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Entrepreneurial Strategy Summary

Firms can achieve a better performance if they are able to develop a unique strategic position (decisions on the level of
non-price value delivered and on the cost level).
Innovative strategies are the result of entrepreneurial processes that allow the exploitation and development of a unique set
of resources.
RESOURCES ! Entrepreneurial processes ! STRATEGIC POSITIONING ! Innovative strategies
development ! INDUSTRY STRUCTURE
Which industry should we choose?
An industry that is attractive and we therefore conduct an Industry structure analysis
Which tools do we use?

Financial record: Average profitability and industry growth perspective

Five forces framework (Porter Analysis productivity frontier):


1. Competition: Actual / Future
2. Entry barriers
a. Scale economies: minimum efficient scale
required to cut costs
b. Cost disadvantages:
c. Proprietary technology:
d. Product differentiation and brand: Incumbents
have brand identification and customer
loyalties. This forces entrants to spend heavily
to overcome these loyalties. Start-ups may
bring a different product to market, but its
benefits must be clearly communicated to the
target customer. Start-ups must find an
effective positioning, which often requires
marketing resources beyond their means.
e. Customer switching costs: fixed costs that tie buyers to one supplier, especially when product is
durable or specialized, customers have invested a lot of time in learning how to use the product or
due to product specifications.
f. Government and legal: Governments can limit or prevent entry to industries with various controls
(e.g., licensing requirements, limits to access to raw materials). Start-ups in highly regulated
industries will find that incumbents have fine-tuned their business according to regulation.
g. Access to distribution: This can be a barrier if logical distribution channels have been locked up by
incumbents.
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Complements and substitutes

Industry Life-cycle
In order to overcome the difficulties/barriers we have to develop a strategy based on positioning choices ! Strategic
positioning:
1. Range (where to compete)
a. New geographical markets
b. New products for a new market segment
c. Distribution channels
d. Products
2. Value proposition
a. Differential value: to be focused on costs trying to get the maximum efficiency that will determine lower
prices for customers
b. Costs: to offer a greater non price value to customers due to performance of products and services
provided
c.
There are two ways to implement the value proposition:
No companies can be outstanding in adopting simultaneously both strategies but companies that work for the differentiation
advantage must consider effectiveness and companies that work in order to get the max efficiency must have the ability to
deliver a minimum non price value
1. DIFFERENTIATION STRATEGY
Costs of differentiation need to be lower than the potential benefit that can be obtained. In practice, the benefit obtained by
the customer (through the companies differentiation strategy) is called the differentiation value, and has to be greater than
the premium price charged in order to cover the cost of differentiation.
Cost of differentiation < Premium price < Differentiation value
2. COST STRATEGY
A company wants to have a cost-strategy that is more efficient than the average of the sector. The pricing will be lower or
equal to the average of the sector.
Value for customer > Price > Costs
In order to understand which strategy to implement more, we have to understand which are the most important value-chain
activities (supply, logistics, marketing & sales, services).
The only method that allows a company to achieve better performance is through strategic innovation (pushing up the
uniqueness curve). Strategic innovation is realized when a company redefines its own strategic positioning with a higher
non-price value for the customer OR/AND with a lower price determined by a more effective cost structure.
A strategic position is the sum of the answers to:

WHO should I target as customers? Identification of new customer segments that are underserved; new
geographical markets

WHAT products or services should I offer them? Redefinition of the product and service peculiarities that are
offered
Aim: increase non-price buyer value offered or to guarantee a minimum value, but with a price lower or equals to
the average market price.

HOW should I do this is an efficient way? How are products and services offered/delivered to customers?
(Achieved in redefining: distribution channels, advertising and communication, customers relationships,
development of complementary services in relation to products/services offered)
Strategic innovations are the result of:

A unique resource set

Unique resource combinations


Strategic innovation processes are guided by entrepreneurial capabilities embedded in the organization. In order to
implement our strategic innovation processes, sometimes the available resource set is not enough. We have to realize that
there is a GAP between the needed or desired set of resources and the one we already have. For this reason, we need to
acquire that set of resources and exploit them to implement our strategic innovation process.
During the process of exploitation we have to remember that we have to integrate these new resources and technology in a
harmonic way (not disruptive) with the existing ones. Seen that the company lives in a competitive environment the search
for the desired set of resources leads to the process of resource imitation and competitive escalation (when you, or a group
makes irrational decisions because they feel like they're trapped in a particular course of action and must keep moving
forward).
How does the strategic innovation process work?
Innovative projects ! Strategic initiatives ! Strategic innovations
Entrepreneurial orientation has the goal of coordinating the relationship between them. This means that top management
has to enable resources that have to be implemented and exploited during the life-span of a project. In the innovative
project phase, resources are requested and the compatibility with the strategic initiatives of the firm is evaluated. During the
implementation phase resources are exploited.
Resource based view: our decisions will be based on the resources that we possess. They can be divided into 3 main
categories:
1. Tangible resources
a. Financial
b. Physical
2. Intangible resources
a. Technological
b. Reputation
c. Company culture
3. Human resources (entrepreneur is also involved)
a. Skills/know-how
b. Capacity for communication and collaboration
c. Motivation
Actions on Resources: we want to understand how each of them can be used to be implemented in strategic initiatives with
an entrepreneurial spirit.
Tangible resources
1. Financial: financial reserves that can be used for strategic initiatives, not
to sustain the on-going business.
2. Physical: production plants, R&D lab, shops, warehouses.
Intangible resources
1. Tech. know-how: product innovation, process management, protected or unprotected.
2. Commercial know-how: CRM, customers directory.
3. Strategic relations with partners (in an industrial district).
4. Reputation: quality products, innovation.
5. Company culture.
Human resources
1. Skilled employees
2. Entrepreneurial employees
3. Entrepreneur and family
Actions on Organization: top managers have to introduce certain organizational innovations to obtain the desired level of
Entrepreneurial Orientation. Its dimensions are:
- Autonomy (he is totally independent)
- Proactiveness (anticipating the market)
- Risk taking attitude
- Innovativeness
Organizational innovation can be related to hard variables (organizational structure) or soft variables (operational
procedures).
HARD Organizational structure:
1. Flat (fast, dynamic better for development of entrepreneurial attitude; unpractical for large organizations)
2. Hierarchical (vertical integrated but necessitates a specific division of power, competences and control)
3. Matrix (allows the combination of technical and commercial competences of frontline managers; the CEO
controls only some division/function directly)
SOFT Operational procedures:
1. Time allocation system: frontline managers are allowed to spend quality and not residual time for new initiatives
2. Formal incentives systems: reward the ability of developing entrepreneurial initiatives, encouraging the attitude
towards entrepreneurial risk. They are much more efficient if they are developed at group level and not at
individual.
3. Stimulate information flow among managers, involved in technical activities
4. Introduce informal reward systems
Top managers need to control the effectiveness of the implementation of the strategy. They have to implement the strategy
in an environment that is small w. r. t. the entire organization.
The leaders role: fundamental role in strategic managerial processes

Ability to identify market potentialities and have a long term vision

Clear communication with specific strategic objectives

Empower leadership, creativity and idea generation

Realize interaction between top-down and bottom-up


A good strategy is a subtle combination of the perfect command of detail and the ability to have a grand vision. Detail is
vital, for without attention to detail, things go wrong, imagination in overall scope is critical too, or there is no impact.
Innovation
Closed innovation system
The final goal is to come up with something for the existing market, both by combining science and new technology and by
internal research investigation, filtering new ideas.

The paradigm of closed innovation says that successful innovation requires control and ownership of the Intellectual
property (IP). A company should control the creation and management of ideas. Roots of closed innovation go back to the
beginning of the twentieth century when universities and governments were not involved in the commercial application of
science. Some companies therefore decided to run their own research and development units. The entire new product
development (NPD) cycle was then integrated within the company where innovation was performed in a "closed" and self-
sufficient way.
Open innovation system
External technology base and external technology insourcing are filtered through internal/external venture handling in order
to come up with new ideas, both for new and current markets.
This allows firms not to close channels for opportunities in new markets.
Big Idea Casa analysis:

Open Innovation: an increasingly relevant phenomenon

The limitations are


o Human capital (you cant buy the knowledge of a person)
o Organizing tasks replication and scalability of processes
o Entrepreneurial skills

Open innovation offers several benefits to companies operating on a program of global collaboration:

Reduced cost of conducting research and development

Potential for improvement in development productivity

Incorporation of customers early in the development process

Increase in accuracy for market research and customer targeting

Potential for viral marketing


Implementing a model of open innovation is naturally associated with a number of risk and challenges, including:

Possibility of revealing information not intended for sharing

Potential for the hosting organization to lose their competitive advantage as a consequence of revealing
intellectual property

Increased complexity of controlling innovation and regulating how contributors affect a project

Devising a means to properly identify and incorporate external innovation

Realigning innovation strategies to extend beyond the firm in order to maximize the return from external
innovation
New trends in innovation
R&D=raising costs
Diminishing returns to scale
Productive lives of strategies is getting shorter (e.g. cell phones)
Challenges in Innovation

NIH syndrome (Not Invented Here): overcome the prejudice that if something is not invented inside the company,
then it is not valid: Example of the new member outside of the circle. He tends to be disregarded, because he has
no legitimacy to say anything. We tend to think that the quality of his ideas is lower. If you rely on your own
ideas, you think you are minimizing the risks. Maybe the outcome will be of lower quality, but Im sure it will be
done.

Avoid sunk cost-based view

Risk in fast moving situations is lower than the perceived

Adopt external technology strategy before it is too late

Use unused technologies can lead to the discovery of new product markets and thus sustain growth and thus
profits

Exploit ideas! Avoid not using it due to


o Supply side reason: I cant exploit the idea as an owner of the idea, so I assume no one else will know
how to use it.
o Demand side reason: selection problem. I f this company wants to sell this idea, there might be some
problem in it. Lemons market! Lack of trust. There is nothing intrinsically wrong in the product, but
perceptions distort reality.
Mergers and acquisitions:
Why do I care about M&A? Companies do M&A for many reasons:

Maximizing something: rational motive. Max profits by buying a synergetic firm. We can grow together.
Spirits industry. Vodka and Rum are trendy today (not here). Vodka company started. Aim: sell it for millions to
Campari... they have synergies in the distribution channel. Also financial and managerial synergies: by being
acquired, good managers can bring the knowledge required to grow.

Agency problems: increase the size of the firm because our prestige as CEOs will be higher if our company is
big. Conglomerates decrease the risk for the manager (not for shareholders)! Especially during the crisis

Monopoly motives: increase mkt share to exclude new entrants. Buy startups, collude, deter entry.
Other motives (non-rational)

Cognitive biases/Process theory: reasoning by analysis, illusion of control, escalating commitment. You spent
millions in lawyers and consulting, that you acquire the company!

Causes for M&A: macroeconomic disturbances. Exogenous shocks that make everyone start buying. Rumors
about stock prices. Then when people realize there is no reason for the price to be so high, prices drop.

Common view: there are some synergies. But its hard to detect synergies! Inspection problem: you are buying
the wrong target. Integration problem: hard to integrate. Price problem: too high!
Rules:

Avoid culture clashes: similar vision needed

Acquisitions must produce quick wins for the shareholders

But dont just think about short-term results!

Geographic proximity of the companies! Important to check and monitor them


Closed Innovation Principles Open Innovation Principles
Most of the smart people in our field work for us Not all the smart people work for us, so owe must find and tap
into the knowledge and expertise of bright individuals outside
our company
To profit from R&D, we must discover, develop and ship ourselves External R&D can create significant value; internal R&D is
needed to claim some portion of that value
If we discover it, we will get it to market first We don't have to originate the research in order to profit from it
If we are the 1st to commercialize we will win Building a better business model is better than getting to market
first
If we create the most and the best ideas in the industry, we will win If we make the best use of internal and external ideas, we will
win
We should control our intellectual property (IP) so that our
competitors don't profit from our ideas
We should profit from others' use of our IP, and we should buy
others' IP whenever it advances our own business model

Dont acquire just for technology, acquire for capabilities! Not only about the patents! Buy them for the
technology they will develop in the future. Think about the CV! What we have done matters only as a signal of
what we will do. Some people will hire us because of what we have done, not because of what we will do.
Capabilities are in people, and sometimes in teams! Its not about the person sometimes. If the team is important, if one
person of the team is missing, things may change. Capabilities and productivity of the team can change.

Structure, but with flexibility! Mandatory processes provide discipline.


M&A have an impact on the innovation processes of firms that are merged, and have an impact on the incentives.
The only thing that works is having the capabilities (resources) AND the effort (incentives)! This is the only way to
succeed.
Employee retention is essential when acquiring companies. If many inventors leave, the company is an empty shell. Those
who stay will have productivity decreased, because they do not feel they have an impact on the final result of the firm.
NPD depends on how you are integrating the companies. The time to market of the first products will be short if you keep
the two organizations relatively separate, but then you will lose the innovation for the future. On the other hand, if you
integrate them closely, the first launches will take some time but the future innovations will be there, constantly. But, do not
homogenize too much because the diversity is lost and the cross fertilization leveled out.
ROI: is the focus on the short term? Yes if you are worried about the market expectations (you paid with stock) and YES if
you paid with cash (because you are indebted and have to pay interest every month. If you have a short-term perspective
you will have more products but of lower breakthrough quality.
Firms that do many acquisitions turn to have financial, short-term incentives. There is always a trade-off between short-
term and long-term.
We want to create competitive advantage: adds value for the buyer and the user. Appropriated value is a function of value
creation! Difference between the WTP of customer and the cost we sustain.
When you enter a market because you see an opportunity, other firms will react. Price is the first reaction! We need to
anticipate how incumbents will react. Integrate game theory analysis concepts. The best way to predict the future is
through commitment.
Differentiate and be different to increase the WTP. Strategy should be consistent internally and externally, with the
environment! But think about the dynamic fit as well: is the CA sustainable? In the long term, the performance of firms
tends to converge. How to avoid this convergence? Growth.
" In principle, growth is good. You need to innovate constantly
" Excessive growth may be bad: growth is an instrument for profit, not a final goal!
" There may be factors impeding our growth: not that easy (think about the BIG idea)
" Think about open innovation strategies
Cases:
Lecture (Airlines industry analysis)
Remark:

Firms can enter new markets

Their profits depend on the reaction of other relevant players

Anticipating a reaction can foster competitive advantage


o Who are the players? What are the actions? What are the payoffs?

Takeaways:
o Retaliation to keep customers is relatively attractive in industries with high fixed and low marginal costs
" Low marginal costs ! companies are willing to drop price very low in order to keep an
incremental customer
o Retaliation is relatively unattractive when
" The entrant is small and is expected to stay that way
" The incumbent base is large and an across-the-board price cut is necessary to keep customers
o Price-based retaliation is more attractive when n demand is elastic and increased volume makes up for
some of the decline in price
n targeted retaliation is easier
n the incumbent cares more about the future profits
Lecture (BIG IDEAS analysis)
Remark:

Idea generation: Hunts! Big events when inventors present their ideas before a group of judges. Outsourced
flow: big companies ask BIG to screen ideas that go to big companies as Toys R us. Professional inventors
network of people who do it as a job. Orphaned products: ideas started out and aborted. Ideas in the warehouse.
Website gathers ideas, as well as the newsletter.

Winnowing: selection of the best ideas by a panel of experts. Aim: knowledge about the business but no/low
bias: different perspectives and backgrounds.

Refinement: improve the idea by designing it in a better way, testing it, packaging it.

Capturing value: channel selection and sale of the idea to them for a premium price. They DO NOT
manufacture, but they can SELECT the most appropriate channel! They choose the one with the best advertising
skills, capabilities and complementary assets.

Is a big success predictable? No.


o Bad industry
o No growth
o Dominated by few players
o Demand side: lower demand by kids ageing quickly
o Huge competition with technological gadgets
o Licensing of hit less successful

Where to diversify?
o In a market where high innovation is required
o Short product lifecycle
o Big market with a high potential
o No economies of scale in R&D. They want a mismatch of scale
o Regulation is an issue
o An industry where it doesnt take that much to have an idea, but its very hard to commercialize the idea.
The inventors will ever bring their ideas to the larger scale alone.

This business is mostly based on what?


o People: the entrepreneur (Mike Collins). He knows the market and is very operative, he is very involved
in every aspect and has the veto power. Knowledge of entrepreneurs because he is an entrepreneur
himself. He inspires other people. Personal motivation. Harvard MBA signals you are good in doing
your business. Will they be able to find a Mike Collins for another business?
o Process: can it be replicated? Not formalized, hard to replicate, hard to copy. Would it be good to
formalize the process? Not if you want to keep it entrepreneurial.