1. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPresentation prepared by Thomas M c Kaig, Ryerson University Entrepreneurship & The Need for Competitive Advantage 1

2. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-2 Looking Ahead After studying this chapter, you should be able to: 1.Identify the rewards and drawbacks of an entrepreneurial career. 2. Describe the various types of entrepreneurs, entrepreneurial management styles, and entrepreneurial ventures. 3. Discuss several factors that indicate a readiness for entrepreneurship. 4.Define small business and identify the importance of small business. 5. Define competitive advantage and assess features of the organization itself that support competitive advantage.

3. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-3 Looking Ahead 6. Identify and compare strategy options for building competitive advangtage. 7. Define market segmentation and its related strategies. 8. Explain the concept of niche marketing and its importance to small business. 9. Discuss the importance of sustaining competitive advantage.

4. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-4 Entrepreneur Defined A person who starts and/or operates a business. All active owner-managers and second generation members of family owned firms and owner- managers which buy out founders of existing firms. Also includes salaried managers of larger corporations who have a flair for innovation and risk.

5. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-5 Figure 1-1 Entrepreneurial Incentives

6. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-6 Drawbacks of Entrepreneurship Hard work Long hours Emotional loneliness Strong possibility of failure Disruptions to personal life

7. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-7 Who Are Entrepreneurs? Entrepreneurs are:  Individuals who discover market needs and launch new firms to meet those needs.  Risk takers who provide an impetus for change, innovation, and progress.  All active owner-managers (founders and/or managers of small businesses).

8. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-8 Characteristics of Entrepreneurs Need for Achievement Willingness to Take Risks Self-Confidence internal locus of control  have an internal locus of control Passion for the Business

9. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-9 Internal vs. External Locus of Control Internal Locus of Control:  Entrepreneurs tend to hold themselves accountable for their own successes or failures. External Locus of Control:  Non-entrepreneurs tend to believe that external circumstances impact upon their worlds.

10. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-10 Varieties of Entrepreneurship Founder (“Pure” Entrepreneur)  An entrepreneur who brings a new firm into existence. General Manager  An entrepreneur who functions as an administrator of a business. Franchisee  An entrepreneur whose power is limited by the contractual relationship with a franchising organization.

11. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-11 Characteristics of Artisan Entrepreneurs Technical training Paternalistic approach Reluctance to delegate Narrow view of strategy Personal sales effort Short planning horizon Simple record keeping

12. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-12 Characteristics of Opportunistic Entrepreneurs Broad-based education Scientific approach to problems Willing to delegate Broad view of strategy Diversified marketing approach Longer planning horizon Sophisticated accounting and financial control

13. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-13 Entrepreneurial Teams Two or more people who work together as entrepreneurs. Helpful to:  Secure a broad range of managerial talents  Enhance profits Useful in:  Marginal firms  Attractive small firms  High potential firms

14. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-14 Small Businesses, Growth, and Profits High-Potential Venture (Gazelle)  A small firm that has great prospects for growth. Attractive Small Firm  A small firm that provides substantial profits to its owner. Marginal Firms  A small firm that provides minimal profits to its owner.

15. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-15 Four Routes to Entrepreneurship Entering a family business Opening a franchised business Starting a new business Buying an existing business

16. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-16 Figure 1-2 Age Concerns in Starting a Business

17. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-17 Entrepreneurial Refugees Foreign refugee Corporate refugee Parental refugee Feminist refugee Housewife refugee Society refugee Educational refugee

18. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-18 Taking the Plunge Precipitating Event  An event, such as losing a job, that moves an individual to become an entrepreneur.

19. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-19 What Is a Small Business? Criteria for Defining Smallness in Business –Financing supplied by one person or small group –Localized business operations (except marketing) –Business’ size small relative to larger competitors –Fewer than 100 employees

20. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-20 Why is Small Business Important? In 1999, 940,000 small businesses were registered in Canada Over 90 percent of these businesses have fewer than 50 employees Firms with less than 5 employees account for 80 percent of all business entities New jobs created by small businesses are growing at rate of 2.3 percent per year, with almost 80 percent of the growth being generated by the newly self-employed.

21. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-21 Competitive Advantage Unique Service Features Notable Product Attributes Customer Service Accessibility CompetitiveAdvantage Price/Value

22. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-22 Laying the Foundation to Competitive Advantage Competitive Advantage  To establish competitive advantage, the owner needs to understand the nature of the environment within which he or she will be operating.  A benefit that exists when a firm has a product or service that is seen by its target market as better than those of competitors.

23. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-23 A Model of Competitive Advantage Figure 1-3

24. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-24 Assessing The Environment The Macroenvironment  A broad environment with its multiple factors that affect most businesses in a society Industry Environment  The combined forces that directly impact a given firm and its competitors

25. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-25 Segments of the General Environment Sociocultural Economic Political/Legal Technological

26. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-26 Major Factors Offsetting Market Attractiveness Concept by Michael Porter Bargaining Power of Buyers Threat of Substitute Products or Services Bargaining Power of Suppliers Rivalry Among Existing Products Threat of New Competitors Attractiveness and Profitability of a Target Market Fig 2.5 Figure 1-4

27. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-27 Competitor Analysis of and by an Organization Who are the new venture’s current competitors? What resources do they control? What are their strengths and weaknesses? How will they respond to the new venture’s decision to enter the industry? How can the new venture respond? Who else might be able to observe and exploit the same opportunity? Are there ways to co-opt potential or actual competitors by forming alliances?

28. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-28 Core Competencies and Assessing the Organization Core Competencies Value-creating organizational capabilities that are unique to a firm Resources versus Capabilities  Resources  Resources are basic inputs that a firm uses to conduct business (capital, technology, equipment, employees, etc.) intangible and tangible resources  Capabilities  Capabilities are the integration of several resources which are deployed together to the firm’s advantage.

29. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-29 Examples of SWOT Factors Internal Strengths –Core Competencies –Financial strength –Well-planned strategy –Skilled management Weaknesses –Production inefficiencies –Inadequate financial resources –Poor management –Poorly planned strategy External Opportunities –Untapped market potential –Favourable shift in market –Emerging technologies –New product Threats –New competition –Rising demand –Increased government regulations

30. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-30 Strategies that Capture Opportunities Broad-Based Strategy Options  Seek an advantage in cost or competition. Cost-Advantage Strategy and Options  Requires the firm to be the lowest-cost producer. Marketing-Advantage Strategy  Emphasizing the uniqueness of the firm’s product or service

31. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-31 Market Segmentation and its Variables Market Segmentation –division of a market into several smaller groups with similar needs or buying behaviour Market –a group of customers or potentional customers who have purchasing power and unsatisfied needs.

32. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-32 Ingredients of a Market Ingredient 1 Customers: People or businesses Ingredient 2 Purchasing power: Money/credit Ingredient 3 Unsatisfied needs

33. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-33 Market Segmentation Variables Segmentation Variables  The parameters used to distinguish one form of market behaviour from another Geographic Variables  Defining a market by its location, size, or extent Benefit Variables  Specific characteristics that distinguish market segments according to the benefit sought Demographic Variables  Specific characteristics that describe customers and their purchasing power. Psychographic Variables  Lifestyle trends such as fitness, diet, political and sexual orientation

34. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-34 Types of Market Segmentation Strategies Unsegmented Strategy (Mass Marketing)  A strategy that defines the total market as the target market Multisegmented Strategy  A strategy that recognizes different preferences of individual market segments and develops a unique marketing mix for each Single-Segmentation Strategy  A strategy that recognizes the existence of several distinct segments but focuses on only the most profitable segment

35. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-35 Marketing Mix 1 Product:Lead Pencil Price:$0.79 Promotion:Television Distribution:Extensive Small Business (Community Writing Company) Market All Potential Users of a Writing Instrument An Unsegmented Market Strategy Figure 1-5

36. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-36 Multisegmentation Market Strategy Figure 1-6

37. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-37 Marketing Mix 1 Product:Felt-Tip Pen Price:$0.49 Promotion:Campus Newspapers Distribution:Bookstores Small Business (Community Writing Company) Market Segment A Students Market Segment C Executives Market Segment B Professors A Single- Segmentation Market Strategy Figure 1-7

38. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-38 Strategic Terms Strategic Decision  A decision regarding the direction a firm will take in relation to its customers and competitors.

39. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-39 Implementation of Niche Marketing Strategies Restricting focus to a single subset of customers. Limiting the market to a single geographical region. Emphasizing a single product or service. Concentrating on superiority of product or service.

40. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-40 Niche Market Potential Niche markets can quickly erode if:  The focus strategy is imitated.  The target segment is structurally unattractive.  The target segment’s differences from other segments narrow.  New firms subsegment the industry.

41. Chapter 1Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 1-41 Sustaining Competitive Advantage Sustaining competitive advantage   A value-creating industry position that is likely to endure over time.   Results include superior profitability, increased market share, and improved customer satisfaction.