MHR 322 Exam 1

Entrepreneurship is

• An economic phenomena

• A possible career choice

• A mindset that can be used in any organizational context 

Management mindsets: Given and Challenges

Given:

• Resources available based on current state 

• Goal to achieve based on incremental steps 

Challenge:

• Find the most effective/ efficient path linking the resources to the goa
  

Entrepreneurial Mindsets: Given and Challenges

Given:

• Opportunities arise from uncertainty 

• Resources can be acquired/ assembled

Challenge:

• Utilize a flexible, adaptive process to simultaneously explore possible goals and path to those goals

In an uncertain world…

An entrepreneurial mindset will be valuable

• new , complex challenges

• Unequal access to resources

• Changing time frames

• Globalization

  • Increased competition, access to resources and customers

• Technology- facilitated scaled up 

Bocks Definition of Entrepreneurship

 recognizing an opportunity and taking action to create change 

Being vs. Succeeding

The traits that lead people to become entrepreneurs may not be the same traits that helps entrepreneurs succeed.

Traits of people more likely to become entrepreneurs 

• Greater self-esteem 

• Need for achievement and independence

• Good on learning aptitude test (GPA not so much) 

• Comfortable with calculated risk-taking

• Innovativeness creativity

• Optimistic 

Non-trait drivers of entrepreneurship 

• Socio-economic factors

• Educational attainment

• national/immigrant status 

• Nature v. nurture

• Prior experience

Traits of Entrepreneurs: Seeking Balance 

• High self-esteem and optimism can lead to trouble

• Need to validate your idea with customer/market feedback

• The nest entrepreneurs are both determined and willing to be wrong

Failure in real learning

• Learn valuable information

• Build new skills

• Be vulnerable

• Stay on a path that can be found by trial and error

• To be successful soon 

Dynamic Capitalism Typology 

• Separating out entrepreneurship types 

• Economic core: restaurants

• Resource Constrained: lot of innovation but low growth rate

• Ambitious: noodles and company, set of meals were created it can be replicated everywhere, low innovation

• Glamorous Ventures: Tesla, significant technological change  

Entrepreneurship is also:

• Social entrepreneurship

• Corporate entrepreneurship

• Family business 

Social Entrepreneurship

• Innovations in non-profit management 

• Solving societal problems via new for-profit firms (ex. Whole Foods, TOMs Shoes)

• Including non-profit maximizing metrics as goals for the firm, such as…

  • Reduce IT items in landfills

  • Donate 10% of profits to charity 

Corporate and Family

• Corporate entrepreneurship (Intrapreneurship) 

  • Innovation and entrepreneurial culture in large firms 

  • Better support structure/lower idk 

  • Limited rewards

• Family Business

  • Significant component of firms of all sizes

    • Large firms: Johnson Wax, Menards

    • Family issues can be very real, for good and bad 

3 Motivations to start a venture (from DE reading) 

• Passion: I like doing X and want to build a company around it 

• Technology: Robot that can do X

• Idea: Came up with an idea that can change the world (by solving a problem) 

 Passion in Entrepreneurship 

• Passion is great 

• Passion is probably required… but alone it isn't enough

Technology/Push risks lack of market demand

• Great solution for a problem I don't have 

• Need to either pivot to new market or create demand

Key Questions-Technology

• The technology is?

• Why do you have a significant advantage over anyone else with regard to this technology/invention? 

• Compared with the most relevant current alternative, why is your technology so compelling that it will make people and industries change 

Idea/Risk is that demand pull exist but no solution

• Problem that has yet to be solved 

Solution isn't Profitable

• Real problem has been solved but not cost effectively 

Key Questions-Problem/Market Pull 

• What is the general problem you are trying to solve or the opportunity you are looking to capitalize on?

• How urgent/big of a problem is this for customers? 

• What makes you and your team uniquely qualified to implement your idea?

Key Questions-Hybrid 

• The idea is relevant to the ________ market because it will produce significant value by ____________

• The enabling technology invention is? Why wasn't this solution possible 5 years ago?

• What makes you and your team uniquely qualified to pursue this opportunity?

Two Key Questions for Entrepreneurship Idea

• Does customer demand exist for what you are selling?

• If “yes,” can I generate long-term profits in the business?

Two main Approaches in Entrepreneurship

• Predictive (Forecasting)

  • Try to predict characteristics of ideas, or conditions, that will 

• Learning (Experimentation)

  •  May Perform experiments and use results to assess future outcomes

Learning Framework

• Have an idea for a product/company 

• Realize that your “idea” may or may not be correct

• Formalize your idea into a theory 

• Test your theory by building an experiment 

  • Inexpensive

  • As real as possible

• Measure the results

• change/pivot your idea in response to what you learn

• Repeat 

Why is failure is normal 

• Attractive customer segment is smaller/different than expected

Why Industry Analysis

• Anticipate the most profitable industries

  • Enter Where profitability will increase or stay high

  • exit/avoid those where profit is low and will remain low. 

• Good manager vs. good business, who wins?

• What drives profitability of a market/industry 

Threat of Entry 

• Brand name

• Patents

• Network effects

• High switching costs

• Scale economies

• Others 

The Five Forces: (Reading)

• determine the competitive structure of an industry, and its profitability. Industry structure together with a company’s relative position within the industry = two basic drivers of company profitability

•  help companies predict shifts in competition, shape how industry structures evolves, and find better strategic positions within the industry 

Top-Down for calculating Total Addressable Market (TAM)

• using industry research and reports

• overestimates market size

Bottom-Up for calculating Total Addressable Market (TAM)

using data for early selling efforts

Value Theory for calculating Total Addressable Market (TAM)

using conjecture about buyers willingness to pay

Factors affecting adoption rate 

• Relative advantage

• Compatibility

• Trainability

• Observability

• Risk 

• Complexity 

Pros and Cons of creating a Market

• Pros: first-mover advantage over competitors: potential brand power, potentially high profit margins

• Cons: difficult to conduct market research: cost of educating customers: high risk of getting it wrong

China Syndrome

• market is huge meaning only need a small % to do well (WRONG)

• “Top-down” analysis → almost always wrong 

Potential Segment Characteristics

• Demographics, Geographics

• what drives these characteristics (loyal, sensitive)

True segments are determined by

behavior

Target Customer Segment

a group of potential customers who share many characters and who would all have similar reasons to buy a particular product. 

Beachhead Market

• Pick one (only one!)

• Small has advantages

• Most compelling value proposition

• Easy access for testing 

End User

person using the product

Champion

closely related and encourage the product

Primary Economic Buyer

paying for the product, but not using the product

Influencers

experts, endorsements, veto power (matters a lot)

Total Addressable Market (TAM)

• Annual revenue your business would earn if it had 100% market share

• As if every (realistically) possible customer made the purchase

• #of potential customers x average price of the product/service calculate per year

Value Proposition

The benefits that a company offers a specific customer segment that makes a purchase worthwhile

Pains removed from customer from product

• Price

• Performance (time/quality)

• Cost reduction

• Risk reduction

• convenience/usability

• Accessibility to new segment

• Feel better/ remove guilt

• Other

Benefits Gained by customer

• Customization

• Newness

• Design

• Social status/brand

• Entertained 

How to confirm value proposition

1. take complete theory to market

2. test theory in smaller, quicker components

Good Value Proportions (Osterwalder)

• difficult to copy

• outperform competition

• align with how customers measure success

• focus on unsatisfied jobs

Common Value Proposition Problems

• Idea is just a feature extension for someone else’s product

• Nice to have but not got to have 

• Too small of a potential market actually cares about the V.P

Prospect Theory

people would rather avoid a loss than have a chance at a gAIN

Endowment Theory

people value what they have more than what they dont

The Innovator’s Curse

• Self-Selection

• Results in a clash in perspective

• knowledge gap (innovator knows the need but the customer doesnt)

Degrees of Change

Incremental/Tinkering: Low Behavior Change, Low Product Change

Strike Out: high behavior change, low product change

Long Haul: high behavior change, high product change

Home Run: low behavior chnge, high product change

Intellectual Property

• inventions

• literacy and artistic works, symbols, names and images

• protected by law

Copyright

• legal protection provided to authors of creative work

• doesn’t protect facts or ideas, not plagiarism

Patents

• not an automatic protection

• inventor and who signs the rights to invention

• limit of years they can protect the invention

• only in US

Types of Patents

Utility Patents: new useful and nonobvious processes, machines

Plant Patent: protect asexually reproducing plants

Design Patent: protect ornamental designs

Trademark

• words, phrases, logos, shapes, colors, sounds and scents

Trade Dress

• Identified a brand or product with its overall look, distinctive non-functional design element of a product, packaging 

Core Competitive Advantage Potential

• Quality

• Network effect

• Customer service

• Low cost

• User experience

• manufacturing /design expertise

Core- Competitive Advantage Cons

• Better technology’ product

• First mover advantage

• Locking up suppliers

• Low price (careful!)

Network Effect

• Value of product/service depends on number of users/customers

• The value to a new user/customer increases as the size of the network increases

  • Ex. ebay, facebook, 

  • High switching cost – switching to something else you lose significant value 

Customer Service - Competitive Advantages

• Can be a powerful advantage

• Often appears easy to create and maintain, but usually not!

• Requires significant investment in training, HR management and culture

Cost < or > Price

• Low price = low margin

  • Anyone can do this and fail

• Low cost = competitive advantage

  • Few companies do this and win

Core is NOT

• First mover advantage

  • Despite what many entrepreneurs want to believe

  • May facilitate network effect but isn't sustainable by itself

• Locking up suppliers (careful…)

  • Rare that there is a single provider

  • Ever rarer that they will be happy with an exclusive distributor/customer 

Comparing your Offering to the competition

• Define market

• Define attributes you think customers will care about the most

• Include status-quo

• Include direct competitors 

Competitive Strategy

• Two sources of competitive advantage:

  • Cost

  • Differentiation 

• Degree of Scope:

  • Broad

  • Focused (niche) 

Start-Up Competition

• looks different

• dont look to competition for solutions

• dont respond instantly to competitive shifts

• focus on competing in one event at first

Competition Factors

• Be careful about assumptions

• Recognize small firm advantages

• Look for switching costs 

High Switching Cost

switching to something else means you lose significant value

Low Switching Cost

• what entrepreneurs wants,

• the customer isnt losing significant value in switching to something else

Small Firm Advantages

• high powered incentives

• idea

• speed

• fit with environment

• no legacy costs : costs from the past of this company that customers compare

• potentially closer to customers

Switching Costs

• cognitive/ user level

• complementary assets

• search costs

• network effects

• costs from switching products

  • time, money, knowledge, opportunity cost

• lead to lock in

Overcoming Switching Costs

• removes/reduces switching cost

• technologically better than the others

• benefits outweigh the costs, risks, and uncertainty of switching

• fits customers purchase logic

Establish Switching Costs

• contractual provisions

  • extended, exclusive

• stagger purchases (durable purchases)

• unique interfaces (brand specific)

• acquire/ neutralize other suppliers

• customize solutions (search cost)

• establishing loyalty programs

Success is

• execution

• creating demonstrable value for customers

  • compared to what they have

  • compared to what is offered by competition

Porters Generic Strategies for gaining competitive advantage

• cost leadership:

  • lowering prices while maintaining profitability

• differentiation

  • offering unique features

• focus

  • niche market

Why Porters model doesnt work

• the shift of mass market to customization

  • consumer feedback to tailor

• decline of size as competitive advantage

  • reduced barriers to enter and zero marginal cost of reaching consumers

  • size is no longer sufficient for success

• Distinct vs Generic good

  • customers buy bother

• role of social media: direct engagement

• customer-centric approach

• adaptability and learning

• reward for moving fast

Competitive Strategy Chart

• industry-wide and cost = lowest cost across country

• Industry wide and differentiation = better product across country

• focus and cost = lowest cost in industry

• differentiation and focus = better product in industry

Why cant you do both low cost and differentiation

low cost requires, lower price and high volume for the minimum customer need while differentiation requires high price at lower volume for customers who need more than minimum

Differentiation

• invest to create better products who need MORE THAN minimum

• high price, low volume

• reinvest profits in further improving products

Low Cost

• drive down cost AND meet minimum customer need

• lower price at high volume

• reinvest in driving costs down further to maintain advantage

First-to-Market Challenges

• High cost of _______ 

  • Building supplier network

  • Setting up distribution and support

  • Customer education

  • Fixing errors

  • Brand-building 

Fast Follower Advantages

• Suppliers already identified and vetted

• Copy distribution and support from 1st mover

• 1st mover has already educated customers

• Most major errors addressed by 1st mover

• Brand-building compares against 1st mover

First-to-Market

• not a sustainable long term competitive advantage

When can First-to-Market convert to long-term advantages?

• take advantage of economies of scale

• leverage network effects

• build unique brand identity

• create supplier/ customer lock in

• use advantages to make a defensible strategic position

3 types of capital required to launch a venture

1. financial capital

2. social capital

3. human capital

Solo Founds

• deep human and social capital

• prefers to maintain control

• small business or slow moving industry

Co-Founders

• lacks one or more types of needed capital

• needs validation

• business is in a fast-moving industry

• 1-4 co-founders

Homophily

the tendency to form strong social connections with people who share defining characteristics

Homogenous Teams

they get work down effectively and quickly at beginning

Heterogenous Teams

• outperform in long run because of diverse opinions and problem-solving processes

Phases of a New Company

• jungle

• dirt road

• highway

“Jungle” Phase of a New Company driving forces

• startups change

• people change

Risk of picking a cofound similar to you

venture lacks breadth of skills needed to succeed quickly, (learning takes a long time)

Risk of picking a cofound who are students

limited business knowledge, significant potential for people to change their minds