The entrepreneurial strategy matrix These suggested strategies can aid in

decision making even for different degrees of risk and innovation.

Entrepreneurship has become a major focus of business thought and research

Today, entrepreneurship can refer to business activity of all sizes--new and independent firms as well as ongoing enterprises

Entrepreneurial ventures What are the strategic

alternatives for a given venture? Which of these alternatives is more

or less likely to result in the best business performance?

And in what ways can these alternatives be implemented?

Entrepreneurial Variables Autonomy - independent action and self-

direction Innovativeness - new ideas,

experimentation, and creativity Risk Taking -- venturing into uncertainty

and committing assets Pro-activeness - acting in anticipation of

future problems or needs Competitive Aggressiveness -- strongly

challenging competition to achieve entry or improve position

Contingency models With these five possible variables,

most resulting models are both very sophisticated and very complex

Nevertheless, a contingency model of entrepreneurial venturing is of value to the inexperienced and unsophisticated new businessperson as well as to the established entrepreneur.

Contingency models One of the best known is the

Boston Consulting Group (BCG) Matrix, which is used frequently for portfolio analysis by large, well-established companies with a variety of strategic business units

The entrepreneurial strategy matrix

Of the five well-established independent variables cited above, two are easier for an entrepreneur to grasp and measure: innovation and risk

innovation is defined as the creation of something new and different

Risk is defined as the probability of major financial loss.

The entrepreneurial strategy matrix

In comparison to innovation, then, risk has far fewer dimensions

Whereas there are many ways to increase innovation, reducing risk largely focuses on financial factors, with a secondary consideration of self-image and ego.

The entrepreneurial strategy matrix

By combining these two independent variables, a four-cell matrix emerges

Like several well-known matrix models, such as the BCG Matrix, this model allows even the most inexperienced entrepreneurs to characterize their new or existing venture situations and identify appropriate strategies.

The entrepreneurial strategy matrix

The model places innovation on the vertical axis and risk on the horizontal axis, and denotes the levels of these two variables using I and R for high levels and i and r for low levels

The top left cell, I-r, indicates high-innovation/ low-risk situations

This type of venture would involve a truly novel idea that carried little risk, possibly because the venture requires little investment

High innovation, Low Risk: I-r

The inventors of products such as Lego[R] building blocks and Velcro fasteners developed ideas from which prototypes could be hand-built at little expense.

the simple nature of the product and the low technology required for manufacture allowed small-scale production either directly or by subcontracting.

High Innovation, High Risk: I-R

The top right cell of the matrix, I-R, indicates high innovation and high risk.

these ventures involve novel products or services, but the risk is high, either because initial financial investment must be large or because competition is greater

For example, to produce and market a new drug or a new automobile requires a major investment and also faces well-established competition

Low Innovation, High Risk: i-R

The lower right cell, i-R, is perhaps the most common situation for small business ventures, and is the most familiar to small business consultants

Most new business start-ups involve somewhat conventional entries into well-established fields.

the lure of owning one's own business is strong, and the most common path to small business ownership is from employment by others in the same type of business.

Low Innovation, Low Risk: i-r

If minimal investment is required, or market demand is strong and competition is weak or nonexistent, the risk will not be very high

Some service businesses, such as home or office cleaning or piano instruction, require minimal financial investment

STRATEGY IMPLICATIONS The value of the Entrepreneurial

Strategy Matrix is that it suggests appropriate avenues for different entrepreneurs.

When the entrepreneur identifies the cell that best describes the new or existing venture being contemplated, then certain strategies are indicated as more likely to be effective.

STRATEGY IMPLICATIONS A high-innovation/low-risk venture

is certainly preferable to a low-innovation/high-risk one.

Yet for every venture found in I-r, large numbers can be found in i-R.

This is because risk is more common than innovativeness in the business world

STRATEGY IMPLICATIONS The initial step in the strategic

analysis is for entrepreneurs to place their venture ideas into the best-fitting cell.

Although some ideas may seem to fall on the dividing lines, most should fit within one cell or another

The I-r Cell

If an objective analysis of your venture indicates this is where you fit, you should move quickly to take full advantage of the situation.

Protect the innovation with patents, copyrights, and so on, and get into the marketplace quickly before any possible competition

The I-r Cell

Keep risk low by locking in both investment and subsequent operating costs

For internal operations, place a major focus on costs by developing and using monitoring and control systems.

For contracted external activities, such as those performed by suppliers and distributors, negotiate long-term contracts with protections against unacceptable cost increases

The I-R Cell

The strategy for I-R, is to reduce risk without compromising innovation

The ideal action would be to move left into I-r, but it will usually be more feasible to simply move left (that is, reduce risk) within the I-R cell.

Risk can be lowered by reducing investment and operating costs in other ways, short of forging a joint venture

The I-R Cell

Operations with high investment or operating costs (such as manufacturing or distribution) might be outsourced to other established companies

Operations that are performed internally can be designed and administered with the primary objective of lowering costs.

The i-R Cell

This most common venture situation is all too familiar to those involved in studying and/or assisting small businesses

Most start-ups are not innovative, yet the new entrepreneur generally takes a major financial risk

The i-R Cell

Inherent in the choice of a specific business is a certain level of required financial investment.

Efforts can be made to lower the investment or operating costs, or to find better and less expensive sources of financing.

though an entrepreneur in this cell should strive for innovation, opportunities for significant innovation in i-R ventures are usually limited.

The i-R Cell

Creativity can often generate innovation in an i-R situation.

The objective is to create a competitive advantage, often in an industry where it rarely exists

The more feasible strategies involve improving the situation within the cell by reducing risk or increasing innovation enough to improve the chances of business success

The i-R Cell

The point is that a business plan forces the entrepreneur to conduct the objective analysis that will identify ways to reduce risk and increase innovation, and thus strengthen the position within the i-R cell.

The business plan also may help the entrepreneur come to the difficult conclusion that the venture's position within the matrix is just not defensible;

The i-R Cell

Another popular way to reduce risk in an i-R venture is to start a franchise operation rather than an independent business venture.

Although this route may increase costs because of the various franchise fees and royalties required, the established brand recognition and proven business practices obtained through franchising can lower risk considerably.

The i-r Cell The i-r situation is the safe but

conservative venture, and generally is low in potential payoff.

With minimal new investment required, the strategic focus is to recognize the situation, be sure it is understood and acceptable, and maintain and defend it.

Conclusion The Entrepreneurial Strategy

Matrix allows the entrepreneur to identify the type of venture at hand and choose the most appropriate strategies for that venture

Entrepreneurs and their advisors will find this model of value in their strategic decision-making.