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Education.

Entrepreneurial Strategy

and Competitive Dynamics

chapter 8

Learning Objectives8-2

After reading this chapter, you should have a good understanding of:

LO8.1 The role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures.

LO8.2 Three types of entry strategies – pioneering, imitative, and adaptive – commonly used to launch a new venture.

LO8.3 How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses.

Learning Objectives

LO8.4 How competitive actions, such as the entry of new competitors into a marketplace, may launch a cycle of actions and reactions among close competitors.

LO8.5 The components of competitive dynamics analysis – new competitive action, threat analysis, motivation and capability to respond, types of competitive actions, and likelihood of competitive reaction.

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Entrepreneurial Strategy

Consider…

New technologies, shifting social and demographic trends, and sudden changes in the business environment can create opportunities for entrepreneurship.

However, business opportunities can disappear as quickly as they appear.

What do new ventures and entrepreneurial firms need to do to achieve a competitive advantage?

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Entrepreneurial Strategy

Entrepreneurship involves value creation and the assumption of risk

New value can be created in many contexts: Startup ventures Major corporations Family owned businesses Nonprofit organizations Established institutions

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Entrepreneurial Strategy

Start-up venture ideas can come from Current or past work experiences Hobbies or suggestions by friends or family

For established firms, opportunities can come from Existing customers Suggestions by suppliers Technological developments

For all firms, change or chance events can uncover unmet consumer needs

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Question?

Three ingredients are critical in order for an entrepreneurial startup to be successful. What are they?A. Good ideas, a team of investors, and a business

plan.B. A viable opportunity, available resources, and a

qualified and motivated founding team.C. An opportunity, a marketing plan, and office

space.D. Management, marketing, and money.

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Entrepreneurial Strategy

Exhibit 8.1 Opportunity Analysis FrameworkSource: Based on Timmons, J.A., & Spinelli, S. 2004. New Venture Creation (6th edition). New York: McGraw Hill/Irwin; and Bygrave, W.D. 1997. The Entrepreneurial Process. In W.D. Bygrave (Ed.), The Portable MBA in Entrepreneurship (2nd edition). New York: Wiley.

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Entrepreneurial Opportunities

Entrepreneurial opportunities require opportunity recognition

Two phases of activity Discovery

Becoming aware of a new business concept

Evaluation Analyzing the opportunity to determine

whether it is viable or feasible to develop further

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Entrepreneurial Opportunities

Discovery phase - Becoming aware of the new business concept Can be spontaneous and unexpected Can also result from a deliberate search

Where are the new venture opportunities?

What might be a creative solution to a business problem?

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Entrepreneurial Opportunities

Evaluation phase - Analyzing the viability of an opportunity Talk to potential target customers Identify operational requirements Conduct a feasibility analysis

What is the market potential?

Is the idea strong enough to create value, and therefore profits ?

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Entrepreneurial Opportunities

Viable opportunities have the following qualities: They are attractive They are achievable They are durable They are value-creating

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Example: The Feasibility of Frozen Treats

Dippin’ Dots was based on an innovative idea

In 1987, product testing showed it was attractive to consumers

Operational facilities were developed to maintain the low temperatures necessary for production

By 2007, competitors such as Frosty Bites (Mini Melts) had stolen market share – the product idea was no longer that innovative

By 2011, Dippin’ Dots was bankrupt Ice cream of the future??

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Entrepreneurial Resources

Resources are essential for entrepreneurial success Financial resources Human capital Social capital Government resources

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Entrepreneurial Resources

Financial resources depend on stage of venture development & venture scale Initial, start up financing

Personal savings, family, and friends Crowdfunding

Early stage financing Bank financing, angel investors

Later stage financing Commercial banks, venture capitalists equity

financing

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Entrepreneurial Resources

Human capital Strong, skilled management

Social capital Extensive social contacts & strategic

alliances Technology, manufacturing, or retail alliances

Federal, state, & local government resources Government contracting Loan guarantee programs Training, counseling, & support services

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Entrepreneurial Leadership

Entrepreneurial leadership is needed Courage Belief in one’s convictions Energy to work hard

Leadership characteristics Vision Dedication and drive Commitment to excellence

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Question?

Why is vision such an important element of entrepreneurial leadership?A. Because the entrepreneur has to envision

realities do not yet exist.B. Because a vision statement must be part of the

documentation used to obtain venture financing.

C. Because organizations cannot function without a detailed and operational vision.

D. All of the above.

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Entrepreneurial Leadership

Vision is an entrepreneur’s most important asset Requires transformational leadership Ability to envision realities that do not yet

exist Ability to share this vision with others

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Entrepreneurial Leadership

Drive & dedication are necessary Involves internal motivation Intellectual commitment Patience Stamina, willingness to work long hours Enthusiasm that attracts others

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Entrepreneurial Leadership

Commitment to excellence is required Commit to knowing the customer Providing quality goods and services Paying attention to details Continuously learning Connecting the dots Hiring people smarter than themselves

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Example: Lessons from a Young

Entrepreneur Create massive value Trust people, but verify credentials Psychology is important – don’t ignore

personal needs Be willing to make the tough decisions Be a manager, not a technician Invest back into the company Integrity is everything

Get comfortable being uncomfortable

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Entrepreneurial Strategy

New ventures require an entrepreneurial strategy What are the industry conditions?

Five-forces analysis - barriers to entry? What is the competitive environment?

Retaliation by established firms? What are the market opportunities?

Entry strategies Generic strategies Combination strategies

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Entry Strategies

New venture entry strategies need to: Quickly generate cash flow Build credibility Attract good employees Overcome the liability of newness

Pioneering new entry Imitative new entry Adaptive new entry

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Entry Strategies

Pioneering new entry Creating new ways to solve old problems Meeting customers’ needs in a unique new

way Will it be accepted by consumers? Will it be disruptive to the status quo of an

industry? Will it be sustainable?

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Entry Strategies

Imitative new entry Imitators have a strong marketing

orientation Capitalizing on proven market successes Introducing the same basic product or

service in another segment of the market Can we do it better than an existing

competitor? Will someone then imitate us?

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Entry Strategies

Adaptive new entry Capitalizes on current market trends Offers a product or service that is

somewhat new and sufficiently different Creates new value for customers Captures market share Is it sufficiently unique and different? Can it be easily imitated? How can we continue to keep it fresh and

new?

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Entry Strategies

Exhibit 8.3 Examples of Adaptive New EntrantsSource: Bryan, M. 2007. Spanx Me, Baby! www.observer.com, December 10, np.; Carey, J. 2006. Perspiration Inspiration. Business Week, June 5: 64; Palanjian, A. 2008. A Planner Plumbs for a Niche. www.wsj.com, September 30, np.; Worrell, D. 2008. Making Mint. Entrepreneur, September: 55; www.mint.com; www.spanx.com; www.underarmour.com; Buss, D. 2010. The Mothers of Invention. Wall Street Journal, February 8: R7; Crook. J. 2012. Mint.com Tops 10 Million Registered Users, 70% Use Mobile. Techcrunch.com, August 29: np.; and www.plumorganics.com.

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Generic Strategies for New Ventures

Overall cost leadership Simpler organizational structure Quicker decision-making to upgrade

technology & integrate marketplace feedback

Differentiation Using new technology Deploying resources in a radical new way

Focus Using niche strategies that fit the small

business mold

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Question?

When an industry is mature, a _________ strategy may be considered to be an effective approach for a new entrant.A. focusB. differentiationC. overall low-costD. small business

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Combination Strategies for New Ventures

Pursuing combination strategies Combine the best features of low-cost,

differentiation, and focused strategies Hold down expenses by having a simple

structure Create high-value products & services by

being flexible & innovative

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Competitive Dynamics

New entry threatens existing competitors Competitive dynamics helps explain

why strategies evolve and how to respond: New competitive action Threat analysis Motivation and capability to respond Types of competitive action Likelihood of competitive reaction

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Competitive Dynamics

Exhibit 8.4 Model of Competitive DynamicsSource: Adapted from Chen, M.J. 1996. Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration. Academy of Management Review, 21(1): 100-134; Ketchen, D.J., Snow, C.C., & Hoover, V.L. 2004. Research on Competitive Dynamics: Recent Accomplishments and Future Challenges. Journal of Management, 30(6): 779-804; and Smith, K.G., Ferrier, W.J., & Grimm, C.M. 2001. King of the Hill: Dethroning the Industry Leader . Academy of Management Executive, 15(2): 59-70.

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Competitive Dynamics

Why do companies launch new competitive actions? To improve market position To capitalize on growing demand To expand production capacity To provide an innovative new solution To obtain first mover advantages To strengthen financial outcomes & capture

profits To grow the business

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Competitive Dynamics

Competition among incumbent rivals can involve “hardball” strategies: Devastating rivals’ profit sanctuaries Plagiarizing with pride Deceiving the competition Unleashing massive & overwhelming force Raising competitors’ costs

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Competitive Dynamics

Threat analysis involves an assessment of Market commonality Resource similarity

How serious is the threat? What is the intent of the competitive

response? What resources are needed to fend off a

competitive attack? Which action should I take?

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Competitive Dynamics

Strategic actions Entering new

markets New product

introductions Changing

production capacity

Mergers/alliances

Tactical actions▣Price cutting (or

increases)▣Product/service

enhancements▣ Increased

marketing efforts▣New distribution

channels

Types of competitive actions include:

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Competitive Dynamics

Likelihood of competitive reaction Market dependence Competitor’s resources The reputation of the firm that initiates the

action – the actor’s reputation Choosing not to respond

Forbearance Co-opetition

Working together behind the scenes to achieve industrywide efficiencies

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Question?

Which of the following might best describe the motivations and actions of small firms as they respond to competitive attacks?A. Because they lack legitimacy in the

marketplace, small firms need to signal their competitive actions long before they launch those actions

B. Small firms typically have more resources available as they undertake competitive attacks.

C. Small firms are more nimble and can respond quickly to competitive attacks.

D. All of the above.

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Competitive Dynamics & Entrepreneurial Strategies

Entrepreneurial strategy involves new value creation, which Threatens existing competitors Changes the competitive dynamics of the

marketplace Entrepreneurial activity involves risk

How should I enter a market? How should I compete? How should I deal with the competitor’s

reaction?

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