1

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

2

3

4

5

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

6

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.

7

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.

8

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

9

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

1

0

(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.

3.2 Trust 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

1

1

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.

1

2

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.

1

3

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

1

4

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

1

5

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

1

6

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

1

7

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

1

8

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.

1

9

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

2

0

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"

2

1

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

2

2

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.

2

3

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.

2

4

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

2

5

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

2

6

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

2

7

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

2

8

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.

2

9

4.3 Key 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

3

0

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

3

1

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.

3

2

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

3

3

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.

3

4

6. Bibliography

Schoorman, Mayer, Davis, 2007. An integrative model of organzational trust: past,

present and future. Academy of Management Review. Vol.32, No. 2, 344 – 354.

Castaldo, Perrini, Misani, Tencati, 2009. The missing link between corporate social

responsibility and consumer trust: The Case of Fair Trade products. Journal of

Business Ethics 84:1–15

Zaheer, McEvily, Perrone. 1998. Does trust matter? Exploring the effect of inter-

organizational and interpersonal trust on performance. Organization Science, Vol. 9,

No. 2, 141-159

Erdem, Ozen, Atsan. 2003. The relationship between trust and team performance.

Work study volume 52, number 7, 337-340.

Rust, Moorman, Bhalla, Jan. – Feb. 2010. Rethinking Marketing. Harvard Business

Review.

Matteo Giuffrida, November 2011. Sourcing, Procurement and Purchasing

Management slides– 1. Bocconi University, Management Department.

Matteo Giuffrida, March 2012. Lean & Green slides. Bocconi University,

Management Departament

R. Grant. Contemporary Strategy Analysis, 7th edition.

J. Barney, 1991. Firm resources and sustained competitive advantage. Journal of

Management, 17 (1), 99 – 120.