1. McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT Chapter 13 Recognizing Opportunities and Creating New Ventures Strategic Management: creating competitive advantages Gregory G. Dess G. T. Lumpkin Marilyn L. Taylor Part 3: Strategic Implementation Part 3: Strategic Implementation

2. 13-2 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives After reading this chapter, you should have a good understanding of: The role of new ventures and small businesses in the U.S. economy. The importance of opportunity recognition, as well as the role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures.

3. 13-3 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives After reading this chapter, you should have a good understanding of: The role of vision, dedication, and commitment to excellence in determining the quality of entrepreneurial leadership. The different types of financing that are available to new ventures depending on their stage of development

4. 13-4 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives After reading this chapter, you should have a good understanding of: The importance of human capital and social capital as well as government resources in supporting new ventures and small businesses. The three types of entry strategies— pioneering, imitative, and adaptive—that are commonly used to launch a new venture.

5. 13-5 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives After reading this chapter, you should have a good understanding of: How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses

6. 13-6 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Categories of Entrepreneurial Ventures Distinctions (with strategic implications) among entrepreneurial firms Size Age Growth goals Entrepreneurial firms generally favor growth Entrepreneur may sell shares to support growth

7. 13-7 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Distribution of Small Businesses in the United States Services (49%) 2,767,000 Finance, Insurance, and Real Estate (8.4%) 473,000 Manufacturing (5.4%) 307,000 Mining (0.3%) 19,000 Construction (12.4%) 703,000 Transportation, Communications, and Public Utilities (4.3%) 245,000 Wholesale Trade (6.3%) 355,000 Retail Trade (6.3%) 355,000 Agricultural Services (0.4%) 27,000 Adapted from Exhibit 13.1 All Small Companies by Industry Source: SBA’s Office of Advocacy, based on data provided by the U.S. Census Bureau, statistics of U.S. businesses.

8. 13-8 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Elephants, Mice, and Gazelles Elephants Large Older Cannot change direction quickly Have laid off more people than hired in past 25 years Can be hard chargers Can mover rapidly because of power in the marketplace Command respect Can influence marketplace and business conditions Elephants

9. 13-9 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Elephants, Mice, and Gazelles Mice Small firms that power the U.S. economy Small retailers, manufacturers Small service firms, auto repair shops, plumbers, restaurants Don’t have much market power Can change direction quickly in response to changes in business conditions Many do not aspire to grow large Maintain profitability Some, however, aspire to grow Mice

10. 13-10 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Elephants, Mice, and Gazelles Gazelles Seek rapid growth and above average profitability May be listed in the Inc. 500 or Entrepreneur Hot 100 Grow at least 20 percent a year for five years, from a base of at least $100,000 in revenues Doubles in size during the four-year period Value proposition often includes radical innovation or implementation of new technology Seek growth rather than control Create many jobs in the economy Gazelles

11. 13-11 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Entrepreneurial Ventures Definition: A family business is a privately held firm in which family members have some degree of effective control over the strategic direction of the firm and intend for the business to remain within the family. Scope: Comprise 80 to 90% of all business enterprises in North America, 30 t0 35% of the Fortune 500 companies and majority of enterprises internationally. Fifty percent of the U.S. GDP (over $3.3 trillion) is generated by family-owned businesses. Family businesses TypeCharacteristics Adapted from Exhibit 13.2 Types of Entrepreneurial Ventures

12. 13-12 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Entrepreneurial Ventures Definition: A franchise exists when a firm that already has a successful product or service (franchisor) contracts with another business to be a dealer (franchisee) by using the franchisor’s name, trademark and business system in exchange for a fee Scope: Accounted for $1 trillion in annual retail sales in the United States in 2000. There are about 320,000 franchise businesses, employing more than 8 million people in 75 different industries. Franchises TypeCharacteristics Adapted from Exhibit 13.2 Types of Entrepreneurial Ventures

13. 13-13 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Entrepreneurial Ventures Definition: a home-based business, also referred to as SOHO (Small Office/Home Office), consists of a company with 20 or fewer employees, including self-employed, free agents, e-lancers, telecommuters, or other independent professionals working from a home-based setting. Scope: Approximately 20 million businesses are home-based. The U.S. Commerce Department estimates that more than half of all small businesses are home-based. Home-based businesses TypeCharacteristics Adapted from Exhibit 13.2 Types of Entrepreneurial Ventures

14. 13-14 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Opportunity Recognition: Identifying and Developing Market Opportunities Opportunities come from many sources Start-ups Current or past work experiences Hobbies that grow into businesses or lead to inventions Suggestions by friends or family Chance events Change

15. 13-15 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Opportunity Recognition: Identifying and Developing Market Opportunities Opportunities come from many sources Established firms Needs of existing customers Suggestions by suppliers Technological developments that lead to new advances Change

16. 13-16 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Opportunity Recognition Process Period when you first become aware of a new business concept May be spontaneous and unexpected May occur as the result of deliberate search for New venture projects Creative solutions to business problems Discovery phase

17. 13-17 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Opportunity Recognition Process Evaluating an opportunity (Can it be developed into a full- fledged new venture?) Talk to potential target customers Discuss it with production or logistics managers Conduct feasibility analysis Market potential Product concept testing Focus groups Trial runs with end users Discovery phase Opportunity formation phase

18. 13-18 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Characteristics of Good Opportunities Good Business Opportunity AttractiveValue creating AchievableDurable Before launching opportunity as a business Evaluate readiness and skills of entrepreneurial founder or team Consider availability and access to resources

19. 13-19 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Opportunity Opportunity Analysis Framework ResourcesEntrepreneur(s) Adapted from Exhibit 13.3 Opportunity Analysis Framework Sources: Based on J. A. Timmons and S. Spinelli, New Venture Creation, 6 th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2004); and W. D. Bygrave, “The Entrepreneurial Process,” in W. D. Bygrave, ed., The Portable MBA in Entrepreneurship, 2 nd ed. (New York:Wiley, 1997).

20. 13-20 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Entrepreneurial Resources Major challenge for entrepreneurial firm is lack of resources Money Human capital Social capital Resources

21. 13-21 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Entrepreneurial Resources Money (New-Venture Financing) Early-stage financing Personal savings, family, and friends Bank financing, public financing, venture capital Debt Equity Bootstrapping Resources

22. 13-22 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Alternatives to Traditional Financing Allows a start-up to hold onto its cash and minimize commitments to equipment or real estate that might need updating as the company grows (or shrinks). Leasing costs are deductible as a business expense. Leasing MethodDescription Adapted from Exhibit 13.4 Alternatives to Traditional Financing A traditional noncash means of exchanging products or services. Bartering has enjoyed a resurgence in p0opularity because exchange services now available on the Internet are facilitating more barter transactions. Barter Sources: J. A. Fraser, “Plans for Growth,” Inc. Magazine, March 2001, pp. 56-57; J. A. Fraser, “A Hitchhiker’s Guide to Capital Resources,” Inc. Magazine, February 1998, pp. 74-82; and T. Owens, “Getting Financing in 1990,” Small Business Reports, June 1990, 0pp. 61-72.

23. 13-23 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Sources: J. A. Fraser, “Plans for Growth,” Inc. Magazine, March 2001, pp. 56-57; J. A. Fraser, “A Hitchhiker’s Guide to Capital Resources,” Inc. Magazine, February 1998, pp. 74-82; and T. Owens, “Getting Financing in 1990,” Small Business Reports, June 1990, 0pp. 61-72. Alternatives to Traditional Financing One of the fastest growing techniques for financing start-ups and number one among female entrepreneurs. It’s like a bank loan without the lengthy approval process. But the high interest rates that some cards charge could make it risky. Credit cards MethodDescription Adapted from Exhibit 13.4 Alternatives to Traditional Financing Suppliers that let you pay for goods or services in 60 or 90 days rather than after only 10 to 30 days are, in effect, financing your purchase. Some suppliers will agree to this because they need your business as badly as you need their credit. Supplier financing

24. 13-24 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Sources: J. A. Fraser, “Plans for Growth,” Inc. Magazine, March 2001, pp. 56-57; J. A. Fraser, “A Hitchhiker’s Guide to Capital Resources,” Inc. Magazine, February 1998, pp. 74-82; and T. Owens, “Getting Financing in 1990,” Small Business Reports, June 1990, 0pp. 61-72. Alternatives to Traditional Financing Factoring is a method of raising cash by selling accounts receivables to a third party or financing against the value of receivables. It’s generally used only for short-term cash needs and often comes with a hefty interest charge. Factoring MethodDescription Adapted from Exhibit 13.4 Alternatives to Traditional Financing

25. 13-25 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Entrepreneurial Resources Money (Going Concern) Later-stage financing Angel investors Venture capital equity financing Commercial banks Resources

26. 13-26 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Entrepreneurial Resources Human capital Social capital Government resources Small Business Administration Government contracting State and local governments Resources

27. 13-27 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Entrepreneurial Leadership Launching a new venture requires a special king of leadership Courage Belief in one’s convictions Energy to work hard Three characteristics Vision Dedication and drive Commitment to excellence Entrepreneur(s)

28. 13-28 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Vision Entrepreneurial Leadership Vision may be entrepreneur’s most important asset Ability to envision realities that do not yet exist Able to communicate with a wide audience Willing to make unpopular decisions Determined to make sure your message gets through Create and implement quality systems and methods that will survive Entrepreneur(s)

29. 13-29 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Vision Dedication and Drive Entrepreneurial Leadership Dedication and drive are reflected in hard work Patience Stamina Willingness to work long hours Internal motivation Intellectual commitment to the enterprise Strong enthusiasm for work and life Entrepreneur(s)

30. 13-30 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Vision Entrepreneurial Leadership To achieve excellence, venture founders and small business owners must Understand the customer Provide quality products and services Manage the business knowledgeably and expertly Pay attention to details Continuously learn Surround themselves with good people Entrepreneur(s) Dedication and Drive Commitment to Excellence

31. 13-31 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Entrepreneurial Strategy Best strategy for the enterprise will be determined to some extent by Unique features of the opportunity, resources, and entrepreneur(s) Other conditions in the business environment Can use various tools and techniques to determine strategic choices Five-forces analysis Value-chain analysis

32. 13-32 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Entry Strategies Getting a foothold in the market Pioneering new entry Creating new ways to solve old problems Meeting customer’s needs in a unique new way Imitative new entry Strong marketing orientation Introduce same basic product or service in another segment of the market Adaptive new entry Offer product or service that is “somewhat new and different” Aware of marketplace conditions and conceive entry strategies to capitalized on current trends

33. 13-33 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Generic Strategies How new ventures can achieve competitive advantages Overall cost leadership Simple organizational structures More quickly upgrade technology and integrate feedback from the marketplace Make timely decisions that affect cost Differentiation Use new technology Deploy resources in a radical new way Focus Niche strategies fit the small business mold

34. 13-34 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Combination Strategies A key issue is the scope of a small firm’s strategic efforts relative to those of its competitors Pursue combination strategies Combine best features of low-cost, differentiation, and focus strategies Flexibility and quick decision-making ability of a small firm not laden with layers of bureaucracy