entrepreneurship strategy: planning for competitive advantage 10
Post on 19-Dec-2015
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Entrepreneurship
Strategy: Planning for Competitive Advantage
10
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“What sets us against one another is not our aims—they all come to the same thing—but our methods, which are the fruit of our varied reasoning.”
--Saint-Exupery
Wind, Sand and Stars, 1939
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Competitive Advantage
• Precludes others from imitating the business idea perfectly
• Allows the entrepreneur to capture the profits from exploiting the opportunity
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Barriers to Competition
• Maintain secrecy
• Control resources
• Establish legal barriers to imitation
• Exploit the idea on a large scale
• Establish a reputation
• Innovate
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It’s a Secret
• Trade secret—piece of intellectual property
• Causal ambiguity—knowing how to exploit the opportunity
• Tacit knowledge—knowledge that isn’t codified
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Legal Monopolies
• Patents
• Government permits
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Opportunity Exploitation
• Licensing—contract to use a business idea in return for a fee
• Franchising—right to provide an existing firm’s product or service to end customers
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Options for Exploitation
• Market-based mode• Best when different parts of the
business are owned by different entities and connected by contractual relationships
• Hierarchical mode• Best when one party owns all parts of
the operation
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Factors in Selecting a Market-Based Mechanism
Speed to market
InformationCapabilities
Cost
Market-Based Mechanism
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Minimizing Cost
A market-based mode allows an entrepreneur to
• Invest less capital in comparison to hierarchical modes
• Tap franchisees as a source of capital
• License ideas to finance development
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Getting to Market
A market-based mode allows an entrepreneur to
• Assemble the entire value chain in time to exploit it
• Be the first mover• Leverage network externalities
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Leveraging Capabilities
A market-based mode allows an entrepreneur to
• Compensate for areas of weakness• Increase performance by contracting with
partners who have stronger capabilities
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Managing Information
A market-based mode allows an entrepreneur to
• Use patents to mitigate the disclosure problem
• Codify a business idea in a contract
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Benefits of Market-Based Methods
Contractual modes of opportunity exploitation can protect entrepreneurs from
• Adverse selection
• Shirking
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Hazards of Market-Based Methods
• Free riding—attempt to benefit from the work of another franchisee
• Hold-up—attempt to opportunistically renegotiate the terms of a contract
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Information Problems and Modes of ExploitationPROBLEM EXPLOITATION
Adverse selection of employees Market-based
Shirking by employees Market-based
Free riding by outlet operators Hierarchical
Hold-up of outlet operators Hierarchical
Disclosure of knowledge Hierarchical
Tacit business idea Hierarchical
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Managing Uncertainty and Information Asymmetry
• Growth from small scale• Forming alliances and partnerships with
established firms• Creating legitimacy for the opportunity
and the new venture
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Starting Small
Uncertainty and information asymmetry make it necessary for entrepreneurs to start small because
• Entrepreneurs must self-finance
• Investors don’t give large sums all at once
• Entrepreneurs must minimize risk
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Finding Allies
Alliances and partnerships can provide:
• The assets needed to pursue short-lived opportunities
• The capital required to purchase needed resources
• A brand name to give the business idea value
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It’s Legit
Entrepreneurs demonstrate the legitimacy of their ideas by
• Showing conformity to existing rules and norms
• Imitating the routines and procedures of existing firms
• Engaging in collective actions
• Obtaining certification