Entrepreneurial

Strategy and
Competitive
Dynamics

chapter 8

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education .
 Learning Objectives
8-2

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
8-3

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.
 Entrepreneurial Strategy
8-4

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?
 Entrepreneurial Strategy
8-5

 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
 Entrepreneurial Strategy
8-6

 Start-up venture ideas can come from

 Currentor past work experiences
 Hobbies or suggestions by friends or family

 For
established firms, opportunities can
come from
 Existingcustomers
 Suggestions by suppliers
 Technological developments

 For
all firms, change or chance events can
uncover unmet consumer needs
 Question?
8-7

 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.
 Entrepreneurial Strategy
8-8

Exhibit 8.1 Opportunity Analysis Framework

Source: 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.
 Entrepreneurial Opportunities
8-9

 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
 Entrepreneurial Opportunities
8-10

 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?
◼ Whatmight be a creative solution to a business
problem?
 Entrepreneurial Opportunities
8-11

 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 ?
 Entrepreneurial Opportunities
8-12

 Viableopportunities have the following

qualities:
 They are attractive
 They are achievable
 They are durable
 They are value-creating
 Example:
The Feasibility of Frozen Treats
8-13

 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??
 Entrepreneurial Resources
8-14

 Resourcesare essential for

entrepreneurial success
 Financial resources
 Human capital
 Social capital
 Government resources
 Entrepreneurial Resources
8-15

 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
 Entrepreneurial Resources
8-16

 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
 Entrepreneurial Leadership
8-17

 Entrepreneurial leadership is needed

 Courage
 Belief
in one’s convictions
 Energy to work hard

 Leadership characteristics
 Vision
 Dedication
and drive
 Commitment to excellence
 Question?
8-18

 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.
 Entrepreneurial Leadership
8-19

 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
 Entrepreneurial Leadership
8-20

 Drive & dedication are necessary

 Involves internal motivation
 Intellectual commitment
 Patience
 Stamina, willingness to work long hours
 Enthusiasm that attracts others
 Entrepreneurial Leadership
8-21

 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
 Example:
Lessons from a Young Entrepreneur
8-22

 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

 Entrepreneurial Strategy
8-23

 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?
 Entrystrategies
 Generic strategies
 Combination strategies
 Entry Strategies
8-24

 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
 Entry Strategies
8-25

 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?
 Entry Strategies
8-26

 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?
 Entry Strategies
8-27

 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?
 Entry Strategies
8-28

Exhibit 8.3 Examples of Adaptive New Entrants

Source: 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.
 Generic Strategies
8-29
for New Ventures
 Overall cost leadership
 Simpler organizational structure
 Quicker decision-making to upgrade
technology & integrate marketplace feedback
 Differentiation
 Usingnew technology
 Deploying resources in a radical new way

 Focus
 Usingniche strategies that fit the small
business mold
 Question?
8-30

 When an industry is mature, a _________ strategy

may be considered to be an effective approach
for a new entrant.
A. focus
B. differentiation
C. overall low-cost
D. small business
 Combination Strategies
8-31
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
 Competitive Dynamics
8-32

 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
 Competitive Dynamics
8-33

Exhibit 8.4 Model of Competitive Dynamics

Source: 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.
 Competitive Dynamics
8-34

 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
 Competitive Dynamics
8-35

 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
 Competitive Dynamics
8-36

 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?
 Competitive Dynamics
8-37

Types of competitive actions include:

 Strategic actions  Tactical actions
 Entering new ▣ Price cutting (or
markets increases)
 New product ▣ Product/service
introductions enhancements
 Changing ▣ Increased
production marketing efforts
capacity ▣ New distribution
 Mergers/alliances channels
 Competitive Dynamics
8-38

 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
◼ Workingtogether behind the scenes to achieve
industrywide efficiencies
 Question?
8-39

 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.
 Competitive Dynamics &
8-40
Entrepreneurial Strategies
 Entrepreneurialstrategy 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?