Copyright © 2008 by Nelson, a division of Thomson Canada Limited ENTREPRENEURSHIP A PROCESS PERSPECTIVE Robert A. Baron Scott A. Shane A. Rebecca Reuber Slides Prepared by: Sandra Malach, University of Calgary

Copyright © 2008 by Nelson, a division of Thomson Canada Limited 11 STRATEGY: PLANNING FOR COMPETITIVE ADVANTAGE 1

Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 1.Define a competitive advantage and explain why an entrepreneur needs to have one to be successful. 2.Describe a new firm strategy, and explain why entrepreneurs need one to protect their profits from opportunity exploitation. 3.Distinguish between efforts to keep others from learning about or understanding the business idea and barriers to imitation, and explain why both are important to entrepreneurs.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 4.Define Arrow’s paradox, and explain the problem of disclosure. 5.List several barriers to imitation that entrepreneurs use. 6.Identify the conditions that favour franchising from the point of view of both the entrepreneur with an opportunity to exploit and potential franchisees. 7.Describe the strategic actions that entrepreneurs take to manage information asymmetry and uncertainty in the entrepreneurial process.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 8.Explain why entrepreneurs often start their businesses on a small scale and expand if they are successful. 9.Explain how alliances and partnerships with established firms help entrepreneurs to exploit their opportunities. 10.List actions that entrepreneurs undertake to make their new ventures appear more legitimate, and explain why they take these actions.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited “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

Copyright © 2008 by Nelson, a division of Thomson Canada Limited DEFINING COMPETITIVE ADVANTAGE A competitive advantage is an attribute that allows a firm, and not its competitors, to capture the profits from exploiting an opportunity.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited COMPETITIVE ADVANTAGE Effective strategy to protect a competitive advantage: Precludes others from imitating the business idea perfectly Allows the entrepreneur to capture the profits from exploiting the opportunity

Copyright © 2008 by Nelson, a division of Thomson Canada Limited BARRIERS TO COMPETITION Controlling Resources Establishing Legal Barriers Building a Reputation for Satisfying Customers Innovating to Stay Ahead of the Competition

Copyright © 2008 by Nelson, a division of Thomson Canada Limited IT’S A SECRET Trade secret—piece of intellectual property Causal ambiguity—knowing how to exploit the opportunity Codified Knowledge - Recorded Tacit knowledge—How to? Not codified Tacit knowledge is better than codified knowledge for creating causal ambiguity

Copyright © 2008 by Nelson, a division of Thomson Canada Limited ARROW’S PARADOX 1.A Buyer will never buy knowledge if its value is unknown 2.So, to sell knowledge its value has to be demonstrated 3.Demonstration transfers the knowledge and undermines the buyers’ incentive to pay 4.Once demonstration has occurred, the buyers won’t pay for the knowledge

Copyright © 2008 by Nelson, a division of Thomson Canada Limited BARRIERS TO IMITATION Three Common Types of Barriers: 1.Obtaining Control of Resources 2.Developing a Reputation & Brand Name 3.Innovating to Stay Ahead of the Competition

Copyright © 2008 by Nelson, a division of Thomson Canada Limited CONTROL OF RESOURCES Key Resources may include: Lease of space Exclusive supply & service contracts Legal Monopoly Patent Government Licence

Copyright © 2008 by Nelson, a division of Thomson Canada Limited ESTABLISH A REPUTATION & BRAND NAME Create Goodwill Advertise Heavily Create Expectations Reputation for Excellent Customer Service

Copyright © 2008 by Nelson, a division of Thomson Canada Limited INNOVATION To keep the product or service ahead of the competitors on any dimension desired by customers Quality Features Speed Cost, etc.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited OPTIONS FOR EXPLOITATION Market-based mode Different parts of the business are owned by different entities and connected by contractual relationships Hierarchical mode One party owns all parts of the operation – vertical integration

Copyright © 2008 by Nelson, a division of Thomson Canada Limited FACTORS IN SELECTING A MARKET-BASED MECHANISM Speed to market InformationCapabilities Cost Market-Based Mechanism

Copyright © 2008 by Nelson, a division of Thomson Canada Limited 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

Copyright © 2008 by Nelson, a division of Thomson Canada Limited PURPOSE OF LICENSING 1.Unable to obtain sufficient resources to bring idea to market Primarily cash 2.Lack critical capabilities Knowledge of market, manufacturing & distribution, sales expertise 3.Quick market entry Time to assemble the entire value chain

Copyright © 2008 by Nelson, a division of Thomson Canada Limited PRODUCT ATTRIBUTES Licencees prefer products with: 1.Intellectual property protection 2.Compelling evidence that it will sell 3.Long life expectancy and technology with potential to serve as basis for multiple products.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited FRANCHISING Permits geographic expansion Expansion financed by Franchisees Capital Costs Human Resources

Copyright © 2008 by Nelson, a division of Thomson Canada Limited 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

Copyright © 2008 by Nelson, a division of Thomson Canada Limited 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

Copyright © 2008 by Nelson, a division of Thomson Canada Limited BENEFITS OF ALLIANCES 1.Opportunities are short-lived Entrepreneurs lack time and $ to create infrastructure 2.Accessing international markets 3.Lack of capital 4.Increases reputation Brand-Name

Copyright © 2008 by Nelson, a division of Thomson Canada Limited POTENTIAL HAZARDS OF ALLIANCES 1.Exploitation of size and power 2.Misrepresentation of assets & capabilities 3.Sunk investments utilized to extract a different deal 4.Withheld promised resources & assets

Copyright © 2008 by Nelson, a division of Thomson Canada Limited 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