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CHAPTER 8

Entrepreneurial Strategy and Competitive Dynamics

Learning Objectives

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

8-1 The role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures.

8-2 Three types of entry strategies – pioneering, imitative, and adaptive – commonly used to launch a new venture.

8-3 How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses.

8-4 How competitive actions, such as the entry of new competitors into a marketplace, may launch a cycle of actions and reactions among close competitors.

8-5 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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Need for Entrepreneurial Strategy

Consider . . .

New technologies, shifting social and demographic trends, as well as 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 and sustain a competitive advantage?

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New ventures often face unique strategic challenges if they’re going to survive and grow. 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. Note that here we focus on entrepreneurial strategy – the actions firms take to create new ventures in markets – but there’s also a related issue – how established firms can build or reinforce an entrepreneurial mindset as they strive to be innovative in markets in which they already compete. This will be covered in Chapter 12.

Recognizing Entrepreneurial Opportunities

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

Ideas and opportunities can come from many sources.

Change or chance can uncover unmet customer needs.

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Entrepreneurship = 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. Startup 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.

Question (1 of 4)

Three ingredients are critical in order for an entrepreneurial startup to be successful. What are they?

good ideas, a team of investors, and a business plan

a viable opportunity, available resources, and a qualified and motivated founding team

an opportunity, a marketing plan, and office space

management, marketing, and money

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Answer: B. See the discussion that follows.

Entrepreneurial Opportunity Analysis

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.

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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 Opportunity Recognition

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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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.

Entrepreneurial Opportunities: Discovery

Discovery phase – Becoming aware of the new business concept. Ask: Where are the new venture opportunities? What might be a creative solution to a business problem?

Can be spontaneous and unexpected

Can also result from a deliberate search

Are there frustrations with current products or processes?

Do stakeholders have unmet needs?

What do other markets or industries do?

Can we revive old ideas?

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The discovery phase refers to the process of becoming aware of a new business concept. 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. The discovery of new opportunities is often spontaneous and unexpected. Opportunity discovery may also occur as the result of a deliberate search for new venture opportunities or creative solutions to business problems. 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. A more structured search for entrepreneurial ideas can come from looking at what’s bugging you – what frustrations do you have with current products or processes? Or from talking to suppliers, customers or front line workers to see how needs aren’t being met, or borrowing ideas from other markets or industries, or being inspired by history and reviving good ideas that have slipped out of practice, but might be valued in the market again.

Entrepreneurial Opportunities: Evaluation

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 ?

Viable opportunities have the following qualities:

They are attractive.

They are achievable.

They are durable.

They are value-creating.

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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. Among the most important factors to evaluate is the market potential for the product or service. New ventures must first determine whether a market exists for the product or service they are contemplating. For an opportunity to be viable, it needs to have four qualities. The opportunity must be attractive in the marketplace; that is, there must be market demand for the new product or service. The opportunity must also be achievable: it must be practical and physically possible. The opportunity must be durable or attractive long enough for the development and deployment to be successful; that is, the window of opportunity must be open long enough for it to be worthwhile. And finally the opportunity must be value-creating and potentially profitable; that is, the benefits must surpass the cost of development by a significant margin. If a new business concept meets these criteria, two other factors must be considered before the opportunity is launched as a business: the resources available to undertake it, and the characteristics of the entrepreneur pursuing it.

Entrepreneurial Resources

Resources are essential for entrepreneurial success.

Financial resources

Human capital

Social capital

Government resources

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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 Financial Resources

Financial resources depend on the stage of venture development & venture scale.

Initial, startup 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 firms must have financing. In fact, the level of available financing is often a strong determinant of how the business is launched and its eventual success. 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 majority of new firms are low-budget startups launched with personal savings and the contributions of family and friends, and can also appeal to the public through a crowdfunding website such as Kickstarter. (See Case: Kickstarter) Crowdfunding = funding a venture by pooling small investments from a large number of investors, often raised on the internet. Angel investors = 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. Venture capitalists = 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.

Entrepreneurial Human, Social & Governmental 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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Bankers, venture capitalists, and angel investors agree that the most important asset an entrepreneurial firm can have is strong and skilled management. Managers need to have a strong base of experience and extensive domain knowledge, as well as an ability to make rapid decisions and change direction as shifting circumstances may require. Startups with multiple partners are more likely to succeed. New ventures founded by entrepreneurs who have extensive social contacts are also more likely to succeed. In addition, strategic alliances can provide a key avenue for growth. By partnering 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. In the United States, the federal, state, and local government provides support for entrepreneurial firms in two key areas – financing and government contracting. Through government contracting, small businesses have the opportunity to bid on contracts to provide goods and services to the government. Regarding financing, the small business administration (SBA) has several loan guarantee programs designed to support the growth and development of entrepreneurial firms. The government itself does not typically lend money but underwrites loans made by banks to small businesses, thus reducing the risk associated with lending to firms with unproven records. Local offices offer training, counseling, and support services.

Entrepreneurial Leadership

Entrepreneurial leadership needs:

Courage

Belief in one’s convictions

Energy to work hard

Leadership personality traits:

Higher self-confidence, conscientiousness, openness to new experiences, emotional stability

Lower agreeableness

Leadership characteristics:

Vision

Dedication and drive

Commitment to excellence

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Launching a new venture requires a special kind of leadership. Entrepreneurial leadership = 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. Entrepreneurs tend to have the following personality traits that distinguish them from corporate managers: higher self-confidence; a higher degree of organization, persistence and hard work in pursuit of goal attainment; more intellectual curiosity; a higher ability to handle ambiguity, less likely to be overcome by anxieties; and lower agreeableness, typically looking out for their own self-interest, willing to influence or manipulate others for their own advantage. 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.

Question (2 of 4)

Why is vision such an important element of entrepreneurial leadership?

The entrepreneur has to envision realities that do not yet exist.

A vision statement must be part of the documentation used to obtain venture financing.

Organizations cannot function without a detailed and operational vision.

All of the above.

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Answer: A. See the discussion that follows.

Entrepreneurial Leadership: Vision, Drive & Dedication

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

Drive & dedication are necessary.

Involves internal motivation

Calls for intellectual commitment

Requires patience

Stamina, willingness to work long hours

Enthusiasm that attracts others

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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. 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 Leadership: Commitment to Excellence

Commitment to excellence is required.

Commit to knowing the customer.

Provide quality goods and services.

Pay attention to details.

Continuously learn.

Connect the dots.

Hire people smarter than themselves.

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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.

Entrepreneurial Strategy

New ventures require an entrepreneurial strategy.

What are the industry conditions?

What are the barriers to entry? (Five-forces analysis)

What is the competitive environment?

Might there be retaliation by established firms?

What are the market opportunities?

How should the firm actually enter a new market?

Firms must choose how to compete,

Entry strategies

Generic strategies

Combination strategies

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Once an opportunity has been recognized, and an entrepreneurial team and resources have been assembled, a new venture must craft a strategy. Entrepreneurial strategy = 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. Given the condition of the overall market, what entry strategies, generic strategies or possible combination strategies are most appropriate?

Entry Strategies

New venture entry strategies need to:

Quickly generate cash flow

Build credibility

Attract good employees

Overcome the liability of newness

Choices include:

Pioneering new entry

Imitative new entry

Adaptive new entry

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One of the most challenging aspects of launching a new venture is finding a way to begin doing business that quickly generates cash flow, builds credibility, attracts employees, and overcomes the liability of newness. The entry strategy will vary depending on how risky and innovative the new business concept is. New entry strategies typically fall into one of three categories – pioneering new entry, imitative new entry, or adaptive new entry. 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. 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. 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.

Entry Strategies: Pioneering

Pioneering new entry:

Create new ways to solve old problems.

Meet 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 the advantage be sustainable against imitators?

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New entrants with a radical new product or highly innovative service may change the way business is conducted in an industry. This kind of breakthrough – creating new ways to solve old problems or meeting customers’ needs in a unique new way – is referred to as a pioneering new entry. 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.

Entry Strategies: Imitative

Imitative new entry:

Imitators have a strong marketing orientation.

Capitalize on proven market successes.

Introduce 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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Imitators usually have a strong marketing orientation. They look for opportunities to capitalize on proven market successes. 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. See Strategy Spotlight 8.3 for how Casper Sleep has shaken up the mattress 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. See the example of Square.

Entry Strategies: Adaptive

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.

Does it do a superior job of meeting customer needs?

Can it be easily imitated?

How can we continue to keep it fresh and new?

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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. Such firms are adaptive in the sense that they are aware of marketplace conditions and conceive entry strategies to capitalize on current 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. 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.

Generic Strategies for New Ventures

Overall cost leadership – advantage due to:

Simpler organizational structure & smaller size

Quicker decision making to upgrade technology & integrate marketplace feedback controls costs

Differentiation – can compete by:

Offering a unique value proposition through innovation & superior use of new technology

Deploying resources in a radical new way

Focus – means ability to:

Use niche strategies that fit the small business model

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A new entrant must decide what type of strategic positioning will work best as the business goes forward. Typically, a new entrant begins with a single business model that is equivalent in scope to a business-level strategy. One of the ways entrepreneurial firms achieve success is by doing more with less. By holding down costs or making more efficient use of resources than larger competitors, new ventures are often able to offer lower prices and still be profitable. Thus, under the right circumstances, a low-cost leader strategy is a viable alternative for new ventures. Compared to large firms, new ventures often have simple organizational structures that make decision making both easier and faster. The smaller size also helps young firms change more quickly when upgrades in technology or feedback from the marketplace indicates that improvements are needed. They are also able to make decisions at the time they are founded that help them deal with the issue of controlling costs. Both pioneering and adaptive entry strategies involve some degree of differentiation. That is, the new entry is based on being able to offer a differentiated value proposition. However, differentiation successes are sometimes built on superior innovation or use of technology, which is challenging for young firms to implement relative to established competitors. 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. If a startup 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.

Question (3 of 4)

When an industry is mature, a _________ strategy may be considered to be an effective approach for a new entrant.

focus

differentiation

overall low-cost

small business

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Answer: A. If a startup 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.

Combination Strategies for New Ventures

Pursuing combination strategies can combine the best features of low-cost, differentiation, and focused strategies.

Holding down expenses by having a simple structure

Creating high-value products & services by being flexible & innovative

Offering highly specialized products or superior customer service to a niche market

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.

Competitive Dynamics

New entry threatens existing competitors.

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.

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 = intense rivalry, involving actions and responses among similar competitors vying for the same customers in a marketplace. Intense rivalry among similar competitors has the potential to alter a company’s strategy. New entry is among the most common reasons why a cycle of competitive actions and reactions gets started. It might also occur because of threatening actions among existing competitors, such as aggressive cost-cutting. Thus, studying competitive dynamics helps explain why strategies evolve and reveals how, why, and when to respond to the actions of close competitors. New competitive action = acts that might provoke competitors to react, such as new market entry, price-cutting, imitating successful products, and expanding production capacity. Threat analysis = a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning.

Competitive Dynamics Model

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.

Jump to Appendix 1 for long description.

Exhibit 8.4 identifies the factors competitors need to consider when determining how to respond to a competitive act.

Competitive Dynamics: Why Launch Actions?

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

When a company enters a market for the first time, it is an attack on existing competitors. In addition, price-cutting, imitating successful products, or expanding production capacity are all examples of competitive acts that might provoke a reaction. Companies are motivated to launch competitive challenges because they want to strengthen financial outcomes, capture some of the extraordinary profits that industry leaders enjoy, and grow the business. They also may want to build their reputation for innovativeness or efficiency. 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.

Competitive Dynamics: Incumbents

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 attacks can come from many sources besides new entrants. Some of the most intense competition is among incumbent rivals intent on gaining strategic advantages. According to Boston Consulting Group authors George Stalk, Jr. and Rob Lachenauer, “winners in business play rough and don’t apologize for it.” Exhibit 8.5 outlines their five strategies for playing “hardball.” While the “big boys” are competing, it’s possible an entrepreneur might be able to take advantage of some of these activities.

Competitive Dynamics: Threat Analysis

Threat analysis involves an assessment of:

Market commonality

Resource similarity

How serious is the threat?

Motivation & capability to respond means asking:

What type of competitive response is necessary?

What resources are needed to fend off a competitive attack?

Am I willing & able to launch an action?

Which competitive action should I take?

Awareness of the threats posed by industry rivals allows a firm to understand what type of competitive response, if any, may be necessary. Threat analysis = a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning. 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. 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. When any two firms have both a high degree of market commonality and highly similar resource bases, a stronger competitive threat is present. Once attacked, competitors are faced with deciding how to respond: What is their motivation and capability to respond? Before deciding, they need to evaluate not only how they will respond, but also their reasons for responding and their capability to respond: How serious is the attack, and what might be the intent of the competitive response? Is it merely to blunt the attack of the competitor, or is it an opportunity to enhance its competitive position? Sometimes the most a company can hope for is to minimize the damage caused by a competitive action. Companies also have to consider what strategic resources can be deployed to fend off a competitive attack. Does the company have an array of internal strengths it can draw on, or is it operating from a position of weakness?

Competitive Dynamics: Actions

Types of competitive actions include:

Strategic actions

Entering new markets

Creating new product introductions

Changing production capacity

Pursuing mergers or alliances

Tactical actions

Doing price cutting (or offering increases)

Making product/service enhancements

Increasing marketing efforts

Developing new distribution channels

Once an organization determines whether it is willing and able to launch a competitive action, it must determine what type of action is appropriate. The actions taken will be determined by both its resource capabilities and its motivation for responding. Two broadly defined types of competitive action include strategic actions and tactical actions. Strategic actions = major commitments of distinctive and specific resources to strategic initiatives. Tactical actions= refinements or extensions of strategies usually involving minor resource commitments. See Exhibit 8.6 for some examples.

Competitive Dynamics: Reaction

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

The final step before initiating a competitive response is to evaluate what a competitor’s reaction is likely to be. Evaluating potential competitive reactions helps companies plan for future counterattacks. How a competitor is likely to respond will depend on three factors: market dependence, the competitor’s resources, and the reputation of the firm that initiates the action. Market dependence = degree of concentration of a firm’s business in a particular industry. If a company has a high concentration of its business in a particular industry, it has more at stake because it must depend on that industry’s market for its sales. Young and small firms with a high degree of market dependence may be limited in how they respond due to resource constraints. The competitor’s resources must also be considered. For instance, if the competitor is a small firm, it may be unable to mount a serious attack due to lack of resources. As a result, it is more likely to react to tactical actions such as incentive pricing or enhanced service offerings because they are less costly to attack than large-scale strategic actions. Finally, whether a company should respond to a competitive challenge will also depend on who launched the attack against it. Compared to relatively smaller firms with less market power, competitors are more likely to respond to competitive moves by market leaders. Competitors can also choose not to react at all. Forbearance = a firm’s choice of not reacting to a rival’s new competitive action. Co-opetition = a firm’s strategy of both cooperating and competing with rival firms.

Question (4 of 4)

Which of the following might best describe the motivations and actions of small firms as they respond to competitive attacks?

Because they lack legitimacy in the marketplace, small firms need to signal their competitive actions long before they launch those actions.

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

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

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.

Competitive Dynamics & Entrepreneurial Strategies

In summary: Entrepreneurial strategy involves new value creation.

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?

The entry of a startup into a market for the first time, an attack by a lower-ranked incumbent on an industry leader, or the launch of a breakthrough innovation can all disrupt an industry structure. Such actions forever change the competitive dynamics of the marketplace. Thus, the cycle of actions and reactions that occur in business every day is a vital aspect of entrepreneurial strategy that leads to continual new value creation and the ongoing advancement of economic well-being.

ADA APPENDICES

Description of Images

Appendix 1 Competitive Dynamics Model

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The graphic depicts the cyclical competitive dynamics model.

Describing the cycle of actions, the graphic shows the actions and responses included in a competitive dynamic process. Beginning with a new competitive action, next is a threat analysis, followed by motivation and capability to respond, then types of competitive action, and then to likelihood of competitive action, which may lead back to new competitive action.