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Entrepreneurial Strategy: Generating and Exploiting

New Entries

McGraw-Hill/IrwinEntrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 13

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What is a New Entry?

Offering a new product to an established or new market.

Offering an established product to a new market.

Creating a new organization.

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Entrepreneurial Strategy: The Generation and Exploitation of New Entry Opportunities

<<Insert Figure 13.1>>

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Resources: Source of Competitive Advantage

Basic building blocks to a firm’s functioning and performance. Inputs into the production process. Can be combined in different ways. Provides a firm its capacity to achieve superior

performance.

Resources need to be: Valuable. Rare. Inimitable.

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Creating a Resource Bundle

Entrepreneur possesses ability to obtain and recombine resources. Market knowledge: information, technology,

know-how/skills that provide insight to market/customers.

Technological knowledge: information, technology know-how/skills that provide insight to create new knowledge.

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Assessing Attractiveness: Information on a New Entry

Prior knowledge and information search More knowledge ensures a more efficient search

process. Search process represents a dilemma for an

entrepreneur. Costs: both money and time.

Window of opportunity Period of time when the environment is favorable

for entrepreneurs to exploit a particular new entry.

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Comfort with Making a Decision under Uncertainty

Dilemma arising from the trade-off between more information and the likelihood of closure of the window of opportunity. Error of commission: negative outcome from

acting. Error of omission: negative outcome from not

acting.

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Decision to Exploit or Not to Exploit the New Entry Opportunity

<<Insert Figure 13.2>>

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Strategy for New Entry: First-Mover Advantages

Develop a cost advantage. Face less competitive rivalry. Can secure important channels. Better positioned to satisfy customers. Gain expertise through participation.

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First Mover (Dis)Advantages (1 of 2)

Demand uncertainty: difficulty in estimating Potential size of the market. How fast it will grow. Key dimensions along which it will grow.

Technological uncertainty: difficulty in assessing Whether the technology will perform. Whether alternate technologies will emerge and leapfrog

over current technologies

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First Mover (Dis)Advantages (2 of 2)

Adaptation: difficulty to adapt to the new environmental conditions.

Customer uncertainty: difficulty in accurately assessing whether the new product or service provides value for them. Overcoming customer uncertainty:

Informational advertising. Highlight product benefits over substitutions. Create frame Of reference for potential customer. Educate customer- set industry standard, customer

loyalty.

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Lead Time and First Mover

Lead time: grace period in which the first mover operates in the industry under conditions of limited competition.

Creating barriers to entry for competition: Building customer loyalties. Building switching costs. Protecting product uniqueness. Securing access to important sources of supply

and distribution.

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Risk Reduction Strategies

Risk: probability of, and magnitude of, downside loss.

Derived from entrepreneur’s uncertainties over: Market demand. Technological development. Actions of competitors.

Two such strategies: Market scope. Imitation.

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Market Scope Strategies: Narrow Scope

Scope: choice about which customer groups to serve and how to serve them.

Narrow scope: offers a small product range to a small number of customer groups to satisfy a particular need. Focuses on producing customized products,

localized business operations, and high levels of craftsmanship.

Focuses on a specific group of customers. High-end of the market represents a highly

profitable niche.

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Market Scope Strategies: Broad Scope

Offers a range of products across many different market segments. Strategy emerges through the information

provided by a learning process. Opens the firm up to many different “fronts” of

competition. Reduction of risks associated with market

uncertainties.

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Imitation Strategy

Involves copying the practices of other firms. Cannot be rare or inimitable.

Why Do It? Minimizes risk of downside loss associated with a

new entry.

Advantages: Easier to imitate the practices of a successful

firm. Can help develop skills necessary to be successful

in the industry. Provides organizational legitimacy.

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Types of Imitation Strategies

Franchising: focuses on imitation to reduce the risk of downside loss for the franchisee.

“Me-too” strategy: copying products that already exist and attempting to build an advantage through minor variations. Might be more difficult to successfully implement

than initially expected Can potentially:

Reduce the entrepreneur’s costs associated with R&D. Reduce customer uncertainty over the firm. Make the new entry look legitimate from day one.

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Managing Newness

Liabilities of newness arise from unique conditions: Costs in learning new tasks. Conflict arising from overlap or gaps in responsibilities. Establishing formal and informal structures of

communication.

New firm need to: Pay special attention in education and training

employees. Help employees develop knowledge and skills quickly. Foster activities to foster informal relationships and a

functional corporate culture.

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Assets of Newness

Lack of established routines, systems, and processes provide a clean slate, giving a learning advantage.

Heightened ability to learn new knowledge in a continuously changing environment.

Flexibility and ability to accommodate new knowledge.