1. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ENTREPRENEURSHIP A PROCESS PERSPECTIVE Robert A. Baron Scott A. Shane A. Rebecca Reuber Slides Prepared by: Sandra Malach, University of Calgary

2. Copyright (c) 2008 by Nelson, a division of Thomson Canada Limited 2 Uncovering Opportunities: Understanding Entrepreneurial Opportunities and Industry Analysis 1

3. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 1.Define an entrepreneurial opportunity and explain why such opportunities exist. 2.Describe how technological, political/regulatory and social/demographic changes generate entrepreneurial opportunities. 3.List the different forms that entrepreneurial opportunities can take, and explain why some forms are better for new firms than others.

4. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 4.Explain why new firms are more successful in some industries than in others, and identify the four major types of industry differences that influence the relative success of new firms. 5.Identify the three different dimensions of knowledge conditions, and explain how they influence an industry’s supportiveness of new firms. 6.Identify the three different dimensions of demand conditions, and explain how they influence an industry’s supportiveness of new firms. 7.Identify the two different dimensions of industry life cycles, and explain how they influence an industry’s supportiveness of new firms.

5. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 8.Identify the four different dimensions of industry structure, and explain how they influence an industry’s supportiveness of new firms. 9.Explain why established firms are usually better than new firms at exploiting entrepreneurial opportunities. 10.Identify the types of opportunities that new firms are better at exploiting, and explain why new firms are advantaged at the exploitation of those opportunities.

6. Copyright © 2008 by Nelson, a division of Thomson Canada Limited “In great affairs we ought to apply ourselves less to creating chances than to profiting from those that offer.” --La Rouchefoucauld, Maxims, 1665

7. Copyright © 2008 by Nelson, a division of Thomson Canada Limited BETTER OPPORTUNITIES Some industries are more favourable to new firms than others Some types of opportunities are better than others for new firms to pursue

8. Copyright © 2008 by Nelson, a division of Thomson Canada Limited INDUSTRIES THAT PRODUCE HIGH-GROWTH COMPANIES* 1. Pulp Mills 2. Computer/Office Equipment 3. Guided missiles/space vehicles/parts 4. Nonferrous rolling & drawing 5. Railroad car rental 6. Measuring & controlling devices 7. Paper Mills 8. Search & navigation equipment 9. Communication equipment 10. Drugs (*Derived From Fortune 500 List)

9. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ENTREPRENEURIAL OPPORTUNITY - DEFINED An entrepreneurial opportunity is a situation in which changes in technology, or economic, political, social, and demographic conditions generate the potential to create something new.

10. Copyright © 2008 by Nelson, a division of Thomson Canada Limited CHANGES MAKE IT POSSIBLE… To make new products or services To develop new production processes To organize in new ways To open up new markets To use new raw materials

11. Copyright © 2008 by Nelson, a division of Thomson Canada Limited OPPORTUNITIES FROM INFORMATION Entrepreneurial opportunities exist because people have different information. (Israel Kirzner, NYU) Different information leads to different decisions. Superior information leads to better decisions.

12. Copyright © 2008 by Nelson, a division of Thomson Canada Limited OPPORTUNITIES FROM CHANGE Truly valuable entrepreneurial opportunities come from an external change that either: Makes it possible to do things that had not been done before. Makes it possible to do something in a more valuable way. (Josef Schumpeter)

13. Copyright © 2008 by Nelson, a division of Thomson Canada Limited SOURCES OF OPPORTUNITY Technological Change Political & Regulatory Change Social & Demographic Change 50% of Inc. 500 companies started business in response to change.

14. Copyright © 2008 by Nelson, a division of Thomson Canada Limited TECHNOLOGICAL CHANGE Makes it possible for people to do things in new and more productive ways. Larger technological changes are a greater source of opportunity.

15. Copyright © 2008 by Nelson, a division of Thomson Canada Limited POLITICAL AND REGULATORY CHANGE Makes it possible to develop business ideas to use resources in new ways that are either more productive, or that redistribute wealth from one person to another.

16. Copyright © 2008 by Nelson, a division of Thomson Canada Limited OPPORTUNITIES FROM POLITICAL AND REGULATORY CHANGE Deregulation Regulations that support particular types of business activities Regulations that increase demand for particular activities or subsidize firms that undertake them Policy that increases innovation

17. Copyright © 2008 by Nelson, a division of Thomson Canada Limited SOCIAL AND DEMOGRAPHIC CHANGE Alters demand for products and services Makes it possible to generate solutions to customer needs that are more productive than those currently available

18. Copyright © 2008 by Nelson, a division of Thomson Canada Limited FORMS OF AN OPPORTUNITY New products and services, New methods of production, New markets, New ways of organizing, and New raw materials.

19. Copyright © 2008 by Nelson, a division of Thomson Canada Limited OPPORTUNITIES & CHANGES FORM OF OPPORTUNITY TECHNOLOGICAL CHANGE BUSINESS RESPONSE REASONING New Product/ServiceGas engineCarEngine to power cars New way of Organizing InternetOnline book sales Sales without stores New MarketRefrigerationRefrigerated Ships Meat Exports to Japan New Production Method ComputerComputer- Aided Design Eliminates Prototypes New Raw MaterialOilRefine to gasGas for cars

20. Copyright © 2008 by Nelson, a division of Thomson Canada Limited NEW VS. ESTABLISHED FIRMS Entrepreneurs most often introduce new products or services or enter new markets Established firms most often introduce new production processes and ways of organizing The most successful entrepreneurs develop new processes. (Mansfield, 1985)

21. Copyright © 2008 by Nelson, a division of Thomson Canada Limited INDUSTRY CONDITIONS THAT AFFECT SUCCESS Knowledge conditions Demand conditions Industry lifecycles Industry structure

22. Copyright © 2008 by Nelson, a division of Thomson Canada Limited KNOWLEDGE CONDITIONS Knowledge Conditions: information that underlies the production of products & services. Favourable industries for new firms: greater R&D intensity (R&D$/sales) public sector production of technology Innovation requires flexible and nimble organizations

23. Copyright © 2008 by Nelson, a division of Thomson Canada Limited DEMAND CONDITIONS Demand Conditions: attributes of customer preferences for products & services New firms do better in: Larger markets Rapidly growing markets Heavily segmented markets

24. Copyright © 2008 by Nelson, a division of Thomson Canada Limited INDUSTRY LIFE CYCLE

25. Copyright © 2008 by Nelson, a division of Thomson Canada Limited INDUSTRY LIFE CYCLES Optimal conditions for new firms: Young Industries Prior to the establishment of a dominant design (common approach or standard)

26. Copyright © 2008 by Nelson, a division of Thomson Canada Limited INDUSTRY STRUCTURE New firms perform more poorly in Capital-intensive industries Advertising-intensive industries Concentrated industries (versus fragmented industries) Industries composed of mostly large firms

27. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ADVANTAGES OF ESTABLISHED FIRMS The learning curve Established reputation Positive cash flow Economies of scale Complementary assets

28. Copyright © 2008 by Nelson, a division of Thomson Canada Limited NEW vs. ESTABLISHED FIRMS NEW FIRMS Competence- destroying change Discrete products and services Ideas embedded in human capital ESTABLISHED FIRMS Learning curve Reputation Positive cash flow Economies of scale Complementary assets

29. Copyright © 2008 by Nelson, a division of Thomson Canada Limited COMPETENCE DESTROYING CHANGE Large Companies  Locked into old ways of thinking  Must cannibalize existing business  Hindered by established routines  Must seek to satisfy existing customers Small Companies Can think in new ways No concerns with existing business Can form new routines easily No existing customer base to satisfy

30. Copyright © 2008 by Nelson, a division of Thomson Canada Limited DANGER! PITFALLL AHEAD! DON’T WASTE TIME DEVELOPING INCREMENTAL INNOVATIONS – THERE IS TOO MUCH AGAINST YOU

31. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ESTABLISHED VS. NEW FIRMS OPPORTUNITY EVALUATION EXAMPLEDIMENSIONADVANTAGEWHY? Jewellery StoreReputationEstablishedCustomers know & trust Automobile Manufacturer Strong Learning Curve EstablishedBetter at producing & distributing 3D Computer Graphics Chip Competence- Destroying Innovation New FirmUndermines established firms BlackberryDiscrete Innovation New FirmIndependent of existing systems