Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Entrepreneurial Strategy and Competitive Dynamics chapter 8

Learning Objectives 8-2 After reading this chapter, you should have a good understanding of: LO8.1 The role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures. LO8.2 Three types of entry strategies – pioneering, imitative, and adaptive – commonly used to launch a new venture. LO8.3 How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses.

Learning Objectives 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. 8-3

Entrepreneurial Strategy Consider… New technologies, shifting social and demographic trends, and sudden changes in the business environment can create opportunities for entrepreneurship. However, business opportunities can disappear as quickly as they appear. What do new ventures and entrepreneurial firms need to do to achieve a competitive advantage? 8-4

Entrepreneurial Strategy  Entrepreneurship involves value creation and the assumption of risk  New value can be created in many contexts: Startup ventures Major corporations Family owned businesses Nonprofit organizations Established institutions 8-5

Entrepreneurial Strategy  Start-up venture ideas can come from Current or past work experiences Hobbies or suggestions by friends or family  For established firms, opportunities can come from Existing customers Suggestions by suppliers Technological developments  For all firms, change or chance events can uncover unmet consumer needs 8-6

Question?  Three ingredients are critical in order for an entrepreneurial startup to be successful. What are they? A. Good ideas, a team of investors, and a business plan. B. A viable opportunity, available resources, and a qualified and motivated founding team. C. An opportunity, a marketing plan, and office space. D. Management, marketing, and money. 8-7

Entrepreneurial Strategy Exhibit 8.1 Opportunity Analysis Framework Source: Based on Timmons, J.A., & Spinelli, S New Venture Creation (6th edition). New York: McGraw Hill/Irwin; and Bygrave, W.D The Entrepreneurial Process. In W.D. Bygrave (Ed.), The Portable MBA in Entrepreneurship (2nd edition). New York: Wiley. 8-8

Entrepreneurial Opportunities  Entrepreneurial opportunities require opportunity recognition  Two phases of activity Discovery Becoming aware of a new business concept Evaluation Analyzing the opportunity to determine whether it is viable or feasible to develop further 8-9

Entrepreneurial Opportunities  Discovery phase - Becoming aware of the new business concept Can be spontaneous and unexpected Can also result from a deliberate search Where are the new venture opportunities? What might be a creative solution to a business problem? 8-10

Entrepreneurial Opportunities  Evaluation phase - Analyzing the viability of an opportunity Talk to potential target customers Identify operational requirements Conduct a feasibility analysis What is the market potential? Is the idea strong enough to create value, and therefore profits ? 8-11

Entrepreneurial Opportunities  Viable opportunities have the following qualities: They are attractive They are achievable They are durable They are value-creating 8-12

Example: The Feasibility of Frozen Treats  Dippin’ Dots was based on an innovative idea  In 1987, product testing showed it was attractive to consumers  Operational facilities were developed to maintain the low temperatures necessary for production  By 2007, competitors such as Frosty Bites (Mini Melts) had stolen market share – the product idea was no longer that innovative  By 2011, Dippin’ Dots was bankrupt  Ice cream of the future?? 8-13

Entrepreneurial Resources  Resources are essential for entrepreneurial success Financial resources Human capital Social capital Government resources 8-14

Entrepreneurial Resources  Financial resources depend on stage of venture development & venture scale Initial, start up financing Personal savings, family, and friends Crowdfunding Early stage financing Bank financing, angel investors Later stage financing Commercial banks, venture capitalists equity financing 8-15

Entrepreneurial Resources  Human capital Strong, skilled management  Social capital Extensive social contacts & strategic alliances Technology, manufacturing, or retail alliances  Federal, state, & local government resources Government contracting Loan guarantee programs Training, counseling, & support services 8-16

Entrepreneurial Leadership  Entrepreneurial leadership is needed Courage Belief in one’s convictions Energy to work hard  Leadership characteristics Vision Dedication and drive Commitment to excellence 8-17

Question?  Why is vision such an important element of entrepreneurial leadership? A. Because the entrepreneur has to envision realities do not yet exist. B. Because a vision statement must be part of the documentation used to obtain venture financing. C. Because organizations cannot function without a detailed and operational vision. D. All of the above. 8-18

Entrepreneurial Leadership  Vision is an entrepreneur’s most important asset Requires transformational leadership Ability to envision realities that do not yet exist Ability to share this vision with others 8-19

Entrepreneurial Leadership  Drive & dedication are necessary Involves internal motivation Intellectual commitment Patience Stamina, willingness to work long hours Enthusiasm that attracts others 8-20

Entrepreneurial Leadership  Commitment to excellence is required Commit to knowing the customer Providing quality goods and services Paying attention to details Continuously learning Connecting the dots Hiring people smarter than themselves 8-21

Example: Lessons from a Young Entrepreneur  Create massive value  Trust people, but verify credentials  Psychology is important – don’t ignore personal needs  Be willing to make the tough decisions  Be a manager, not a technician  Invest back into the company  Integrity is everything  Get comfortable being uncomfortable 8-22

Entrepreneurial Strategy  New ventures require an entrepreneurial strategy What are the industry conditions? Five-forces analysis - barriers to entry? What is the competitive environment? Retaliation by established firms? What are the market opportunities?  Entry strategies  Generic strategies  Combination strategies 8-23

Entry Strategies  New venture entry strategies need to: Quickly generate cash flow Build credibility Attract good employees Overcome the liability of newness  Pioneering new entry  Imitative new entry  Adaptive new entry 8-24

Entry Strategies  Pioneering new entry Creating new ways to solve old problems Meeting customers’ needs in a unique new way Will it be accepted by consumers? Will it be disruptive to the status quo of an industry? Will it be sustainable? 8-25

Entry Strategies  Imitative new entry Imitators have a strong marketing orientation Capitalizing on proven market successes Introducing the same basic product or service in another segment of the market Can we do it better than an existing competitor? Will someone then imitate us? 8-26

Entry Strategies  Adaptive new entry Capitalizes on current market trends Offers a product or service that is somewhat new and sufficiently different Creates new value for customers Captures market share Is it sufficiently unique and different? Can it be easily imitated? How can we continue to keep it fresh and new? 8-27

Entry Strategies Exhibit 8.3 Examples of Adaptive New Entrants Source: Bryan, M Spanx Me, Baby! December 10, np.; Carey, J Perspiration Inspiration. Business Week, June 5: 64; Palanjian, A A Planner Plumbs for a Niche. September 30, np.; Worrell, D Making Mint. Entrepreneur, September: 55; Buss, D The Mothers of Invention. Wall Street Journal, February 8: R7; Crook. J Mint.com Tops 10 Million Registered Users, 70% Use Mobile. Techcrunch.com, August 29: np.; and

Generic Strategies for New Ventures  Overall cost leadership Simpler organizational structure Quicker decision-making to upgrade technology & integrate marketplace feedback  Differentiation Using new technology Deploying resources in a radical new way  Focus Using niche strategies that fit the small business mold 8-29

Question?  When an industry is mature, a _________ strategy may be considered to be an effective approach for a new entrant. A. focus B. differentiation C. overall low-cost D. small business 8-30

Combination Strategies for New Ventures  Pursuing combination strategies Combine the best features of low-cost, differentiation, and focused strategies Hold down expenses by having a simple structure Create high-value products & services by being flexible & innovative 8-31

Competitive Dynamics  New entry threatens existing competitors  Competitive dynamics helps explain why strategies evolve and how to respond: New competitive action Threat analysis Motivation and capability to respond Types of competitive action Likelihood of competitive reaction 8-32

Competitive Dynamics Exhibit 8.4 Model of Competitive Dynamics Source: Adapted from Chen, M.J Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration. Academy of Management Review, 21(1): ; Ketchen, D.J., Snow, C.C., & Hoover, V.L Research on Competitive Dynamics: Recent Accomplishments and Future Challenges. Journal of Management, 30(6): ; and Smith, K.G., Ferrier, W.J., & Grimm, C.M King of the Hill: Dethroning the Industry Leader. Academy of Management Executive, 15(2):

Competitive Dynamics  Why do companies launch new competitive actions? To improve market position To capitalize on growing demand To expand production capacity To provide an innovative new solution To obtain first mover advantages To strengthen financial outcomes & capture profits To grow the business 8-34

Competitive Dynamics  Competition among incumbent rivals can involve “hardball” strategies: Devastating rivals’ profit sanctuaries Plagiarizing with pride Deceiving the competition Unleashing massive & overwhelming force Raising competitors’ costs 8-35

Competitive Dynamics  Threat analysis involves an assessment of Market commonality Resource similarity  How serious is the threat?  What is the intent of the competitive response?  What resources are needed to fend off a competitive attack?  Which action should I take? 8-36

Competitive Dynamics  Strategic actions Entering new markets New product introductions Changing production capacity Mergers/alliances  Tactical actions ▣ Price cutting (or increases) ▣ Product/service enhancements ▣ Increased marketing efforts ▣ New distribution channels Types of competitive actions include: 8-37

Competitive Dynamics  Likelihood of competitive reaction Market dependence Competitor’s resources The reputation of the firm that initiates the action – the actor’s reputation  Choosing not to respond Forbearance Co-opetition Working together behind the scenes to achieve industrywide efficiencies 8-38

Question?  Which of the following might best describe the motivations and actions of small firms as they respond to competitive attacks? A. Because they lack legitimacy in the marketplace, small firms need to signal their competitive actions long before they launch those actions B. Small firms typically have more resources available as they undertake competitive attacks. C. Small firms are more nimble and can respond quickly to competitive attacks. D. All of the above. 8-39

Competitive Dynamics & Entrepreneurial Strategies  Entrepreneurial strategy involves new value creation, which Threatens existing competitors Changes the competitive dynamics of the marketplace  Entrepreneurial activity involves risk How should I enter a market? How should I compete? How should I deal with the competitor’s reaction? 8-40