Entrepreneurship
3. Market conditions and Industry factors
Madina Sagidullina
Senior Lecturer
Hometask
• Read and study 2 week slides
• Watch the video “The Role of Venture Creation in Society: Interview:
Andy Rachleff, Founder, Wealthfront, Co-founder, Benchmark Capital”
• Prepare summary of the video interview (short essay, 250-300 words)!!! FINAL DEADLINE
• Write down your one goal by using SMART structure
Industry Conditions:
Knowledge Conditions
“Industry” is a type of economic activity
• Agriculture, Forestry, Fishing and Hunting
• Arts, Entertainment, and Recreation
• Educational Services
• Mining, Oil and Gas Extraction
• Utilities
• Construction
• Manufacturing
• Wholesale Trade
• Retail Trade
• Transportation and Warehousing
• Information
• Finance and Insurance
• Real Estate
• Professional, Scientific, and Technical Services
• Management of Companies and Enterprises
• Waste Management and Remediation Services
• Health Care and Social Assistance
• Accommodation and Food Services
• Other Services (except Public Administration)
• Public Administration
Selecting the “right” industry
• Success depends a great deal on
selecting the right industry in which to launch a new firm
• Important to focus on identifying the attributes that make an industry
favorable or unfavorable to new entrants
Knowledge and demand conditions
• Understanding the knowledge
conditions and demand conditions within an industry provides:
– Insights into the attractiveness of an industry for new entrants
– Information on if, and how, to compete effectively within a chosen industry
Knowledge Conditions
• Amount and type of knowledge creation that is required to generate the industry’s products/services.
• Do you need specific expertise, or is success based more on financial
capabilities, location, relationships, etc.?
– Why do high-knowledge industries favor new entrants?
To leverage your knowledge
• Explore ideas that align with your educational and/or work experiences
• Seek ideas that intersect
– Your know-how, – Your interests, and – Your social capital.
What do you know?
• By considering new venture ideas that build on your existing
knowledge, you can create favorable knowledge conditions for yourself.
• You may see opportunities that others do not (or see opportunities sooner)
– And have unique ideas on solutions
What would you like to know?
• Seek opportunities to build your knowledge of industries, markets, technologies etc.
– To expand your new venture creation opportunities and ideas
• Partner with co-founder/team members to expand knowledge
Summary
• Explore ideas that leverage what you know, and what you would like to know
• Consider co-founders or team members
– Brings complimentary knowledge – Adds social capital for the venture
Are the demand conditions in your industry
favorable?
Objectives
Examine demand conditions in the context of entrepreneurial industry conditions
Explore the impact of demand conditions on success as an entrepreneur
Exploring industry conditions
Provides insights into the attractiveness of an industry for new entrants
Knowledge conditions Demand conditions
With this understanding, aspiring entrepreneurs can determine if, and how, to compete effectively within their chosen
industry
• Defining demand conditions
“the size, rate of growth, and consistency of the market”
To create a successful new company, you need to introduce a product or service that:
satisfies customer needs in a better way than competitors; and
at a price that is greater than the cost of creating and delivering that product or service.
“A problem well-stated is a problem half-solved”
Seek new ways to solve a known problem rather than speculate on unknown problems
Study current products and customers to see needs and wants
For a real need to exist, the new product or service must be significantly better than alternatives
Entrepreneurs should develop and deliver exceptionally better value to customers
Researching demand conditions
• IBISWorld
– Industry Market Research and Industry Risk Ratings
• BizStats
– Business financial ratios and statistics
• Eurostat
– Statistics on the European Union countries
• SBDCNet
– National Information Clearinghouse of the U.S. Small Business Administration
• U.S. Census Bureau
– Economic indicators on monthly and quarterly bases, and economic census data every five year for every industry
To capitalize on demand conditions, focus on three aspects
•Magnitude of customer demand for products and services, as this quantifies your number of
prospective customers
•Rate of growth of that demand, in that you should enter a growing market
•Consistency of that demand across customer segments.
Segmentation is an opportunity for entrepreneurs to specialize
1.Build your reputation and brand for doing one thing well
2.Leverage that into new segments later in your venture’s lifetime
Summary
•Is the industry that I am planning to enter a good one for starting a new company?
•Are the demand conditions in the industry favorable to a start-up?
– Magnitude of customer demand sufficiently high – Rate of growth increasing
– Consistency of demand relatively homogenous
What is the lifecycle stage of your industry?
•Examine lifecycle stages in the context of entrepreneurial industry status
•Explore the impact of lifecycle stages on your success as an entrepreneur
Exploring industry status
•With industry conditions framing knowledge and demand factors, it’s important to
understand industry status
– Industry status addresses industry lifecycle and industry structure with an emphasis on growth opportunities and industry evolution
•By studying industry status, aspiring entrepreneurs can assess the industry’s timeliness for new entrepreneurial entrants
Macroeconomic Change Entrepreneurial
Motivation
Entrepreneurial Behavior
Industry Condition
Industry Status Industrylifecycle Industrystructure
Opportunity Identification
Value Curve Competition
The Opportunity Analysis CanvasTM
Entrepreneurial Mindset
Defining industry lifecycle
“the stages of development of an industry”
•Lifecycle of the industry significantly affects a new venture’s performance in the market
•Impacts how existing and new competitors will behave and react to your entry
Lifecycle influences cost of entry and rules of competition
•Depending on the maturity of the industry, the costs to enter and compete effectively differ dramatically
– Early lifecycle industries are typically easier and more cost effective for entrepreneurs to compete within
– Alternatively, middle and late-stage industries may be dominated by large, established competitors
New ventures perform best in young industries
•Substantially less competition versus established industries
– Competing companies are often small and thereby operating on a more level playing field with new entrants
•Offer a common learning curve amongst all competitors
– No old competitors
– No one is yet an established leader
Summary
•Industry lifecycle influences the competitive environment of your venture, and overall
success
•Young industries present multiple advantages for new entrants
•Requires greater consideration of what the future holds, and how to establish and grow the industry, as the rules are yet to be set
Industry Status:
Industry Structure
Industry Structure
• Refers to the nature of barriers to entry &
competitive dynamics in the industry – Capital intensity
– Advertising intensity – Firm concentration
– Average company size
Capital intensity
• Amount of money required to enter and compete in the industry
– An industry that is expensive to enter
has high capital intensity (i.e. automotive manufacturing).
– Industries that are inexpensive to enter have low capital intensity (i.e. a website providing movie reviews and opinions).
Advertising intensity
• Addresses the importance of advertising and branding to the success of competitors in a specific industry
– If customers in this industry prefer to buy from companies with which they have had successful transactions in the past,
– or companies that offer their preferred products or brands,
– the advertising intensity is high.
Company concentration and size
• Concentration
– Number of competitors in the industry
• Size
– Level of resources (money, employees, etc.) of competitors
Company concentration and size
• Industries with a small number of small sized competitors present the preferred scenario for new ventures.
• Competing with a few small
competitors is more advantageous for entrepreneurs versus competing with many large competitors.
Summary
• Is the industry at the right stage of the life cycle for a start-up?
• Is the industry structure favorable for a start-up?
Is your advantage superior and sustainable?
•Examine your competitive advantage at the opportunity identification phase of your new venture creation activities
Macroeconomic Change Entrepreneurial
Motivation
Entrepreneurial Behavior
Industry Condition
Industry Status Industrylifecycle Industrystructure
Opportunity Identification
Value Curve Competition
The Opportunity Analysis CanvasTM
Entrepreneurial Mindset
Building competitive advantage
•Begin with a customer-validated perspective on the problem for your planned solution
•Invest time and resources into building the venture
•To understand your advantage versus competitors, consider the:
–Degree of the advantage; and the –Sustainability of that advantage.
The degree of your advantage?
•A product or service with better features or functions
•A sustainably lower price for the customer based on the value created for them
– Due to your operations or other cost control strategies
•A rareness factor, meaning that competitors cannot offer the same set of values to this
customer
The sustainability of your advantage?
•Sustainability determines the likelihood of competitors replicating or surpassing your venture
• How easily can a competitor copy/exceed your
–Resources, –Know-how, –Operations, –Relationships –etc.?
Summary
•Competitive advantage depends on its degree and sustainability
–Are you significantly better, cheaper, rarer, etc.?
–How will you maintain or improve your position?
•Explore sources of competitive advantage
–Specialization –Localization –Team
–Etc.
Learning Curve
The learning curve refers to the speed of learning something new.
• Depicted graphically as the
relationship between the number of times something has been done on one axis versus the level of
proficiency demonstrated on the other axis
The learning curve refers to the speed of learning something new.
Source:http://www.frontier.net/~grifftoe/nervous.html
Influences of your learning curve
• What you know today
• Your interests
• Your commitment
• Your resources to learn new things
Learning curve challenges for entrepreneurs
• As a novice entrepreneur, you may not start at the same point on the learning curve as an established company
– Due to their past operations, they’ve moved up the learning curve through trial and error, research, lessons learned, etc.
What is an entrepreneur to do given this disadvantage to established companies?
• Minimize the gap between your knowledge and your competitors’
knowledge
– Pursue entrepreneurial ideas in new industries
– Seek new markets
• Chief Technical Officer
– CTO and co-founder of the aerospace firm. Invented long-endurance hybrid electric propulsion concept for Boeing.
• Chief Designer
– Director of Design at the Mazda North American Design Center. Design
Director at General Motors.
• Chief Financial Officer
– Controller of Small Cars Product
Development at Ford. CFO for Ford of Southern Africa, a $3 billion subsidiary.
• Vice President of Sales
– VP of Apple Real Estate/Retail Sales.
VP of Retail Strategy for Gap.
• Vice President of Manufacturing
– Led manufacturing for Toyota, Volvo, Mack and Renault across North
America and Europe
Summary
• What is the learning curve in your industry and market of interest?
• How can you leverage what you know, and who you know, to climb this curve?
Complementary
Assets
Complementary assets involve tangible and intangible resources.
• Tangible assets
– Money, equipment, real estate, etc.
• Intangible assets
– Knowledge, relationships, etc.
• Patents or brands may sit between the tangible and intangible categories
Consider where your advantages may lie
• Entrepreneurs may have an advantage over competitors when their
– knowledge,
– relationships, or
– financial capital is significant.
Beware of starting a company in an area
where the company with the most money wins
• Large companies with more money may enter a space later and dominate that market
• Instead, compete where knowledge and relationships are key sources of competitive advantage
Where does startup money come from?
Source: pivotal-services.com
Summary
• What complementary assets are most critical in the above industry and
market of interest?
• How can you build your knowledge and enhance your social capital?
• What financial capital can you secure by creative means?
Reputation Effects
Reputation effects include brand awareness and perception
• Customers often prefer to buy from
– Companies with which they have had a successful transaction in the past, or
– Companies they know well via friends, family, or
– Companies with effective branding efforts
Be thoughtful on your investments of money and time in building your reputation
• Reputation effects are best aligned with new ventures when new industries and/or new markets are being pursued.
• Focus on serving new customers in new ways to make the reputation of existing competitors irrelevant.
Dimensions of brand equity
• Brand awareness
– Familiarity with the brand
• Perceived quality
– Based on desired features
• Brand associations
– Connects the customer to the brand
• Brand loyalty
– Bond or tie to the brand
Ways to build brand equity
• Create and communicate your image
• Build awareness and familiarity
• Build associations
– Name, logo, design, packaging, colors, etc.
– Price “right”
– Placement and affiliations
• Build loyalty
– Rewards, special pricing – Community, special benefits
Summary
• How can you make the reputation of competitors irrelevant?
• How can you build your reputation and brand (affordably and quickly)?