Entrepreneurial Strategy: Generating and Exploiting New Entries Chapter 3 Entrepreneurial Strategy: Generating and Exploiting New Entries McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

New Entry New entry refers to: Offering a new product to an established or new market. Eg. Bluetooth watch Offering an established product to a new market. Eg. Volkswagen is now sold to medium-income people Creating a new organization. Entrepreneurial strategy – The set of decisions, actions, and reactions that first generate, and then exploit over time, a new entry.

Figure 3.1 - Entrepreneurial Strategy: The Generation and Exploitation of New Entry Opportunities

Generation of a New Entry Opportunity Resources as a Source of Competitive Advantage Resources are the basic building blocks to a firm’s functioning and performance; the inputs into the production process. They can be combined in different ways. A bundle of resources provides a firm its capacity to achieve superior performance. Resources must be: Valuable-when it enables firm to pursue opportunities, neutralize threats & offer prod/services that customer value Rare- when only few competitors (if any) possess it Inimitable(nonsubstitutable) - when replication of combination resources is difficult or costly for competitors

Generation of a New Entry Opportunity (cont.) Creating a Resource Bundle That Is Valuable, Rare, and Inimitable Entrepreneurs need to draw from their unique experiences and knowledge. Market knowledge - Information, technology, know-how, and skills that provide insight into a market and its customers. Technological knowledge - Information, technology, know-how, and skills that provide insight into ways to create new knowledge.

Generation of a New Entry Opportunity (cont.) Assessing the Attractiveness of a New Entry Opportunity Depends on the level of information and the willingness to make a decision without perfect information. Information on a New Entry Prior knowledge and information search More knowledge ensures a more efficient search process. Search costs include time and money. The viability of a new entry can be described in terms of a window of opportunity. Windows open- favourable to exploit new prod/new mkt Window close- unfavourable to exploit

Generation of a New Entry Opportunity (cont.) Comfort with Making a Decision under Uncertainty The trade-off between more information and the likelihood that the window of opportunity will close provides a dilemma for entrepreneurs. Error of commission Negative outcome from acting on the perceived opportunity. Occur from the decision to pursue opportunity, only then find out he overestimate his ability to create customer demand/protect form technology imtitation by competitors Error of omission Negative outcome from not acting on the new entry opportunity. Occur from the decision not to pursue opportunity, only then find out he underestimate his ability to create customer demand/protect form technology imitation by competitors

Figure 3.2 - The Decision to Exploit or Not to Exploit the New Entry Opportunity

Generation of a New Entry Opportunity Decision to exploit or not to exploit the new entry opportunity Assessment of a new entry’s attractiveness

Figure 3.3- Factors That Influence the Decision to Enter the Market Now or to Delay Entry

Entry Strategy for New Entry Exploitation Being a first mover can result in a number of advantages that can enhance performance. These include: Cost advantages- as a firm produces greater volume of product, the cost of producing each unit will reduce Less competitive rivalry- market growth will compensate the market share lost to new competitors The opportunity to secure important supplier and distributor channels – opportunity to select & develop strong relationship with the most important suppliers & distribution channel

Entry Strategy for New Entry Exploitation A better position to satisfy customers- have chance to: Select & secure most attractive market segments Position themselves at the centre of market Establish product as the industry standard The opportunity to gain expertise through participation- opportunity to: Learn form 1st generation of products & improve Monitor chnages in the market Build up networks

TO BE THE FIRST-MOVER OR NOT TO BE????? Assess: Environment satability/instability Ability to educate customers Ability to raise barriers to entry & imitation to extend lead time

Entry Strategy for New Entry Exploitation (cont.) Environmental Instability and First-Mover (Dis)Advantages The entrepreneur must first determine the key success factors of the industry being targeted for entry; are influenced by environmental changes. Environmental changes are highly likely in emerging industries (industries that are newly formed)

Entry Strategy for New Entry Exploitation (cont.) Demand uncertainty Difficulty in estimating future demand- overestimate means higher cost, underestimate means not being able to satisfy customer demand Difficulty in predicting key dimesions along market grow- eg. Changing in customers’ need s & tastes Followers get: learn from first mover without incurring same cost More info obout mkt demand More info abour customer preferences due to additional time When demand is unstable & unpredictable = should delay the entry

Entry Strategy for New Entry Exploitation (cont.) Technological uncertainty Difficulty in assessing whether the technology will perform and whether alternate technologies will emerge and leapfrog over current technologies- if not perform as expected, will ruin reputation & add to R&D & production cost; if works as expected, superior tech might be imitate by late entrants Delay entrants enjoy: Opportunity to reduce technological uncertainty eg. Learn form fist mover’s R&D, opportunity to observe & learn from first mover mistakes When technological uncertainty is high= should delay the entry

Entry Strategy for New Entry Exploitation (cont.) Adaptation - Difficulty in adapting to new environmental conditions. Entrepreneurial attributes of persistence and determination can inhibit the ability of the entrepreneur to detect, and implement, change.

Entry Strategy for New Entry Exploitation (cont.) Customers’ Uncertainty and First-Mover (Dis)Advantages Uncertainty for customers - Difficulty in accurately assessing whether the new product or service provides value for them. Overcome customer uncertainty by: Informational advertising. Comparison marketing- Highlighting product benefits over substitutions. Creating a frame of reference for potential customer for new highly innovative product- show customer how product is useful for them Educating customers through demonstration and documentation. First mover enjoy reputation as ‘founder’, customer loyalty and rise up barrier to entry and imitation

Entry Strategy for New Entry Exploitation (cont.) Lead Time and First-Mover (Dis)Advantages Lead time – The grace period in which the first mover operates in the industry under conditions of limited competition. Lead time can be extended if the first mover can erect barriers to entry by: Building customer loyalties- loyalty sometimes associated with the first mover eg. Maggi, Milo, Colgate Building switching costs Cost that must be borne by customers if they are to stop purchasing from currennt supplier and begin purchasing from another How to prevent? Eg. Reward system

Entry Strategy for New Entry Exploitation (cont.) Protecting product uniqueness- maintain by intellectual property protection such as patents, copyrights, trademarks & trade secret Securing access to important sources of supply and distribution- ability to develop exclusive relationship with key supplier will force competitors less attractive alternatives Switching costs: Must be borne by customers if they: Stop purchasing from the current supplier Begin purchasing from new supplier

Risk Reduction Strategies for New Entry Exploitation Probability, and magnitude, of downside loss Derived from uncertainties over: Market demand Technological development Actions of competitors Two strategies can be used to reduce these uncertainties: Market scope strategies - Focus on which customer groups to serve and how to serve them. Imitation strategies - Involves copying the practices of others.

Risk Reduction Strategies for New Entry Exploitation (cont.) Market Scope Strategies Narrow-scope strategy involves offering a small product range to a small number of customer groups to satisfy a particular need. Producing customized products Localized business operations High level craftsmanship High-end of the market

Risk Reduction Strategies for New Entry Exploitation (cont.) 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

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

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

Risk Reduction Strategies for New Entry Exploitation (cont.) Managing Newness Liabilities of newness arise from unique conditions: Costs in learning new tasks. Conflict arising from overlap or gaps in responsibilities. Unestablished informal structures of communication. A new firm needs to: Educate and train employees. Facilitate conflict over roles. Promote activities that foster informal relationships and a functional corporate culture.

Risk Reduction Strategies for New Entry Exploitation (cont.) Assets of Newness Lack of established routines, systems, and processes provide a learning advantage. A heightened ability to learn new knowledge in a continuously changing environment is an important source of competitive advantage.