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The type of the entrant often determines the resources available to them and their capability. The resource based view pertaining to strategic management has been used in research related to resources and capability of a new entrant. In an article, Barney (1991) has divided capabilities and resources in three categories namely human, physical and organizational. Further research has even more explicitly distinguished between resources and capabilities (Amit and Shoemaker, 1993). It is helpful in the analysis of market if resources and capabilities are organized along two dimensions as can be seen summarized in table 4. First is the core vs. complimentary and the second is specialized vs. generalized. Table 4 has a lot of examples depicting capabilities and resources based on the two above taxonomies.
The taxonomy of core vs. complimentary is based on Teece's (1986) distinction between the core and complimentary assets. Core resources essentially mean the knowledge required in the creation of a service or product that includes core technological knowledge (Teece, 1986) and the customer needs knowledge (Helfat and Raubitschek, 2000). Complimentary resources are needed to make profit from the core knowledge which includes marketing, manufacturing, financing, sales and distribution.
The other taxonomy shows the distinction between specialized and generalized resources and capabilities (Teece, 1980 & 1982). The specialized resources are limited in use as they are confined to the usage in particular settings. In contrast, generalized resources and capabilities can be put into use in any environment and settings. Individual capabilities and resources can fall in between the spectrum of generalized resources and capabilities that can be used under any settings. However, with regards to analyzing market entry it is useful to distinguish between the more generalized resources and the more specialized resources (Chatterjee and Wenefelt, 1991).
Activities such as marketing, research and development and distribution fall under specialized capabilities. These activities are crucial in aspects like operation, technology and products that the firm deals with in its business. Even organizational knowledge is specialized for certain types of industries or technologies or market areas more specifically regional or national markets. Technology specific patents, relation between supplier and buyers, mineral deposits are also forms of specialized resources.
Resources and Capabilities of Various Entrants
The various types of entrants in the market tend to have different types of resources and capabilities which suit their operational needs and overall goals. Parent company ventures, de novo and diversifying however are varying in depth and breadth of their pre entry resources. It is only obvious that established firms will have more resources and capabilities than the new firms entering into the market. New entrants stock up resources and capabilities from the parent company.
The resources of the new entrant depend completely on the way that the resources and capabilities are transferred from the parent company. The new entrants get the operational systems, personnel and physical assets from the parent company at the founding of the new entrant. Even in cases where the transfer from the parent company is limited to financial help, the new ventures are allowed to make use of parent company services like capital infusion and advice from management.
The parent company may differ in their goals from the new entrants depending on the number of parent company the new firm has.
A spin off firm which is a result of an off shoot of just one company has a narrower base than a joint venture or franchise which has the option of getting resources and capabilities from multiple parent companies. Franchises can gain resources like operational routines, brand name from the parent company along with management experience and capital finance. The same can be said for joint ventures which make use of the resources and capabilities of their partners. In actuality, one of the main motivations of a joint venture is to bring in the capabilities and resources of the partners by gaining access to it (Kogut, 1988: Dyer and Singh, 1998). A slight deviation from the working of the diversifying entrants and the parent company ventures, de novo entrants are said to have very less resources. This is mainly because the firms are newly created. This thought can mislead especially in cases of entrepreneurial spin offs from existing well established firms. This may not even be the best description for start ups as well as the founders of the company have their traits that shape their firm. It has been observed by Nelson and Winter (1982) has observed that the core of a newly created firm rests in the hands of the organizational heads. Hence some of the firms formed have known to contain a "founder effect" which is mainly a result of the results of the work of the founder of the firm. Kimberly (1979) researched and came to the conclusion that the founders of a new firm have an everlasting impact on the organization of the company and its functioning. In 1989, Boeker and in 2001, Burton, Sorenson and Beckham noted that the entrepreneurs in Silicon Valley were most likely to gain external financing if their social capital was large as they belonged to reputed firms and had a vast human capital as far as senior management experience was concerned.
What are the markets that firms get into?
Various studies have been the focused their research on the topics of innovation, foreign direct investment, diversification, entrepreneurship and joint ventures. The main concern at this point is the subset of research that relates firm level data belonging to pre entry capabilities and resources during the market entry of a firm. It can be noted that the rate of de novo entry is considerably higher than diversified firm entrants. The impact of diversifying entrants is however higher than their numbers as they enter the markets at a considerably larger scale than the de novo firms do. They even have a bigger rate of survival (Dunne, Roberts and Samuelson, 1988: Geroski, 1995 and Caves, 1998).
The diversifying entrants comprise of a large variation of markets that include various geographic locations for services and products that are being already sold in other locations. These entrants make use of established markets and entre new market niches as well like generation of new products, new customer segments or new products. The entry into these established product markets can be divided into two entry levels namely the entry in related and unrelated market.
Difference between related and unrelated product market entry
The research on diversification of resources and capabilities is sourced mainly from Penrose (1995, originally published in 1959). Penrose noticed that firms become more and more efficient in the use of their resources and capabilities over a period of time. The excess that is created is used as the base for expanding to markets that can be used to deploy the resources into by the firm (Teece, Rumelt, Dosi and Winter, 1994).
In 1995, Penrose suggested that the nature of the pre entry capability of a firm is responsible for the expansion of the firm over time, a view also used by the evolutionary economic theory (Nelson and Winter, 1982). Diversifying entrants therefore are more likely to enter industries with resource needs that are more or less the same as the pre entry resources of the firm. It has been found through studies that more the likeliness in the pre entry resources like human resources, marketing and technology of the firm are to that of the individual industry requirements, the chances of the entry are that much higher(Montgomery and Hariharan, 1991: Chatterjee and Wernefelt, 1991: Chang, 1997: Merino and Rodriguez, 1997 and Silverman, 1999). The studies showed that the specialized pre entry marketing, human resources and technology were responsible for entry into markets where the resources had bigger applicability.
Related diversification is not restricted to just various product markets, it includes foray into various geographical markets. The most accurate description of geographical expansion would be the entry into another geographical area which has more or less the same resources and market characteristics to those that firm currently has in one geographical location. The expansion that takes place n such conditions is known as "replication strategy." A lesser level of geographical expansion consists of entry into areas that have slightly different resource needs. The prototype of such a case is the entry into a different country altogether. First we analyze the replication strategies, and then the entry into the foreign market.
The information on the local environment is necessary for the expansion into other geographical regions like the expansion into foreign countries. The research on direct foreign investment tell that firms will get involved in overseas operation is they are equipped with the resources specially the intangible assets like technology which are very effective in foreign market but are not easy to transfer in transactions(Dunning, 1981: Rugman, 1981: Teece, 1986). The objective of firms is to make profits from expansion into foreign regions and hence they often hard situations since they are not equipped with the detailed information regarding the conditions in the local markets in those regions. As a result the resources of the firm should be very valuable in the foreign region in order to justify the entry into foreign territory (Buckley and Casson, 1976: Caves, 1982: Henmart, 1982).
New market niche
A new market niche is yet another form of related market entry. When a new firm is deciding on its entry, it is not entirely sure whether the service or product selected will be an existing product or a new generation product, new product niche or new customer segment. No matter the distinction, complementary and core resources both make an impact during entry. The fact that the pre entry core technological information plays a role in deciding the entry of technical subfields or new product generations is not surprising. Let us consider the study of introducing a new product in twenty product classes in the industry of laser printers. In 2001, De Figueiredo and Kyle noted that firms with more patents are the most likely ones to bring in new products. In 2996, Kim and Kogut noted that semiconductor firms with some experience behind them in industrial aspects that made use of "platform technologies" had a greater chance of entering in new subfields as a result of growth from platform technologies. Hefalt in 1997 studied oil companies of the U.S and pointed out those firms with higher amount of experience in Rand D were likelier to carry out Rand D on synthetic fuels that used the technological properties of did refining. Scott Morton in 199 carried out a study on new generic pharmaceutical markets and noted that entrants were likelier to enter markets when they gained substantial experience in a similar form of drug ingredients or therapy, information that was obtained from previous Rand D.
Technological changes at times led to hordes of new products and business practice. At some instances they also resulted in the development of an entirely new industry. The choice of market is affected by the similar nature of the required resources and the pre entry resources of the established firm. Klepper in 2000 analyzed entry in the U.S television receiver industry by making note of radio producers. It was found that the potential radio entrants with experience in producing home radios, with high financial resources and marketing experience were most likely to get into the television industry.
All the three parent company ventures namely franchises, spin offs and joint ventures provide the entrant with lesser direct ties to the parent company than in case of diversifying entry. Spin offs may be used by parent companies when they need leverage for some resources like financial capital, technology but may perceive the other parent company resources as harmful. The spin offs can avoid bias in favor of any one parent company by focusing on the nature of customer requirements and technologies. Parent company resources help spin offs benefit and also limit the impact of other parent resources that may prove to be detrimental to the entry success (lto, 1995). In addition, spin offs operate with names different to that of the parent company to prevent damage to the parent company in terms of reputation and capital in cases of failure.
This above phenomenon suggests that the parent companies use spin offs to work on new ventures which are very indeed much different in nature to the pre entry resources and capabilities of the company at the time of entry into markets. Research on innovations in technology in 2001 at Xerox in Chesbrough showed that Xerox indulged in spin offs that used technologies that were much different and could not be used by the sales force of Xerox. This shows that the entry in market by spin off of the parent company lack similarity in core technology and complimentary marketing to the required resource profile of the market entry.
De Novo entrants
Entrepreneurs use the knowledge from their previous business and educational activity which may prove to be useful in recognizing business opportunities (Shane, 2000) and in the functioning of firms after they have been setup. The de novo entrants carry forward the skills of their founding owners and are the main source of the objectives of the firm and their future success. The entrepreneurial spin offs consist of pre entry experience which is closely linked to the new enterprise and as such spin offs are segments of the same industry in which the funding members have worked in.
Not all the entrepreneurs and the firms they start are not being analyzed. Some of the entrepreneurs may be a franchise of a reputed company. The study includes the analysis companies except de novo entrants.
The founders are formerly associated with the market related to it and hence bring in the necessary information related to technology, customer demand, suppliers, products and competitors. This information may include the use of new technology based on previous technical or scientific training (Roberts, 1991) and related to supplier and customer needs in the current market (Shane, 2000).
Even without the entry of de novo entrants, the pre entry experience may affect the choice of market of the founders who were former employers of a related company. The founders can enter the downstream or upstream industry in order to gain valuable resources such as the information related to industry customers and suppliers. In case of a small start up which has been based on new technology in the industry of typesetter, the firms were basically founded by the users of typesetters (Tripsas, 2000). The users of typesetters gained experience and gave them a very clear understanding of the user preferences which acted as an insight into the potential customer base. The importance of technical training along with scientific training ha been clearly stated by Roberts (1991). In 200, Shane noted that a pack of eight teams who were potential entrepreneurs and had licensed MIT invention were aided with market and technical experience related to different industries and they planned on entering these different markets with the experience that they held. Some of the license holders were thinking along the lines of a spin off in the scope of the industries in which they were earlier employed. In case of other entrepreneurs, their objective was to supply the downstream or upstream industries.