
in place. It plays a role also in our business model because part of the competitive
advantage achieved cannot really be explained by specific actions taken by the organizing
team. Another source of competitive advantage can be our unique historical conditions.
4.4. The specifics of the market
First of all, being a service, the market is very local. The majority of the potential
clients live in the city or in its outskirts. Hence, it is pointless to waste time, energy and
resources to publicize the event in other cities, because for the biggest majority of
prospective clients it is highly improbable that they would come to a New Year's Eve party
if they live farther than 20-30 kilometres from the location of the event.
Second, there is a high degree of segmentation: by age, by price, by food served,
by music played etc. Consequently, in doesn't make sense to compare our party with, for
example, a party of a selective restaurant (e.g. Ratio Beach) that has 200 seat capacity,
which puts focus on serving a variety of dishes and which mainly targets families. Another
comparison that wouldn't make sense is the type of party that we did 3-4 years ago,
namely a typical high-school party where most people know themselves (probably most
guests are from the same high-school), were the recruiting process was done in a highly
selective manner to not attract outsiders.
As stated earlier, in the marketing strategy, the size of our city shapes also the
market, because the options cannot be that numerous so most people can have a quite
good idea of what kind of parties are organized in different places. This reduces
asymmetric information and makes our work easier(and also the work of other organizers),
because we don't have to explain to much what target we aim, what kind of party are we
organizing, what will we offer and so on.
We could benchmark ourselves with clubs or with the venue where we organized
our last 2 parties, the Safir venue in Sofronea. For example, New Year's Eve parties were
organized by the “La Mouche Society Club” -most established club in our city- and by
“Club Karma” - a newly opened club- both with a capacity around 300-350 places(at
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tables). They both ran out of capacity before Christmas, and both had all inclusive offers,
at 120RON end respectively 140RON (party also in 1st
of January). From what we heard,
the first was a great success while the latter is said to have had big organizational
problems.
Still, our best comparison is with Safir venue which practically almost identically
copied our model, putting the price at 99RON, in comparison with our 100RON price. The
organizers from Safir venue launched the event some hours after we launched our event
on facebook and they also benefited of some positive externalities because, especially at
the beginning, many people thought that we did the party in that place. Having a lot of
respect for the organizers at Safir, we didn't respond in any way to their challenge and just
continued to mind our own business. In the end, they had around 320-340 guests, 60-80
guests less than a year earlier, far from being a full house, even though the price was
considerably lower that last year's price(from 120RON to 99RON). Sadly, there was also a
fight that created major disruptions in the proper development of the party and probably
created a negative image for parties to come. The things mentioned above clearly signal
that we, the organizing team, managed over the years to create a competitive advantage
based also on differentiation because we always had a nucleus of guests that came every
year and that gave the tone of the party. It is highly likely that this element protected us
also from conflicts like the above mentioned, because when you manage to have a
nucleus of guests that are quite cohesive, very energetic and with a positive attitude all
these are transmitted to all the guests.
Here I finish explaining all the business case and further I will conclude by linking
theory with practice.
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5. Conclusions
As mentioned in the theory part, trust is considered crucial when there is perceived
risk and other control systems are lacking. Indeed, when choosing the place where you
spend your New Year's Eve party usually implies saying no to all others and this decision
carries with it a considerable amount of risk. The fact that so many people decided to
spend the last night of the year with us even though many asymmetric information were
present many implies that we enjoy a good amount of trust from many of our guests. As a
matter of fact, at least 50% of the guests spent at least on other New Year's Eve Party with
us. It is also evident for us that trust is “trait like”, thus based in relationships. We also
enjoyed a good amount of trust at the organizational level, especially with Expo Arad
International, the venue owner. Their control systems were very light and they given us a
discount at the end even though they didn't have any immediate incentive to do so, only
probably for establishing a more trustful relationship that can foster great collaborations
also for the years to come.
Benevolence and integrity have a very important role for establishing the trustful
relationship but also ability is critical, and I personally think that the trust received from al
parties was mainly because of our ability to put together a large scale event like this.
Actually, the trust received from many of our guests was correlated with our willingness to
take risk in organizing this event. We were assured that we will get help in spreading the
word because a event like this is a collective effort, even though the organizing team was
the one that has taken care for the actual organization of the event.
As for the relationship between trust and performance our findings are in line with
what Zaheer, et. All. found, meaning that our group as a whole was the one who was
trusted, individual trust playing a marginal role. It was quite evident that trust at the
organizational level led to eased negotiation and reduced conflict. For example, one of our
critical components was getting a got deal for renting the event and we obtained that with
almost no negotiation and conflict was never present. I felt that the owner of the venue felt
that the financial component was only a part of the deal, one more important being the
positive externalities that occurred because we organized an event of high quality. The
organization team as a whole had created the competitive advantage that the event now
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enjoys.
Trust was indeed a necessary underpinning that fostered team performance in the
organizing team. We think that the level is exactly the right one because we also always
double check any information, so excess of trust didn't create any problems yet. Very
powerful economies of learning were observed over the years. These led to reduced costs
and increased quality through faster coordination, more effective separation of tasks for
every member of the team and improved processes.
In conclusion, I observed that trust has a very important role in the creation of our
event and implicitly in new business formation because it goes over the imperfection of
contracts, it gives great credentials and in nurtures long term sustainable relations. Trust,
as an essential element, combined with a big network of contacts and a good strategy, is
one of the main reasons why our event thrived in an extremely competitive environment
with minimal marketing costs compared to the average and is facing positive developing
prospects.
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Zaheer, McEvily, Perrone. 1998. Does trust matter? Exploring the effect of inter-
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Erdem, Ozen, Atsan. 2003. The relationship between trust and team performance.
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