New Venture Strategy
Professor Settles
Course Update
• No lecture on Friday November 27th
• Exam on December 4th
• Review of Literature / Research Paper due
December 11th
Learning Objectives
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The role of opportunities, resources, and
entrepreneurs in successfully pursuing new
ventures.
The role of new ventures and small businesses in
the U.S. economy.
Three types of entry strategies—pioneering,
initiative, and adaptive—commonly used to launch
a new venture.
How the generic strategies of overall cost
leadership, differentiation, and focus are used by
new ventures and small businesses.
Learning Objectives
– How competitive actions, such as the entry
of new competitors into a marketplace,
may launch a cycle of actions and
reactions among close competitors.
– The components of competitive dynamics
analysis—new competitive action , threat
analysis, motivation and capability to
respond, types of competitive actions, and
likelihood of competitive reaction.
Recognizing Entrepreneurial
Opportunities
• Entrepreneurship – new value creation
• New value can be created in:
– Start-up ventures
– Major corporations
– Family-owned businesses
– Non-profit organizations
– Established institutions
Opportunity Analysis
Framework
Adapted from Exhibit 8.2 Opportunity Analysis Framework
Sources: Based on J. A. Timmons and S. Spinelli, New Venture Creation, 6th ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2004); and W. D. Bygrave, “The
Entrepreneurial Process,” in W. D. Bygrave, ed., The Portable MBA in
Entrepreneurship, 2nd ed. (New York:Wiley, 1997).
Question
What is the starting point for any new business
venture?
A) The resources to pursue the opportunity
B) The presence of an entrepreneurial opportunity
C) An entrepreneur or entrepreneurial team willing and
able to undertake a social responsibility
D) The creation of a business concept
Entrepreneurial Opportunities
• Opportunities come from many
sources
– Start-ups
• Current or past work experiences
• Hobbies that grow into businesses or lead to
inventions
• Suggestions by friends or family
• Chance events
• Change
Entrepreneurial Opportunities
• Opportunities come from many
sources
– Established firms
• Needs of existing customers
• Suggestions by suppliers
• Technological developments that lead to new
advances
• Change
Entrepreneurial Opportunities
• Discovery phase
– Period when you first become aware of a
new business concept
– May be spontaneous and unexpected
– May occur as the result of deliberate search
for
• New venture projects
• Creative solutions to business problems
Opportunity Recognition
Process
• Opportunity evaluation phase
– Evaluating an opportunity (Can it be developed into
a full-fledged new venture?)
• Talk to potential target customers
• Discuss it with production or logistics managers
• Conduct feasibility analysis
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Market potential
Product concept testing
Focus groups
Trial runs with end users
Characteristics of Good
Opportunities
Good Business
Opportunity
Attractive
Achievable
Value creating
Durable
Before launching opportunity as a business
•Consider the resources available to undertake it
•Consider the characteristics of the entrepreneur
pursuing it
Entrepreneurial Leadership
• Launching a new venture requires a
special kind of leadership
– Courage
– Belief in one’s convictions
– Energy to work hard
• Three characteristics
– Vision
– Dedication and drive
– Commitment to excellence
Entrepreneurial Leadership
• Vision may be entrepreneur’s most
important asset
– Ability to envision realities that do not yet
exist
– Exercise a kind of transformational
leadership
– Able to share with others
Entrepreneurial Leadership
• Dedication and drive are reflected in
hard work
– Patience
– Stamina
– Willingness to work long hours
– Internal motivation
– Intellectual commitment to the enterprise
– Strong enthusiasm for work and life
Entrepreneurial Leadership
• To achieve excellence, venture
founders and small business owners
must
– Understand the customer
– Provide quality products and services
– Pay attention to details
– Continuously learn
– Surround themselves with good people
Entrepreneurial Strategy
• Best strategy for the enterprise will be
determined to some extent by
– A viable opportunity, resources, and entrepreneur
– Other conditions in the business environment
• Can use various tools and techniques to
determine strategic choices
– Five Forces analysis
– Value chain analysis
Entry Strategies
• Getting a foothold in the market
– Pioneering new entry
• Creating new ways to solve old problems
• Meeting customer’s needs in a unique new
way
– Imitative new entry
• Strong marketing orientation
• Introduce same basic product or service in
another segment of the market
Entry Strategies
• Getting a foothold in the market
– Adaptive new entry
• Offer product or service that is “somewhat new
and different”
• Aware of marketplace conditions and conceive
entry strategies to capitalized on current trends
Generic Strategies
• How new ventures can achieve
competitive advantages
– Overall cost leadership
• Simple organizational structures
• More quickly upgrade technology and integrate
feedback from the marketplace
• Make timely decisions that affect cost
– Differentiation
• Use new technology
• Deploy resources in a radical new way
– Focus
• Niche strategies fit the small business mold
Combination Strategies
• A key issue is the scope of a small
firm’s strategic efforts relative to those
of its competitors
– Pursue combination strategies
• Combine best features of low-cost,
differentiation, and focus strategies
• Flexibility and quick decision-making ability of
a small firm not laden with layers of
bureaucracy
Model of Competitive Dynamics
Sources: Adapted from Chen, M-J. 1996. Competitor analysis and interfirm rivalry: Toward a theoretical integration. Academy of Management Review,
21(1): 100-134; Ketchen, D.J., Snow, C. C., Hoover, V.L. 2004. Research on competitive dynamics: Recent accomplishments and future challenges.
Journal of Management, 30(6): 779-804; and Smith, K.G., Ferrier, W.J., & Grimm, C.M. 2001. King of the hill: Dethroning the industry leader. Academy of
Management Executive, 15(2): 59-70.
Strategic and Tactical
Competitive Actions
Actions
Strategic
Actions
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Entering new markets
New product introductions
Changing production capacity
Mergers/Alliances
Tactical
Actions
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Price cutting (or increases)
Product/service enhancements
Increased marketing efforts
New distribution channels
Likelihood of Competitive
Reaction
• How a competitor is likely to respond
will depend on three factors
– Market dependence
– Competitor’s resources
– The reputation of the firm that initiates the
action (actor’s reputation)
Crafting
• Create a simple intuitive approach that
facilitates crafting a creative idea into a
unique and definitive new venture strategy
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This approach is designed to achieve two objectives:
Incorporate relevant academic knowledge at the
right time and place to compliment the
entrepreneur’s intuitive insight
Facilitate insight into the alternate opportunities and
strategies inherent in the entrepreneur’s creative
vision
Strategy Design Considerations
A natural and intuitive process that
synthesizes:
- Creativity – the entrepreneur’s tacit
intuition and insight
- Knowledge – The explicit and relevant
academic knowledge
Strategy Models
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Mintzberg’s
theory of strategy crafting
Eisenhardt’s
strategy as simple rules
Janis’s
vigilant problem solving
Kaplin & Norton’s
strategy maps
A three-phase strategy crafting
approach
A three-phase strategy crafting approach
focused on three critical decisions encountered
in the art of strategy crafting:
1. Envision the range of opportunities
2. Assess the feasibility of opportunities
3. Craft the new venture strategy
Entrepreneurial Strategy Crafting Approach
Approach Phase
Prerequisite Requirement
The creative idea
Phase I - Envision the
Opportunities
Key Activities Involved
1. Create the idea
2. Identify a basic vision or future state
1.
Envision a range of alternative
business products or services
Envision the range of 2.
potential business
applications and target
3.
markets inherent within
the creative idea
Envision a range of alternative
target markets
Identify potential ApplicationTarget Paths, i.e., “The
Opportunities” inherent in the
creative idea
Phase II
Assess Feasibility
1. Create intuitive, simple rules-based
feasibility decision criteria
2.
Assess each identified opportunity as to
its potential feasibility/credibility
3.
Identify key characteristics of the
feasible “Proto-strategies”
Phase III
Craft the Strategy
1.
Configure each proto-strategy to its
natural type and natural basis
Comparatively evaluate
the Strategies using
entrepreneurial insight
2.
Evaluate each configured proto-strategy
using entrepreneurial insight and the
relevant academic knowledge for its
specific configuration
3.
Comparatively examine the protostrategies to determine the best
entrepreneurial strategy
Assess the perceived
feasibility of the envisioned
opportunities and determine
the defining characteristics
Strategy Crafting Outcome
A Crafted Strategy
A unique and distinctive entrepreneurial strategy for
the new venture
Feasibility Assessment: Simple Decision Rules
• Competencies available versus competencies
required
– Intellectual competencies – tacit, explicit, patents and
copyrights
– Technological, operational, marketing, or
development competencies
• Consideration of the value of boundary rules - determine
what limits the opportunity
– Market, environment, competitors, regulations,
technology, capital?
– The level of uncertainty, the lack of critical resources
Feasibility Assessment: Simple Decision Rules
• Consideration of the value of resource rules:
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Understand the critical resources required
The Ability to develop or acquire the critical resources
Proven Competency with resources required
Consideration of the value of timing rules:
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Perceived window of opportunity for the new venture
Perceived startup and development time
Expected market and product life cycles
Strategy Defining Characteristics
• The unique feature that serves to differentiate
the opportunity
• The products and services to best exploit the
opportunity:
– Derived product/service lines
– Potential for developing future core competencies
• The target markets perceived available for
exploitation:
– Ability to competitively position the venture in an
existing market
– Ability to use the venture to expand the existing
market
– Ability to use the venture to create a new market
Strategy Defining Characteristics
• Consider the types of critical resources required :
– Knowledge-based resources: patents, copyrights, proprietary
– Technology-based resources: leader technology, follower
technology
– R&D-based resources, facilities and support
– Capital-based resources: finance, facilities, materials
• Consider the type of competitive advantage to be
pursued:
– Cost Leadership strategy – the low cost competitor
– Differentiation strategy – unique hard to imitate products/services
– Niche strategy – a subset of cost leadership or differentiation
• Consider what is the basis for competitive strategy:
– Market Based – external orientated strategy
– Resource Based – internal orientated strategy
Strategy Defining Characteristics
• Consider how the excess return is to be
achieved/sustained:
– Superior price/quality performance
– Continuous value added innovation
– Achieving and maintaining an economy of
scale
– Superior customer service/loyalty
– Patent or copyright protection
– Superior research and development
technology
Strategy Types
A - Low cost–market based strategy
B - low cost–resource based strategy
C - differentiation–market based
strategy
D - differentiation–resource based
Strategy
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Evolutionary
Revolutionary
Strategy Types
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2.
“Cost-leadership” Strategy
- to become the low-cost product /service
provider
“Differentiation” Strategy
- to provide a unique value-added
product/service
Cost-Leadership Type Strategy
• The Cost Leadership Strategy is based on achieving a
sustainable low cost competitive advantage
• Cost leadership usually entails economy of scale – a
high volume approach based on:
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low cost products and services
low cost operation processes
low cost distribution chains
low cost materials
• Cost leadership can also be proprietary – based on
patents or copyrights
• Cost leadership can also be niche based – low cost for a
narrow product or market segment
Differentiation Type Strategy
• The Differentiation Objective is to achieve a sustainable
competitive advantage based on unique products or
services
• Differentiation strategy is typically based on:
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Intellectual knowledge
Unique experience
Innovative approaches
Technological advances
• Differentiation offers customer’s unique value-added
attributes clearly perceived to be superior to the
competition
• Differentiation requires continuous innovation to sustain
competitive advantage –investments in research and
talent
• Differentiation strategy allows premium pricing for unique
value-added features
Second Dimension of Strategy
• “Market Based” Strategy
– external-orientated approach with the market
dominant
• “Resource Based” Strategy
– internal-oriented where the resources are
dominant
A Market Based Strategy
• The existing market determines the strategy
• Strategy is primarily dependent on the selected market
and its industry forces
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The strategy is limited to one market
The market is selected for attractiveness to the creative idea
The goal is to achieve a sustainable competitive position
The strategy objective is to influence the market so as to improve
the new venture’s competitive position
• Market based strategy is a competition driven zero sum
game
• This strategy is best employed in relatively stable market
environments
A Resource Based Strategy
• The new venture’s resources determine the
strategy
• Strategy is based on the new venture’s internal
resources and competencies
– Resource-based strategy facilitates reactions to
market changes
– A competency driven resource strategy can more
quickly react to or even create change
• Resource-based strategy can cross markets and
industries
• Best employed in environments of rapid market
or technology change
Strategy Differentiation
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Cost Leadership–market based strategy
Cost Leadership–resource based strategy
Differentiation–market based
Differentiation–resource based
– Evolve the market
– Create the market
Differentiation - Resource Based
Type Evolutionary Approach
• Goal – “Exploit, do not disrupt the markets”.
• Utilize the new venture’s tangible and intangible internal
resources
• Generate sustainable value-added products and
services that are difficult to imitate
• Continually expand an established market, or multiple
markets, avoiding wholesale disruption
• Develop tangible and intangible internal resources into
core competencies
• Produce a range of products and services for various
markets that are superior in customer value and difficult
to imitate.
Evolutionary – Resource based
differentiation strategy
Prerequisite Requirements
• Intellectual Capital: the ability to outthink
the competition
• Conversion Capability: the ability to
convert intangible assets into resources
• Core Competency Base: the ability to
develop a “right” set of core competencies
Intellectual Capital Required
• Identify and develop the basic core competencies
• Goal is to continuously create diverse lines of unique
products or services with differentiating attributes that
that add customer value superior the competitors across
multiple markets.
• The differentiating attributes could include:
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Improved performance
Additional/alternative capabilities
Expanded life
Increased reliability
Aesthetic appeal
Environmental or safety factors
Conversion Capability
• Ability to convert intangible intellectual assets into critical
tangible resources and future core competencies
• The new venture begins with limited resources, mostly
intangible.
• A key strategy consideration is how to convert limited
resources, intangible ideas, and visions into:
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Tangible capabilities
Core competencies,
Strategic assets
and finally, a sustainable competitive advantage.
• This entrepreneurial conversion process requires;
– Identification of the critical resources required for success
– A method of gaining access to the critical resources
– Combining the critical resources with the required competencies
Other Relevant Strategy
Considerations
• The evolutionary resource-based differentiation strategy
allows
• Increased flexibility – Exploit the creative vision across the spectrum of products and
services in multiple markets
– Rapid adjustment to continuous or dramatic changes in key
environmental or market conditions
• Mitigated risk and uncertainty
– Multiple market dispersion reduces single market risk
– Avoidance of major market disruption reduces risk
• The value of multiple markets
– Creating new products in multiple markets allows the ability to
seek premium pricing in multiple markets
Other Relevant Strategy
Considerations
• Operating in multiple markets incurs the risk of
dissipating the new venture’s resources and efforts
resulting in a potential lack of strategic focus.
• Consider the impact of potential technological change
– What potential technological changes could significantly impact
on the new venture’s resource based differentiation strategy and
when?
• Consider the impact of globalization driven change
– What potential globalization factors could significantly impact on
the new venture’s resource based - differentiation strategy and
when?
Business Model
• Is an outline of the actions that occur in the
delivery of a good or service
• The plan for how a firm
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Competes (core strategy),
Uses resources (distinctive resources),
Structures relationships (partnership network),
Interfaces with customers (customer interface), and
Creates value to sustain itself based on its generated
profits (approach to creating value)
• A firm’s business model takes it beyond its
boundaries (to consider necessary partners that
help enable the business model)
Dell’s vs. IBM Business Model
How Business Models Emerge
• The Value Chain
– Illustrates activities that move products from
raw material stage - manufacturing and
distribution - end user.
– Studying a business or industry’s value chain,
can help identify opportunities for new
businesses
– That is, areas in the value chain where value
can be created
How Business Models Emerge
• Using the Value Chain
– Examine business or industry value chains to see where
additional “value” can be added (e.g., can be more effective) and
focus firm around creating this new value
• Analysis may focus on:
– One primary activity (e.g., marketing and sales)
» FedEx, UPS with Outbound Logistics
– One support activity (e.g., human resource management)
» Administaff & Paychex with HRM; Accenture and BCG with
Management Support (e.g., administration)
– Interface between ≥ 2 stages (e.g., operations & outbound
logistics)
» DHL, UPS with operations (supply and distribution
management) and outbound logistics (shipping offerings to
consumers)
Fatal Flaws
To Avoid in Business Models
• Fatal Flaws
• Two fatal flaws can render a business
model untenable from the beginning:
– A complete misread of the customer
– Utterly unsound economics
Four Components of a
Business Model
Business Model Component 1:
Core Strategy
• Core Strategy: how firm competes relative
to competitors
– Porter’s generic strategies
• Cost leadership: operations streamlined for
efficiency (e.g., Wal-Mart)
• Differentiation: create an industry-wide perception
of unique value (e.g., Tiffany jewelry; Intel)
• Focus: concentrate on narrow segment of the
industry (e.g., Red Bull with energy drinks) of a
narrow set of customers (e.g., Babies ‘R’ Us with
baby needs)
• Focused-differentiation: uniquely serve narrow
industry or customer segments (e.g., Babies ‘R’ Us
comprehensively serves consumers in need of
baby care items)
Business Model Component 1:
Core Strategy
• Requires development of Business mission
(overarching purpose): describes why firm
exists and what it’s supposed to accomplish
– Southwest: “…the highest level of customer service
delivered with… warmth, friendliness, individual pride,
and company spirit.”
– Product/market scope (what you provide customers):
defines products & markets on which firm
concentrates
– Amazon: adjusted product choices over time (first
only books - cds, dvds, etc.)
Business Model Component 2:
Strategic Resources
• Strategic Resources
– The resources firm has substantially affects business model
• New ventures’ resources often limited to competencies of founders,
opportunity identified, unique way they serve the market
– 2 most important strategic resources are:
• Core competencies: resource/capability serves as source of
competitive advantage over rivals
– When identifying core competencies, try to identify skills that are
unique, valuable to customers, difficult to imitate, and transferable to
other opportunities
– Examples: Sony and miniaturization, Dell’s supply chain management
• Strategic assets: anything rare and valuable that firm owns
– Brands, patents, customer data, distinctive partnerships, HR, etc.
– Example: Starbucks’ brand name in coffee retailing
Business Model Component 2:
The Importance of Strategic Resources
• Must combine core competencies & strategic
assets to get a sustainable competitive
advantage
• Investors pay attention to this when evaluating a business
• A sustainable competitive advantage is achieved by having
Valuable, Rare, and Inimitable strategic resources that the
founder has the ability to use (e.g., can Organize/implement
them effectively).
– Value: Does a resource enable a firm to exploit an environmental
opportunity, and/or neutralize an environmental threat?
– Rarity: Is a resource currently controlled by only a small number of
competing firms? [are the resources used to make the
products/services or the products/ services themselves rare?]
– Imitability: Do firms without a resource face a cost disadvantage in
obtaining or developing it? [is what a firm is doing difficult to imitate?]
– Organization: Are a firm’s other policies and procedures organized to
support the exploitation of its valuable, rare, and costly-to-imitate
resources?”
Business Model Component 3:
Partnership Network
• New ventures don’t usually have all resources
needed to perform all activities
• Do not want to do everything as many tasks
aren’t core to venture’ competitive advantage
– Example: Nike with manufacturing
– Example: Dell with suppliers (e.g., Intel supplies
microprocessors to Dell, gets paid quickly, uses Dell’s
supply management software, etc.)
• It’s important to have collaborative relationships with
suppliers, and to find ways to motivate them to perform at
higher levels
Business Model Component 3:
Common Types of Business Partnerships
• Joint Venture: Formal partnership (involves equity stakes)
– Two or more firms pool resources to create a separate, jointly owned
organization (e.g., Sony Ericsson to make mobile phones using Sony’s
consumer electronics and Ericsson’s technology leadership expertise)
• Strategic Alliance: Generally no equity, but contractual in nature
– Relationship between two or more firms that exchange resource with
one another but do not have a joint, equity, relationship (e.g., Lexus and
Coach  Limited Lexus ES 300 Coach Edition)
• Trade Associations: Informal partnership (often non-profit)
– Organizations formed by firms to collect and disseminate important
industry information
– Often used to promote the industry via advertising, lobbying, etc.
• National Cattleman’s Association and “Beef, it’s what’s for dinner” campaign
Business Model Component 4:
Customer Interface
• Customer Interface
– The way a firm interacts with customers dictates how it competes
• Ex. 1: Amazon.com sells on Internet; Barnes & Noble sells via traditional
bookstores and online
• Ex. 2: Dell initially sold only online; HP sells through retail stores
– 3 elements of a ventures’ customer interface:
• Target customer: people the firm tries to appeal to
– Affects almost every decision the firm makes like strategic assets acquired,
partnerships, promotional campaigns
• Fulfillment & Support: How offerings get to customers and how they offer
after-sale support
– Fulfillment: Cell phone technology (license, manufacture, partner); Nike
(outsources production, and focuses on marketing)
– Support: Dell offers 24/7 support & customers pay more because it adds value
• Pricing model: The cost of the venture’s offerings and how collect those
funds
– Ex. 1: Price leaders like Wal-Mart and Domino’s
– Ex. 2: Create a new pricing strategy like Priceline.com
Business Model Component 4: Customer Interface
• Customer Interface
– The way a firm interacts with customers dictates how it competes
• Ex. 1: Amazon.com sells on Internet; Barnes & Noble sells via traditional
bookstores and online
• Ex. 2: Dell initially sold only online; HP sells through retail stores
– 3 elements of a ventures’ customer interface:
• Target customer: people the firm tries to appeal to
– Affects almost every decision the firm makes like strategic assets acquired,
partnerships, promotional campaigns
» Example: Abercrombie vs. Chico’s
• Fulfillment & Support: How offerings get to customers and how they offer
after-sale support
– Fulfillment: Cell phone technology (license, manufacture, partner); Nike
(outsources production, and focuses on marketing)
– Support: Dell offers 24/7 support & customers pay more because it adds value
• Pricing model: The cost of the venture’s offerings and how collect those funds
– Ex. 1: Price leaders like Wal-Mart and Domino’s
– Ex. 2: Create a new pricing strategy like Priceline.com and CarMax