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Entrepreneurial Strategy and Competitive Dynamics

McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives

After reading this chapter, you should have a good understanding of:
The role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures. The role of new ventures and small businesses in the U.S. economy. Three types of entry strategiespioneering, initiative, and adaptivecommonly used to launch a new venture. How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses.

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Learning Objectives

After reading this chapter, you should have a good understanding of:
How competitive actions, such as the entry of new competitors into a marketplace, may launch a cycle of actions and reactions among close competitors. The components of competitive dynamics analysisnew competitive action , threat analysis, motivation and capability to respond, types of competitive actions, and likelihood of competitive reaction.

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Recognizing Entrepreneurial Opportunities

Entrepreneurship new value creation New value can be created in:
Start-up ventures Major corporations Family-owned businesses Non-profit organizations Established institutions

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Opportunity Analysis Framework

Adapted from Exhibit 8.2 Opportunity Analysis Framework Sources: Based on J. A. Timmons and S. Spinelli, New Venture Creation, 6th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2004); and W. D. Bygrave, The Entrepreneurial Process, in W. D. Bygrave, ed., The Portable MBA in Entrepreneurship, 2nd ed. (New York:Wiley, 1997).

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Question
What is the starting point for any new business venture?
A) The resources to pursue the opportunity B) The presence of an entrepreneurial opportunity C) An entrepreneur or entrepreneurial team willing and able to undertake a social responsibility D) The creation of a business concept

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Entrepreneurial Opportunities
Opportunities come from many sources
- Start-ups
Current or past work experiences Hobbies that grow into businesses or lead to inventions Suggestions by friends or family Chance events Change

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Entrepreneurial Opportunities
Opportunities come from many sources
- Established firms
Needs of existing customers Suggestions by suppliers Technological developments that lead to new advances Change

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Entrepreneurial Opportunities
Discovery phase
- Period when you first become aware of a new business concept - May be spontaneous and unexpected - May occur as the result of deliberate search for
New venture projects Creative solutions to business problems

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Opportunity Recognition Process

Opportunity evaluation phase
- Evaluating an opportunity (Can it be developed into a fullfledged new venture?)
Talk to potential target customers Discuss it with production or logistics managers Conduct feasibility analysis
Market potential Product concept testing Focus groups Trial runs with end users

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Characteristics of Good Opportunities

Good Business Opportunity
Attractive Value creating

Achievable

Durable

Before launching opportunity as a business

Consider the resources available to undertake it Consider the characteristics of the entrepreneur pursuing it

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Entrepreneurial Resources
Major challenge for entrepreneurial firm is lack of resources
- Money - Human capital - Social capital

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Entrepreneurial Resources
Financial Resources
- Early-stage financing
Personal savings, family, and friends Bank financing, public financing, venture capital
- Debt - Equity

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Financing New Ventures

Exhibit 8.4 How different types of new ventures are financed: Informal investment versus venture capital

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Entrepreneurial Resources
Financial resources (Going Concern)
- Later-stage financing
Angel investors Venture capital
- Equity financing

Commercial banks

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Example
The challenge of financing a business venture significantly increases if you are a 20 year old entrepreneur. The key to successfully raising capital is to open your mind and expand your choices.
- Look beyond your parents or personal credit cards

A solid business plan and a good business concept will attract some business angels.

Source: Advani, Asheesh. Can Young Entrepreneurs Get Funding?, www.entrepreneur.com. February 13, 2006.

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Entrepreneurial Resources
Human capital Social capital Government resources
- Small Business Administration - Government contracting - State and local governments

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Entrepreneurial Leadership
Launching a new venture requires a special kind of leadership
- Courage - Belief in ones convictions - Energy to work hard

Three characteristics
- Vision - Dedication and drive - Commitment to excellence

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Entrepreneurial Leadership
Vision may be entrepreneurs most important asset
- Ability to envision realities that do not yet exist - Exercise a kind of transformational leadership - Able to share with others

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Entrepreneurial Leadership
Dedication and drive are reflected in hard work
Patience Stamina Willingness to work long hours Internal motivation Intellectual commitment to the enterprise Strong enthusiasm for work and life

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Entrepreneurial Leadership
To achieve excellence, venture founders and small business owners must
Understand the customer Provide quality products and services Pay attention to details Continuously learn Surround themselves with good people

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Example

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Here are 10 management lessons from a young entrepreneur, Scott Smigler, the founder of Exclusive Concepts Inc.:
Its all about perseverance Understand the value of mentorship and teamwork Stick to your niche Stay on top of news that affects your clients Communication is key Capitalization is crucial Communication unwavering honesty and integrity Stay on top of the curve Take ownership in your clients success Never stop marketing Source: Pierce, Sarah. 10 Management Lessons From a Young
Entrepreneur, www.entrepreneur.com. December 17, 2003.

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Entrepreneurial Strategy
Best strategy for the enterprise will be determined to some extent by
- A viable opportunity, resources, and entrepreneur(s) - Other conditions in the business environment

Can use various tools and techniques to determine strategic choices

- Five Forces analysis - Value chain analysis

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Entry Strategies
Getting a foothold in the market
- Pioneering new entry
Creating new ways to solve old problems Meeting customers needs in a unique new way

- Imitative new entry

Strong marketing orientation Introduce same basic product or service in another segment of the market

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Entry Strategies
Getting a foothold in the market
- Adaptive new entry
Offer product or service that is somewhat new and different Aware of marketplace conditions and conceive entry strategies to capitalized on current trends

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Generic Strategies
How new ventures can achieve competitive advantages
- Overall cost leadership
Simple organizational structures More quickly upgrade technology and integrate feedback from the marketplace Make timely decisions that affect cost

- Differentiation
Use new technology Deploy resources in a radical new way

- Focus
Niche strategies fit the small business mold

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Combination Strategies
A key issue is the scope of a small firms strategic efforts relative to those of its competitors
- Pursue combination strategies
Combine best features of low-cost, differentiation, and focus strategies Flexibility and quick decision-making ability of a small firm not laden with layers of bureaucracy

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Question
Why do companies launch new competitive actions?

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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.

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Five Hardball Strategies

Devastate rivals profit sanctuaries Plagiarize with pride Deceive the competition Unleash massive and overwhelming force Raise competitors costs

Exhibit 8.7 Five Hardball Strategies

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Strategic and Tactical Competitive Actions

Actions Strategic Actions
Entering new markets New product introductions Changing production capacity Mergers/Alliances Price cutting (or increases) Product/service enhancements Increased marketing efforts New distribution channels

Tactical Actions

Exhibit 8.8 Strategic and Tactical Competitive Actions

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Likelihood of Competitive Reaction

How a competitor is likely to respond will depend on three factors
- Market dependence - Competitors resources - The reputation of the firm that initiates the action (actors reputation)