enterprenurship chapter 3

Hisrich
Peters
Shepherd
Chapter 3
Entrepreneurial Strategy:
Generating and Exploiting
New Entries
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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New Entry
 New entry refers to:
 Offering a new product to an established or new
market.
 Offering an established product to a new
market.
 Creating a new organization.
 Entrepreneurial strategy – The set of
decisions, actions, and reactions that first
generate, and then exploit over time, a new
entry.

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

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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.
 Rare.
 Inimitable.

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 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.
Opportunity (cont.)

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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.

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 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.
 Error of omission - Negative outcome from not acting
on the new entry opportunity.
Opportunity (cont.)

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

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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.
 Less competitive rivalry.
 The opportunity to secure important supplier
and distributor channels.
 A better position to satisfy customers.
 The opportunity to gain expertise through
participation.

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 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.
 Demand uncertainty - Difficulty in estimating the
potential size of the market, how fast it will
grow, and the key dimensions along which it will
grow.
Exploitation (cont.)

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 Technological uncertainty - Difficulty in
assessing whether the technology will perform
and whether alternate technologies will emerge
and leapfrog over current technologies.
 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.

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 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.
 Highlighting product benefits over substitutions.
 Creating a frame of reference for potential customer.
 Educating customers through demonstration and
documentation.

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 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.
 Building switching costs.
 Protecting product uniqueness.
 Securing access to important sources of supply and
distribution.

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Risk Reduction Strategies for
New Entry Exploitation
 Risk is derived from uncertainties over
market demand, technological
development, and 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.

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 Market Scope Strategies
 Narrow-scope strategy involves offering 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.
 Leads to specialized expertise and knowledge.
 High-end of the market represents a highly profitable
niche.
 Reduces some competition-related risks but increases
the risks associated with market uncertainties.
New Entry Exploitation (cont.)

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 Broad-scope strategy involves offering 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.
 Reduces risks associated with market uncertainties but
increases exposure to competition.

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 Imitation Strategy
 Why do it?
 It is easier to imitate the practices of a successful firm.
 It can help develop skills necessary to be successful in
the industry.
 It provides organizational legitimacy.
 Types of imitation strategies
 Franchising - A franchisee acquires the use of a
“proven formula” for new entry from a franchisor.
 “Me-too” strategy - Copying products that already exist
and attempting to build an advantage through minor
variations.

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 An imitation strategy 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.
 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.

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 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.

enterprenurship chapter 3

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