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Necessity entrepreneurship and competitive strategy

Abstract

Many start-ups chose to compete with incumbent firms using one of two generic strategies: cost leadership or differentiation. Our study demonstrates how this choice depends on whether the start-up was founded out of necessity. Our results, based on a representative data set of 4,568 German start-ups, show that necessity entrepreneurs are more likely than other entrepreneurs to pursue a cost leadership strategy and less likely to pursue a differentiation strategy. Decomposition analyses further show that up to half of the difference in choice of strategy can be attributed to distinct endowments of human capital, socioeconomic attributes, and start-up project characteristics that correlate with necessity entrepreneurship.

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Notes

  1. Miles and Snow (1978) distinguished among prospector firms that competed on the basis of their innovative abilities and charged higher prices for their superior offerings, defender firms that competed on the basis of efficiency and price, and analyzers who combined these strategies toward different ends. The work of Porter (1980) is related to that of Miles and Snow (1978) in that it contrasted firms that were differentiators and cost leaders. Prospectors engaged in innovative differentiation and defenders tended to be cost leaders. Porter’s (1980) third focus category of firms tailored a blend of differentiation and cost leadership to a narrowly targeted niche of the market; they related in orientation to Miles and Snow’s (1978) analyzers. Miller (1988) showed that there were many types of differentiation—for example, according to quality, marketing expertise, and innovative talent.

  2. Prior studies have distinguished between entrepreneurs who started their business “to take advantage of a unique market opportunity”—so-called opportunity entrepreneurs, and those that became entrepreneurs because no other employment opportunities were available to them—necessity entrepreneurs (Reynolds et al. 2005). These notions of necessity and opportunity entrepreneurship relate to the earlier work on “push versus pull” motivations for starting a venture (Amit and Muller 1995; Cooper and Dunkelberg 1986; Solymossy 1997).

  3. See Fryges et al. (2010) for a detailed description of the design of the KfW/ZEW Start-up Panel.

  4. The only sectors excluded are agriculture, mining and quarrying, electricity, gas and water supply, health care, and the public sector.

  5. Using correlation analysis and variance inflation factors (VIFs), we did not find evidence for multicollinearity.

  6. Multinomial probit estimations show similar results. The marginal effect of the necessity motive is significantly negative with respect to the differentiation strategy and significantly positive with respect to the cost leadership strategy, with magnitudes of four percentage points. Detailed estimation results are available from the authors upon request.

  7. See Blinder (1973) and Oaxaca (1973). See also Fairlie (1999, 2005) and Bauer and Sinning (2008).

  8. In contrast to the approach pursued by Fairlie (1999, 2005), we do not focus on differences in observed average probabilities \((\bar{S}^{o} - \bar{S}^{n} )\), but rather on projected differences \((\hat{S}^{o} - \hat{S}^{n} )\). The advantage of this approach is that the coefficients effect includes less residual noise. Even though \(\bar{S}^{m}\)and \(\hat{S}^{m}\)resulting from probit estimation are not necessarily identical, their deviation is negligible for appropriate model specifications.

  9. It is well known that the decompositions resulting from the different counterfactuals do not necessarily yield identical results. Different approaches to the issue of non-uniqueness have been proposed in the literature; see Oaxaca and Ransom (1994) and Silber and Weber (1999) for surveys. Yet each of the approaches relies on ad hoc assumptions of some type, so we choose to report the two most prominent cases.

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Acknowledgments

This paper represents the authors’ personal opinions and does not necessarily reflect the views of KfW

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Correspondence to Joern H. Block.

Appendix

Appendix

See Tables 6, 7 and 8.

Table 6 Definition of variables
Table 7 Characteristics of necessity-based start-ups by chosen strategy
Table 8 Characteristics of other (non-necessity-based) start-ups by chosen strategy

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Block, J.H., Kohn, K., Miller, D. et al. Necessity entrepreneurship and competitive strategy. Small Bus Econ 44, 37–54 (2015). https://doi.org/10.1007/s11187-014-9589-x

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Keywords

  • Necessity entrepreneurship
  • New venture strategy
  • Competitive strategy
  • Cost leadership
  • Product differentiation
  • Decomposition analysis

JEL Classifications

  • L10
  • L26