Chapter 3

Entrepreneurial Strategy:
Generating and Exploiting
New Entries

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Course Contains
• New Entry
• Generation of new entry opportunity
• Entry strategy for new entry exploitation
• Risk Reduction strategy for new entry
exploitation

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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.

• Newness is both positive and negative.

1. Newness can help differentiate a firm from its competitors.
2. However, newness creates a number of challenges for
entrepreneurs.

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Entrepreneurial strategy represents the set of decisions,
actions, and reactions that first generate a new entry and
then exploits over time, in a way that maximizes the
benefits of newness and minimizes its costs.

The elements of an entrepreneurial strategy are:

1. The generation of a new entry opportunity, the result of
a combination of knowledge and other resources into a
bundle that will be valuable, rare, and difficult for others
to imitate.
2. The exploitation of a new entry opportunity.
3. A feedback loop.

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 Entrepreneurial Strategy:
The Generation and Exploitation of New Entry Opportunities

If the entry warrants exploitation, then firm performance depends on

1. The entry strategy; the risk reduction strategy.
2. The way the firm is organized.
3. The competence of the entrepreneur and the management team.
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Long-run performance is dependent upon the ability to
generate and exploit numerous new entries. (Life cycle of
product)

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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
•These resources are the inputs into the production
process such as machinery, financial capital and
skilled employees)
•They can be combined in different ways and it is
this bundle of resources that provides a firm its
capacity to achieve superior performance.
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In order for a bundle of resources to be the basis of a firm’s
superior performance, the resources must be valuable, rare,
and inimitable.

A bundle of resources is:

Valuable when it enables the firm to pursue opportunities,
neutralize threats, and to offer products and services that
are valued by customers.
Rare when it is possessed by few.
Inimitable when replication of this combination of
resources would be difficulty and/or costly for
competitors.

Eg: Breeze Technology Inc.- ventilated shoes 3-8

 Creating a Resource Bundle That Is Valuable, Rare, and Inimitable.

The ability to obtain, and then recombine, resources into a bundle that is
valuable, rare, and inimitable represents an important entrepreneurial
resource.
The basis of this resource is knowledge, built up over time through
experience.
Experience is idiosyncratic–unique to the life of the individual–and
therefore can be considered rare.
Knowledge is important for generating a bundle of resources that enables
the firm to prosper.
The text discusses the impact of mountain bikers in causing innovation
in the industry.
This sort of knowledge is unlikely to be learned in a textbook or in class.

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Market knowledge refers to the entrepreneur’s possession of
information, technology, know-how, and skills that provide
insight into a market and its customers.

Being knowledgeable about the market and customers to

understand problems that customers have with the
market’s existing products.

Entrepreneurs who lack this extensive and intimate

knowledge of the market, and of customers’ attitudes and
behaviors, are less likely to recognize or create attractive
opportunities for new products and/or new markets.

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Difficult to articulate/ express the problem they have with
the product or services.
Eg: bikers intimate and first hand knowledge about the
problems help them to come up with new products.

Not all the time market research will help.

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Technological knowledge is also a basis for generating new entry
opportunities.

Technological knowledge refers to the entrepreneur’s possession of

information, technology, know-how, and skills that provide insight into
ways to create new knowledge.

For example, the laser was invented over 30 years ago and has led to
many new entry opportunities.

Used in navigation, precision measurement, music recording, and fiber

optics. repair detached retinas and reverse blindness.

These new entries were derived from the knowledge of laser technology,
and market applicability

Technological knowledge has led to technological advancement that

creates new markets. 3-12
Assessing the Attractiveness of a New Entry Opportunity.

The entrepreneur needs to determine whether a new product is in fact valuable, rare,
and inimitable.

Information on a New Entry.

1)Prior knowledge and information search

Prior market and technological knowledge used to create new entry potential –helps in
assessing the attractiveness of particular opportunity.

More prior knowledge means the entrepreneur starts from a position of less
ignorance.

Knowledge can be increased by searching for information on the attractiveness of the

new entry opportunity.

A longer search period gives the entrepreneur more time to gain more information
about customer demand and protection from imitation.

However, there are costs associated with this search in terms of money and time.
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2. Window of Opportunity (a favorable opportunity for doing
something that must be seized immediately).

When the window of opportunity is open, the environment is

favorable for entrepreneurs to exploit a new product.

However, the window of opportunity may close.

Competitors enters in the market and creates barriers to entry.

The time spent in collecting additional information increases

the likelihood that the window of opportunity will close.

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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.

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The Decision to Exploit or Not to Exploit the New Entry
Opportunity

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D. Decision to Exploit or Not to Exploit the New Entry.

The decision on whether to exploit or not to exploit the new

entry opportunity depends on whether the entrepreneur has
sufficient information to make a decision and whether the
window is still open.

This decision depends on the stock of information and on the

entrepreneur’s level of comfort with making a decision
without perfect knowledge.

The assessment of a new entry’ attractiveness is less about

whether the opportunity “really” exists and more about
whether the entrepreneur believes he or she can make it
work. 3-17
ENTRY STRATEGY FOR NEW ENTRY
EXPLOITATION
Being first can create advantages that can enhance
performance.
1.First movers develop a cost advantage.
a.The first mover is also able to move down the
“experience curve.”
b.The firm can spread its fixed costs over a greater
number of units (economies of scale) as well as learn
by trial and error (learning curve.)

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2. First movers face less competitive rivalry.
a. First movers enjoy a rapidly growing market.
b. In the growth stage, firms are more concerned with keeping
up with demand than they are with taking market share from
others.

3. First movers can secure important channels.

a. First movers can select and develop strong relationships
with the most important suppliers and distribution
channels.
b. This may represent a barrier to those considering entry and
choosing the inferior suppliers to do business.

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 Advantage and Disadvantages
of First Mover
Advantages of First Mover Disadvantages of First Mover
• Cost Advantages • Environmental Instability
• Loss Reduction • Customer
• Secure Important Channels • Uncertainty
• Prime Position For • Short Lead Time
Customers
• Expertise from Participation
• Benefit of Experience Curve

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4. First movers are better positioned to satisfy customers:
They have the chance to:
a. Select and secure the most attractive segments of a market.
b. Position themself at the center of the market.
c. Establish their product as the industry standard.

5. First movers gain expertise through participation: They

can:
a. Learn from the first generation of products and improve.
b. Monitor changes in the market that might be difficult to
detect for firms not in the market.
c. Build up their networks.

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B. Environmental Instability and First-Mover
(Dis)Advantages.
The performance of a firm depends on the fit between its
bundle of resources and the external environment.
a. If there is a good fit, then the firm will be rewarded with
superior performance.
b. If the fit is poor, then performance will also be poor.

To obtain a good fit with the external environment, the

entrepreneur must determine key success factors, requirements
that any firm must meet to successfully compete.
The first mover will not know these key success factors and
must commit resources based on his or her best guess of what
these factors might be.
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If the environment remains stable, the firm has a good
chance for success.
If the environment changes, so too will the key
success factors.
Entrepreneurs face considerable demand uncertainty
and technological uncertainty.

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3. Demand Uncertainty.

First movers have little information on the potential size of the market and how
fast it will grow.

Demand uncertainty makes it difficult to estimate future demand.

(i) By overestimating demand, the entrepreneur will suffer the costs of

overcapacity.

(ii) By underestimating market demand, the entrepreneur will suffer the costs of
undercapacity.

Demand uncertainty also makes it difficult to predict key dimensions such as how
customers’ needs and tastes may change.

Entrepreneurs that delay entry have the opportunity to learn from first movers
without incurring the same costs.

Followers have the advantage of more information about market demand.

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4. Technological Uncertainty.

First movers often must make a commitment to a new

technology.

New technology may not perform as expected or superior

alternate technology may be introduced.

A superior technology might be introduced that provides later

entrants a competitive advantage.

Delayed entry can reduce technological uncertainty by

learning from the first mover’s R&D program.

When technological uncertainty is high, first-mover

advantages may be outweighed by first-mover
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5. Adaptation.

Changes in market demand and technology mean the

entrepreneur must adapt to new environmental conditions.

Such change is difficult; the organization has an inertia that

resists change.

The entrepreneurial attributes of persistence/stubbornness and

determination can inhibit the entrepreneur’s ability to
detect and implement change.
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C. Customers Uncertainty, and First-Mover (Dis)Advantages.

Introducing a new product or entering a new market both involve an

element of newness.

Uncertainty for customers:

They may be uncertain about how to use the product or about its benefits
over current products.

Even with a superior product the entrepreneur must reduce customer

uncertainties.

To reduce this uncertainty, the entrepreneur can:

Offer informational advertising about how the product performs.

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Use comparison marketing to highlight a product’s benefits
over those of other products.

When the new product is highly innovative, the customer may

lack a frame of reference for processing this information.

Customers are unlikely to purchase a product until they are

convinced it is consistent with enabling products, systems and
knowledge–possibly through demonstration and
documentation.

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D. Lead Time and First-Mover (Dis)Advantages.

Entry barriers let the first mover operate for a grace period of
limited competition.

The lead time gives the entrepreneur a period to prepare for when
competition does increase.

Lead time can be extended if the first mover can erect barriers to
entry such as:

a. Building customer loyalties.

b. Build customer’s switching costs.
c. Protecting product uniqueness.
d. Securing access to important sources of supply and
distribution.
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Risk Reduction Strategies for New Entry
Exploitation
Business risk refers to uncertainty in profits or danger of loss
and events that could pose a risk due to some unforeseen
events in future, which causes business to fail.
The risk comes from uncertainty over market demand,
technological development, and the actions of competitors.
• 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. 3-30
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.
• 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.
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Risk Reduction Strategies for
New Entry Exploitation (cont.)
– 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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Risk Reduction Strategies for
New Entry Exploitation (cont.)
• 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. 3-33
Risk Reduction Strategies for
New Entry Exploitation (cont.)
– 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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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.

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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.

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