Chapter 8: Entrepreneurial Strategy and Competitive Dynamics

Tactical Actions

Refinements or extensions of strategies usually involving minor resource commitments.

Generic Strategies for New Ventures include:

1) Overall Cost Leadership 2) Differentiation 3) Focus

TWO Types of Competitive Actions:

1) STRATEGIC ACTIONS include: - Entering new markets - Creating new product introductions - Changing production capacity - Pursuing mergers/alliances 2) TACTICAL ACTIONS include: - Doing price cutting (or offering increases) - Making product/service enhancements - Increasing marketing efforts - Developing new distribution channels.

Market Dependence

A degree of concentration of a firm's business in a particular industry.

Typically, a new entrant begins with a single business model that is equivalent in scope to a __________________________ strategy.

Business-level

Mostly ideas consist of problems and ________________.

Solutions

In the United States, the federal, state, and local government provides support for entrepreneurial firms in two key areas - ________________ and government contracting.

Financing

Imitators usually have a strong __________________ orientation. They look for opportunities to capitalize on proven market successes.

Marketing

Why is vision such an important element of entrepreneurial leadership?

A) Because the entrepreneur has to envision realities that 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 ANSWER: A

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. ANSWER: C Smaller size makes them more nimble compared to large firms so they can respond quickly to competitive attacks. Because they are not well known, startups also have the advantage of the element of surprise in how and when they attack. Innovative uses of technology, for example, allow small firms to deploy resources in unique ways. Because they are young, however, startups may not have the financial resources needed to follow through with a competitive response. In contrast, older and larger firms may have more resources and a repertoire of competitive techniques they can use in a counterattack. Large firms, however, tend to be slower to respond.

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 ANSWER: A **If a start-up wants to succeed, it has to take business away from an existing competitor. Young firms can often succeed best by finding a market niche where they can get a foothold and make small advances that erode the position of the existing competitors. From this position, they can build a name for themselves and grow.

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. ANSWER: B

Threat Analysis

A firm's awareness of its closest competitors and the kinds of competitive actions they might be planning. Threat analysis involves an assessment of: Market commonality Resource similarity And, also, to ask.....How serious is the threat?

Forbearance

A firm's choice of not reacting to a rival's new competitive action.

Adaptive New Entry

A firm's entry into an industry by offering a product or service that is somewhat new and sufficiently different to create value for customers by capitalizing on current market trends. An adaptive new entry involves taking an existing idea and adapting it to a particular situation. However, unless potential customers believe the product or service does a superior job of meeting their needs, they will have little motivation to try it. Second, there is nothing to prevent a close competitor from mimicking the new firm's adaptation as a way to hold onto its customers. Third, once an adaptive entrant achieves initial success, the challenge is to keep the idea fresh. If the attractive features of the new business are copied, the entrepreneurial firm must find ways to adapt and improve the product or service offering.

Pioneering New Entry

A firm's entry into an industry with a radical new product or highly innovative service that changes the way business is conducted. If the product or service is unique enough, a pioneering new entrant might actually have little direct competition. However, there is a strong risk that the product or service will not be accepted by consumers. A pioneering new entry is also potentially disruptive to the status quo of an industry. If it is successful, other competitors will rush into copy it. This can create issues of sustainability for entrepreneurial firms. For a new entrant to sustain its pioneering advantage, it may be necessary to protect its intellectual property, advertise heavily to build brand recognition, form alliances with businesses that will adopt its products or services, and offer exceptional customer service.

Imitative New Entry

A firm's entry into an industry with products or services that capitalize on proven market successes and that usually has a strong marketing orientation. An imitative new entry strategy is used by entrepreneurs who see products or business concepts that have been successful in one market niche or physical locale and introduce the same basic product or service in another segment of the market. Sometimes the key to success with an imitative strategy is to fill a market space where the need had previously been filled inadequately. Entrepreneurs are also prompted to be imitators when they realize that they have the resources or skills to do a job better than an existing competitor. But success triggers imitation.

Co-opetition

A firm's strategy of both cooperating and competing with rival firms.

What are the common drivers of venture failure?

According to David Drews: - Failure to plan based on analysis of market demand; spending too much time planning - Not having enough top talent who can wear multiple hats; having too many employees you can't afford - Coming up short on revenue; neglecting to figure out "burn rate" of capital or break-even point

How does one identify profitable opportunities?

According to David Drews: - Listen to the customers, anticipate their needs - Understand the competitive landscape; adopt new offerings before they're widely available in the market - Hire world-class talent with diverse backgrounds who can use new thinking to broaden product offerings.

How should growth be funded?

According to David Drews: Don't give away equity - use past earnings & debt to finance growth - protect the employee-owners.

How important are social networks & relationships to creating a competitive advantage?

According to David Drews: Social networks provide excellent background information, BUT nothing replaces a strong personal relationship. - Trust must be earned by solving real business problems for clients: addressing current & anticipating future needs - Find & develop trusted alliances with suppliers & technology partners - Take the time to build truly trusted relationships across the entire spectrum of clients, suppliers, employees & other business contacts

How to succeed?

According to David Drews: To be successful, you should know your business model and key success factors, and lead, inspire, & recruit outstanding people.

Angel Investors

A private individuals who provide equity investments for seed capital during the early stages of a new venture. These outside investors favor companies that already have a winning business model and dominance in a market niche. Once a venture has established itself as a going concern, other sources of financing become readily available, such as commercial loans taken out by the business.

New Competitive Action

Are acts that might provoke competitors to react, such as new market entry, price-cutting, imitating successful products, and expanding production capacity. 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 The likelihood that a competitor will launch an attack depends on many factors. Some of these factors include competitor analysis, market conditions, types of strategic actions available, and the resource endowments and capabilities companies need in order to take this competitive action.

Venture Capitalists

Are companies organized to place their investors' funds in lucrative business opportunities. Through venture capitalists, entrepreneurs can raise money by selling shares in the new venture. Businesses with extensive development costs or firms on the brink of rapid growth are likely to turn to venture capitalists.

"Hardball" Strategies

Competition among incumbent rivals can involve "hardball" strategies: 1) Devastating rivals' profit sanctuaries 2) Plagiarizing with pride 3) Deceiving the competition 4) Unleashing massive & overwhelming force 5) Raising competitors' costs

Awareness of the threats posed by industry rivals allows a firm to understand what type of _______________response, if any, may be necessary.

Competitive

Competitive Dynamics

Competitive Dynamics concerns intense rivalry, involving actions and responses among similar competitors vying for the same customers in a marketplace. New entry into markets, whether by startups or by incumbent firms, nearly always threatens existing competitors. As a result, the competitive actions of the new entrants are very likely to provoke negative response from companies that feel threatened. COMPETITIVE DYNAMICS helps explain why competitive strategies evolve and how to respond: - Need to identify NEW COMPETITIVE ACTION. - Engage in THREAT ANALYSIS. - Have the motivation and capability to respond - Understand the types of competitive action - Evaluate the likelihood of competitive reaction

Opportunity Analysis Framework

Consists of THREE Factors: 1) Resources 2) Opportunity 3) Entrepreneur(s) For an entrepreneurial venture to create new value, THREE FACTORS must be present - an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. The entrepreneurial strategy that an organization uses will depend on these three factors. Thus, beyond merely identifying a venture concept, the opportunity recognition process also involves organizing the key people and resources that are needed to go forward.

Entrepreneurial Strategy

A strategy that enables the skilled and dedicated entrepreneur, with a viable opportunity and access to sufficient resources, to successfully launch a new venture. To be successful, new ventures must evaluate industry conditions, the competitive environment, and market opportunities in order to position themselves strategically. However, a traditional strategic analysis may have to be altered somewhat to fit the entrepreneurial situation. For instance, a five-forces analysis can be applied to the analysis of new ventures to assess the impact of industry and competitive forces. First, the new entry needs to examine barriers to entry. A second important factor is the threat of retaliation by market incumbents. Part of any decision about what opportunity to pursue is a consideration of how a new entry will actually enter a new market, and, once it's there, how it will compete. 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. Whether the firm is an entrepreneurial startup, a small business, or an existing business entering a market or industry for the first time, it must rely on sound strategic principles to be successful. ENTREPRENEURIAL ACTIVITY influences a firm's strategic priorities and intensifies the rivalry among an industry's close competitors. Even with a strong initial resource base, entrepreneurs are unlikely to succeed if their business ideas are easily imitated or the execution of the strategy falls short. Not only is it important for a firm to recognize an entrepreneurial opportunity, a firm must understand the COMPETITIVE DYNAMICS that are at work in the business environment in order to succeed with a growth opportunity. It's important to have an effective competitive strategy.

Both pioneering and adaptive entry strategies involve some degree of ______________________ .

Differentiation

Drive & Dedication

Drive and dedication are reflected in hard work. DRIVE involves internal motivation; DEDICATION calls for intellectual commitment that keeps an entrepreneur going even in the face of bad news or poor luck. They BOTH require patience, stamina, and a willingness to work long hours. **The dedicated entrepreneur's enthusiasm is also important - it attracts others to the business to help with the work.

Entrepreneurial Opportunities

Entrepreneurial opportunities require OPPORTUNITY RECOGNITION. TWO PHASES of activity: 1) DISCOVERY: Becoming aware of a new business concept. 2) EVALUATION: Analyzing the opportunity to determine whether it is viable or feasible to develop further.

Commitment to Excellence

Excellence requires entrepreneurs to commit to knowing the customer, providing quality goods and services, paying attention to details, and continuously learning. Entrepreneurs who achieve excellence are sensitive to how these factors work together. The most successful entrepreneurs often report that they owed their success to hiring people smarter than themselves.

New ventures founded by entrepreneurs who have __________________social contacts are also more likely to succeed.

Extensive

Financial Resources

Financial resources depend on stage of venture development & venture scale: Initial, start up financing can take the form of: - Personal savings, family, and friends - CROWDFUNDING Early stage financing can take the form of: - Bank financing, ANGEL INVESTORS. Later stage financing Commercial banks, VENTURE CAPITALISTS equity financing. Cash finances are, of course, highly important, but access to capital, such as a line of credit or favorable payment terms with the supplier, can also help a new venture succeed. The types of financial resources that may be needed depend on TWO factors: the stage of venture development and the scale of the venture.

The level of available _______________ is often a strong determinant of how the business is launched and its eventual success.

Financing

Crowdfunding

Funding a venture by pooling small investments from a large number of investors, often raised on the internet.

When any two firms have both a ____________ degree of market commonality and highly similar resource bases, a stronger competitive threat is present.

High

Human Capital

Human capital includes strong, skilled management.

If an idea does NOT have the opportunity to become commercialized, it is just an __________.

Idea **The idea must be viable, as well as, able to be commercialized in order to be an opportunity to pursue.

Entrepreneurial Leadership

Is leadership appropriate for new ventures that requires courage, belief in one's convictions, and the energy to work hard even in difficult circumstances, and that embodies vision, dedication and drive, and commitment to excellence. However, ventures built on the charisma of a single person may have trouble growing "from good to great" once that person leaves. Thus, the leadership that is needed to build a great organization is usually exercised by a team of dedicated people rather than a single leader. The leadership team must attract members who fit with the company's culture, goals, and work ethic. For a venture's leadership to be a valuable resource and not a liability it must be cohesive in its vision, drive and dedication, and commitment to excellence.

Entrepreneurship

Is the creation of new value by an existing organization or new venture that involves the assumption of risk. Even though entrepreneurial activity is usually associated with startup companies, new value can be created in many different contexts. New value can be created in many contexts: - Startup ventures - Major corporations - Family owned businesses - Nonprofit organizations - Established institutions

Strategic Actions

Major commitments of distinctive and specific resources to strategic initiatives.

Bankers, venture capitalists, and angel investors agree that the most important asset an entrepreneurial firm can have is strong and skilled _____________________.

Management

Entry Strategies

New venture entry strategies need to: - Quickly generate cash flow - Build credibility - Attract good employees - Overcome the liability of newness. New entry strategies typically fall into one of THREE categories - pioneering new entry, imitative new entry, or adaptive new entry.

Pursuing Combination Strategies

One of the best ways for young and small businesses to achieve success is by pursuing combination strategies. By combining the best features of low-cost, differentiation, and focus strategies, new ventures can often achieve something truly distinctive. Entrepreneurial firms are often in a strong position to offer a combination strategy because they have the flexibility to approach situations uniquely. They can often enact combination strategies in ways that the large firms cannot copy. For example, holding down expenses can be difficult for big firms because each layer of bureaucracy adds to the cost of doing business across the boundaries of a large organization. Also, large firms often find it difficult to offer highly specialized products or superior customer services, while entrepreneurial firms can create high-value products and services through their unique differentiating efforts. However, one of the major dangers is that either a large firm with more resources or a close competitor will copy what the new entry is doing. A carefully crafted and executed combination strategy may be the best answer. Nevertheless, competition among rivals is a key determinant of new venture success.

The starting point for any new venture is the presence of an entrepreneurial __________________ .

Opportunity **Opportunities can come from many sources, however all entrepreneurial firms must make the most of changes brought about by new technology, socio-cultural trends, and shifts in consumer demand.

By _________________ with other companies, through technology, manufacturing, or retail licensing agreements, young or small firms can expand or give the appearance of entering numerous markets or handling a range of operations.

Partnering

Startups with multiple ________________ are more likely to succeed.

Partners

Most new entrants use a strategy somewhere between pure imitation and pure _________________ .

Pioneering **That is, they offer a product or service that is somewhat new and sufficiently different to create new value for customers and capture market share.

Among the most important factors to evaluate is the market _____________ for the product or service.

Potential

New entrants with a ___________ new product or highly innovative service may change the way business is conducted in an industry.

Radical

The final step before initiating a competitive response is to evaluate what a competitor's _______________is likely to be.

Reaction

Competitive dynamics are likely to be most intense among companies that are competing for the same customers or who have highly similar sets of __________________.

Resources

Resources

Resources are an ESSENTIAL component of a successful entrepreneurial launch. For STARTUPS, the most important resource is usually money because a new firm typically has to expend substantial sums just to start the business. However, financial resources are not the only kind of resource a new venture needs. HUMAN CAPITAL and SOCIAL CAPITAL are also important. Many firms also rely on government resources to help them thrive.

Entrepreneurial Activity involves _______________ .

Risk

Examples of Adaptive New Entrants Table

SEE Exhibit 8.3 on Powerpoint Slide 29. An adaptive new entry approach does not involve "reinventing the wheel," nor is it merely imitative either. It involves taking an existing idea and adapting it to a particular situation. Exhibit 8.3 presents examples of four young companies that successfully modified or adapted existing products to create new value.

Compared to large firms, new ventures often have __________________ organizational structures that make decision-making both easier and faster.

Simple **The smaller size also helps young firms change more quickly when upgrades in technology or feedback from the marketplace indicates that improvements are needed.

Social Capital

Social capital includes: - Extensive social contacts & strategic alliances which can be facilitated using technology, manufacturing, or retail alliances. - Federal, state, & local government resources, such as, government contracting, Loan guarantee programs, and training, counseling, & support services.

Start-up Ventures

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.

PHASE 1: Discovery Phase

The discovery phase is about becoming aware of the new business concept: - Can be spontaneous and unexpected. - Can also result from a deliberate search. Businesses should ask themselves: Where are the new venture opportunities? What might be a creative solution to a business problem? Many entrepreneurs report that their idea for a new venture came through some unexpected insight, often based on their prior knowledge, that gave them an idea for a new business. Viable opportunities often emerge only after a concerted effort. To stimulate the discovery of new opportunities, companies often encourage creativity, out-of-the-box thinking, and brainstorming.

PHASE 2: Evaluation Phase

The evaluation phase occurs AFTER an opportunity has been identified, and involves analyzing this opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture. Ideas developed by new product groups or in brainstorming sessions are TESTED by various methods, including talking to potential target customers and discussing operational requirements with production or logistics managers. FEASIBILITY ANALYSIS is used to evaluate these and other critical success factors. This type of analysis often leads to the decision that a new venture project should be discontinued. Only if the venture concept continues to seem viable would a more formal business plan be developed.

Market Commonality

The extent to which competitors are vying for the same customers in the same markets

Resource Similarity

The extent to which rivals draw from the same types of strategic resources.

How a competitor is likely to respond will depend on THREE factors:

The likelihood of competitive reaction depends on: - MARKET DEPENDENCE - Competitor's resources - The reputation of the firm that initiates the action - the actor's reputation. Choosing not to respond is a choice & includes: FORBEARANCE: holding back on an attack CO-OPETITION: both cooperating & competing. Working together behind the scenes to achieve industrywide efficiencies.

Opportunity Recognition

The process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is NOT enough. They then need to be evaluated to find out if they're strong enough to become new ventures. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities.

Overall Cost Leadership

This strategy has an advantage due to: Simpler organizational structure & smaller size Quicker decision-making to upgrade technology & integrate marketplace feedback controls costs.

Differentiation

This strategy is able to compete by Offering a unique value proposition through innovation & superior use of new technology Deploying resources in a radical new way.

Focus

This strategy means having the ability to use niche strategies that fit the small business model. Focus strategies work for small businesses because there is a natural fit between the narrow scope of the strategy and the small size of the firm.

Viable Opportunities

Viable opportunities have the following qualities: They are attractive in the marketplace. They are achievable; practical & physically possible. They are durable or attractive long enough for the development and deployment to be successful. They are value-creating & potentially profitable; the benefits MUST surpass the cost of development by a significant margin.

Vision

Vision may be an entrepreneur's most important asset. Entrepreneurs envision realities that do not yet exist. With vision, entrepreneurs are able to exercise a kind of transformational leadership that creates something new and, in some way, changes the world. In order to develop support, get financial backing, and attract employees, entrepreneurial leaders must share their vision with others.

Motivation & capability to respond means asking:

What type of competitive response is necessary? What resources are needed to fend off a competitive attack?