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Need for Entrepreneurial Strategy

Consider . . .

New technologies, shifting social and demographic trends, as well as sudden changes in the business environment can create opportunities for entrepreneurship.

However, business opportunities can disappear as quickly as they appear.

What do new ventures and entrepreneurial firms need to do to achieve and sustain a competitive advantage?

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New ventures often face unique strategic challenges if they’re going to survive and grow. Whether the firm is an entrepreneurial startup, a small business, or an existing business entering a market or industry for the first time, it must rely on sound strategic principles to be successful. Entrepreneurial activity influences a firm’s strategic priorities and intensifies the rivalry among an industry’s close competitors. Even with a strong initial resource base, entrepreneurs are unlikely to succeed if their business ideas are easily imitated or the execution of the strategy falls short. Not only is it important for a firm to recognize an entrepreneurial opportunity, a firm must understand the competitive dynamics that are at work in the business environment in order to succeed with a growth opportunity. It’s important to have an effective competitive strategy. Note that here we focus on entrepreneurial strategy – the actions firms take to create new ventures in markets – but there’s also a related issue – how established firms can build or reinforce an entrepreneurial mindset as they strive to be innovative in markets in which they already compete. This will be covered in Chapter 12.

Recognizing Entrepreneurial Opportunities

Entrepreneurship involves value creation and the assumption of risk.

New value can be created in many contexts.

Startup ventures

Major corporations

Family-owned businesses

Nonprofit organizations

Established institutions

Ideas and opportunities can come from many sources.

Change or chance can uncover unmet customer needs.

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Entrepreneurship = the creation of new value by an existing organization or new venture that involves the assumption of risk. Even though entrepreneurial activity is usually associated with startup companies, new value can be created in many different contexts. Startup venture ideas can come from: current or past work experiences, hobbies or suggestions by friends or family. For established firms, opportunities can come from: existing customers, suggestions by suppliers, technological developments. For all firms, change or chance events can uncover unmet consumer needs.

Entrepreneurial Opportunity Analysis

Exhibit 8.1 Opportunity Analysis Framework

Source: Based on Timmons, J.A., & Spinelli, S. 2004. New Venture Creation (6th edition). New York: McGraw Hill/Irwin; and Bygrave, W.D. 1997. The Entrepreneurial Process. In W.D. Bygrave (Ed.), The Portable MBA in Entrepreneurship (2nd edition). New York: Wiley.

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For an entrepreneurial venture to create new value, three factors must be present – an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. The entrepreneurial strategy that an organization uses will depend on these three factors. Thus, beyond merely identifying a venture concept, the opportunity recognition process also involves organizing the key people and resources that are needed to go forward.

Entrepreneurial Opportunity Recognition

Entrepreneurial opportunities require opportunity recognition.

Two phases of activity:

Discovery

Becoming aware of a new business concept

Evaluation

Analyzing the opportunity to determine whether it is viable or feasible to develop further

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Opportunity recognition = the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they’re strong enough to become new ventures. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities.

Entrepreneurial Opportunities: Discovery

Discovery phase – Becoming aware of the new business concept. Ask: Where are the new venture opportunities? What might be a creative solution to a business problem?

Can be spontaneous and unexpected

Can also result from a deliberate search

Are there frustrations with current products or processes?

Do stakeholders have unmet needs?

What do other markets or industries do?

Can we revive old ideas?

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The discovery phase refers to the process of becoming aware of a new business concept. Many entrepreneurs report that their idea for a new venture came through some unexpected insight, often based on their prior knowledge, that gave them an idea for a new business. The discovery of new opportunities is often spontaneous and unexpected. Opportunity discovery may also occur as the result of a deliberate search for new venture opportunities or creative solutions to business problems. Viable opportunities often emerge only after a concerted effort. To stimulate the discovery of new opportunities, companies often encourage creativity, out-of-the-box thinking, and brainstorming. A more structured search for entrepreneurial ideas can come from looking at what’s bugging you – what frustrations do you have with current products or processes? Or from talking to suppliers, customers or front line workers to see how needs aren’t being met, or borrowing ideas from other markets or industries, or being inspired by history and reviving good ideas that have slipped out of practice, but might be valued in the market again.

Entrepreneurial Opportunities: Evaluation

Evaluation phase – Analyzing the viability of an opportunity

Talk to potential target customers.

Identify operational requirements.

Conduct a feasibility analysis.

What is the market potential?

Is the idea strong enough to create value, and therefore, profits ?

Viable opportunities have the following qualities:

They are attractive.

They are achievable.

They are durable.

They are value-creating.

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The evaluation phase occurs after an opportunity has been identified, and involves analyzing this opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture. Ideas developed by new product groups or in brainstorming sessions are tested by various methods, including talking to potential target customers and discussing operational requirements with production or logistics managers. Feasibility analysis is used to evaluate these and other critical success factors. This type of analysis often leads to the decision that a new venture project should be discontinued. Only if the venture concept continues to seem viable would a more formal business plan be developed. Among the most important factors to evaluate is the market potential for the product or service. New ventures must first determine whether a market exists for the product or service they are contemplating. For an opportunity to be viable, it needs to have four qualities. The opportunity must be attractive in the marketplace; that is, there must be market demand for the new product or service. The opportunity must also be achievable: it must be practical and physically possible. The opportunity must be durable or attractive long enough for the development and deployment to be successful; that is, the window of opportunity must be open long enough for it to be worthwhile. And finally the opportunity must be value-creating and potentially profitable; that is, the benefits must surpass the cost of development by a significant margin. If a new business concept meets these criteria, two other factors must be considered before the opportunity is launched as a business: the resources available to undertake it, and the characteristics of the entrepreneur pursuing it.

Entrepreneurial Resources

Resources are essential for entrepreneurial success.

Financial resources

Human capital

Social capital

Government resources

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Resources are an essential component of a successful entrepreneurial launch. For startups, the most important resource is usually money because a new firm typically has to expend substantial sums just to start the business. However, financial resources are not the only kind of resource a new venture needs. Human capital and social capital are also important. Many firms also rely on government resources to help them thrive.

Entrepreneurial Financial Resources

Financial resources depend on the stage of venture development & venture scale.

Initial, startup financing

Personal savings, family, and friends

Crowdfunding

Early-stage financing

Bank financing, angel investors

Later-stage financing

Commercial banks, venture capitalists equity financing

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Entrepreneurial firms must have financing. In fact, the level of available financing is often a strong determinant of how the business is launched and its eventual success. Cash finances are, of course, highly important, but access to capital, such as a line of credit or favorable payment terms with the supplier, can also help a new venture succeed. The types of financial resources that may be needed depend on two factors: the stage of venture development and the scale of the venture. The majority of new firms are low-budget startups launched with personal savings and the contributions of family and friends, and can also appeal to the public through a crowdfunding website such as Kickstarter. (See Case: Kickstarter) Crowdfunding = funding a venture by pooling small investments from a large number of investors, often raised on the internet. Angel investors = private individuals who provide equity investments for seed capital during the early stages of a new venture. These outside investors favor companies that already have a winning business model and dominance in a market niche. Once a venture has established itself as a going concern, other sources of financing become readily available, such as commercial loans taken out by the business. Venture capitalists = companies organized to place their investors’ funds in lucrative business opportunities. Through venture capitalists, entrepreneurs can raise money by selling shares in the new venture. Businesses with extensive development costs or firms on the brink of rapid growth are likely to turn to venture capitalists.

Entrepreneurial Human, Social & Governmental Resources

Human capital

Strong, skilled management

Social capital

Extensive social contacts & strategic alliances

Technology, manufacturing, or retail alliances

Federal, state, & local government resources

Government contracting

Loan guarantee programs

Training, counseling, & support services

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Bankers, venture capitalists, and angel investors agree that the most important asset an entrepreneurial firm can have is strong and skilled management. Managers need to have a strong base of experience and extensive domain knowledge, as well as an ability to make rapid decisions and change direction as shifting circumstances may require. Startups with multiple partners are more likely to succeed. New ventures founded by entrepreneurs who have extensive social contacts are also more likely to succeed. In addition, strategic alliances can provide a key avenue for growth. By partnering with other companies, through technology, manufacturing, or retail licensing agreements, young or small firms can expand or give the appearance of entering numerous markets or handling a range of operations. In the United States, the federal, state, and local government provides support for entrepreneurial firms in two key areas – financing and government contracting. Through government contracting, small businesses have the opportunity to bid on contracts to provide goods and services to the government. Regarding financing, the small business administration (SBA) has several loan guarantee programs designed to support the growth and development of entrepreneurial firms. The government itself does not typically lend money but underwrites loans made by banks to small businesses, thus reducing the risk associated with lending to firms with unproven records. Local offices offer training, counseling, and support services.

Entrepreneurial Leadership

Entrepreneurial leadership needs:

Courage

Belief in one’s convictions

Energy to work hard

Leadership personality traits:

Higher self-confidence, conscientiousness, openness to new experiences, emotional stability

Lower agreeableness

Leadership characteristics:

Vision

Dedication and drive

Commitment to excellence

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Launching a new venture requires a special kind of leadership. Entrepreneurial leadership = leadership appropriate for new ventures that requires courage, belief in one’s convictions, and the energy to work hard even in difficult circumstances, and that embodies vision, dedication and drive, and commitment to excellence. Entrepreneurs tend to have the following personality traits that distinguish them from corporate managers: higher self-confidence; a higher degree of organization, persistence and hard work in pursuit of goal attainment; more intellectual curiosity; a higher ability to handle ambiguity, less likely to be overcome by anxieties; and lower agreeableness, typically looking out for their own self-interest, willing to influence or manipulate others for their own advantage. However, ventures built on the charisma of a single person may have trouble growing “from good to great” once that person leaves. Thus, the leadership that is needed to build a great organization is usually exercised by a team of dedicated people rather than a single leader. The leadership team must attract members who fit with the company’s culture, goals, and work ethic. For a venture’s leadership to be a valuable resource and not a liability it must be cohesive in its vision, drive and dedication, and commitment to excellence.

Entrepreneurial Leadership: Vision, Drive & Dedication

Vision is an entrepreneur’s most important asset.

Requires transformational leadership

Ability to envision realities that do not yet exist

Ability to share this vision with others

Drive & dedication are necessary.

Involves internal motivation

Calls for intellectual commitment

Requires patience

Stamina, willingness to work long hours

Enthusiasm that attracts others

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Vision may be an entrepreneur’s most important asset. Entrepreneurs envision realities that do not yet exist. With vision, entrepreneurs are able to exercise a kind of transformational leadership that creates something new and, in some way, changes the world. In order to develop support, get financial backing, and attract employees, entrepreneurial leaders must share their vision with others. Drive and dedication are reflected in hard work. Drive involves internal motivation; dedication calls for intellectual commitment that keeps an entrepreneur going even in the face of bad news or poor luck. They both require patience, stamina, and a willingness to work long hours. The dedicated entrepreneur’s enthusiasm is also important – it attracts others to the business to help with the work.

Entrepreneurial Leadership: Commitment to Excellence

Commitment to excellence is required.

Commit to knowing the customer.

Provide quality goods and services.

Pay attention to details.

Continuously learn.

Connect the dots.

Hire people smarter than themselves.

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Excellence requires entrepreneurs to commit to knowing the customer, providing quality goods and services, paying attention to details, and continuously learning. Entrepreneurs who achieve excellence are sensitive to how these factors work together. The most successful entrepreneurs often report that they owed their success to hiring people smarter than themselves.

Competitive Dynamics

New entry threatens existing competitors.

Competitive dynamics helps explain why competitive strategies evolve and how to respond.

Need to identify new competitive action.

Engage in threat analysis.

Have the motivation and capability to respond.

Understand the types of competitive action.

Evaluate the likelihood of competitive reaction.

New entry into markets, whether by startups or by incumbent firms, nearly always threatens existing competitors. As a result, the competitive actions of the new entrants are very likely to provoke negative response from companies that feel threatened. Competitive dynamics = intense rivalry, involving actions and responses among similar competitors vying for the same customers in a marketplace. Intense rivalry among similar competitors has the potential to alter a company’s strategy. New entry is among the most common reasons why a cycle of competitive actions and reactions gets started. It might also occur because of threatening actions among existing competitors, such as aggressive cost-cutting. Thus, studying competitive dynamics helps explain why strategies evolve and reveals how, why, and when to respond to the actions of close competitors. New competitive action = acts that might provoke competitors to react, such as new market entry, price-cutting, imitating successful products, and expanding production capacity. Threat analysis = a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning.

Competitive Dynamics Model

Exhibit 8.4 Model of Competitive Dynamics

Source: Adapted from Chen, M.J. 1996. Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration. Academy of Management Review, 21(1): 100-134; Ketchen, D.J., Snow, C.C., & Hoover, V.L. 2004. Research on Competitive Dynamics: Recent Accomplishments and Future Challenges. Journal of Management, 30(6): 779-804; and Smith, K.G., Ferrier, W.J., & Grimm, C.M. 2001. King of the Hill: Dethroning the Industry Leader . Academy of Management Executive, 15(2): 59-70.

Jump to Appendix 1 for long description.

Exhibit 8.4 identifies the factors competitors need to consider when determining how to respond to a competitive act.

Competitive Dynamics: Why Launch Actions?

Why do companies launch new competitive actions?

To improve market position

To capitalize on growing demand

To expand production capacity

To provide an innovative new solution

To obtain first mover advantages

To strengthen financial outcomes & capture profits

To grow the business

When a company enters a market for the first time, it is an attack on existing competitors. In addition, price-cutting, imitating successful products, or expanding production capacity are all examples of competitive acts that might provoke a reaction. Companies are motivated to launch competitive challenges because they want to strengthen financial outcomes, capture some of the extraordinary profits that industry leaders enjoy, and grow the business. They also may want to build their reputation for innovativeness or efficiency. The likelihood that a competitor will launch an attack depends on many factors. Some of these factors include competitor analysis, market conditions, types of strategic actions available, and the resource endowments and capabilities companies need in order to take this competitive action.

Competitive Dynamics: Incumbents

Competition among incumbent rivals can involve “hardball” strategies.

Devastating rivals’ profit sanctuaries

Plagiarizing with pride

Deceiving the competition

Unleashing massive & overwhelming force

Raising competitors’ costs

Competitive attacks can come from many sources besides new entrants. Some of the most intense competition is among incumbent rivals intent on gaining strategic advantages. According to Boston Consulting Group authors George Stalk, Jr. and Rob Lachenauer, “winners in business play rough and don’t apologize for it.” Exhibit 8.5 outlines their five strategies for playing “hardball.” While the “big boys” are competing, it’s possible an entrepreneur might be able to take advantage of some of these activities.

Competitive Dynamics: Threat Analysis

Threat analysis involves an assessment of:

Market commonality

Resource similarity

How serious is the threat?

Motivation & capability to respond means asking:

What type of competitive response is necessary?

What resources are needed to fend off a competitive attack?

Am I willing & able to launch an action?

Which competitive action should I take?

Awareness of the threats posed by industry rivals allows a firm to understand what type of competitive response, if any, may be necessary. Threat analysis = a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning. Competitive dynamics are likely to be most intense among companies that are competing for the same customers or who have highly similar sets of resources. Market commonality = the extent to which competitors are vying for the same customers in the same markets. Resource similarity = the extent to which rivals draw from the same types of strategic resources. When any two firms have both a high degree of market commonality and highly similar resource bases, a stronger competitive threat is present. Once attacked, competitors are faced with deciding how to respond: What is their motivation and capability to respond? Before deciding, they need to evaluate not only how they will respond, but also their reasons for responding and their capability to respond: How serious is the attack, and what might be the intent of the competitive response? Is it merely to blunt the attack of the competitor, or is it an opportunity to enhance its competitive position? Sometimes the most a company can hope for is to minimize the damage caused by a competitive action. Companies also have to consider what strategic resources can be deployed to fend off a competitive attack. Does the company have an array of internal strengths it can draw on, or is it operating from a position of weakness?

Competitive Dynamics: Actions

Types of competitive actions include:

Strategic actions

Entering new markets

Creating new product introductions

Changing production capacity

Pursuing mergers or alliances

Tactical actions

Doing price cutting (or offering increases)

Making product/service enhancements

Increasing marketing efforts

Developing new distribution channels

Once an organization determines whether it is willing and able to launch a competitive action, it must determine what type of action is appropriate. The actions taken will be determined by both its resource capabilities and its motivation for responding. Two broadly defined types of competitive action include strategic actions and tactical actions. Strategic actions = major commitments of distinctive and specific resources to strategic initiatives. Tactical actions= refinements or extensions of strategies usually involving minor resource commitments. See Exhibit 8.6 for some examples.