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Chapter 3

Entrepreneurial Strategy: Generating and Exploiting

New Entries

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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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.

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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-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

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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.

Generation of a New Entry Opportunity (cont.)

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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

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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. 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

Generation of a New Entry 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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Generation of a New Entry Opportunity Decision to exploit or not to exploit the new

entry opportunity Assessment of a new entry’s attractiveness

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

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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- 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

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Entry Strategy for New Entry Exploitation

A better position to satisfy customers- have chance to:

1) Select & secure most attractive market segments2) Position themselves at the centre of market3) Establish product as the industry standard

The opportunity to gain expertise through participation- opportunity to:

1) Learn form 1st generation of products & improve2) Monitor chnages in the market3) Build up networks

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TO BE THE FIRST-MOVER OR NOT TO BE?????

Assess:1.Environment satability/instability2.Ability to educate customers3.Ability to raise barriers to entry & imitation to extend lead time

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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 (industries that are newly formed)

Entry Strategy for New Entry Exploitation (cont.)

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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.)

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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- 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.)

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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.)

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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. 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.)

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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- 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.)

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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

Entry Strategy for New Entry Exploitation (cont.)

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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.

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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. Producing customized products Localized business operations High level craftsmanship High-end of the market

Risk Reduction Strategies for New Entry Exploitation (cont.)

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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

Risk Reduction Strategies for New Entry Exploitation (cont.)

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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

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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

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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.

Risk Reduction Strategies for New Entry Exploitation (cont.)

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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.

Risk Reduction Strategies for New Entry Exploitation (cont.)