Entrepreneurial strategies

1. Entrepreneurial strategies

2. Strategy defined ……. • The pattern of decisions that share the ventures internal resources configuration and deployment, and guide alignment with the environment ( Dollinger 1999) • The implications of this definition: • The pattern of decisions here means: • Strategy formulation – which includes planning and analysis • Strategy implementation - which includes execution and evaluation

3. The entrepreneur has to consider…… • Micro environment • The ventures internal environment • Firms resources and competences • The industry environment • Macro environment • Political environment • Economical environment • Technological environment • Social and demographic environment • Ecological environment

4.  process of business environmental analysis • There are four tasks required for comprehensive entrepreneur analyses of the environment. These include: • Scanning – to detect change • Monitoring – to track development • Forecasting – to project the future • Assessing – to interpret data

5.  POLITICAL AND GOVERNMENT ANALYSIS • To a large extent the individual entrepreneur is forced to accept the current political environment of the new venture • Collectively and over time and organized group of entrepreneurs can influence the political sector e.g. through NCCI, KAM, Matatu Owners Associations, Kenya Association of Insurers, Nairobi Central District Business Associations etc.

6. Political and government analysis involves: • 1.Stakeholder analysis – which helps the entrepreneur in identifying which groups and interest are friendly to the venture and which ones are hostile • 2.Analysis of international issues: • Global economy • Global events • Trade barriers • Tariffs • Political risks – instability, corruption, violence • Trade agreements

7. 3.National issue analysis: • Taxation • Regulations • Legislation • Government spending • Patent protection

8. Taxation affects the cash available for reinvestment, affects returns on investment • Regulations – control the flow of resources to firms and property rights of business owners • Legislation - e.g. Anti monopoly laws • 4. Regional and local issue analysis • Analysis of regional and local level policies can create opportunities or disadvantages for the entrepreneurs • E.g. Comesa, EAC policies

9. Macro Economical analysis • The macro economy is the total of all goods and services produces, distributed, sold or consumed • This activity takes place at global, national and local levels •  involves the exploration of the impact of two types of macro economic changes: • Structural changes • Cyclical changes

10. Structural changes • These are the major permanent shifts of resources and customers from one sector of the economy to another • As these shifts occur, financial capital, physical resources and human resources diminish in an industry that is fading and flow to the emerging industries e.g. shift form big industries to SMEs • Cyclical changes • This occurs because the macro economy enjoys period of growth and then sustained periods of contractions • These alternative time period are what are called the business cycle

11. Technological analysis • Technological analysis requires scanning and monitoring the environment in terms of operations and manufacturing techniques. • Technological changes take place in tow ways • Through pure invention • Through process innovation

12. Pure invention • Is the creation of something radically different from the existing technologies or products. • This usually gives a monopoly to the individuals who hold the legal rights to the inventions • Results to new industries • Process innovation • This makes the existing industries more efficient • Process innovation refers to small changes in: • Design • Product formulation • Manufacturing materials • Service delivery

13. Social demographic analysis • This analysis combines both demographic and social trends • The interaction of these two produces a popular culture and a popular culture determines business opportunities • Demographics changes are major sources of social change • Demography refer to trends in human population • size of the population in its various subgroups: • Population age and structure • Geographical distribution • Ethnic and racial mix • distribution of incomes and wealth within the population  

14. Demographic changes refer to a change in any of these variables and changes in relationships between them. • Demography determines: • Consumer demands • Industry capacities • Purchasing power

15. Social trends and values • Social trends refer to the modes and manners in which people live their lives • Lifestyles reflect people’s tastes and preferences in an economic sense • Lifestyle related variable that affect businesses are: • Household’s formation • Work modes • Labour force participation modes • Education levels and attainment • Patterns of consumptions • Patterns of leisure • Cultural values • Religion

16. Ecological analysis • This is the analysis of current stage of the ecology • The ecology pertains to such issues as • Pollution and waste disposal • Recycling of usable materials • Protection of wildlife • Protection of forests • Workplace safety and hazards • The general quality of life • Ecological awareness and sustainable development means that the entrepreneur “meets the requirements of the present generation without compromising the needs of the future generation”

17. Industry analysis • Purpose: • Determine what makes the industry attractive • To decide which segments of the industry are most attractive • The analysis will reveal appropriate strategies and resources to be procured and developed

18. Attractive industry • An attractive industry is that which can generate above normal profits or high growth. • How can firms earn supernormal or above normal profits? • 1. Through a differentiation strategy • This is where a firm develops a product that is distinctive enough that customers will be willing to pay a price high enough to productive attractive margins • 2. Through a low cost strategy • This is where a firm is able to produce at lower costs enough to produce attractive margins of profitability for those products that are identical to the competitors

19. TYPES OF STRATEGIES • A. ENTRY WEDGE STRATEGIES • For new ventures the entry wedge determines its strategy • An entry wedge is “the method the founders use to get their initial foothold into a business.” also referred to as “entry strategy”   • Major entry wedge which new ventures employ include: • New product or service • Parallel competition • Franchising

20. 1. New product/service wedge • This involves “being the first.” It’s a relatively rare strategy • The new product/service wedge is aimed at achieving a permanent leadership position within an existing industry by or by creating a new industry • Being first gives the venture a head start and also could given a lead in market share, low cost manufacturing and public awareness and recognition

21. Being first requirements… • This strategy requires • Being innovative • Being competitive – to wad off competition – through service warranties, delivery, proprietary issues

22. 2. Parallel competition strategy • This is a “me too” strategy that introduces competitive duplication into the market. • The duplications are parallel not identical to the existing products • The duplication represents an attempt to fill a niche, a small hole in the market • This can be done with small innovations or variation in an already well accepted and understood product line or service • Under this strategy, an entrepreneur notes that the present customers of a firm are unhappy and conceives a strategy that makes them happy

23. 2. Parallel competition strategy (cont..) • This strategy is also referred to as “creative imitation” strategy • It requires the firm to possess some distinctive competence without which one becomes easily displaces by other firms •  “Creative imitation” combines the common business configuration of the competitor (imitation part) and the new twist of variation ( the creative part)

24.  Examples of where entrepreneurs can get creative innovation •  “Not invented here syndrome” Where the existing firms are slow to adopt innovation or are slow to change because they did not initiate the idea •  The “skim the market” blind spot – firms that charge higher prices and attempt to capture only the most profitable business •  The maximiser complex – firms that try to do too much that serve all types of customers with all types of products or sere s are vulnerable because they may not serve customers well

25. 3. Franchising • The entrepreneur here enters the business as a franchisor or a franchisee. • The franchisor is the seller of the franchise • He or she expand his/her business using other people money time and energy to sell his or her product or service • The franchisee buys the franchise in form of fees or royalties and in return gets expertise, knowledge, support (training, marketing, osprations0 and other experiences of the franchisor • This reduces the risk of failure for the new entrepreneurs

26. Franchise businesses are advantageous because: • They are widely distributed • Are more recognized • Saves cost on logistics • Has volumes buying power • Training costs are low • Ability to use mass media for advertising efficiency  

27. Other minor entry strategies • 1. Exploiting partial momentum – where the entrepreneur has already market or product information that indicates that the new venture will be successful – having done it and worked on it in another geographical location • 2. Customer sponsorship – by entering into a contract with a customer to guarantee new firm sales – later on look for other customers

28. 3. Parent company sponsorship • This is done through licensing of joint ventures. The entrepreneur contracts with the parent company to produce a product or service (subcontracting) • It can also be done through market relinquishment – means parent company decides to stop servicing a market or product line and relinquishes to a specific entrepreneur.  

29. 4. Government sponsorship • Through direct assistance e.g. managerial or technical assistance • Favoured purchasing – procurement policies favour some type of businesses • Rules change – as rules change, new opportunities arise e.g. liberalization

30. strategy and industry environment • The industry one is entering is a major determinant of the strategy to adopt. • The entrepreneur can add to the success of their strategy by understanding the industry environment they are entering • Industry environment is not static. It evolves over time and this evolvement is called the industry life cycle. • The industry life cycle progresses through four stages • Emerging • Transitional • Maturing • Declining  

31. The life cycle progression rate is not the same in all industries and the length of each stage and the timing of each stage are highly variable and difficult to predict • Entry and competition takes different forms depending on the stage: •  Emerging industries – characterized by high rage of growth • Transitional industries – growth occurs at a decreased rate • Maturing industry - growth rate is zero • Declining industry – no growth or negative growth

32. EMERGING INDUSTRIES • These are newly created networks of firms launched to exploit new technology, new markets/customers or any other change in the macro environment. • They experience: • High levels of uncertainty. • Rapid growth • High rate of birth of new organisations

33. High levels of uncertainty includes • structural uncertainty • No traditional way of doing things. • No rules of the game/thumb. • There are no standard operating procedures. • There is technology uncertainties and firms are like laboratories trying new combinations of technology, human resources etc • Strategic uncertainty • The industry is not aware who the competition is or will be or what type of products or services the competitor is working on • Customer uncertainty • Customer market is only vague lily understood. Buyers’ needs, wants and behaviour etc are vague

34. 3. Resource uncertainty • Difficult to raise capital since financial sources are unfamiliar with the industry risks • Labour is difficult to get and turnover is also high because they are moving to other emerging industries. It is difficult to produce raw material and suppliers are limited

35. The entry strategy required here is: • being innovative and creative by creating utility, creative distribution, creative value (making something cheaper)  

36. TRANSITIONAL INDUSTRIES • Includes those industries moving form emerging to stability • At some point at this stage, there will be: • 1. Scarce resources • As new firms entering the industry push prices for resources up and create shortage e.g. labour movement form one employer to another • 2. Customer changes • Customers become more sophisticated and sure of what they want in terms of value, quality or product characteristics • Customers become more powerful, sophisticated and knowledgeable • At this stage it is now clear who the customer is

37. 3. Survivalstrategy in the shake out • The entry of many competitors/players and scarce resources results to increased production costs and decreased selling price. • This in turn leads to smaller margins for everyone and only the efficient firms survive. • The inefficient ones are “shaken out”. • Only firms that qualify under SCA will survive 

38. MATURING INDUSTRIES • Characterized by slow growth with: • Little pure innovation • More products/process improvements • More sophisticated customers • Increased concentration of producers (i.e. a large percentage of the goods 40 – 80% is being produced by a few firms) • One on two market leaders emerge e.g. uchumi vs. nakumatt • Entry in the industry is possible but barriers are high.

39. The strategies that can be used are: 1. Attacking the leader • If customers are unhappy, if the leader has become arrogant and no longer provides value • For attacking the leader to be successful, the following conditions must exist: • The attacker must have SCA. • The new entrant must neutralize the leaders advantage by at least matching the perceived quality of the leaders product • There must be an impediment that prevents retaliation  

40. 2. Specialization • This calls for the new venture to do something for a mature venture better than it could do itself leading to subcontracting

41. DECLINING INDUSTRIES • These industries are characterized by end of growth and sometimes decline. • For example, the tobacco industry could decline because of the new world lobby against smoking. • The manufacturers of cabulators for automobiles are declining; the manufacture of typewriters is also declining • The main cause of declining industry is: • Technological substitution – where old technology is replaces by new ones • Shift in the taste and preferences of customers • Demographic factors – more babies, less old people etc

42. Types of resources • Physical • Reputational • Organizational • Financial • Intellectual/human • Technological  

43. B. RESOURCE BASED STRATEGIES • Resource based strategies say that for a firm to have a sustainable completive advantage (SCA), it must have resources and capabilities that are • Rare - in the sense that there are not enough for all competitors • Valuable - because they exploit some environmental opportunities • Hard to copy - so that competitors cannot merely duplicate • Non substitutable - with other resources

44. These characteristics are so important because when a firm possess and controls resources with these four characteristics, it can withstand competitive pressures and will have competitive advantage in the long term

45. VALUABLE RESOURCES • What makes a resource valuable? • When they help an organisation implement its strategy effectively and efficiently • This means that in a SWOT model of firm performance, a valuable resource exploits opportunities or minimizes threat in a firm environment • Examples of valuable resources are property, equipment, skills

46. RARE RESOURCES • Because of their widespread availability they are not rare. • A resource can be considered rare as long as it is not widely available to all competitors. • Examples include good location, a good manage or leader, control of natural resources e.g. water, oil, heavy equipment needing high capital investment

47. HARD TO COPY • Firms with rare and valuable resources clearly have an advantage over firms lacking • Such assets such make a firm to acquire leadership position in the market. • However, at some price even rare resources can be obtained. But where duplication is not possible at a low price enough to lave a profit, the resource is said to be hard to copy

48. There are three factors which make it difficult for firms to copy each other skills and resources • Unique historical condition • Causal ambiguity ( ambiguous cause effect relationship) • Social complexity 

49. unique historical condition – examples • When starting a firm in a unique location that was unrecognized by others at the time • The creation of new venture by scientists and engineers whose special knowledge represent human capital and are difficult to copy because of patents • In this case initial assets and resources that accompany the organisation origin are unique for that place and time  

50. Ambiguous cause effects • Causal ambiguity exists where the relationship between cause and effect is not well understood or is ambiguous. • There is double about what is causing what and why things happened the way the do • When these things are imperfectly understood it is difficult for other firms to duplicate it •  For example, • an entrepreneur may not himself explain their own success, so how can imitators hope to duplicate its operation • The resources for this ambiguity is the complexity of an economic organisation i.e. relationship among product design, development, manufacturing, marketing cant be accurately analyzed.