Section 1 The Entrepreneurial Perspective Chapter 4 Generating

Section 1 The Entrepreneurial Perspective Chapter 4 Generating and Exploiting New Entries ©Mc. Graw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of Mc. Graw-Hill Education.

New Entry New entry is one of the essential acts of entrepreneurship. • Newness can be both good and bad. Entrepreneurial strategy maximizes benefits of newness and minimizes its costs. Elements include: • The generation of a new entry opportunity. • The exploitation of a new entry opportunity. • A feedback loop. If the new entry is exploited, performance depends on: • Entry strategy. • Risk reduction strategy. • The way the firm is organized. • Competence of the entrepreneur and management team. ©Mc. Graw-Hill Education.

Generation of a New Entry Opportunity Resources are the building blocks, combined in various ways to achieve superior performance. • Valuable if it allows the firm to pursue opportunities, neutralize threats, and offer products and services valued by customers. • Rare when few or no competitors have it. • Inimitable when replicating the bundle is difficult and/or costly. ©Mc. Graw-Hill Education.

Entrepreneurial Resource The basis for entrepreneurial resource is knowledge built up over time through experience – idiosyncratic, therefore rare. • The entrepreneur’s market knowledge is deeper than knowledge gained through market research. • Entrepreneurs who lack this knowledge are less likely to recognize or create attractive opportunities for new products or new markets. • An entrepreneur’s technological knowledge often leads to new markets rather than meeting unmet market needs. A resource bundle is the basis for a new entry – created from the entrepreneur’s market and technological knowledge, and other resources. ©Mc. Graw-Hill Education.

Assessing the Attractiveness of a New Entry Opportunity The following considerations help the entrepreneur determine if the product is valuable, rare, inimitable and worth pursuing. • Information on a new entry. • Window of opportunity may be open or shut. • Comfort in making decisions under uncertainty – must choose between an error of commission or an error of omission. The assessment of a new entry’s attractiveness is less about if the opportunity exists and more about the entrepreneur believing they can make it work with entrepreneurial strategies. ©Mc. Graw-Hill Education.

First Mover Entry Strategy First movers develop a cost advantage First movers face less competitive rivalry. First movers can secure important suppliers and channels of distribution. First movers are better positioned to satisfy customers. ©Mc. Graw-Hill Education. First movers gain expertise through participation. First movers do not always prosper. First mover advantages must outweigh the disadvantages and depend on: • Environmental stability. • Ability to educate customers. • Ability to erect barriers to entry and imitation to extend the firm’s lead time.

Environmental Instability – First Mover (Dis)Advantages Performance depends on the fit between a firm’s bundle of resources and the external environment. • For a good fit, first determine key success factors. • Environmental changes are likely in emerging industries. Entrepreneurs face demand technological uncertainty. • Demand uncertainty makes it difficult to estimate future demand. • First movers must often commit to a new, unproven technology resulting in technological uncertainty. • When demand is unstable or technological uncertainty is high, first mover disadvantages may outweigh first mover advantages. • Changes in demand or technology means the firm must adapt to new environmental conditions – difficult due to inertia. ©Mc. Graw-Hill Education.

Customers’ Uncertainty and First Mover (Dis)Advantages The element of newness may mean uncertainty for customers. • They may be uncertain about how to use the product or its benefits. To reduce this uncertainty, entrepreneurs can: • Offer informational advertising or use comparison marketing. When the product is highly innovative, the customer may lack a frame of reference for processing product information. By delaying entry in a market requiring considerable education, the firm might benefit from the investments of first movers. First movers can have an advantage when : • Education directs customer preferences to the firm’s products, when the firm is seen as a “founder, ” and when the firm can erect barriers to entry and imitation. ©Mc. Graw-Hill Education.

Lead Time and First Mover (Dis)Advantages Entry barriers provide a grace period of limited competition. • This lead time lets the first mover prepare for future competition. The first mover can extend lead time by using barriers to entry. • Building customer loyalties. • Building switching costs. • Protecting product uniqueness. • Securing access to important sources of supply and distribution. Barriers to entry reduce competition. If there is insufficient customer demand, consider allowing competitor into the industry to share pioneering costs. ©Mc. Graw-Hill Education.

Risk Reduction Strategies for New Entry Exploitation A new entry involves considerable risk. The choice of market scope ranges from a narrow- to a broadscope strategy depending on the risk targeted for reduction. • Narrow-scope strategy offers a small product range to a small number of customer groups. • Vulnerable to the risk that market demand does not materialize or changes over time. • A broad-scope strategy takes a “portfolio” approach and offers a range of products. • If new entry involves creation of a new market, a broad-scope strategy reduces the major risk of uncertainty over customer preferences. ©Mc. Graw-Hill Education.

Imitation Strategies Imitation strategy is another strategy for minimizing risk. • Imitation is easier than conducting a systematic and expensive search. • Imitating successful practices helps the entrepreneur develop skills necessary for industry success. • Imitation provides organizational legitimacy. Imitation strategies include franchising and “me-too” strategy. • In the “me-too” strategy, variations may be minor product changes, entering new markets, or delivering the product in a different way. An imitation strategy may reduce R&D costs, reduce customer uncertainty, and provide immediate legitimacy. ©Mc. Graw-Hill Education.

Managing Newness Creation of a new organization offers some liabilities of newness. • Learning new tasks is expensive and takes time. • Role responsibility may overlap or have gaps. • The informal structure takes time to establish. The entrepreneur can also benefit from assets of newness. • Established routines can be a liability when the firm faces change. • Previous practices create momentum, redirection is difficult. A heightened ability to learn new knowledge is a source of competitive advantage. New ventures have strategic advantage over mature companies, particularly in dynamic environments. ©Mc. Graw-Hill Education.