Chapter 3 Entrepreneurial Strategy: Generating and Exploiting New Entries © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Learning Objectives • To understand that the essential act of entrepreneurship involves new entry • To be able to think about how an entrepreneurial strategy can first generate, and then exploit over time, a new entry • To understand how resources are involved in the generation of opportunities • To be able to assess the attractiveness of a new entry opportunity 3-2 Learning Objectives • To acknowledge that entrepreneurship involves making decisions under conditions of uncertainty • To be able to assess the extent of first-mover advantages and weigh them against firstmover disadvantages • To understand that risk is associated with newness, but there are strategies that the entrepreneur can use to reduce risk 3-3 New Entry • Includes: • New product in an established or new market • Established product in a new market • A new organization • Entrepreneurial strategy • Set of decisions, actions, and reactions that generate, and exploit, a new entry over time 3-4 Figure 3.1 - Entrepreneurial Strategy: The Generation and Exploitation of New Entry Opportunities 3-5 Generation of a New Entry Opportunity • Resources • • • • • Inputs into the production process Source of competitive advantage Basic building blocks to a firm’s functioning Can be combined in different ways Provide capacity to achieve superior performance when they are: • Valuable • Rare • Inimitable 3-6 Generation of a New Entry Opportunity • Creating a resource bundle that is valuable, rare, and inimitable • Entrepreneurial resource • Ability to obtain, and recombine, resources into a bundle that is valuable, rare, and inimitable • Drawn from the unique experiences and knowledge of the entrepreneurs • Market knowledge • Information, technology, know-how, and skills that provide insight into a market and its customers 3-7 Generation of a New Entry Opportunity • Technological knowledge • Provides insight into ways to create new knowledge • Assessing the attractiveness of a new entry opportunity depends on: • The level of information • Willingness to make a decision without perfect information 3-8 Generation of a New Entry Opportunity • Information on a new entry • More knowledge ensures: • Entrepreneur starts from a position of less ignorance • Less time is spent on information search • Window of opportunity: Favorable environment for entrepreneurs to exploit a new entry 3-9 Generation of a New Entry Opportunity • Comfort with making a decision under uncertainty • Likelihood that the window of opportunity will close leads to the dilemma of choosing between • Error of commission: Negative outcome from acting on the perceived opportunity • Error of omission: Negative outcome from not acting on the new entry opportunity 3-10 Figure 3.2 - The Decision to Exploit or Not to Exploit the New Entry Opportunity 3-11 Generation of a New Entry Opportunity • Decision to exploit or not to exploit the new entry opportunity • Assessment of a new entry’s attractiveness 3-12 Figure 3.3- Factors That Influence the Decision to Enter the Market Now or to Delay Entry 3-13 Entry Strategy for New Entry Exploitation • Environmental instability and first-mover (dis)advantages • Firm performance depends upon the fit between external environment and resources • First movers are unaware of key success factors • Emerging industries 3-14 Entry Strategy for New Entry Exploitation • Demand uncertainty: Difficulty in estimating: • Potential size, growth, and the key dimensions along which a market will grow • Technological uncertainty: Difficulty in assessing whether: • The technology will perform • Alternate technologies will emerge and leapfrog over current technologies • Adaptation • Persistence and determination can inhibit the ability to adapt 3-15 Entry Strategy for New Entry Exploitation • Customers’ uncertainty and first-mover (dis)advantages • Uncertainty for customers • Difficulty in accurately assessing whether the new product or service provides value • Overcome customer uncertainty by: • Informational advertising • Highlighting product benefits over substitutes 3-16 Entry Strategy for New Entry Exploitation • Creating a frame of reference for potential customers • Educating customers through demonstration and documentation • Lead time and first-mover (dis)advantages • Lead time • Grace period in which the first mover operates in the industry under conditions of limited competition 3-17 Entry Strategy for New Entry Exploitation • Lead time can be extended by: • • • • Building customer loyalties Building switching costs Protecting product uniqueness Securing access to important sources of supply and distribution • Switching costs: Must be borne by customers if they: • Stop purchasing from the current supplier • Begin purchasing from new supplier 3-18 Risk Reduction Strategies for New Entry Exploitation • Risk • Probability, and magnitude, of downside loss • Derived from uncertainties over: • Market demand • Technological development • Actions of competitors • Strategies to reduce uncertainties • Market-scope strategies • Imitation strategies 3-19 Market Scope Strategies • Scope: Choice about which customer groups to serve and how to serve them • Narrow-scope strategy • Offers small product range to a small number of customers to satisfy a particular need • Focuses on: • • • • Producing customized products Localized business operations High level craftsmanship High-end of the market 3-20 Market Scope Strategies • Broad-scope strategy • Offers range of products across different market segments • Helps gain better understanding of the whole market • Opens the firm up to many different “fronts” of competition • Reduces risks associated with market uncertainties • Increases exposure to competition 3-21 Imitation Strategies • Copying practices of other • Advantages • Help develop skills necessary to be successful in the industry • Provide organizational legitimacy • Reduce costs associated with R&D • Reduce customer uncertainty over the firm • Make the new entry look legitimate from day one 3-22 Imitation Strategies • Types of imitation strategies • Franchising • Acquiring a “proven formula” for new entry from a franchisor • “Me-too” strategy • Copying exist products and attempting to build an advantage through minor variations 3-23 Risk Reduction Strategies for New Entry Exploitation • Liabilities of newness • Negative implications arising from an organization’s newness • Arise from: • Costs in learning new tasks • Conflict arising from overlap or gaps in responsibilities • Informal structures of communication 3-24 Risk Reduction Strategies for New Entry Exploitation • Assets of newness • Positive implications arising from an organization’s newness • Learning advantage 3-25