The Entrepreneur and Competitive Strategy

Entrepreneurial views (EV) of competitive strategy highlight the role of the entrepreneur. An effective entrepreneur can combine the resources of capital and efficient human resource to operate the company and earn a profit after paying all resource suppliers including the investor and the manager. This is made possible by the entrepreneur by combing resources in new ways, which results in the shift of economy away from equilibrium.

In contrast to Entrepreneurial view, positioning view (Porter and Brandenburger et al.) assumes a perfect competition in the market and hence market equilibrium.  There are barriers to competition and strategies are formulated to obtain a generic position in the market. How the firm deals with the outward forces to sustain this position defines its performance and profitability,

The Resource based view, on the other hand, focuses on scarce, heterogeneous resources to earn rents, rather than market power. The RBV gives an inside-out, instead of the outside-in approach of the PV. Quality of resource, its uniqueness, inimitability and high value defines the company’s ability to earn supra-normal profits.

Overtime resource based view underwent changes and at a later stage, Prahalad and Hamel (1993) put forward that strategy should be considered as a stretch, which means that a firm can change its market environment to suit its needs by means of its core competencies.

The EV is in a way further development of positioning and resource based view. Jacobsen (1992) supports the Austrian School of Strategy (the Austrian School). In Austrian Economics, the market is not static but in disequilibrium. This advocates that a firm should focus on being an enterpreneur in order to exploit the imperfections of the market, rather than restricting competition or looking at the resources of the firm. An enterpreneur is supposed to gather, evaluate and use knowledge in the limited period in which an arbitrage opportunity arises. The Austrian School in similarity to RBV acknowledges that there is heterogeneity between firms, but does not support that a firm should aim for sustained competitive advantages (which contradicts the RBV). Although Schumpeter (1934) also has an enterpreneurial like view on performance (i.e. firms should focus on innovation), Schumpeter does not view the market as being in disequilibrium (as does the Austrian School).

In the Schumpeterian system, the entrepreneur disturbs the market and moves it away from its equilibrium. When the innovations are completed and the new products enter the market or when new production processes are in place, the innovator out-competes the other firms it is competing with and earns economic profits. (Jacobson , (1992))

Realization of supra-normal profits provides the incentive for innovation, but these profits are short lived. As innovations are imitated, economic profits dissipate and finally disappear. The market returns to equilibrium until another innovation occurs. Each innovation is imitated and then replaced by yet another innovation. This is the process of "creative destruction". (Jacobson , (1992))

The profits realized from the innovation give the firm only the means to pursue new innovations. The Forces of dynamic competition doom any firm that merely attempts to maintain its present position.

According to Mises (1949), entrepreneurship is an action that successfully directs the flow of resources toward the fulfillment of consumer needs. Alertness to opportunities is the hallmark of entrepreneurs. Entrepreneurs discover errors or inefficiencies and try to eliminate them. (Jacobson , (1992))

Coff (1999) defines the firm as a nexus of contracts (p 119). Coff states that the RBV does not address what resources generate (Ricardian) rent and who has the bargaining power to appropriate such rent. Coff does not view the firm as a (legal) person or entity, as do the PV, the RBV and the Austrian School, but merely as a constellation of stakeholders that are contractually connected to each other. Hence, it is not the firm which generates the rent but its stakeholders.

Martin & Moldovenanu (2003) further takes the concepts given by Coff. As economy is more and more developing towards a knowledge economy, labour becomes increasingly important. It is argues that more talented workers have increased bargaining power towards the other stakeholders of the firm. Consequently, talented workers may appropriate a greater part of the rent of the firm. This creates conflict with the shareholders of the firm. This is because little is left for the stakeholders, while on the other hand employees need to be compensated to satisfy and to retain them.

Stoelhorst & Bridoux (2008) connect value creation to a firms performance. A  firm may not always be seen as an unitary agent, as a result whereof the causal link between heterogeneity and performance fades. Knowledge is acknowledged as a separate factor of production and plays as such an important role in value creation as well as value appropriation of the firm.

Entrepreneurial profits

The main essence of EV is that the role of the entrepreneur is to see economic opportunities that have been overlooked by others. Kirzner (1973, 1979) argued that at any given time, an enormous amount of ignorance stands in the way of the complete coordination of the actions and decisions of the many market participants. As such, innumerable opportunities for mutually beneficial exchange are likely to exist unperceived. Even though some profit opportunities are uncovered by pure chance, certain firms have more information than others, and this knowledge gives them an advantage in ascertaining market inefficiencies. Superior profits depend on superior knowledge.

Role of entrepreneur

The entrepreneur sees a mismatch between what the resource market has to offer and what customers will be willing to pay. By exploiting this market imperfection, the entrepreneur receives the residue from the arbitrage (i.e., economic profits). Similar to Mises and Kirzner, Rumelt (1987: 143) defined "entrepreneurial rent as the difference between a venture's ex post value (or payment stream) and the ex ante cost (or value) of the resources combined to form the venture". The possibility of earning these profits sustains the entrepreneur in a state of alertness

Entrepreneurial discovery

Another important concept is entrepreneurial discovery, which involves a wide range of activities. Many researchers have highlighted the important role of discovery in influencing business success.

 Business Models

With the new innovations, there came a time when it was believed that all a company needs to be successful is a good business model. This concept did not hold for long. Although the truth is that the fault did not lie with the business model, but the misuse by the management.

Magretta (2002) explains that there are a number of requisites of a business model, for it to be successful. Firstly, it should define a way that makes it stand out in front of other companies and simultaneously enables it to provide its customers with more value. Secondly, it outlines the operations of the company, design of it products and how sale should be made.

Stoelhorst (2001) lays down the basis of analyzing a business model, in terms of three board categories.

·         Functionality of the firm for its customer

·         Methods for revenue generation

·         Cost involved in operations

An overview of the business models of some firms is given below:

References

David J. Collis (2008), Competing on Resources

Robert M Grant (1996), Prospering in Dynamically-competitive environments: Organization capability as Knowledge Integration

Jay B. Barney (1995), Looking Inside for Competitive Advantage

Margaret A. Peteraf (1993), the Cornerstones of Competitive Advantage; A resource based view

George Stalk, Philip Evans, Lawrence E. Shulman (1992), Competing on capabilities: The new rules of Corporate Strategy 

C. K.Prahalad and Gary Hamel, (1990), The core competence of the corporation

Robert Jacobson, 1992, The Austrian School of strategy

Russell W. Coff, 1999, When competitive advantage does not lead to performance

Roger L. Martin and Minhea C. Moldoveanu, Capital versus talent

Joan Margretta, 2002, Why Business Models Matter

J.W. Stoelhorst, 2008, Value creation in the knowledge economy: The rigor, relevance, and morality of the RBV