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chapter_8.docxEntrepreneurial Strategy and Competitive Dynamics
After reading this chapter, you should have a good understanding of the following learning objectives:
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.
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.
Learning from Mistakes
Digg was an early social network pioneer. In 2004, its founder, Kevin Rose, had an innovative idea. Rather than allow major news services to decide what the big news stories of the day were, Rose figured that people could make that choice. He founded Digg, a news-sharing site, to give them that choice.1 Users would post news articles they found interesting. Other users would then vote the story up or down and also post comments about the article. Articles that were voted up moved up in prominence on the site. Those voted down sank and eventually disappeared. The business took off and served as a front page article on BusinessWeek in 2006. Notable venture capitalists like Marc Andreessen, Ron Conway, and Greylock Partners invested $45 million in Digg. It was rumored that Google was interested in buying Digg in 2008 for a reported $200 million.
But the deal never happened, and Digg quickly fell from favor. It struggled due to two major issues—new competition and poor operational decisions. As we’ll discuss later in this chapter, innovative business ideas are typically quickly imitated. Digg faced two forms of imitation. First, Reddit and other sites came online to challenge Digg by implementing similar business models. Second, other social network sites,
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such as Facebook and Twitter, ate away at Digg’s business by letting users share news articles they found interesting with their friends and followers. This seemed much more personalized to many, since they would be more interested in what their friends recommended than how the general population voted on Digg.
Digg also suffered by not building the resource set needed to serve their users effectively. They struggled to handle the volume of traffic on their site, leaving users frustrated when the site kept going down. When they finally went to a wholesale upgrade of their systems in 2010, there were a number of technical glitches that drove users away. They also didn’t make the site as easy to use as they should have or as easy as their competitors’ sites. As Rose himself noted, “It took eight steps to post a link on Digg.”2
What was the cost of Digg’s missteps? Even though Digg was still drawing over 7 million visitors a month in early 2012, it was no longer a valued brand or corporation. The firm, which was at one time thought to be worth $200 million, was sold to Betaworks in July 2012 for the whopping sum of $500,000.
Discussion Questions
1. What lessons can we learn from Digg?
2. Can you think of other Internet firms that have failed and recovered? If so, what lessons can Betaworks draw from these experiences to help Digg recover?
By offering a service allowing users to share and vote on news stories, Digg seemed to have identified an attractive opportunity. But the start-up’s failure shows what can go wrong when—even though a good opportunity and a skilled entrepreneurial team are brought together—a business opportunity disappears as quickly as it appeared.
The Digg case illustrates how important it is for new entrepreneurial entrants—whether they are start-ups or incumbents—to think and act strategically. Even with a strong initial
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resource base, entrepreneurs are unlikely to succeed if their business ideas are easily imitated or the execution of the strategy falls short.
In this chapter we address entrepreneurial strategies. The previous three chapters have focused primarily on the business-level, corporate-level, and international strategies of incumbent firms. Here we ask: What about the strategies of those entering into a market or industry for the first time? Whether it’s a fast-growing start-up such as Digg or an existing company seeking growth opportunities, new entrants need effective strategies.
Companies wishing to launch new ventures must also be aware that, consistent with the five forces model in Chapter 2, new entrants are a threat to existing firms in an industry. Entry into a new market arena is intensely competitive from the perspective of incumbents in that arena. Therefore, new entrants can nearly always expect a competitive response from other companies in the industry it is entering. Knowledge of the competitive dynamics that are at work in the business environment is an aspect of entrepreneurial new entry that will be addressed later in this chapter.
Before moving on, it is important to highlight the role that entrepreneurial start-ups and small businesses play in entrepreneurial value creation. Small businesses, those defined as having 500 employees or fewer, create about 65 percent of all new jobs in the United States and also generate 13 times as many new patents per employee as larger firms.3
Recognizing Entrepreneurial Opportunities
Defined broadly, entrepreneurship refers to new value creation. Even though entrepreneurial activity is usually associated with start-up companies, new value can be created in many different contexts including:
entrepreneurship
the creation of new value by an existing organization or new venture that involves the assumption of risk.
• Start-up ventures
• Major corporations
• Family-owned businesses
• Non-profit organizations
• Established institutions
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.4 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. Exhibit 8.1 depicts the three factors that are needed to successfully proceed—opportunity, resources, and entrepreneur(s). In the sections that follow, we address each of these factors.
LO8.1
The role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures.
Entrepreneurial Opportunities
The starting point for any new venture is the presence of an entrepreneurial opportunity. Where do opportunities come from? For new business start-ups, opportunities come from many sources—current or past work experiences, hobbies that grow into businesses or lead to inventions, suggestions by friends or family, or a chance event that makes an entrepreneur aware of an unmet need. Terry Tietzen, founder and CEO of Edatanetworks puts it this way, “You get ideas through watching the world and through relationships. You get ideas from looking down the road.”5 For established firms, new business opportunities come from the needs of existing customers, suggestions by suppliers, or technological developments that lead to new advances.6 For all firms, there is a major, overarching factor behind all viable opportunities that emerge in the business landscape: change. Change creates opportunities. Entrepreneurial firms make the most of changes brought about by new technology, sociocultural trends, and shifts in consumer demand.
EXHIBIT 8.1 Opportunity Analysis Framework
Sources: Based on Timmons, J. A. & Spinelli, S. 2004. New Venture Creation (6th ed.). New York: McGraw-Hill/Irwin; and Bygrave, W. D. 1997. The Entrepreneurial Process. In W. D. Bygrave (Ed.), The Portable MBA in Entrepreneurship (2nd ed.). New York: Wiley.
How do changes in the external environment lead to new business creation? They spark creative new ideas and innovation. Businesspeople often have ideas for entrepreneurial ventures. However, not all such ideas are good ideas—that is, viable business opportunities. To determine which ideas are strong enough to become new ventures, entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. This is the process of opportunity recognition. 7
opportunity recognition
the process of discovering and evaluating changes in the business environment, such as a new technology, sociocultural trends, or shifts in consumer demand, that can be exploited.
Opportunity recognition refers to more than just the “Eureka!” feeling that people sometimes experience at the moment they identify a new idea. Although such insights are often very important, the opportunity recognition process involves two phases of activity—discovery and evaluation—that lead to viable new venture opportunities.8
The discovery phase refers to the process of becoming aware of a new business concept.9 Many entrepreneurs report that their idea for a new venture occurred to them in an instant, as a sort of “Aha!” experience—that is, they had some insight or epiphany, 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. For example, Howard Schultz, CEO of Starbucks, was in Milan, Italy, when he suddenly realized that the coffee-and-conversation café model that was common in Europe would work in the U.S. as well. According to Schultz, he didn’t need to do research to find out if Americans would pay $3 for a cup of coffee—he just knew. Starbucks was just a small business at the time but Schultz began literally shaking with excitement about growing it into a bigger business.10 Strategy Spotlight 8.1 tells how one entrepreneur combined her heritage with the desire for a healthy lifestyle to build a successful food business.
Opportunity discovery also may 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. It is very similar to a creative process, which may be unstructured and “chaotic” at first but eventually leads to a practical solution or business innovation. To stimulate the discovery of new opportunities, companies often encourage creativity, out-of-the-box thinking, and brainstorming.
Opportunity evaluation, which occurs after an opportunity has been identified, involves analyzing an 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. A technique known as feasibility analysis is used to evaluate these and other critical
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success factors. This type of analysis often leads to the decision that a new venture project should be discontinued. If the venture concept continues to seem viable, a more formal business plan may be developed.11
|
STRATEGY SPOTLIGHT |
8.1 |
HOW AN ENTREPRENEUR’S BACKGROUND DRIVES HER VISION
Susana Cabrera has a rich background and a full plate. Growing up in Venezuela, she learned about what it means to run your own business by observing her entrepreneur father. Trained as an attorney, she moved to the United States. As a wife and mother, she was interested in maintaining a healthy lifestyle and offering her children healthy food and was appalled by the high sodium content, fat level, and preservatives in major Latin American food brands. Finally, she had a desire to give back to her adopted country.
Her background and interests led her to launch Delicious Bite, a company that makes Latin American appetizers and meals. Drawing on her background and interests, she set the vision of the firm to be the leading provider of easy to prepare, healthy, and authentic Hispanic foods. She emphasizes the freshness of inputs, no transfats in her ingredients, and no preservatives. In her words, she wants to provide “a treat without the guilt.” To support her adopted home, she also decided to source her inputs from U.S. growers and suppliers and manufacture all of her products in the United States.
She launched the firm in 2005 and outgrew her initial 1300 square foot facility and moved into a 17,000 square foot building in 2009. She now has over 15 employees and sells her products through 700 stores in 20 states. The success of Delicious Bite led CNNMoney to name her a “kick butt entrepreneur” in 2012.
Cabrera’s story shows that entrepreneurial vision often arises out of an individual’s experience and can encompass both a business idea and a vehicle to provide a social benefit.
Sources: Anonymous. 2012. Be a kick butt entrepreneur. Cnnmoney.com , January 26: np; http://www.youtube.com/watch?v=zrN2ENqpmTs ; and www.delicious-bite.com .
Among the most important factors to evaluate is the market potential for the product or service. Established firms tend to operate in established markets. They have to adjust to market trends and to shifts in consumer demand, of course, but they usually have a customer base for which they are already filling a marketplace need. New ventures, in contrast, must first determine whether a market exists for the product or service they are contemplating. Thus, a critical element of opportunity recognition is assessing to what extent the opportunity is viable in the marketplace.
For an opportunity to be viable, it needs to have four qualities.12
• Attractive. The opportunity must be attractive in the marketplace; that is, there must be market demand for the new product or service.
• Achievable. The opportunity must be practical and physically possible.
• Durable. The opportunity must be 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.
• Value creating. The opportunity must be 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(s) pursuing it. In the next section, we address the issue of entrepreneurial resources; following that, we address the importance of entrepreneurial leaders and teams. But first, consider the opportunities that have been created by the recent surge in interest in environmental sustainability. Strategy Spotlight 8.2 discusses how an entrepreneurial firm is working to develop and sell a line of biodegradable plastics.
GREEN PLASTICS
Despite an increasing emphasis on recycling, only 7 percent of the plastic used by Americans is currently recycled. The remainder goes into landfills or ends up in lakes and oceans, where the plastic poisons fish that consume it. One vivid place to find the consequences of plastic use is in the middle of the ocean over a thousand miles off the California coast. It is the Great Pacific Garbage Patch, a collection of mostly plastic trash that has been estimated to be up to twice the size of France, formed as ocean currents pull plastic trash from coastal areas.
How do we reduce our reliance on nonbiodegradable plastics that clog our landfills and oceans? Metabolix, a small firm based in Cambridge, Massachusetts, is stepping up with an innovative solution—environmentally friendly biodegradable plastics. Plastic is typically made from petroleum, and the products made from petroleum-based plastic can take hundreds of years to decompose in landfills. Metabolix has developed a process to make plastics out of plant materials—the first 100 percent bioplastic product that is both biodegradable and durable enough to stand up to heat and use. The firm uses a genetically engineered microbe that consumes the sugar in corn, producing a plastic molecule called PHA. Plastic products made from PHA will decompose in water or soil in a few months.
The challenge for Metabolix is to build a viable market position in the short term and work to make the product widely economically feasible in the long run. For now, Metabolix is aiming at markets that especially benefit from the biodegradable properties of their product and are willing to absorb the higher cost relative to petroleum-based plastics. Their core focus for now is organic waste handling. Specifically, they are striving to sell to municipalities that separate organic waste and send it to composting facilities. This market finds Mirel, Metabolix’s product, valuable since it is so pure that consumers can toss them into their compost piles and still use the resulting mulch in vegetable gardens or around their fruit trees.
In the long run, Metabolix is aiming to improve the cost efficiency of their product to be able to compete with other plastics by developing genetically engineered nonfood crops, such as switchgrass and oilseeds, that will produce the PHA polymer within the plant and require less processing to extract into usable plastics. If they are successful, they will reduce the need for petroleum and landfill space and, hopefully, begin to reduce the size of the Great Pacific Garbage Patch.
Sources: Dumaine, B. 2010. Feel-good plastic. Fortune, May 3: 36; Ziegler, J. 2009. Metabolix defies skeptics with plastic from plants. Bloomberg, May 7: np; Anonymous. 2009. Drowning in plastic: The Great Pacific Garbage Patch is twice the size of France. telegraph.co.uk , April 24: np; Bomgardner, M. 2012. Metabolix: The post-ADM update. Cenblog.org , July 10: np; Verespej, M. 2012. Metabolix finds new partner to make biopolymer Mirel. Plasticnews.com , July 27: np.
Entrepreneurial Resources
As Exhibit 8.1 indicates, resources are an essential component of a successful entrepreneurial launch. For start-ups, 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.13
Financial Resources Hand-in-hand with the importance of markets (and marketing) to new-venture creation, entrepreneurial firms must also 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 a 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.14 Entrepreneurial firms that are starting from scratch—start-ups—are at the earliest stage of development. Most start-ups also begin on a relatively small scale. The funding available to young and small firms tends to be quite limited. In fact, the majority of new firms are low-budget start-ups launched with personal savings and the contributions of family and friends.15 Among firms included in the Entrepreneur list of the 100 fastest-growing new businesses in a recent year, 61 percent reported that their start-up funds came from personal savings.16
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Although bank financing, public financing, and venture capital are important sources of small business finance, these types of financial support are typically available only after a company has started to conduct business and generate sales. Even angel investors— private individuals who provide equity investments for seed capital during the early stages of a new venture—favor companies that already have a winning business model and dominance in a market niche.17 According to Cal Simmons, coauthor of Every Business Needs an Angel, “I would much rather talk to an entrepreneur who has already put his money and his effort into proving the concept.”18
angel investors
private individuals who provide equity investments for seed capital during the early stages of a new venture.
Thus, while the press commonly talks about the role of venture capitalists and angel investors in start-up firms, the majority of external funding for young and small firms comes from informal sources such as family and friends. Based on a Kaufmann Foundation survey of entrepreneurial firms, Exhibit 8.2 identifies the source of funding used by start-up businesses and by ongoing firms that are five years old. The survey shows that most start-up funding, about 70 percent, comes from either equity investments by the entrepreneur and the entrepreneur’s family and friends or personal loans taken out by the entrepreneur.
venture capitalists
companies organized to place their investors’ finds in lucrative business opportunities.
Once a venture has established itself as a going concern, other sources of financing become readily available. Banks, for example, are more likely to provide later-stage financing to companies with a track record of sales or other cash-generating activity. According to the Kauffman Foundation study, after five years of operation, the largest source of funding is from loans taken out by the business.
At both stages, 5 percent or less of the funding comes from outside investors, such as angel investors or venture capitalists. In fact, few firms ever receive venture capital investments—only 7 of 2606 firms in the Kaufmann study received money from outside investors. But when they do, these firms receive a substantial level of investment—over $1 million on average in the survey—because they tend to be the firms that are the most innovative and have the greatest growth potential. These start-ups typically involve large capital investments or extensive development costs—such as manufacturing or engineering firms trying to commercialize an innovative product—and have high cash requirements soon after they are founded. Since these investments are typically well beyond the capability of the entrepreneur or even a local bank to fund, entrepreneurs running these firms turn to the venture capital market. Other firms turn to venture capitalists when they are on the brink of rapid growth.
EXHIBIT 8.2 Sources of Capital for Start-Up Firms
|
|
Capital Invested in Their First Year |
Percentage of Capital Invested in Their First Year |
Capital Invested in Their Fifth Year |
Percentage of Capital Invested in Their Fifth Year |
|
Insider equity |
$33,034 |
41.1 |
$13,914 |
17.9 |
|
Investor equity |
$ 4,108 |
5.1 |
$ 3,108 |
4.0 |
|
Personal debt of owners |
$23,353 |
29.1 |
$21,754 |
28.0 |
|
Business debt |
$19,867 |
24.7 |
$39,009 |
50.1 |
|
Total average capital invested |
$80,362 |
|
$77,785 |
|
Source: From Robb, A., Reedy, E. J., Ballou, J., DesRoches, D., Potter, F., & Zhao, A. 2010. An Overview of the Kauffman Firm Survey. Reproduced with permission from the Ewing Marion Kauffman Foundation.
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Venture capital is a form of private equity financing through which entrepreneurs raise money by selling shares in the new venture. In contrast to angel investors, who invest their own money, venture capital companies are organized to place the funds of private investors into lucrative business opportunities. Venture capitalists nearly always have high performance expectations from the companies they invest in, but they also provide important managerial advice and links to key contacts in an industry.19
In recent years, a new source of funding, crowdfunding, has emerged as a means for start-ups to amass significant pools of capital.20 In these peer-to-peer investment systems, individuals striving to grow their business post their business ideas on a crowdfunding website. Potential investors who go to the site evaluate the proposals listed and decide which, if any, to fund. Typically, no individual makes a very sizable funding allotment. Most investors contribute up to a few hundred dollars to any investment, but the power of the crowd is at work. If a few thousand investors sign up for a venture, it can potentially raise over a million dollars.
crowdfunding
funding a venture by pooling small investments from a large number of investors, often raised on the internet.
The crowdfunding market has taken off since the term was first coined in 2006. There are over 500 crowdfunding websites, and the total value of crowdfunding investments approached $3 billion in 2012. Some crowdfunding websites allow investors to own actual equity in the firms they fund. Others, such as Kickstarter, don’t offer investors equity. Instead, they get a reward from the entrepreneurial firm. For example, Mystery Brewing Company gave its investors logoed bottle openers, tulip-shaped beer glasses, T-shirts, posters, and home-brew recipes.
To foster growth and establish stability in this market, the United States Congress included guidelines and rules for this market as part of the Jumpstart Our Business Startups (JOBS) Act, which was passed into law in April 2012. This act allows start-ups to go to the crowd-funding market without going through the expense of filing with the Securities and Exchange Commission. If a firm is trying to raise $100,000 or less, all the entrepreneur needs to do is attest to the validity of the firm’s financial statements and provide his or her tax returns. Firms raising $100,000 to $500,000 have to have their financial statements reviewed by a CPA. Financial statements have to be fully audited if the firm is trying to raise over $500,000.
While crowdfunding offers a new avenue for corporations to raise funding, there are some potential downsides. First, the crowdfunding sites take a slice of the funds raised—typically 4 to 9 percent. Second, while crowdfunding offers a marketplace in which to raise funds, it also puts additional pressure on entrepreneurs. The social-network savvy investors who fund these ventures are quick to comment on their social media websites if the firm misses deadlines or falls short of their revenue projections. Finally, entrepreneurs can struggle with how much information to share about their business ideas. They want to share enough information without releasing critical information that competitors trolling these sites can benefit from. They also may be concerned about posting their financials, since these statements give their suppliers and customers access to sensitive information about margins and earnings.
There are also some concerns that the loose rules included in the JOBS Act could lead to significant fraud by firms soliciting investment. According to Stephen Goodman, an attorney with Pryor Cashman LLP, “The SEC has been extremely skeptical of this [crowdfunding] process.” Others have faith in the wisdom of the crowd to catch fraud. They point to the experience with Little Monster Productions, a video game developer. Little Monsters was set to raise funds on Kickstarter, but the fund call was closed by Kickstarter when potential investors noticed and commented that Little Monsters had stolen some of the images they were using in their game from another game site. Strategy Spotlight 8.3 provides a checklist for investors considering participating in a crowdfunding effort. Regardless of their source, financial resources are essential for entrepreneurial ventures.21
EVALUATING CROWDFUNDING OPPORTUNITIES
Because the requirements for firms raising funds through crowd-funding are lax, investors need to do their homework. Here are some simple recommendations to keep from getting burned.
• Financial statements—Be sure to closely review the corporate tax returns that firms are required to post. Better yet, have your accountant review them to see if anything looks fishy.
• Licenses and registrations—You should check to see if the company has current licenses and registrations needed to operate in their chosen industry. This can often be done with online checks with the Secretary of State’s office or the state’s corporation department. Sometimes, it will take a phone call or two. This provides a simple check to see if the company is legitimate.
• Litigation—Check to see if the company has been sued. You can search online at the free site justia.com and the law-oriented information sites Westlaw and Lexis. Be sure to check under current and former names of the firm and its principals (top managers).
• Better Business Bureau—Check the firm’s BBB report. Does the firm appear to exist? What is the grade the BBB gives them? Are they BBB members? All of these give insight into the firm’s current operations and their customer relations.
• Employment and educational history—This is a bit tricky because of privacy issues, but you can typically contact colleges listed on the filing forms and inquire if the principals of the firm attended and graduated from the schools they list. You can also search employment histories on the websites of the companies the principals used to work at as well as social network sites, such as LinkedIn and Facebook.
• Required disclosures—Read all of the documentation carefully. This includes the shareholder rights statement. This statement will provide information on how much of a stake in the firm you get and how this will be diluted by future offerings. Also, read statements on the company’s competition and risks it faces.
Sources: Wasik, J. 2012. The brilliance (and madness) of crowdfunding. Forbes, June 25: 144–146; Burke, A. 2012. Crowdfunding set to explode with passage of Entrepreneur Access to Capital Act. Forbes.com , February 29: np.
Human Capital Bankers, venture capitalists, and angel investors agree that the most important asset an entrepreneurial firm can have is strong and skilled management.22 According to Stephen Gaal, founding member of Walnut Venture Associates, venture investors do not invest in businesses; instead “We invest in people … very smart people with very high integrity.” 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. In the case of start-ups, more is better. New ventures that are started by teams of three, four, or five entrepreneurs are more likely to succeed in the long run than are ventures launched by “lone wolf entrepreneurs.23
Social Capital New ventures founded by entrepreneurs who have extensive social contacts are more likely to succeed than are ventures started without the support of a social network.24 Even though a venture may be new, if the founders have contacts who will vouch for them, they gain exposure and build legitimacy faster.25 This support can come from several sources: prior jobs, industry organizations, and local business groups such as the chamber of commerce. These contacts can all contribute to a growing network that provides support for the entrepreneurial firm. Janina Pawlowski, co-founder of the online lending company E-Loan, attributes part of her success to the strong advisors she persuaded to serve on her board of directors, including Tim Koogle, former CEO of Yahoo!26
Strategic alliances represent a type of social capital that can be especially important to young and small firms.27 Strategic alliances can provide a key avenue for growth
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by entrepreneurial firms.28 By partnering with other companies, young or small firms can expand or give the appearance of entering numerous markets or handling a range of operations. According to the National Federation of Independent Business (NFIB), nearly two-thirds of small businesses currently hold or have held some type of alliance. Here are a few types of alliances that have been used to extend or strengthen entrepreneurial firms:
• Technology alliances—Tech-savvy entrepreneurial firms often benefit from forming alliances with older incumbents. The alliance allows the larger firm to enhance its technological capabilities and expands the revenue and reach of the smaller firm.
• Manufacturing alliances—The use of outsourcing and other manufacturing alliances by small firms has grown dramatically in recent years. Internet-enabled capabilities such as collaborating online about delivery and design specifications have greatly simplified doing business, even with foreign manufacturers.
• Retail alliances—Licensing agreements allow one company to sell the products and services of another in different markets, including overseas. Specialty products—the types sometimes made by entrepreneurial firms—often seem more exotic when sold in another country.
Although such alliances often sound good, there are also potential pitfalls. Lack of oversight and control is one danger of partnering with foreign firms. Problems with product quality, timely delivery, and receiving payments can also sour an alliance relationship if it is not carefully managed. With technology alliances, there is a risk that big firms may take advantage of the technological know-how of their entrepreneurial partners. However, even with these potential problems, strategic alliances provide a good means for entrepreneurial firms to develop and grow.
Government Resources In the U.S., the federal government provides support for entrepreneurial firms in two key arenas—financing and government contracting. 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. The SBA also offers training, counseling, and support services through its local offices and Small Business Development Centers.29 State and local governments also have hundreds of programs to provide funding, contracts, and other support for new ventures and small businesses. These programs are often designed to grow the economy of a region.
Another key area of support is in government contracting. Programs sponsored by the SBA and other government agencies ensure that small businesses have the opportunity to bid on contracts to provide goods and services to the government. Although working with the government sometimes has its drawbacks in terms of issues of regulation and time-consuming decision making, programs to support small businesses and entrepreneurial activity constitute an important resource for entrepreneurial firms.
Entrepreneurial Leadership
Whether a venture is launched by an individual entrepreneur or an entrepreneurial team, effective leadership is needed. Launching a new venture requires a special kind of leadership.30 It involves courage, belief in one’s convictions, and the energy to work hard even in difficult circumstances. Yet these are the very challenges that motivate most business owners. Entrepreneurs put themselves to the test and get their satisfaction from acting independently, overcoming obstacles, and thriving financially. To do so, they must embody
leadership appropriate for new ventures that requires courage, belief in ones convictions, and the energy to work hard even in difficult circumstances; and embody vision, dedication and drive, and commit to excellence.
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three characteristics of leadership—vision, dedication and drive, and commitment to excellence—and pass these on to all those who work with them:
• Vision. This may be an entrepreneur’s most important asset. Entrepreneurs envision realities that do not yet exist. But without a vision, most entrepreneurs would never even get their venture off the ground. With vision, entrepreneurs are able to exercise a kind of transformational leadership that creates something new and, in some way, changes the world. Just having a vision, however, is not enough. To develop support, get financial backing, and attract employees, entrepreneurial leaders must share their vision with others.
• Dedication and drive. Dedication and drive are reflected in hard work. Drive involves internal motivation; dedication calls for an 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. However, a business built on the heroic efforts of one person may suffer in the long run. That’s why the dedicated entrepreneur’s enthusiasm is also important—like a magnet, it attracts others to the business to help with the work.31
• 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. However, entrepreneurs may flounder if they think they are the only ones who can create excellent results. The most successful, by contrast, often report that they owe their success to hiring people smarter than themselves.
In his book Good to Great, Jim Collins makes another important point about entrepreneurial leadership: Ventures built on the charisma of a single person may have trouble growing “from good to great” once that person leaves.32 Thus, the leadership that is needed to build a great organization is usually exercised by a team of dedicated people working together rather than a single leader. Another aspect of this team approach is attracting team members who fit with the company’s culture, goals, and work ethic. Thus, 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.
Once an opportunity has been recognized, and an entrepreneurial team and resources have been assembled, a new venture must craft a strategy. Prior chapters have addressed the strategies of incumbent firms. In the next section, we highlight the types of strategies and strategic considerations faced by new entrants.
Entrepreneurial Strategy
Successfully creating new ventures requires several ingredients. As indicated in Exhibit 8.1, three factors are necessary—a viable opportunity, sufficient resources, and a skilled and dedicated entrepreneur or entrepreneurial team. Once these elements are in place, the new venture needs a strategy. In this section, we consider several different strategic factors that are unique to new ventures and also how the generic strategies introduced in Chapter 5 can be applied to entrepreneurial firms. We also indicate how combination strategies might benefit entrepreneurial firms and address the potential pitfalls associated with launching new venture strategies.
a strategy that enables a 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 example, five-forces analysis (as discussed in Chapter 2) is typically used by established firms. It can also be applied to the analysis of new ventures to assess the impact of industry and competitive forces. But you may ask: How does a new entrant evaluate the threat of other new entrants?
First, the new entrant needs to examine barriers to entry. If the barriers are too high, the potential entrant may decide not to enter or to gather more resources before attempting to do so. Compared to an older firm with an established reputation and available resources, the barriers to entry may be insurmountable for an entrepreneurial start-up. Therefore, understanding the force of these barriers is critical in making a decision to launch.
A second factor that may be especially important to a young venture is the threat of retaliation by incumbents. In many cases, entrepreneurial ventures are the new entrants that pose a threat to incumbent firms. Therefore, in applying the five-forces model to new ventures, the threat of retaliation by established firms needs to be considered.
Part of any decision about what opportunity to pursue is a consideration of how a new entrant will actually enter a new market. The concept of entry strategies provides a useful means of addressing the types of choices that new ventures have.
Entry Strategies
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 good employees, and overcomes the liability of newness. The idea of an entry strategy or “entry wedge” describes several approaches that firms may take to get a foothold in a market.33 Several factors will affect this decision.
• Is the product/service high-tech or low-tech?
• What resources are available for the initial launch?
• What are the industry and competitive conditions?
• What is the overall market potential?
• Does the venture founder prefer to control the business or to grow it?
LO8.2
Three types of entry strategies—pioneering, imitative, and adaptive —commonly used to launch a new venture.
In some respects, any type of entry into a market for the first time may be considered entrepreneurial. But the entry strategy will vary depending on how risky and innovative the new business concept is.34 New-entry strategies typically fall into one of three categories—pioneering new entry, imitative new entry, or adaptive new entry.35
Pioneering New Entry 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 may actually have little direct competition. The first personal computer was a pioneering product; there had never been anything quite like it and it revolutionized computing. The first Internet browser provided a type of pioneering service. These breakthroughs created whole new industries and changed the competitive landscape. And breakthrough innovations continue to inspire pioneering entrepreneurial efforts. Strategy Spotlight 8.4 discusses Pandora, a firm that pioneered a new way to broadcast music.
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.
The pitfalls associated with a pioneering new entry are numerous. For one thing, there is a strong risk that the product or service will not be accepted by consumers. The history of entrepreneurship is littered with new ideas that never got off the launching pad. Take, for example, Smell-O-Vision, an invention designed to pump odors into movie theatres from the projection room at preestablished moments in a film. It was tried only once (for the film Scent of a Mystery) before it was declared a major flop. Innovative? Definitely. But hardly a good idea at the time.36
A pioneering new entry is disruptive to the status quo of an industry. It is likely based on a technological breakthrough. If it is successful, other competitors will rush in to copy it. This can create issues of sustainability for an entrepreneurial firm, especially if a larger
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company with greater resources introduces a similar product. 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.
|
STRATEGY SPOTLIGHT |
8.4 |
PANDORA ROCKS THE MUSIC BUSINESS
Whether the music was transmitted over FM radio signals, streamed over the web, or from a satellite, the musical choices radio listeners had were fairly standardized until Pandora arrived. Radio stations determined their play list based on a combination of interest evident in music sales and listener surveys along with the format of their stations. Listeners in a given market could decide if they wanted to listen to a top 40, adult contemporary, country, or classic rock station, but they couldn’t custom design a station to meet their eclectic musical tastes.
Tim Westergren completely changed the radio business when he created Pandora. In 1999 he developed the Music Genome Project—a system that analyzes music for its underlying traits, including melody, rhythm, lyrics, instrumentation, and many other traits. Each song is measured on approximately 400 musical “genes” and given a vector or list of attributes. The vectors of multiple songs can be compared to assess the “distance” between the two songs. Using the Music Genome Project, Westergren launched Pandora in 2000. Users input bands or songs they like, and Pandora creates a customized station that plays music that meets the users’ tastes. Users can then tweak the station by giving input on whether or not they like the songs Pandora plays for them.
Pandora radically changes the radio business in multiple ways. First, users create their own customized stations. Second, users can access their personal radio stations wherever they go through any Internet-connected device. Third, the playing of songs is driven by their musical traits, not how popular a band is. If an unsigned garage band has musical traits similar to Pearl Jam, their music will get play on a user’s Pearl Jam station. This offers great exposure to aspiring musicians not available on commercial radio. It also offers an avenue for record labels to get exposure for newly signed bands that don’t yet get air play on traditional radio.
Pandora has grown in 10 years from a bold new idea to become the largest “radio” station in the world, with 150 million registered users. Pandora faces a number of competitors, such as Spotify, Rdio, and Songza, but it continues to grow and change the music business.
Sources: Copeland, M. V. 2010. Pandora’s Founder Rocks the Music Business. Fortune, July 5: 27–28; Levy, A. 2010. Pandora’s Next Frontier: Your Wheels. BusinessWeek.com , October 14: np; www.pandora.com ; and Kessler, S. 2012. Spotify who? Pandora surges past 150 million registered users. mashable.com , May 8: np.
Imitative New Entry Whereas pioneers are often inventors or tinkerers with new technology, 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.
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.
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. This can actually be a serious problem for entrepreneurial start-ups if the imitator is an established company. Consider the example of Square.37 Founded in 2010, Square provides a means for small businesses to process credit and debit card sales without signing up for a traditional credit card arrangement that typically includes monthly fees and minimum charges. Square provides a small credit card reader that plugs into a smartphone to users who sign up for their service. Swipe the card and input the charge amount. Square does the rest for a 2.75 percent transaction fee. By the middle of 2012, Square had signed up over two million users. But success triggers imitation. A host of both upstart and established firms have moved into this new segment. While Square has quickly established itself in the market, it now faces strong competition from major competitors, including Intuit and PayPal. Sensing that they may have difficulty going head to head with
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these larger imitators, Square is looking to further innovate and is now offering an app, called Pay with Square, that will allow users to pay by credit straight from their smartphone without ever taking out a credit card.
Adaptive New Entry 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.
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.
According to business creativity coach Tom Monahan, “Every new idea is merely a spin of an old idea. [Knowing that] takes the pressure off from thinking [you] have to be totally creative. You don’t. Sometimes it’s one slight twist to an old idea that makes all the difference.”38 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.
There are several pitfalls that might limit the success of an adaptive new entrant. First, the value proposition must be perceived as unique. Unless potential customers believe a new 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 on to 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.
Considering these choices, an entrepreneur or entrepreneurial team might ask, Which new entry strategy is best? The choice depends on many competitive, financial, and marketplace considerations. Nevertheless, research indicates that the greatest opportunities
EXHIBIT 8.3 Examples of Adaptive New Entrants
|
Company Name |
Product |
Adaptation |
Result |
|
Under Armour, Inc. Founded in 1995 |
Undershirts and other athletic gear |
Used moisture-wicking fabric to create better gear for sweaty sports. |
Under Armour generated over $1.4 billion in sales in 2012 and was number 51 in Fortune Magazine’s list of fastest-growing firms. |
|
Mint.com Founded in 2005 |
Comprehensive online money management |
Created software that tells users what they are spending by aggregating financial information from online bank and credit card accounts. |
Mint has over 10 million users and is helping them manage over $1 billion in assets. |
|
Plum Organics Founded in 2005 |
Organic baby food and snack foods for children |
Made convenient line of baby food using organic ingredients. |
Plum now has over 20 products and is listed at number 63 on the Inc 500 list of fastest-growing private companies. |
|
Spanx Founded in 2000 |
Footless pantyhose and other undergarments for women |
Combined nylon and Lycra(r) to create a new type of undergarment that is comfortable and eliminates panty lines. |
Now produces over 200 products sold in 3,000 stores to over 6 million customers. |
Sources: Bryan, M. 2007. Spanx Me, Baby! www.observer.com , December 10, np.; Carey, J. 2006. Perspiration Inspiration. BusinessWeek, 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 .
may stem from being willing to enter new markets rather than seeking growth only in existing markets. One study found that companies that ventured into arenas that were new to the world or new to the company earned total profits of 61 percent. In contrast, companies that made only incremental improvements, such as extending an existing product line, grew total profits by only 39 percent.39
However, whether to be pioneering, imitative, or adaptive when entering markets is only one question the entrepreneur faces. A new entrant must also decide what type of strategic positioning will work best as the business goes forward. Those strategic choices can be informed by the guidelines suggested for the generic strategies. We turn to that subject next.
Generic Strategies
Typically, a new entrant begins with a single business model that is equivalent in scope to a business-level strategy (Chapter 5). In this section we address how overall low cost, differentiation, and focus strategies can be used to achieve competitive advantages.
LO8.3
How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses.
Overall Cost Leadership 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 some new ventures. The way most companies achieve low-cost leadership, however, is typically different for young or small firms.
Recall from Chapter 5 that three of the features of a low-cost approach included operating at a large enough scale to spread costs over many units of production (economies of scale), making substantial capital investments in order to increase scale economies, and using knowledge gained from experience to make cost-saving improvements. These elements of a cost-leadership strategy may be unavailable to new ventures. Because new ventures are typically small, they usually don’t have high economies of scale relative to competitors. Because they are usually cash strapped, they can’t make large capital investments to increase their scale advantages. And because many are young, they often don’t have a wealth of accumulated experience to draw on to achieve cost reductions.
Given these constraints, how can new ventures successfully deploy cost-leader strategies? 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 indicate 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. For example, they may source materials from a supplier that provides them more cheaply or set up manufacturing facilities in another country where labor costs are especially low. Thus, new firms have several avenues for achieving low cost leadership. Strategy Spotlight 8.5 highlights the success of Vizio, Inc., a new entrant with an overall cost leadership strategy. Whatever methods young firms use to achieve a low-cost advantage, this has always been a way that entrepreneurial firms take business away from incumbents—by offering a comparable product or service at a lower price.
Differentiation 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. In the case of pioneers, the new venture is attempting to do something strikingly different, either by using a new technology or deploying resources in a way that radically alters the way business is conducted. Often, entrepreneurs do both.
Amazon founder Jeff Bezos set out to use Internet technology to revolutionize the way books are sold. He garnered the ire of other booksellers and the attention of the public by making bold claims about being the “earth’s largest bookseller.” As a bookseller,
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Bezos was not doing anything that had not been done before. But two key differentiating features—doing it on the Internet and offering extraordinary customer service—have made Amazon a differentiated success.
|
STRATEGY SPOTLIGHT |
8.5 |
LOW-COST IMITATOR VIZIO, INC. TAKES OFF
When flat-panel TVs were first introduced in the late 1990s, major manufacturers such as Samsung, Sony, and Matsushita (maker of Panasonic) made heavy investments in R&D in a competition for technological leadership. As a result, the early flat-panel TVs were expensive. Even as technological advances drove prices down, the TVs were growing larger and flatter, and they continued to command premium prices. By 2002, 50-inch plasma TVs were still selling for $8,000–$10,000. But by then, panel technology had also become somewhat commoditized. That’s when William Wang, a former marketer of computer monitors, realized he could use existing technologies to create a high-quality TV. Wang discovered he could keep operations lean and outsource everything from tech support to R&D, so he founded Vizio, Inc.
In January 2003, Wang pitched Costco Wholesale Corp. on a 46-inch flat-panel plasma TV for $3,800—half the price of the competition. Although Costco executives laughed when Wang said he wanted to become the next Sony, they decided to give him a chance. By March 2003, the TVs were being offered in over 300 of Costco’s U.S. warehouse stores. Today, Vizio is one of Costco’s largest suppliers of TVs.
Vizio’s success is due not only to enlightened imitation and low-cost operations, but also to Wang’s unique approach to financing growth. Although he initially mortgaged his home and borrowed from family and friends, when he needed additional funding, he targeted the manufacturing partners who were supplying him parts. In 2004, Taiwan-based contract manufacturer AmTran Technology Co. purchased an 8 percent stake in Vizio for $1 million; today, AmTran owns 23 percent of Vizio and supplies over 80 percent of its TVs. “Unlike many PC companies who try to make their money by squeezing the vendor,” says Wang, “we try to work with our vendor.”
Vizio has found success focusing on LCD TVs, staying lean, and working with their suppliers. This has allowed them to grow from an upstart firm to a position of market leadership. Vizio shipped 18.5 percent of the LCD TVs sold in the first quarter of 2012, leading the number two firm, Samsung, which had 17.6 percent of the market. Their status as a major player in consumer electronics is reinforced by their status as the title sponsor of the 2014 Vizio BCS National Championship college football game.
Sources: Lawton, C., Kane, Y. I., & Dean, J. 2008. U.S. upstart takes on TV giants in price war. www.wsj.com , April 15, np.; Taub, E. A. 2008. Flat-panel TV prices plummet. www.nytimes.com , December 2, np.; Wilson, S. 2008. Picture it. Entrepreneur, July: 43; www.wikipedia.com ; Edwards, C. 2010. How Vizio beat Sony in high-def TV. Bloomberg Businessweek, April 26: 51–52; and Morrod.T. 2012. Vizio retakes lead in U.S. LCD TV market; Samsung maintains overall TV dominance. www.isuppli.com , July 12: np.
There are several factors that make it more difficult for new ventures to be successful as differentiators. For one thing, the strategy is generally thought to be expensive to enact. Differentiation is often associated with strong brand identity, and establishing a brand is usually considered to be expensive because of the cost of advertising and promotion, paid endorsements, exceptional customer service, etc. Differentiation successes are sometimes built on superior innovation or use of technology. These are also factors where it may be challenging for young firms to excel relative to established competitors.
Nevertheless all of these areas—innovation, technology, customer service, distinctive branding—are also arenas where new ventures have sometimes made a name for themselves even though they must operate with limited resources and experience. To be successful, according to Garry Ridge, CEO of the WD-40 Company, “You need to have a great product, make the end user aware of it, and make it easy to buy.”40 It sounds simple, but it is a difficult challenge for new ventures with differentiation strategies.
Focus Focus strategies are often associated with small businesses because there is a natural fit between the narrow scope of the strategy and the small size of the firm. A focus strategy may include elements of differentiation and overall cost leadership, as well as combinations of these approaches. But to be successful within a market niche, the key strategic requirement is to stay focused. Here’s why:
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Despite all the attention given to fast-growing new industries, most start-ups enter industries that are mature.41 In mature industries, growth in demand tends to be slow and there are often many competitors. Therefore, if a start-up wants to get a piece of the action, it often has to take business away from an existing competitor. If a start-up enters a market with a broad or aggressive strategy, it is likely to evoke retaliation from a more powerful 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 existing competitors.42 From this position, they can build a name for themselves and grow.
Consider, for example, the “Miniature Editions” line of books launched by Running Press, a small Philadelphia publisher. The books are palm-sized minibooks positioned at bookstore cash registers as point-of-sale impulse items costing about $4.95. Beginning with just 10 titles in 1993, Running Press grew rapidly and within 10 years had sold over 20 million copies. Even though these books represent just a tiny fraction of total sales in the $23 billion publishing industry, they have been a mainstay for Running Press.43 As the Running Press example indicates, many new ventures are successful even though their share of the market is quite small.
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. 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.44
A similar argument could be made about entrepreneurial firms that differentiate. Large firms often find it difficult to offer highly specialized products or superior customer services. Entrepreneurial firms, by contrast, can often create high-value products and services through their unique differentiating efforts. Strategy Spotlight 8.6 shows how two entrepreneurs found a recipe to sell fashionable eyeglasses to demanding customers while also cutting costs and serving a social mission.
For nearly all new entrants, one of the major dangers is that a large firm with more resources will copy what they are doing. Well-established incumbents that observe the success of a new entrant’s product or service will copy it and use their market power to overwhelm the smaller firm. The threat may be lessened for firms that use combination strategies. Because of the flexibility of entrepreneurial firms, they can often enact combination strategies in ways that the large firms cannot copy. This makes the new entrant’s strategies much more sustainable.
Perhaps more threatening than large competitors are close competitors, because they have similar structural features that help them adjust quickly and be flexible in decision making. Here again, a carefully crafted and executed combination strategy may be the best way for an entrepreneurial firm to thrive in a competitive environment. Nevertheless, competition among rivals is a key determinant of new venture success. To address this, we turn next to the topic of competitive dynamics.
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.
Competitive Dynamics
New entry into markets, whether by start-ups or by incumbent firms, nearly always threatens existing competitors. This is true in part because, except in very new markets, nearly every market need is already being met, either directly or indirectly, by existing firms. As a result, the competitive actions of a new entrant are very likely to provoke a competitive response from companies that feel threatened. This, in turn, is likely to evoke a reaction to the response. As a result, a competitive dynamic—action and response—begins among the firms competing for the same customers in a given marketplace.
|
STRATEGY SPOTLIGHT |
8.6 |
WARBY PARKER SEES VALUE IN A COMBINATION STRATEGY
Wharton School of Business graduates Neil Blumenthal and Dave Gilboa wondered why a pair of eyeglass frames, a simple and mass-produced product, often costs as much as an iPhone. Blumenthal concluded that he knew why. “The optical industry is an oligopoly. A few companies are making outrageous margins and screwing you and me.” One of the firms dominating the $16 billion eyeglass industry is Luxottica, which owns LensCrafters, Pearle Vision, Sunglass Hut, and the eyeglass clinics in Target and Sears stores. By owning multiple stores and producing over 25 brands of glasses, Gilboa argues that Luxottica has “created the illusion of choice” in an uncompetitive and high-profit industry.
Blumenthal and Gilboa are striking out to offer real choice to eyeglass wearers. They have developed a simple formula to offer customers new ways to buy glasses. They developed an online system where customers can upload a picture and virtually “try on” a range of glasses. Customers can then order and test try up to five frames at a time in their own home.
Warby Parker keeps its costs low in a number of ways. First, it outsources to low-cost manufacturers. Second, it developed its own brand, leaving out the cost of licensing a fashion brand, which can often add 15 percent to the cost of a pair of glasses. Third, they don’t work through retailers, whose markups can double the cost of glasses. They also rely on low-cost marketing. For example, they use a “brand ambassador” program where unpaid promoters get a free pair of glasses and are asked to share a discount code with friends and family. As a result, they are able to offer their frames at one-third to one-half the cost of their brand name competitors.
Warby Parker also has a social mission. For every pair of glasses the firm sells, it provides a free pair of eyeglasses to a needy person. In 2011, they helped distribute over 100,000 free pairs of glasses. They are also focused on sustainability and are certified as a zero net carbon emissions business.
So far, the firm’s balance of fashion, cost consciousness, and social responsibility has led to remarkable success. They have grown from the two founders to over 100 employees in two and a half years. They have also attracted the interest of investors, receiving $37 million in venture capitalist funding in 2012. With this business model, Blumenthal and Gilboa see a bright future.
Sources: Berfield, S. 2011. A startup’s new prescription for eyewear. Bloomberg Businesweek, July 4, 49–51; Mitroff, S. 2012. With $37M, Warby Parker sets its sights on more than just eyeglasses. Wired.com , September 10. Np; and Kim, R. 2012. Warby Parker raises $36.8M to expand fashion eyewear brand. Gigaom.com , September 10, np.
Competitive dynamics—intense rivalry among similar competitors—has the potential to alter a company’s strategy. New entrants may be forced to change their strategies or develop new ones to survive competitive challenges by incumbent rivals. 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. Exhibit 8.4 identifies the factors that competitors need to consider when determining how to respond to a competitive act.
competitive dynamics
intense rivalry, involving actions and responses, among similar competitors vying for the same customers in a marketplac.
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.
New Competitive Action
Entry into a market by a new competitor is a good starting point to begin describing the cycle of actions and responses characteristic of a competitive dynamic process.45 However, new entry is only one type of competitive action. Price cutting, imitating successful products, or expanding production capacity are other examples of competitive acts that might provoke competitors to react.
Why do companies launch new competitive actions? There are several reasons:
• Improve market position
• Capitalize on growing demand
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EXHIBIT 8.4 Model of Competitive Dynamics
Sources: 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.
• Expand production capacity
• Provide an innovative new solution
• Obtain first mover advantages
Underlying all of these reasons is a desire to strengthen financial outcomes, capture some of the extraordinary profits that industry leaders enjoy, and grow the business. Some companies are also motivated to launch competitive challenges because they want to build their reputation for innovativeness or efficiency. For example, Toyota’s success with the Prius signaled to its competitors the potential value of high-fuel-economy cars, and these firms have responded with their own hybrids, electric cars, high-efficiency diesel engines, and even more fuel-efficient traditional gasoline engines. This is indicative of the competitive dynamic cycle. As former Intel Chairman Andy Grove stated, “Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another until there is nothing left.”46
acts that might provoke competitors to react, such as new market entry, price cutting, imitating successful products, and expanding production capacity.
When a company enters into a market for the first time, it is an attack on existing competitors. As indicated earlier in the chapter, any of the entry strategies can be used to take competitive action. But competitive attacks come from many sources besides new entrants. Some of the most intense competition is among incumbent rivals intent on gaining strategic advantages. “Winners in business play rough and don’t apologize for it,” according to Boston Consulting Group authors George Stalk, Jr., and Rob Lachenauer in their book Hardball: Are You Playing to Play or Playing to Win? 47 Exhibit 8.5 outlines their five strategies.
The likelihood that a competitor will launch an attack depends on many factors.48 In the remaining sections, we discuss factors such as competitor analysis, market conditions, types of strategic actions, and the resource endowments and capabilities companies need to take competitive action.
Threat Analysis
Prior to actually observing a competitive action, companies may need to become aware of potential competitive threats. That is, companies need to have a keen sense of who their closest competitors are and the kinds of competitive actions they might be planning.49 This may require some environmental scanning and monitoring of the sort described in Chapter 2. Awareness of the threats posed by industry rivals allows a firm to understand what type of competitive response, if any, may be necessary.
a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning.
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EXHIBIT 8.5 Five “Hardball” Strategies
|
Strategy |
Description |
Examples |
|
Devastate rivals’ profit sanctuaries |
Not all business segments generate the same level of profits for a company. Through focused attacks on a rival’s most profitable segments, a company can generate maximum leverage with relatively smaller-scale attacks. Recognize, however, that companies closely guard the information needed to determine just what their profit sanctuaries are. |
In 2005, Walmart began offering low-priced extended warranties on home electronics after learning that its rivals such as Best Buy derived most of their profits from extended warranties. |
|
Plagiarize with pride |
Just because a close competitor comes up with an idea first does not mean it cannot be successfully imitated. Second movers, in fact, can see how customers respond, make improvements, and launch a better version without all the market development costs. Successful imitation is harder than it may appear and requires the imitating firm to keep its ego in check. |
In designing their smartphones, Samsung copied the look, feel, and technological attributes of Apple’s IPhone. Samsung lost a patent infringement lawsuit to Apple, but by copying Apple, Samsung was able to improve its market position. |
|
Deceive the competition |
A good gambit sends the competition off in the wrong direction. This may cause the rivals to miss strategic shifts, spend money pursuing dead ends, or slow their responses. Any of these outcomes support the deceiving firms’ competitive advantage. Companies must be sure not to cross ethical lines during these actions. |
Max Muir knew that Australian farmers liked to buy from family-firm suppliers but also wanted efficient suppliers. To meet both needs, he quietly bought a number of small firms to build economies of scale but didn’t consolidate brands or his sales force so that, to his customers and rivals, they still looked like independent family firms. |
|
Unleash massive and overwhelming force |
While many hardball strategies are subtle and indirect, this one is not. This is a full-frontal attack where a firm commits significant resources to a major campaign to weaken rivals’ positions in certain markets. Firms must be sure they have the mass and stamina required to win before they declare war against a rival. |
Unilever has taken a dominant position, with 65 percent market share, in the Vietnamese laundry detergent market by employing a massive investment and marketing campaign. In doing so, they decimated the market position of the local, incumbent competitors. |
|
Raise competitors’ costs |
If a company has superior insight into the complex cost and profit structure of the industry, it can compete in a way that steers its rivals into relatively higher cost/lower profit arenas. This strategy uses deception to make the rivals think they are winning, when in fact they are not. Again, companies using this strategy must be confident that they understand the industry better than their rivals. |
Ecolab, a company that sells cleaning supplies to businesses, encouraged a leading competitor, Diversity, to adopt a strategy to go after the low-volume, high-margin customers. What Ecolab knew that Diversity didn’t is that the high servicing costs involved with this segment make the segment unprofitable—a situation Ecolab assured by bidding high enough to lose the contracts to Diversity but low enough to ensure the business lost money for Diversity. |
Sources: Berner, R. 2005. Watch Out, Best Buy and Circuit City. BusinessWeek, November 10; Stalk, G. Jr. 2006. Curveball Strategies to Fool the Competition. Harvard Business Review, 84(9): 114—121; and Stalk, Jr., G. & Lachenauer, R. 2004. Hardball: Are You Playing to Play or Playing to Win? Cambridge, MA: Harvard Business School Press. Reprinted by permission of Harvard Business School Press from G. Stalk, Jr. and R. Lachenauer. Copyright 2004 by the Harvard Business School Publishing Corporation; all rights reserved; Lam, Y. 2013. FDI companies dominate Vietnam’s detergent market. www.saigon-gpdaily.com.vn , January 22: np; Vascellaro, J. 2012. Apple wins big in patent case. www.wsj.com , August 25: np; and Pech, R. & Stamboulidis, G. 2010. How strategies of deception facilitate business growth. Journal of Business Strategy, 31(6): 37–45.
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Being aware of competitors and cognizant of whatever threats they might pose is the first step in assessing the level of competitive threat. Once a new competitive action becomes apparent, companies must determine how threatening it is to their business. 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.50 Two factors are used to assess whether or not companies are close competitors:
• Market commonality—Whether or not competitors are vying for the same customers and how many markets they share in common. For example, aircraft manufacturers Boeing and Airbus have a high degree of market commonality because they make very similar products and have many buyers in common.
• Resource similarity—The degree to which rivals draw on the same types of resources to compete. For example, the home pages of Google and Yahoo! may look very different, but behind the scenes, they both rely on the talent pool of high-caliber software engineers to create the cutting-edge innovations that help them compete.
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. Such a threat, however, may not lead to competitive action. On the one hand, a market rival may be hesitant to attack a company that it shares a high degree of market commonality with because it could lead to an intense battle. On the other hand, once attacked, rivals with high market commonality will be much more motivated to launch a competitive response. This is especially true in cases where the shared market is an important part of a company’s overall business.
How strong a response an attacked rival can mount will be determined by their strategic resource endowments. In general, the same set of conditions holds true with regard to resource similarity. Companies that have highly similar resource bases will be hesitant to launch an initial attack but pose a serious threat if required to mount a competitive response.51 Greater strategic resources increase a firm’s capability to respond.
Motivation and Capability to Respond
Once attacked, competitors are faced with deciding how to respond. Before deciding, however, they need to evaluate not only how they will respond, but also their reasons for responding and their capability to respond. Companies need to be clear about what problems a competitive response is expected to address and what types of problems it might create.52 There are several factors to consider.
First, how serious is the impact of the competitive attack to which they are responding? For example, a large company with a strong reputation that is challenged by a small or unknown company may elect to simply keep an eye on the new competitor rather than quickly react or overreact. Part of the story of online retailer Amazon’s early success is attributed to Barnes & Noble’s overreaction to Amazon’s claim that it was “earth’s biggest bookstore.” Because Barnes & Noble was already using the phrase “world’s largest bookstore,” it sued Amazon, but lost. The confrontation made it to the front pages of The Wall Street Journal and Amazon was on its way to becoming a household name.53
Companies planning to respond to a competitive challenge must also understand their motivation for responding. What is 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.
A company that seeks to improve its competitive advantage may be motivated to launch an attack rather than merely respond to one. For example, a few years ago, the Wall Street Journal (WSJ) attacked the New York Times by adding a local news section to the New York edition of the WSJ. Their aim was to become a more direct competitor of the Times
The publishers of the WSJ undertook this attack when they realized the Times was in a weakened financial condition and would be unable to respond to the attack.54 A company must also assess its capability to respond. 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?
Consider, the role of firm age and size in calculating a company’s ability to respond. Most entrepreneurial new ventures start out small. The smaller size makes them more nimble compared to large firms so they can respond quickly to competitive attacks. Because they are not well-known, start-ups 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, start-ups may not have the financial resources needed to follow through with a competitive response.55 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. Older firms tend to be predictable in their responses because they often lose touch with the competitive environment and rely on strategies and actions that have worked in the past.
Other resources may also play a role in whether a company is equipped to retaliate. For example, one avenue of counterattack may be launching product enhancements or new product/service innovations. For that approach to be successful, it requires a company to have both the intellectual capital to put forward viable innovations and the teamwork skills to prepare a new product or service and get it to market. Resources such as cross-functional teams and the social capital that makes teamwork production effective and efficient represent the type of human capital resources that enhance a company’s capability to respond.
Types of Competitive Actions
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. There are also marketplace considerations. What types of actions are likely to be most effective given a company’s internal strengths and weaknesses as well as market conditions?
Two broadly defined types of competitive action include strategic actions and tactical actions. Strategic actions represent major commitments of distinctive and specific resources. Examples include launching a breakthrough innovation, building a new production facility, or merging with another company. Such actions require significant planning and resources and, once initiated, are difficult to reverse.
strategic actions
major commitments of distinctive and specific resources to strategic initiatives.
Tactical actions include refinements or extensions of strategies. Examples of tactical actions include cutting prices, improving gaps in service, or strengthening marketing efforts. Such actions typically draw on general resources and can be implemented quickly. Exhibit 8.6 identifies several types of strategic and tactical competitive actions, and Strategy Spotlight 8.7 shows the range of actions that can occur in a rivalrous relationship.
tactical actions
refinements or extensions of strategies usually involving minor resource commitments.
Some competitive actions take the form of frontal assaults, that is, actions aimed directly at taking business from another company or capitalizing on industry weaknesses. This can be especially effective when firms use a low-cost strategy. The airline industry provides a good example of this head-on approach. When Southwest Airlines began its no-frills, no-meals, strategy in the late-1960s, it represented a direct assault on the major carriers of the day. In Europe, Ryanair has similarly directly challenged the traditional carriers with an overall cost leadership strategy.
Guerilla offensives and selective attacks provide an alternative for firms with fewer resources.56 These draw attention to products or services by creating buzz or generating
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enough shock value to get some free publicity. TOMS shoes has found a way to generate interest in its products without a large advertising budget to match Nike. Their policy of donating one pair of shoes to those in need for every pair of shoes purchased by customers has generated a lot of buzz on the internet.57 Over 2 million people have given a “like” rating on TOMS’s Facebook page. The policy has a real impact as well, with over 2 million shoes donated as of January 2013.58
EXHIBIT 8.6 Strategic and Tactical Competitive Actions
|
|
Actions |
Examples |
|
Strategic Actions |
• Entering new markets |
• Make geographical expansions |
|
|
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• Expand into neglected markets |
|
|
|
• Target rivals’ markets |
|
|
|
• Target new demographics |
|
|
• New product introductions |
• Imitate rivals’ products |
|
|
|
• Address gaps in quality |
|
|
|
• Leverage new technologies |
|
|
|
• Leverage brand name with related products |
|
|
|
• Protect innovation with patents |
|
|
• Changing production capacity |
• Create overcapacity |
|
|
|
• Tie up raw materials sources |
|
|
|
• Tie up preferred suppliers and distributors |
|
|
|
• Stimulate demand by limiting capacity |
|
|
• Mergers/Alliances |
• Acquire/partner with competitors to reduce competition |
|
|
|
• Tie up key suppliers through alliances |
|
|
|
• Obtain new technology/intellectual property |
|
|
|
• Facilitate new market entry |
|
Tactical Actions |
• Price cutting (or increases) |
• Maintain low price dominance |
|
|
|
• Offer discounts and rebates |
|
|
|
• Offer incentives (e.g., frequent flyer miles) |
|
|
|
• Enhance offering to move upscale |
|
|
• Product/service enhancements |
• Address gaps in service |
|
|
|
• Expand warranties |
|
|
|
• Make incremetal product improvements |
|
|
• Increased marketing efforts |
• Use guerilla marketing |
|
|
|
• Conduct selective attacks |
|
|
|
• Change product packaging |
|
|
|
• Use new marketing channels |
|
|
• New distribution channels |
• Access suppliers directly |
|
|
|
• Access customers directly |
|
|
|
• Develop multiple points of contact with customers |
|
|
|
• Expand Internet presence |
Sources: Chen, M. J. & Hambrick, D. 1995. Speed, Stealth, and Selective Attack: How Small Firms Differ from Large Firms in Competitive Behavior. Academy of Management Journal, 38: 453—482; Davies, M. 1992. Sales Promotions as a Competitive Strategy. Management Decision, 30(7): 5–10; Ferrier, W., Smith, K., & Grimm, C. 1999. The Role of Competitive Action in Market Share Erosion and Industry Dethronement: A Study of Industry Leaders and Challengers. Academy of Management Journal, 42(4): 372–388; and Garda, R. A. 1991. Use Tactical Pricing to Uncover Hidden Profits. Journal of Business Strategy, 12(5): 17–23.
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|
STRATEGY SPOTLIGHT |
8.7 |
AMAZON AND APPLE: COLLIDING GIANTS
Amazon and Apple come from very different backgrounds. Amazon’s roots are as an online retailer. Apple is the quintessential technology firm. But now they find themselves taking each other on in a multifronted battle. Their battle is an intriguing one since they come from different backgrounds but share similar traits. They are both known for the tight control they keep on their software, secretive cultures, the range of consumer data they collect, and their drive to win. However, their business models are very different. Apple generates the bulk of its profits by selling high-margin hardware. In contrast, Amazon earns razor-thin margins on its hardware but generates the majority of its profits by channeling buyers to its e-commerce businesses.
Today, they compete in two major arenas: tablet computers, and music downloading and electronic books. Interestingly, they are each the leader in one of those markets, but the other has signaled they are willing to fight for each of those markets. Apple was first to the tablet market, but Amazon has aggressively attacked this market with its Kindle Fire. In the fourth quarter of 2012, Apple had 44 percent of the tablet market, while Amazon had a 12 percent market share. As the underdog in this market, Amazon directly compares the utility of its products to the iPad. For example, when it launched the Kindle Fire, Jeff Bezos, Amazon’s CEO, directly noted the ability of the Kindle Fire to wirelessly back up media on the tablet without having to sync it to a computer—a step an iPad user had to do. In doing so, Amazon leverages its strong capabilities in cloud computing storage. While Apple doesn’t acknowledge Amazon as a key competitor in this market, some analysts believe the development of the mini-iPad was a move to respond to the smaller Kindle Fire.
In their other current area of competition, Amazon and Apple both sell e-books. Amazon dominates this market, with a 60 percent market share in 2012. Apple, with less than 10 percent of this market, is the aggressive upstart. To better compete with Amazon in the e-book market, Apple has developed a platform where users can build interactive e-books.
Amazon is also positioning itself to challenge Apple in some of its other product areas. Amazon has developed its own smartphone, which it will launch in 2013. As part of this launch, Amazon will borrow from its recipe that it used to launch the Kindle Fire and employ a disruptive pricing scheme. Reports indicate they will price their phone much lower than the iPhone and competing high-end smartphones. Amazon is also building up its capabilities in mobile communication software. To better compete on the apps available for its hardware, Amazon has acquired two software firms, Yap and UpNext, giving it capabilities to develop mobile apps, mapping software, and voice recognition software. One example of their action here is Amazon’s launch of the Amazon Cloud Player, an app that allows users to purchase music and store it on the cloud to be accessed on a mobile or Internet-connected device whenever and wherever the user wants.
While they compete in many ways, they also complement each other in some ways. For example, one of the most widely downloaded apps for the iPad is the Amazon Kindle app, and some of the most popular items sold on amazon.com are iPads and iPhones.
In their competitive battle, these firms have employed and will continue to employ both strategic and tactical actions as they strive to improve their own competitive position and unsettle the competitive position of their rival. The rivalry between Amazon and Apple is pushing the firms to continue to improve their products and services while also finding ways to provide solutions for their customers at attractive prices.
Sources: Vascellaro, J. & Bensinger, G. 2012. Apple-Amazon war heats up. Wsj.com , July 26: np; Krause, R. 2013. Amazon.com smartphone with disruptive pricing. Investors.com , January 3: np; and Scarpello, L. 2013. Apple vs. Amazon: Amazon opens mobile MP3 store. Popai.com , January 21: np.
Some companies limit their competitive response to defensive actions. Such actions rarely improve a company’s competitive advantage, but a credible defensive action can lower the risk of being attacked and deter new entry.
Several of the factors discussed earlier in the chapter, such as types of entry strategies and the use of cost leadership versus differentiation strategies, can guide the decision about what types of competitive actions to take. Before launching a given strategy, however, assessing the likely response of competitors is a vital step.59
Likelihood of Competitive Reaction
The final step before initiating a competitive response is to evaluate what a competitor’s reaction is likely to be. The logic of competitive dynamics suggests that once competitive actions are initiated, it is likely they will be met with competitive responses.60 The last step before mounting an attack is to evaluate how competitors are likely to respond. Evaluating potential competitive reactions helps companies plan for future counterattacks. It may also lead to a
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decision to hold off—that is, not to take any competitive action at all because of the possibility that a misguided or poorly planned response will generate a devastating competitive reaction.
How a competitor is likely to respond will depend on three factors: market dependence, competitor’s resources, and the reputation of the firm that initiates the action (actor’s reputation). The implications of each of these is described briefly in the following sections.
Market Dependence 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. Single-industry businesses or those where one industry dominates are more likely to mount a competitive response. Young and small firms with a high degree of market dependence may be limited in how they respond due to resource constraints.
market dependence
degree of concentration of a firm’s business in a particular industry.
Competitor’s Resources Previously, we examined the internal resource endowments that a company must evaluate when assessing its capability to respond. Here, it is the competitor’s resources that need to be considered. For example, a small firm 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. In contrast, a firm with financial “deep pockets” may be able to mount and sustain a costly counterattack.
Actor’s Reputation 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. Another consideration is how successful prior attacks have been. For example, price-cutting by the big automakers usually has the desired result—increased sales to price-sensitive buyers—at least in the short run. Given that history, when GM offers discounts or incentives, rivals Ford and Chrysler cannot afford to ignore the challenge and quickly follow suit.
Choosing Not to React: Forbearance and Co-opetition
The above discussion suggests that there may be many circumstances in which the best reaction is no reaction at all. This is known as forbearance—refraining from reacting at all as well as holding back from initiating an attack. The decision of whether a firm should respond or show forbearance is not always clear.
forbearance
a firm’s choice of not reacting to a rival’s new competitive action.
Related to forbearance is the concept of co-opetition. This is a term that was coined by network software company Novell’s founder and former CEO Raymond Noorda to suggest that companies often benefit most from a combination of competing and cooperating.61 Close competitors that differentiate themselves in the eyes of consumers may work together behind the scenes to achieve industrywide efficiencies.62 For example, breweries in Sweden cooperate in recycling used bottles but still compete for customers on the basis of taste and variety. As long as the benefits of cooperating are enjoyed by all participants in a co-opetition system, the practice can aid companies in avoiding intense and damaging competition.63
co-opetition
a firm’s strategy of both cooperating and competing with rival firms.
Despite the potential benefits of co-opetition, companies need to guard against cooperating to such a great extent that their actions are perceived as collusion, a practice that has legal ramifications in the United States. In Strategy Spotlight 8.8, we see an example of crossing the line into illegal cooperation.
Once a company has evaluated a competitor’s likelihood of responding to a competitive challenge, it can decide what type of action is most appropriate. Competitive actions can take many forms: the entry of a start-up 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 that disrupts the industry structure. Such actions forever change the competitive dynamics of a 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.
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|
STRATEGY SPOTLIGHT |
8.8 ETHICS |
CLEANING UP IN THE SOAP BUSINESS
Consumer product companies Colgate-Palmolive, Unilever, Procter & Gamble (P&G), and Henkel compete with each other globally in the soap business. But as regulators found after a long investigation, this wasn’t true in France. The firms in this market had colluded to fix prices for nearly a decade. In the words of a Henkel executive, the detergent makers wanted “to limit the intensity of competition between them and clean up the market.” The Autorite de la Concurrance, the French antitrust watchdog, hit these four firms with fines totaling $484 million after completing its investigation.
The firms started sharing pricing information in the 1980s, but by the 1990s their cooperation got bolder, morphing into behavior that sounds like something out of a spy novel. In 1996, four brand directors secretly met in a restaurant in a suburb of Paris and agreed to coordinate the pricing of their soap products. They agreed to prearranged prices at which they would sell to retailers and to notify each other of any planned special offers. They gave each firm a secret alias: Pierre for Procter & Gamble,
Laurence for Unilever, Hugues for Henkel, and Christian for Colgate-Palmolive. From that point forward, they allegedly scheduled clandestine meetings four times a year. The meetings, which they called “store checks” in their schedules to limit any questioning they may have received, often lasted an entire afternoon. They would set complex pricing schemes. For example, P&G sold its Ariel brand as an upscale product and coordinated with Unilever to keep Ariel at a 3 percent markup over Unilever’s Skip brand. At these meetings, they would also hash out any complaints about whether and how any of the participants had been bending the rules.
The collusion lasted for almost 10 years until it broke down in 2004. Unilever was the first to defect, offering a 10 percent “D-Day” price cut without negotiating it with the three other firms. Other competitors quickly responded with actions that violated the pricing norms they had set.
Sources: Colchester, M. & Passariello, C. 2011. Dirty secrets in soap prices. Wsj.com , December 9: np; Smith, H. & White, A. 2011. P&G, Colgate fined by France in $484 million detergent cartel. Bloomberg.com , December 11: np.
ISSUE FOR DEBATE
When Scottsdale Quarter, a mall in a suburb of Phoenix, opened in 2009, it faced a daunting environment. Shoppers were pulling back from purchases as the country struggled through the recession. Shoppers were also changing their shopping habits, moving away from physical stores to online sites for many of their purchases. When the mall opened, only a handful of the store locations in the mall were leased.
Michael Glimcher, the CEO of the mall operator, knew that he had to get entrepreneurial and develop some game-changing ideas for the mall. He had to go beyond the standard model of adding a few more restaurants or an expanded food court. He sent his leasing agents around the country to look for experience-oriented options they could add to Scottsdale Quarter to pull customers away from their computers and back to the mall. In the words of Jacqueline Finch, one of Glimcher’s leasing agents, the target they were considering “is also a form of hospitality.” They visited and added a range of new retailers. This included membership retailer Make Meaning, a place where members come to take classes on and make a range of crafts and cakes. They also added Drybar, a salon that will blow dry and style your hair without cutting it and where you can throw a styling party with your friends. There is also a new movie theatre with a restaurant that will deliver your full restaurant meals to your seats in the theater. There’s also Blissful Yoga, a Restoration Hardware store that also offers fresh cut flowers and herbal tea, a men’s salon and bar combination, a fresh produce store, and an Apple Store. The aim of the changes is to offer experiences that customers can’t get online and to build stores that customers want to visit more frequently than once or twice a year. For example, with Make Meaning, customers come in frequently to experience new crafts and often have to return a second time to pick up their new pottery after it’s been fired or some other craft after it has dried.
The results so far are promising for Scottsdale Quarter. The mall’s sales per square foot are among the highest for Glimcher’s company, but it is an open question whether this is a long-term solution for Scottsdale Quarter.
Disscussion Questions
1. Will customers find shopping at a mall like Scottsdale Quarter valuable over the long run or will the novelty of these types of shops wear off?
2. What is likely to happen in future tough economic times? Will stores like these weather future recessions better than typical mall stores?
3. Can mall operators translate the experience of Scottsdale Quarter from a fairly upscale market to malls in less well-off areas?
Sources: Clifford, S. 2012. U.S. malls try to offer what internet can’t. International Herald Tribune, July 19: 14; www.makemeaning.com ; www.drybar.com ; and www.scottsdalequarter.com .
Reflecting on Career Implications …
Opportunity Recognition: What ideas for new business activities are actively discussed in your work environment? Could you apply the four characteristics of an opportunity to determine whether they are viable opportunities? If no one in your organization is excited about or even considering new opportunities, you may want to ask yourself if you want to continue with your current firm.
Entrepreneurial New Entry: Are there opportunities to launch new products or services that might add value to the organization? What are the best ways for you to bring these opportunities to the attention of key managers? Or might this provide an opportunity for you to launch your own entrepreneurial venture?
Entrepreneurial Resources: Evaluate your resources in terms of financial resources, human capital, and social capital. Are these enough to launch your own venture? If you are deficient in one area, are there ways to compensate for it? Even if you are not interested in starting a new venture, can you use your entrepreneurial resources to advance your career within your firm?
Competitive Dynamics: There is always internal competition within organizations: among business units and sometimes even individuals within the same unit. What types of strategic and tactical actions are employed in these internal rivalries? What steps have you taken to strengthen your own position given the “competitive dynamics” within your organization?
summary
New ventures and entrepreneurial firms that capitalize on marketplace opportunities make an important contribution to the U.S. economy. They are leaders in terms of implementing new technologies and introducing innovative products and services. Yet entrepreneurial firms face unique challenges if they are going to survive and grow.
To successfully launch new ventures or implement new technologies, 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 venture. Firms must develop a strong ability to recognize viable opportunities. Opportunity recognition is a process of determining which venture ideas are, in fact, promising business opportunities.
In addition to strong opportunities, entrepreneurial firms need resources and entrepreneurial leadership to thrive. The resources that start-ups need include financial resources as well as human and social capital. Many firms also benefit from government programs that support new venture development and growth. New ventures thrive best when they are led by founders or owners who have vision, drive and dedication, and a commitment to excellence.
Once the necessary opportunities, resources, and entrepreneur skills are in place, new ventures still face numerous strategic challenges. Decisions about the strategic positioning of new entrants can benefit
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from conducting strategic analyses and evaluating the requirements of niche markets. Entry strategies used by new ventures take several forms, including pioneering new entry, imitative new entry, and adaptive new entry. Entrepreneurial firms can benefit from using overall low cost, differentiation, and focus strategies although each of these approaches has pitfalls that are unique to young and small firms. Entrepreneurial firms are also in a strong position to benefit from combination strategies.
The entry of a new company into a competitive arena is like a competitive attack on incumbents in that arena. Such actions often provoke a competitive response, which may, in turn, trigger a reaction to the response. As a result, a competitive dynamic—action and response—begins among close competitors. In deciding whether to attack or counterattack, companies must analyze the seriousness of the competitive threat, their ability to mount a competitive response, and the type of action—strategic or tactical—that the situation requires. At times, competitors find it is better not to respond at all or to find avenues to cooperate with, rather than challenge, close competitors.
SUMMARY REVIEW QUESTIONS
1. Explain how the combination of opportunities, resources, and entrepreneurs helps determine the character and strategic direction of an entrepreneurial firm.
2. What is the difference between discovery and evaluation in the process of opportunity recognition? Give an example of each.
3. Describe the three characteristics of entrepreneurial leadership: vision, dedication and drive, and commitment to excellence.
4. Briefly describe the three types of entrepreneurial entry strategies: pioneering, imitative, and adaptive.
5. Explain why entrepreneurial firms are often in a strong position to use combination strategies.
6. What does the term competitive dynamics mean?
7. Explain the difference between strategic actions and tactical actions and provide examples of each.
(Dess 272-273)
Dess, Gregory, G.T. Lumpkin, Alan Eisner, Gerry McNamara. Strategic Management: Text and Cases, 7th Edition. McGraw-Hill Learning Solutions, 09/2013. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
