Entrepreneurial Strategy and Competitive Dynamics Chapter Eight McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO8.1 The role of new ventures and small businesses in the U.S. economy. LO8.2 The role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures. LO8.3 Three types of entry strategies—pioneering, initiative, and adaptive—commonly used to launch a new venture. 8-2

Learning Objectives (cont.) LO8.4 How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses. LO8.5 How competitive actions, such as the entry of new competitors into a marketplace, may launch a cycle of actions and reactions among close competitors. LO8.6 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

Recognizing Entrepreneurial Opportunities  Entrepreneurship  the creation of new value by an existing organization or new venture that involves the assumption of risk. 8-4

Recognizing Entrepreneurial Opportunities  New value can be created in:  Start-up ventures  Major corporations  Family-owned businesses  Non-profit organizations  Established institutions 8-5

Entrepreneurial Opportunities Start-ups  Current or past work experiences  Hobbies that grow into businesses or lead to inventions  Suggestions by friends or family  Chance events  Change 8-6

Entrepreneurial Opportunities Established firms  Needs of existing customers  Suggestions by suppliers  Technological developments that lead to new advances  Change 8-7

U.S. Small Companies by Industry 8-8 Exhibit 8.1

Entrepreneurial Opportunities  Opportunity recognition  the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. 8-9

Opportunity Analysis Framework 8-10 Exhibit 8.3

QUESTION The majority of entrepreneurial start-ups are financed with A. Bank financing B. Public financing C. Venture capital financing D. Personal savings and the contributions of family and friends 8-11

Entrepreneurial Opportunities  Discovery phase  the process of becoming aware of a new business concept.  May be spontaneous and unexpected  May occur as the result of deliberate search for new venture projects or creative solutions to business problems 8-12

Opportunity Recognition Process  Opportunity evaluation phase  involves analyzing an opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture.  Talk to potential target customers  Discuss it with production or logistics managers  Conduct feasibility analysis 8-13

Characteristics of Good Opportunities AttractiveAchievable Durable Value creating 8-14

Sources of Capital for Start-Up Firms 8-15 Exhibit 8.5

Entrepreneurial Resources  Human capital  Social capital  Government resources  Small Business Administration  Government contracting  State and local governments 8-16

Entrepreneurial Leadership  Launching a new venture requires a special kind of leadership  Courage  Belief in one’s convictions  Energy to work hard 8-17

Entrepreneurial Leadership  Three characteristics  Vision  Dedication and drive  Commitment to excellence 8-18

Entrepreneurial Leadership  Vision may be entrepreneur’s most important asset  Ability to envision realities that do not yet exist  Exercise a kind of transformational leadership  Able to share with others 8-19

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 8-20

Entrepreneurial Leadership  To achieve excellence, entrepreneurs must  Know the customer  Provide quality products and services  Pay attention to details  Continuously learn  Surround themselves with good people 8-21

Example: 10 Management Lessons  It’s 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  Communicate unwavering honesty and integrity  Stay on top of the curve  Take ownership in your clients’ success  Never stop marketing 8-22

Entrepreneurial Strategy  Best strategy for the enterprise will be determined to some extent by  A viable opportunity, sufficient resources, and skilled and dedicated entrepreneurial team  Other conditions in the business environment 8-23

Entry Strategies  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. 8-24

Entry Strategies  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. 8-25

Entry Strategies  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. 8-26

Examples of Adaptive New Entrants 8-27 Exhibit 8.6

Elements of a Blue Ocean Strategy  Create uncontested market space  Make the competition irrelevant  Create and capture new demand  Break the value/cost tradeoff  Pursue differentiation and low cost simultaneously. 8-28

Generic Strategies  Overall cost leadership  Simple organizational structures  More quickly upgrade technology and integrate feedback from the marketplace  Make timely decisions that affect cost 8-29

Generic Strategies  Differentiation  Use new technology  Deploy resources in a radical new way  Focus  Niche strategies fit the small business mold 8-30

Combination Strategies  Entrepreneurial firms are often in a strong position to offer a combination strategy  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 8-31

Competitive Dynamics  Competitive dynamics  Intense rivalry, involving actions and responses, among similar competitors vying for the same customers in a marketplace. 8-32

Model of Competitive Dynamics 8-33 Exhibit 8.7

Why Do Companies Launch New Competitive Actions?  Improve market position  Capitalize on growing demand  Expand production capacity  Provide an innovative new solution  Obtain first mover advantages 8-34

Threat Analysis  Threat analysis  A firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning.  Market commonality  Resource similarity 8-35

Question Aircraft makers Boeing and Airbus have a high degree of __________ because they make very similar products and have many buyers in common. A. Dynamic capabilities B. Market commonality C. First mover advantages D. Equity funding 8-36

Five “Hardball” Strategies Devastate rivals’ profit sanctuariesPlagiarize with prideDeceive the competitionUnleash massive and overwhelming forceRaise competitors’ costs 8-37

Types of Competitive Actions  Strategic actions  Major commitments of distinctive and specific resources to strategic initiatives.  Tactical actions  Refinements or extensions of strategies usually involving minor resource commitments. 8-38

Likelihood of Competitive Reaction  How a competitor is likely to respond will depend on three factors  Market dependence  Competitor’s resources  The reputation of the firm that initiates the action (actor’s reputation) 8-39

Choosing Not to React  Forbearance  a firm’s choice of not reacting to a rival’s new competitive action.  Co-opetition  A firm’s strategy of both cooperating and competing with rival firms. 8-40