STRAz EGY
SMALL BUSINESS ENTRY STRATEGIES:

AN INTEGRATION OF TECHNOLOGICAL
DISCONTINUITY AND INDUSTRY

GROWTH POTENTIAI.
Laurence G. Weinzimmer

Bradley University

Robert K. Robinson
The University of Mississippi

Ross L. Fink
Bradley University

ABSTRACT

Technological innovations ofien create growth and profit opportunities for new firms.
Entrepreneurs may find it beneficial to take advantage of these opportunities. A critical decision
facing any new ventureis selecting a strategy to effectively enter a market orindustry. To assist
the decision makerin this endeavor, a normati ve model is offere to help entrepreneurs position
themselves io take advantage of technologicalinnovaiion. Specifically, the model develops four
different strategic choices. These strategic choices are contingent on the magnitude of techno-
logical change and the growth potential of the industry.

INTRODUCTION

In the recessionary climate of the 1990's, small businesses have increasingly been offered
as the panacea for numerous national economic problems ranging I'rom the lack of product
innovation (Keats gi. Bracker, 1988) to unemployment (Hofer tk Sandberg, 1987). Despite thc
anticipauon of the apparent benefits that can be gained through accelerated small business growth,
the poor survivability record among small firms has continued to overshadow these aspirations.
It is well documented that small businesses exhibit a discouraging failure rate. Dcpcnding on the
sample and industry, these rates have been reported to range from 34 percent (Bates k. Nucci,
1989) to 53 percent (Romanelli, 1989) during the first five years of operation. Some industries,
like the restaurant industry, are particularly brutal on new entrants, reporting failure rates as high
as 90 percent (Kopf gi. Beam, 1992).

Numerous studies have been devoted to asccrtaining thc causes of small business failures.
The more commonly cited reasons I'or this lack of continuity are insufficient capital budgeting,
poor money management, excessive inventory, inadequate provision for contingencies, lack of
formal planning, and inability to cope with growth (Laitinen, 1992; Duchesneau & Gartner,
1990). All of these issues can bc attributed to deficiencies in thc strategic planning process.

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Bracker, Keats, and Pearson (1988) have shown that strategic planning is positively correlated
with the linancial performance of small businesses. CounUess other studies reinforce this
contention by showing that small businesses that develop strategic plans outperform those that

do not (Ackelsberg k. Arlow, 1985; Bracker 61 Pearson, 1986; Kopf dt Beam, 1992; Robinson gt
Pearce, 1983; Shuman Ik Seager, 1986; Shuman, Shaw, & Sussman, 1985; Shrader, Mulford, dt
Blackbum, 1989).

One aspect of siroregic choice theory suggests that managers of an organization have the
ability to proactively select the market in which to operate (Astley and Van de Ven, 1983). This
decision of selecting the market or indusuy to enter is one of the most critical strategic decisions
for any new venture. Child (1972) contends that this strategic choice strongly affects perfor-
mance. Because the success of a small business, or any size enterprise for that matter, is tied to
choosing viable business-entry suategies, a normative model has been developed to provide
entrepreneurs a framework for making the strategic choice of marketfindustry entry.

There have been relatively few studies investigating potential small business entry

strategies. One of the more noteworthy studies addressing entry strategies is Vesper's (1990),in
which 14 different competitive tacucs were developed for new ventures trying to enter a market
that already had existing competition. This study differs from Vesper's work by developing
specific entry strategies based upon technological discontinuity and industry auractiveness.

As stated previously, innovation has been one of the hallmarks of small business growth.
Drucker (1986) sees innovation as a key variable in creating entrepreneurial opportunities. He
funher identifies seven sources of innovation that could encourage asmall business venture. Two
of these industry sources are innovation based on process needs, and changes in the industry
structure. Process needs focus primarily on correcting a weakness in an existing process. Simply
stated, an existing process possesses some inherent inefficiency, and the enuepreneur develops
a solution to eradicate that deficiency. Changes in industry structure imply the development of
a new product or service that undermines the existing industry stattdard —e.g., the supplanting of
the slide-rule by the pocket calculator. To one degree or another, these innovation opportunities
involve the displacement of an existing technology by a new one, a phenomenon called
technological discontinuity.

Thisstudydevelopsanentrystrategymodel. Thismodelisofferedtofillthevoidofrelevant
entry strategy models designed exclusively for small businesses. Currently, no small business
entry strategy model considers the impact of technological discontinuities. Given the occurrence
of a technological discontinuity, this model should assist small business owners in analyzing and
developing appropriate entry strategies. This model is potentially important in light of the high
failure rates associated with new ventures, many of which can be attributed to poor entry
decisions.

THE ENTRY STRATEGY MODEL

The model developed in this study identifies entry strategies on the basis of two dimensions:
technological discontinuity within a particular industry and that industry's potential for growth.
The entry strategy model being proposed is presented as a two-by-two matrix in order to facilitate
the reader's understanding of the interrelationship between these two environmental factors. In
the model, categories of technological discontinuities are represented as the factor on the vertical-
axis and industry growth potential on the horizontal-axis.

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Technological Discontinuity

Technology discontinuity is a dimension that has profound effects on entry opportunities
(Foster, 1986).Consequently, an in-depth understanding of the concept of technology is essential.
Technology is broadly defined as developments, tools, and knowledge that mediate between
inputs and outputs or that create new products/services (Rosenberg, 1972). Technology is not
only new tangible "things" like the PENTIUM microchip, but it can also be an improvement in
the way a service is provided, such as the introduction of drive-up windows at McDonald's
restaurants.

The introduction of a new technology predictably affects the industry from which it
emerges. Sometimes the advent of a new technology affects several industries simultaneously.
Tushman and Anderson (1986) show that technology evolves through periods of incremental
change punctuated by technological breakthroughs that either enhance or destroy the competence
of cuuent firms in an environment. Using case studies, they show that technological progress
constitutes a cumulative process interrupted by discontinuous change. These changes often offer
extreme improvements over existing technologies. If the technological improvements are very
significant, then no increase in scale, efficiency, or design can make older technologies
competitive with newer technologies (Mensch, 1979;Sahal, 1981).The old technology becomes
a hinderance to those firms still using it. These firms are then confronted with the choice of
abandoning the old technology or abandoning the market. Those firms that can make the rapid
transition to the new technology are more likely to survive than the late adopters (Ansoff, 1987).
Given the success of new ventures in dynamic environments (Hofer & Sandberg, 1987) and the
imponance of technology as a factor influencing environmental dynamism, the proposed model
provides a contextual framework for evaluating an environment sensitive to technological
change.

Although no tools exist specifically for the identification of technological discontinuities,
potential small business owners can use established environmental scanning techniques to gather
the necessary information. Discontinuities may be identified by such simple techniques as
reviewing trade association reports (which can be found in the Encyclopedia of Associanons),
trade magazines, and general purpose business magazines. Entrepreneurs may further seek
feedback from customers and suppliers. Moreover, a small business owner's experience and
expertise within an industry may facilitate this analysis.

Environmental change caused by technological discontinuity presents both threats and
opportunities for individual organizations (Tushman & Romanelli, 1985). For those firms that
are among the first to exploit this change, discontinuities alter the competiuve environment and
afford first mover advantages. These first movers enhance their competitive advantage by reaping
the benefits of volume and experience (MacMillan gt McMaffrey, 1984; Porter, 1985). Conse-
quently, given the flexibility and adaptability of most small businesses, achieving first mover
advantages should be a central objective.

However, technological discontinuities pose threats as well as opportunities. As previously
mentioned, those firms that are slow in adopting the new technology often find their ability to
compete severely diminished. Whether the inuoduction of a new technology presents an
organization with an opportunity or poses a threat is dependent upon how the changes affect the
firm's competitive competence. Consequently, discontinuities have been classified as either
competence-destroying or competence-enhancing based on the potential to desuoy or enhance

3



existing organizations in a given environment(Tushman & Anderson, 1986).These discontinuities
are not necessarily two ends of a spectrum, but disunct environmental phenomena that collec-
uvely encourage the use of innovative, proactive and risk-taking strategies. These are precisely
the types of strategies that have been proven to enhance the probability of success for new ventures
(Hofer and Sandberg, 1987; Romanelli, 1989). For example, Apple Computer proactively
entered the personal computer market. As a result, Apple gained first-mover advantages by
establishing its product as the industry standard, Therefore, due to high switching cosh they were
able to compete as larger firms entered the marketplace.

Competence-destroying Discontinuities

Competence-destroying discontinuities are characterized by a technological innovation so
extreme that the new technology fundamentally alters the set of relevant competencies within a
class. Often a shift may occur in the skills and knowledge-base necessary to employ basic
technologies (Tushman & Anderson, 1986). These major disruptions in skills and distinctive
competence are associated with major changes in the distribution of power and control within the
environment(Chandler,1977; Barley,1986). Competence-destroyingdiscontinuitiesareusually
initiated by new firms and are associated with increasing environmental dynamism (Tushman 8t

Anderson, 1986). Examples of competence-destroying changes are diesel versus steam locomo-
tive and microchip versus transistor.

Competence-enhancing Discontinuities

Tushman and Anderson (1986) define competence-enhancing discontinuities as improve-
ments in a product or process that build on exisung know-how within a product class. Like
competence-destroying disconunui ties, these developments substitute for older technologies, but
do not render obsolete the skills required to master the old technologies. These improvements
build on existing knowledge and provide the foundation for subsequent incremental changes
(Dutton& Thomas,1986). Examplesofcompetcnceenhancingimprovementsareelectricversus
manual typewriter and IBM AT versus IBM XT.

Industry Growth Potential

The other dimension in our model, industry growS potential, is defined as a product of
munificence and market demographics. Munificence is essentially the extent to which an
environment can support growth. An environment with high munificence would be characterized

by fewer resource constraints on a new venture, as compared to depleted environments (Dess &
Beard, 1984; Starbuck, 1976). An environment with high munificence contains ample resources
and demand to facilitate considerable growS. Conversely, an environment with low munificence
contains minimal resources and diminished demand which constrain or thwart organizational
growth (Tushman, 1977). When an environment is characterized by low munificence, resource
scarcity increases the risk to organizations that remain in that environment. Growth and
profitability for individual firms become more difficult because ltrms must compete with each
other for resources and customers needed to sustain growth (Porter, 1980). For example, in the
early 1970's, munificence in the air express industry was high, allowing firms like Federal
Express to realize considerable gains without competing for common resources. As the industry
became saturated, munificence declined, thus forcing many firms to leave the market.

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Munificence is considered important because it is directly affected by technological
discontinuity. When a discontinuity occurs, munificence increases due to an altered environment
(Tushman & Anderson, 1986). This point is illusuated by the development of personal
computers, which made computer usage possible for wider audiences. The new markets created
by this technological improvement or discontinuity resulted in tremendous growth opportunity
for the computer manufacturing industry, as well as the computer software industry.

In addition to technological discontinuity, other factors such as population demographics
may affect industry growth potential. Specifically, factors such as age, ethnicity, affluence, and
other characteristics of the target market in a given industry can affect demand for products/
services in that industry. population demographics are particularly important because of their
impact on the firm's environment, and because such demographic information is readily available
to the entrepreneur. For a detailed explanation of calculaung munificence for a specific industry,
the reader is referred to Dess and Beard (1984).

The proposed strategic choice model integrates the interrelationship between research
focusing on the environment and research focusing on the firm. More specifically, the model
assists the user in analyzing the possible strategic choices and developing viable strategic
alternatives. The model, as depicted in Figure I, illustrates the different possible strategies given
the interrelationship of technological discontinuities and industry growth potential. This model
is offered as a general analytical tool and is not intended to give answers in specific situations. It
isameanstoprovideaparsimoniousperspectiveonacomplexsituation. Bypmvidingfourbroad
entry strategies, the entrepreneur is afforded general policy guidance to avoid making market
entry decisions that are potentially incompatible with environmental condiuons (defined in terms
of growth and technological discontinuities).

Figure 1. Entry Strategy Model

Technological
Discontinuities

Competence- Niche Avoidance
Enhancing Strategy Strategy

Competence- Asymmetric Resource
Destroying Strategy Strategy

Low High

Industry Growth Potential

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Niche and Avoidance Strategies

In instances when a competence-enhancing discontinuity occurs, existing firms in the
industry are in the best position to exploit the change. This is usually the case because the change
caused by the discontinuity is built on existing know-how. Since existing firms already have
established resources and expanisc in place to take advantage of the new situation, they are more
likely to gain advantages than new ventures. Competence-enhtincing disconunuities tend to
consolidate the industry leaders; as a result, the rich are likely to get richer (Tushman & Anderson,
1986). Additionally, any previous entry barriers that may have made an industry impervious to
new ventures may still exist. For instance, the introduction of the steel-belted radial tire is an
example of competence-enhancing technological change. This new product technology allowed
existing firms in the tire industry to potentially increase profits. 'However, given the capital
invesunent in plant and equipment required to operate in this industry, entry barriers remained
unchanged. Small firms wishing to take advantage of this technological change could not benefit
as these high entry barriers still remain and preclude competition in these markets.

One viable alternative for small businesses is the niche strategy. This is the logical choice
when a competence-enhancing discontinuity occurs and industry growth potential is low. Some
of the established firms may not find it attractive to alter their operations to exploit the
technological change, especially if this change is costly in upgrading current fixed assets. From
a benefit/cost standpoint, the projected sales of the new technology when applied to a specific
market segment may not be sufficiently large to jusufy the entry of the large firm. Under such
circumstances, an opportunity may arise for a new venture to focus on a certain market segment,
or niche, that may have been abandoned by the competence-enhancing situation. Homebuilding
software, used for managing new residential construction, is an excellent example of a successful
niche strategy. This software was specifically tailored to the needs of this market by improving
on existing technology marketed by major software companies, such as Microsoft and Borland.
Since this market does not provide high growth potential, it does not attract the larger software
development companies. Smaller companies, such as YARDI Systems, have specifically
targeted their improvements for profitable operation in this niche. Consequently, YARDI, by
employing these competence-enhancing improvements (homebuilding software), successfully
serves this market segment that larger competitors have chosen to ignore.

Conversely, the avoidance strategy is intended for the worst possible scenario confronting
a new venture. A competence-enhancing discontinuity has occurred, which means existing firms
are exploiting their distinctive competence, thereby creating sizable barriers to entry. Because
industry growth potential is high, most established firms have a strong incentive to implement the
technological change. Moreover, given the nature of a competence-enhancing change, suppliers
of the established firms would not be rendered obsolete since the change was buih on exisung
know-how. Therefore, the best strategy for a new venture in this quadrant would be to reconsider
other market alternatives. The introduction of the 3.5 inch computer diskeue demonstrates the
rationale underlying the avoidance strategy. Larger firms in the industry, such as 3M, BASF, and
Kodak, were able to use their current expertise, customer base, and existing distribution channels
to exploit this competence-enhancing development. Their economies of scale remained in tact
as did their baniers to entry. Small firms were precluded from compeung effecdvely, because the
introduction of the 3.5 inch computer diskette did notdiminish theta'ohibitive capital required for
entry into the markeL

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Resource and Asytnrnetric Strategies

As previously mentioned, competence-destroying discontinuities disrupt the existing
industry structure (Mensch, 1979). Resources and expertise that assured industry leaders their
market share, having become obsolete, are now mobility barriers. Under such circumstances, new
ventures founded to take advantage of the new technology will gain market share at the expense
of organizations that are burdened with sunken costs, fixed capital investments and outmoded
technology (Hannan dt Freeman, 1977). As a result of competence-destroying discontinuities,
barriers to entry that had previously been considered imp"netrable are lowered to new firms
(Astley, 1985).

In such situations, the resource strotegy calls for a small firm to be positioned to be a
supplier to a larger, more established firm, or to provide supplemental or support services for an
established firm's products. This strategy is a feasible alternative when munificence is high and
demand supports new or continued growth in an industry.

Direct competition with a larger firm is generally considered a risky strategy, but
considering the fact that previous technology has been discarded, the possibility exists that the
interrelated communities, such as the suppliers, have also Income obsolete. A viable strategy is
to position and differentiate a new venture to become a primary supplier for a larger firm attracted
to the new industry, or to provide supplemental or support services for their products.

Resource strategies, however, are not without risk. A threat may emerge as larger,
financially stable firms view this as an opportunity to diversify. With their accumulated resources,
such firms may be in a position to exploit a technological discontinuity much more efficiently than
smaller new ventures.

Implementation of the resource strategy can be illustrated by the opportunities created by
the introduction of Computer-Aided Design and Computer-Aided Manufacturing (CAD/CAM)
systems. CAD/CAM systems have replaced existing technologies such as digitizers, mechanical
drawing, and Numerical Conuol (NC) tapes. Initially, larger firms, such as McDonald Douglas,
became heavily involved in the development of CAD/CAM systems due to its large growth
potential. Smaller firms would have been virtually excluded from competing because of the
capital and human resources invesunent needed during the developmental stages. Some small
firms were able to exploit this change, by providing support activities for the larger firms. In doing
so, the small companies were able to capitalize on the discontinuity opportunities while avoiding
direct competition with larger organizations.

Advanced CAD/CAM Systems (ACCS), a small business founded by two engineers is an
excellent example of a resource strategy in pracuce. By customizing existing software, ACCS
filled a gap in the services offered by larger companies and also avoided direct competition.

Now assume that a situation has been created by competence-destroying technology in
which munificence is low and population demographics do not support industry gmwth. Under
these circumstances, the larger firms looking to implement a diversification strategy may not be
strongly attracted to this market due to the growth limitations of that industry. As a result of lower
competitive pressures from large firms, the new venture would be afforded the opportunity to
adopt an asymmetric strategy by entering the industry and competing with firms that possess
comparable resources. 'This strategy is similar to Vesper's (1990) parallel competition entry
strategy in which an entrepreneur begins a venture that is similar to existing competitors in an

7



industry. If the threat of large, resource rich competitors is low as a result of insufficient industry
growth potential, a new venture could auempt to establish a distinctive competence over
competitors by differentiating its process or ability from similar small rival firms (Stoner, 1987).

One small business to attempt an asymmetric strategy is Genesis Automation. With only
five employees, this company developed a robotics system to i:Ul soft drink orders in fast-food
restaurants. This technological innovation replaces the manual soft drink dispenser. Since the
restaurant equipment industry isa slow growth market and has not attracted large entrants, the lack
of attractiveness in this industry has, so far, allowed Genesis Automation to operate without
competition from larger competitors.

IMPLICATIONS AND CONCLUSIONS

Given the importance of small businesses to the United States'conomy combined with the
high failure rates of small businesses, initial assessment of potential growth opportunities and
competition is vital when considering what market to enter. The model presented in this study
should assist the entrepreneur in making this decision when technological discontinuities occur.

Technological discontinuities create opportunities for growth and profitability for existing
firms, as weg as new ventures. As has been shown, these resuliing opportunities affect industry
attractiveness which, in turn, influences whether a new ventme's primary competitors wiff be
large or small firms. The framing model proposed in this paper illusuates the interrelationship
between industry/market entry choice and industry characteristics, given an environment ex pe-
riencing technological innovation and helping to predict the size (large or small) of potential
colapeutofs.

This model is presented not to prescribe a specific strategy to match a specific situation, but
rather to provide entrepreneurs with broad guidance under which a number of viable strategies can
be examined and implemented under suitable conditions. As such, the model is not intended to
narrowly channel the decision-maker to the "one best strategy," but instead, to assess entry
strategies in terms of compatibility with the potenual indusuy's level of competence-enhancing
or competence-destroying technological discontinuities, and indusuy growth potential.

Technological discontinuities provide opportunities for sniall businesses. Therefore, itcan
be beneficial for small business owners to utilize scanning techniques to search for these
opportunities. The model presented in the paper offers assistance in exploiting these opportuni-
ties. By assessing the type of technological discontinuity and potential growth of the market, the
small business owner can employ the model to assist in the development of an appropriate entry
strategy. Use of the model will encourage small business owners to generate their strategy, taking
into account the prominence of competitors, and the lung term orientation of the industry.

This model also has practical implications for small business consultants. Often, small
business owners need assistance with feasibility studies for new business ventures. This model
provides a framework to assist in the feasibility analysis of the new venture, as well as providing
a potenual entry strategy. Additionally, small business owners may identify an opportunity due
to technological change. However, they may not consider thc transformation of the compeutive
structure resulting from the technological changes. ConsequenUy, they may expose themselves
to competitive risks by inadvertenUy pursuing the same market as larger organizations. This
model provides the consultant with a framework to make this analysis.

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