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Summary Strategic Analysis for Small Business article summaries

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Course
Strategic Analysis For Small Business

Institution
Rijksuniversiteit Groningen (RuG)

Strategic Analysis for Small Business, EBM060A05 – summaries of the course articles, block 1.1, . • Article 0: Gans JS, Stern S, Wu J. (2019), Foundations of entrepreneurial strategy, Strategic Management Journal, 40, 736–756. • Article 1: Porter, M. E., 2008, The Five Competitive Forces...

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strategic analysis
strategic analysis small business
strategic analysis for small business

Institution
Rijksuniversiteit Groningen (RuG)
Education
Small Business & Entrepreneurship
Course
Strategic Analysis For Small Business

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Strategic Analysis for Small Business, EBM060A05 – summaries
of the course articles, block 1.1, 2022-2023.
 Article 0: Gans JS, Stern S, Wu J. (2019), Foundations of entrepreneurial strategy,
Strategic Management Journal, 40, 736–756.
 Article 1: Porter, M. E., 2008, The Five Competitive Forces that Shape Strategy, Harvard
Business Review, 79-93
 Article 2: Parmigiani, A., 2007, Why do firms both make and buy? An investigation of
concurrent sourcing, Strategic Management Journal, 28: 285-311
 Article 3: Ruey-Jer, Jean; Daekwan Kim, Erin Cavusgil (2020), Antecedents and outcomes
of digital platform risk for international new ventures’ internationalization, Journal of
World Business, 55, 101021
 Article 4: Tojeiro-Rivero, D.; and R. Moreno (2019), Technological cooperation, R&D
outsourcing, and innovation performance at the firm level: The role of the regional
context, Research Policy, 48, 1798-1808.
 Article 5: Cao, Z. & Lumineau, F., (2015), Revisiting the interplay between contractual
and relational governance: a qualitative and meta-analytic investigation, Journal of
Operations Management, 33-34: 15-42.
 Article 6: Yang, H.B., Zheng, Y.F., and Zhao, X., (2014), Exploration or exploitation? Small
firms’ alliance strategies with large firms, Strategic Management Journal, 35(1): 146-157.
 Article 7: Gardet, E. & Monte, C. (2011), The dynamics of coordination in innovation
networks, European Management Review 8: 213-229.
 Article 8: Croonen, E.P.M. & Brand, M.J. (2015), Antecedents of franchisee responses to
franchisorinitiated strategic change, International Small Business Journal, 33(3), 254-276.
 Article 9: Barney, J., 1991, Firm Resources and Sustained Competitive Advantage, Journal
of Management, Vol 17, No 1: 99-120.
 Article 10: Stoian, C. & Gilman, M., 2017, Corporate Social Responsibility That “Pays”: A
Strategic Approach to CSR for SMEs, Journal of Small Business Management, Vol 55, No
1: 5-31.
 Article 11: Teece, D. J., A., 2014, The foundations of enterprise performance: dynamic
and ordinary capabilities in an (economic) theory of firms, Academy of Management
Perspectives, Vol 28, No 4: 328-352.
 Article 12: Weaven, S., Quach, S., Thaichon, P., Frazer, L., Billot, K., Grace, D., 2021,
Surviving an economic downturn: Dynamic capabilities of SMEs, Journal of Business
Research, Vol128: 109-123

,LECTURE 1+2

0. Gans JS, Stern S, Wu J. (2019), Foundations of entrepreneurial strategy
Abstract

Managerial Summary: The central strategic challenge for an entrepreneur is how to choose:
entrepreneurs often face multiple potential strategies for commercializing their idea but due to the
constraint of limited resources, cannot pursue them all at once. At the same time, entrepreneurs are
venturing into new domains and as such, must choose under conditions of high uncertainty with only
noisy learning available. This paper explores the interplay between these unique conditions that shape
the entrepreneurial choice process, finding that often, the process will not yield a single best strategy but
instead several equally attractive strategic alternatives. A key implication is that entrepreneurs cannot
simply choose what not to do, but instead must proactively decide which equally viable alternatives to
leave behind when choosing an entrepreneurial strategy.

Body

Some scholars, such as Porter, claim that decision makers, even under high levels of uncertainty, manage
to get enough information from the environment in order to rank all alternatives and choose the most
beneficial one (optimization). Others claim it is better to experiment within the environment and thus
learn through action to get the best results (action). The 2 might seem incompatible, but they both play a
role in the entrepreneurial choice process. Entrepreneurs should not search for a single best option, but
search until they find a set of equally viable alternatives. First optimize, then choose.

4 conditions (axioms) rules to choose, ‘test 2, choose 1’ rule.

Implications:

1) Experimenting with strategic decisions, while beneficial, incurs opportunity costs of not choosing
the other options.
2) The choice of entrepreneurial strategy is not independent of the conditions (market, technology)
and they are not exogenous, but the choice of strategy to some extent is a choice of
environment.

Prior research

Two approaches to entrepreneurial strategy:

 Optimization
You have different business models and market opportunities, but a firm cannot implement all
approaches simultaneously. Hence, all evidence about the potential value and risk should be
gathered. Evaluations include cost-benefit analyses of potential profitability; attractiveness of
alterative market segments; technological trajectories; alternative ways of commercializing the
idea to the market. This way entrepreneurs avoid committing resources to suboptimal strategies.
The consideration of multiple alternative strategies leads to higher performance. These
approaches assume that alternatives can be ranked.

,  Action
Literature in strategic learning and entrepreneurial practice focuses on the role of action in the
entrepreneurial strategy development. Planning is limited due to the scarcity of real data. Not
having real data could lead to inertia. Can be overcome by incremental and adaptive cycles of
experimentation, learning. Experiments can be based on: core profitability assumptions,
available resources and means, whatever signals legitimacy. Such literature, however, neglects
the opportunity costs and strategic commitments inherent in experimentation.

Strategic choice is rationally bounded. Entrepreneurs cannot choose a global optimum, have to settle for
a strategy such that its expected returns would be higher than a potential incremental search for
alternatives.

Real options theory focuses on learning more about a specific alternative by learning and
experimentation. The strategist can proceed in stages without committing too much, could also abandon
and redirect if the results are suboptimal.

Authors’ idea:

4 conditions (axioms), that explain how an entrepreneur chooses an entrepreneurial strategy.

1) Freedom - There is more than one path to create and capture value from an idea.
Ent. Should believe there is a positive value in implementing an idea and have to assess if to
go with it or not. Also how to go about it. Many was to go about it, esp. for start-ups. All this
because new firms have strategic freedom, unburdened by revenue streams, pre-existing
customers, organizational architecture.
2) Constraint - Constraints prevent the pursuit of more than one alternative at once.
Freedom though leads to strategic and resource limitations – no reputation, less credit-
taking opportunities, harder to attract talent.
3) Uncertainty - The parameters of the probability distribution governing the value of an
idea are not known by the entrepreneur.
Expected returns depend both on the value inherent to the idea and to the chosen strategy.
Uncertainty regarding both. Even if you know a good strategy in general, might not work for
a certain idea. The idea might be technically sound, but could be hard estimating the market
demand.
4) Noisy Learning - Commitment-free learning can only generate noisy estimates of the value
of an idea and a given strategic alternative, and the relationship between the two.
Positive news about one alternative increases the value of the whole idea. Could lead to
inducement effect – positive feedback on strategy does not lead to commitment but further
search. The learnings from experimentation are ‘noisy’, rely on assumptions that might
prove wrong. If there is an error it might be not because of the strategy but because of the
idea itself. Positive news about a specific alternative would lead to a positive update of other
similar alternatives previously considered.

Hence a rule - Test Two, Choose One—Entrepreneurs continue search until they reach at least two
alternatives that are ex ante equivalent in expected value before making a choice.

, In other words, entrepreneurs should continue search until they have reached the limits of learning in
the absence of commitment such that further search and commitment-free learning is no longer
worthwhile. At this point (paradox of entrepreneurship), entrepreneurs must choose to act on one
alternative while leaving other ex ante equally viable options behind.

The Paradox of Entrepreneurship—ranking alternative viable strategies requires knowledge that can
only be gained through experimentation, but experimentation to resolve uncertainty ultimately results in
some level of commitment that can foreclose particular strategic options.

Emphasizing on the role of entrepreneurial choice as opposed to the centrality of the strategic
environment.

LECTURE 3
1. Porter, M. E., 2008, The Five Competitive Forces that Shape Strategy - STUVIA
Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s
current profitability while providing a framework for anticipating and influencing competition (and
profitability) over time. A healthy industry structure should be as much a competitive concern to
strategists as their company’s own position. Understanding industry structure is also essential to
effective strategic positioning. Defending against the competitive forces and shaping them in a
company’s favour are crucial to strategy.

Forces that shape competition
The configuration of the five forces differs by industry. The strongest competitive force or forces
determine the profitability of an industry. Industry structure grows out of a set of economic and
technical characteristics that determine the strength of each competitive force.

1. Threat of entry

New entrants to an industry bring new capacity and a desire to gain market share that puts pressure
on prices, costs, and the rate of investment necessary to compete. The treat of entry therefore puts
a cap on the profit potential of an industry, as a higher threat forces incumbents to hold down prices
and/or boost investment. Thus is threat of entry, not whether it actually occurs, that holds down
profitability.

a. Barriers to entry;
i. Supply-side economies of scale
 Arises as a result of large production from spread fixed costs, more
efficient technology, or being better able to demand better terms from
suppliers
ii. Demand-side benefits of scale
 Network effects; A customers’ willingness to pay increases as the
number of other buyers increases

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