Growing and Internationalizing the Entrepreneurial Firm 5 Growing and Internationalizing the Entrepreneurial Firm chapter Part II: Business-Level Strategies Global Strategy Mike W. Peng Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community College All rights reserved.

Outline Entrepreneurship, entrepreneurs, and entrepreneurial firms A comprehensive model of entrepreneurship Five entrepreneurial strategies Internationalizing the entrepreneurial firm Debates and extensions The savvy entrepreneur Copyright © 2009 Cengage. All rights reserved.

Entrepreneurship, Entrepreneurs, and Entrepreneurial Firms Entrepreneurship - the identification and exploitation of previously unexplored opportunities Entrepreneurs - set of individuals who discover, evaluate, and exploit opportunities Founders and owners of new businesses and managers of firms with fewer then 500 employees Not the exclusive domain of small, young firms Small and medium-sized enterprises (SMEs) globally 95% of all firms Create 50% of total value added Generate 60-90% of all employment Each year 4-6% of adult working population in North America and Europe start a new venture Copyright © 2009 Cengage. All rights reserved. 3

Entrepreneurship, Entrepreneurs, and Entrepreneurial Firms (cont’d) Only a small number of entrepreneurial firms survive Entrepreneurship also exists in large firms International entrepreneurship Innovative, proactive, and risk-seeking behavior that crosses national borders Intended to create wealth Copyright © 2009 Cengage. All rights reserved.

A Comprehensive Model of Entrepreneurship Copyright © 2009 Cengage. All rights reserved. Figure 5.1

A Comprehensive Model of Entrepreneurship Resource Based Industry-based considerations Intensity of inter-firm rivalry Fewer incumbents, more likely to collude to keep out newcomers Entry barriers: capital intensive Bargaining power of suppliers: how to reduce it Bargaining power of buyers: how to reduce it Threat of substitute products/services Copyright © 2009 Cengage. All rights reserved. 3

A Comprehensive Model of Entrepreneurship Resource Based (cont’d) Cautions: Factors underlying the above five forces may be unknown Consumer preferences Effective pricing Capacity needed No guarantees Copyright © 2009 Cengage. All rights reserved.

A Comprehensive Model of Entrepreneurship Resource Based (cont’d) Resource-based considerations Entrepreneurial resources must create VRIO (value, rare, inimitable, organizationally embedded) Signs of credibility: specialization, reputation, alliances, etc. Institution-based considerations Formal institutions govern new ventures Striking differences in government regulations of start-ups Copyright © 2009 Cengage. All rights reserved.

A Comprehensive Model of Entrepreneurship Resource Based (cont’d) General conclusions: Level of entrepreneurship affected by: Economic developments Harshness of regulations Friendliness of formal institutions Support of informal institutions (values and norms) Copyright © 2009 Cengage. All rights reserved.

Five Entrepreneurial Strategies Growth Innovation Network Financing/governance Harvest/exit A sixth strategy, internationalization, will be covered in the next section Copyright © 2009 Cengage. All rights reserved.

Entrepreneurial Strategies: Growth Attempt to utilize resources and capabilities Entrepreneurial vision Entrepreneurial drive Entrepreneurial leadership Hallmarks of growth Dynamic, flexible, guerilla strategy Emphasize action, not analysis - emergent strategies Cautions Avoid over-aggressiveness Embrace uncertainties, but avoid excessive risk Carefully stage and sequence risky projects Copyright © 2009 Cengage. All rights reserved.

Entrepreneurial Strategies: Innovation An innovation strategy is a specialized form of differentiation strategy On average, there is a positive relationship between a high degree of innovation and superior profitability Advantages of an innovation strategy Creates a more sustainable competitive advantage Technological breakthroughs and organizational innovations (new ways of doing business) Owners, managers, and employees at entrepreneurial firms are more innovative and risk-taking than those at large firms Copyright © 2009 Cengage. All rights reserved.

Entrepreneurial Strategies: Network Intentionally construct and tap into relationships, connections and ties that individuals and organizations have developed Translate personal networks into value-adding organizational networks Distinguishing characteristics Needed to overcome liability of newness Intensity of relationships is important Networks represent significant resources and opportunities May lead to successful entrepreneurial performance Centrally located network positions are most helpful Copyright © 2009 Cengage. All rights reserved. 4

Entrepreneurial Strategies: Financing and Governance Strong ties (e.g. family, friends, etc.) are the most likely sources International differences in extent to which entrepreneurs draw on resources of family/friends versus outsiders Outside investors usually demand collateral or some other assurance Odds for survival during crucial early years are significantly correlated with firm size Faster a new start-up can reach a certain size, the more likely it will survive Entrepreneurs often choose to accept more outside investment in order to reach a large size Copyright © 2009 Cengage. All rights reserved. 4

One- and Four-Year Survival Rates by Firm Size CHANCES OF SURVIVING FIRM SIZE CHANCES OF SURVIVING (EMPLOYEES) AFTER 1 YEAR (EMPLOYEES) AFTER 4 YEARS 0-9 78% 0-19 50% 10-19 86% 20-49 67% 20-99 95% 50-99 67% 100-249 95% 100-499 70% 250+ 100% Source: Adapted from J. Timmons, 1999, New Venture Creation (p. 33), Boston: Irwin McGraw-Hill, based on US data. Copyright © 2009 Cengage. All rights reserved. Table 5.1

Entrepreneurial Strategies: Harvest and Exit Entrepreneurs must think about their exit plan early in the business cycle and aim at maximizing the gains from their labor. Routes for entrepreneurial harvest and exit: Selling an equity stake Selling the business Merging with another firm Going public with an initial public offering (IPO) Declaring bankruptcy Copyright © 2009 Cengage. All rights reserved. 4

Advantages and Disadvantages of an Initial Public Offering (IPO) Improved financial condition Subject to the whims of financial market Access to more capital Forced to focus on the short term Diversification of shareholder base Loss of entrepreneurial control Ability to cash out New fiduciary responsibilities for shareholders Management and employee incentives Loss of privacy Enhanced corporate reputation Limits on management’s freedom of action Greater opportunity for future acquisition Demands of periodic reporting Source: Based on text in J. Kaplan, 2003, Patterns of Entrepreneurship (pp. 428–430), New York: Wiley. Copyright © 2009 Cengage. All rights reserved. Table 5.3

Internationalizing the Entrepreneurial Firm Entrepreneurs are challenging myths about internationalization Transaction costs are higher International strategies for entering foreign markets Direct exporting Licensing or franchising Foreign direct investment (FDI) Copyright © 2009 Cengage. All rights reserved. 4

Internationalizing the Entrepreneurial Firm (cont’d) International strategies for staying in domestic markets Indirect exporting through domestic - based export intermediaries Become suppliers of foreign firms doing business in one’s home country Become licensees or franchisees of foreign brands Become alliance partners of foreign direct investors Harvest and exit through sell-offs to foreign firms Copyright © 2009 Cengage. All rights reserved.

Internationalization Strategies for Entrepreneurial Firms ENTERING FOREIGN MARKETS STAYING IN DOMESTIC MARKETS Direct exports Indirect exports (through domestic export intermediaries) Franchising/licensing Supplier of foreign firms Foreign direct investment (through strategic alliances, green-field wholly owned subsidiaries, and/or foreign acquisitions) Franchisee/licensee of foreign brands Alliance partner of foreign direct investors Harvest and exit (though sell-off to and acquisition by foreign entrants) Copyright © 2009 Cengage. All rights reserved. Table 5.4

Debates and Extensions Traits versus institutions Slow versus rapid internationalization Anti-failure biases versus entrepreneur-friendly bankruptcy laws Copyright © 2009 Cengage. All rights reserved. 4

The Savvy Entrepreneur Entrepreneurs are engines of creative destruction Insights on entrepreneurship by the three leading perspectives on strategy: Industry, Resource, and Institution views Four fundamental questions in strategy provide insight Copyright © 2009 Cengage. All rights reserved.