Imitative new entry involves offering a radical new product or highly innovative service.

Entrepreneurship

https://www.ted.com/talks/paul_tasner_how_i_became_an_entrepreneur_at_66

©McGraw-Hill Education.

Learning Objectives

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

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

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

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

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

8-5 The components of competitive dynamics analysis – new competitive action, threat analysis, motivation and capability to respond, types of competitive actions, and likelihood of competitive reaction.

©McGraw-Hill Education.

2

Learning from Mistakes

Snapchat

2 Stanford students created technology

Recruited a computer programmer

1 Stanford student & programmer decided 2nd Stanford student wasn’t doing enough and locked him out

Q: Why do you think so many startup firms have these disputes?

Q: If you were in this situation, would you be comfortable having the legal conversation with your partner(s) early on?

©McGraw-Hill Education.

Q1

Startups develop informally

Typically friends

Don’t see the need for formal legal arrangements early on

Who knows if the idea will take off

3

4 Species of Entrepreneurs Source: Rottenberg, L. 2014. The Four Species of Entrepreneurs. Wsj.com, October 4: np.

Diamonds - charismatic evangelists with bold innovations that are aimed at transforming people’s lives. When they succeed, they change the game. When they fail, it is often dramatic and tragic.

Stars - dynamic trendspotters and trendsetters who have big personalities and can see how society is changing and what the next hot trends will be. They tend to be lone wolves who project themselves boldly into their environments.

©McGraw-Hill Education.

What are examples of entrepreneurs who are diamonds? Stars?

Diamonds – Mark Zuckerberg, Ted Turner, Steve Jobs

(Tend to tune others out; successful diamonds are conscious of their need to listen and learn and willing to take criticism.)

Stars – Martha Stewart, Lance Armstrong, Jay Z

(need strong support team and organization to handle boring details of operations and customer service)

4

4 Species of Entrepreneurs

Transformers - see established industries as settings open for transformation. These transformers modernize systems, redefine operating rules, and change the way products are delivered.

Rocket Ships - brilliant experimenters who aim to build businesses that are evermore cheaper, faster, and more efficient. They excel at using analytics to see opportunities for streamlining operations. However, they can struggle to see creative, industry changing innovations. Their narrow focus can limit the opportunities their firms see and pursue.

©McGraw-Hill Education.

What are examples of entrepreneurs who are transformers? Rocket ships?

Transformers - Howard Schultz of Starbucks

(need to be disciplined in working through details and mindful of continuously looking forward for additional opportunities)

Rocket Ships - Michael Dell, Bill Gates, Jeff Bezos

(surround selves with people who are more creative and higher in emotional intelligence.)

5

4 Species of Entrepreneurs

No optimal species

Success comes in 3 steps

Know themselves

Acknowledge strengths & weaknesses

Surround self with others who complement

©McGraw-Hill Education.

Recognizing Entrepreneurial Opportunities

Entrepreneurship involves value creation and the assumption of risk.

New value can be created in many contexts.

Startup ventures

Major corporations

Family-owned businesses

Nonprofit organizations

Established institutions

Ideas and opportunities can come from many sources.

Change or chance can uncover unmet customer needs.

©McGraw-Hill Education.

Even though entrepreneurial activity is usually associated with startup companies, new value can be created in many different contexts.

Startup venture ideas can come from: current or past work experiences, hobbies or suggestions by friends or family.

For established firms, opportunities can come from: existing customers, suggestions by suppliers, technological developments.

For all firms, change or chance events can uncover unmet consumer needs.

7

Water Conserving Showerheads

Most volatile cost for Mexican health spa was water

Most water was used in the shower room

Showers have been the same for decades

Borrowed design from an internal combustion engine

New shower head uses 70% less water

Over $3 million raised from investors

Product won many awards

©McGraw-Hill Education.

Problem: How many consumers will buy a $600 shower head just to save water/money?

Not all business opportunities are viable.

8

Question

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

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

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

an opportunity, a marketing plan, and office space

management, marketing, and money

©McGraw-Hill Education.

Answer: B. See the discussion that follows.

9

Entrepreneurial Opportunity Analysis

Exhibit 8.1 Opportunity Analysis Framework

Source: Based on Timmons, J.A., & Spinelli, S. 2004. New Venture Creation (6th edition). New York: McGraw Hill/Irwin; and Bygrave, W.D. 1997. The Entrepreneurial Process. In W.D. Bygrave (Ed.), The Portable MBA in Entrepreneurship (2nd edition). New York: Wiley.

©McGraw-Hill Education.

10

Entrepreneurial Opportunity Recognition

Entrepreneurial opportunities require opportunity recognition.

Two phases of activity:

Discovery

Becoming aware of a new business concept

Evaluation

Analyzing the opportunity to determine whether it is viable or feasible to develop further

©McGraw-Hill Education.

Opportunity recognition = the process of discovering and evaluating changes in the business environment, such as

new technology,

socio-cultural trends, or

shifts in consumer demand, that can be exploited.

Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they’re strong enough to become new ventures.

Q: Which do you think is more important to launching a promising new venture and building a successful business?

11

Entrepreneurial Opportunities: Discovery

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

Can be spontaneous and unexpected

Can also result from a deliberate search

Are there frustrations with current products or processes?

Do stakeholders have unmet needs?

What do other markets or industries do?

Can we revive old ideas?

©McGraw-Hill Education.

Intro: Many entrepreneurs report that their idea for a new venture came through some unexpected insight, often based on their prior knowledge, that gave them an idea for a new business.

[Deliberate search]

To stimulate the discovery of new opportunities, companies often encourage creativity, out-of-the-box thinking, and brainstorming.

A more structured search for entrepreneurial ideas can come from looking at what’s bugging you – what frustrations do you have with current products or processes?

Or from talking to suppliers, customers or front line workers to see how needs aren’t being met, or

borrowing ideas from other markets or industries, or

being inspired by history and reviving good ideas that have slipped out of practice, but might be valued in the market again.

12

Entrepreneurial Opportunities: Evaluation

Evaluation phase – Analyzing the viability of an opportunity

Talk to potential target customers.

Identify operational requirements.

Conduct a feasibility analysis.

What is the market potential?

Is the idea strong enough to create value, and therefore, profits ?

Viable opportunities have the following qualities:

They are attractive.

They are achievable.

They are durable.

They are value-creating.

©McGraw-Hill Education.

The evaluation phase occurs after an opportunity has been identified, and involves analyzing this opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture.

Ideas developed by new product groups or in brainstorming sessions are tested by various methods, including talking to potential target customers and discussing operational requirements with production or logistics managers.

Feasibility analysis is used to evaluate these and other critical success factors. This type of analysis often leads to the decision that a new venture project should be discontinued. Only if the venture concept continues to seem viable would a more formal business plan be developed.

Among the most important factors to evaluate is the market potential for the product or service.

For an opportunity to be viable, it needs to have four qualities. The opportunity must be attractive in the marketplace; that is, there must be market demand for the new product or service. The opportunity must also be achievable: it must be practical and physically possible. The opportunity must be durable or attractive long enough for the development and deployment to be successful; that is, the window of opportunity must be open long enough for it to be worthwhile. And finally the opportunity must be value-creating and potentially profitable; that is, the benefits must surpass the cost of development by a significant margin.

If a new business concept meets these criteria, two other factors must be considered before the opportunity is launched as a business: the resources available to undertake it, and the characteristics of the entrepreneur pursuing it.

Q: What are examples of new venture start-ups that you are familiar with? Did they have the 4 features described?

13

Entrepreneurial Resources

Resources are essential for entrepreneurial success.

Financial resources

Human capital

Social capital

Government resources

©McGraw-Hill Education.

14

Entrepreneurial Financial Resources

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

Initial, startup financing

Personal savings, family, and friends

Crowdfunding

Early-stage financing

Bank financing, angel investors

Later-stage financing

Commercial banks, venture capitalists equity financing

©McGraw-Hill Education.

Entrepreneurial firms must have financing. In fact, the level of available financing is often a strong determinant of how the business is launched and its eventual success.

Cash finances are highly important, but access to capital, such as a line of credit or favorable payment terms with the supplier, can also help a new venture succeed.

The types of financial resources that may be needed depend on two factors: the stage of venture development and the scale of the venture.

The majority of new firms are low-budget startups launched with personal savings and the contributions of family and friends, and can also appeal to the public through a crowdfunding website such as Kickstarter.

Crowdfunding = funding a venture by pooling small investments from a large number of investors, often raised on the internet.

Angel investors = private individuals who provide equity investments for seed capital during the early stages of a new venture.

These outside investors favor companies that already have a winning business model and dominance in a market niche.

Once a venture has established itself as a going concern, other sources of financing become readily available, such as commercial loans taken out by the business.

Venture capitalists = companies organized to place their investors’ funds in lucrative business opportunities. Through venture capitalists, entrepreneurs can raise money by selling shares in the new venture. Businesses with extensive development costs or firms on the brink of rapid growth are likely to turn to venture capitalists.

Bootstrapping = relying on personal resources and resourcefulness to minimize borrowing – some entrepreneurs “bunk” together to cut expenses

15

Entrepreneurial Human, Social & Governmental Resources

Human capital

Strong, skilled management

Social capital

Extensive social contacts & strategic alliances

Technology, manufacturing, or retail alliances

Federal, state, & local government resources

Government contracting

Loan guarantee programs

Training, counseling, & support services

©McGraw-Hill Education.

Bankers, venture capitalists, and angel investors agree that the most important asset an entrepreneurial firm can have is strong and skilled management.

Managers need to have a strong base of experience and extensive domain knowledge, as well as an ability to make rapid decisions and change direction as shifting circumstances may require.

Startups with multiple partners are more likely to succeed.

New ventures founded by entrepreneurs who have extensive social contacts are also more likely to succeed.

In addition, strategic alliances can provide a key avenue for growth. By partnering with other companies, through technology, manufacturing, or retail licensing agreements, young or small firms can expand or give the appearance of entering numerous markets or handling a range of operations.

In the United States, the federal, state, and local government provides support for entrepreneurial firms in two key areas – financing and government contracting.

Through government contracting, small businesses have the opportunity to bid on contracts to provide goods and services to the government.

Regarding financing, the small business administration (SBA) has several loan guarantee programs designed to support the growth and development of entrepreneurial firms.

The government itself does not typically lend money but underwrites loans made by banks to small businesses, thus reducing the risk associated with lending to firms with unproven records. Local offices offer training, counseling, and support services.

16

Entrepreneurial Leadership

Entrepreneurial leadership needs:

Courage

Belief in one’s convictions

Energy to work hard

Leadership personality traits:

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

Lower agreeableness

Leadership characteristics:

Vision

Dedication and drive

Commitment to excellence

©McGraw-Hill Education.

Launching a new venture requires a special kind of leadership.

Entrepreneurial leadership = leadership appropriate for new ventures that requires courage, belief in one’s convictions, and the energy to work hard even in difficult circumstances, and that embodies vision, dedication and drive, and commitment to excellence.

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

However, ventures built on the charisma of a single person may have trouble growing “from good to great” once that person leaves.

The leadership that is needed to build a great organization is usually exercised by a team of dedicated people rather than a single leader.

The leadership team must attract members who fit with the company’s culture, goals, and work ethic.

For a venture’s leadership to be a valuable resource and not a liability it must be cohesive in its vision, drive and dedication, and commitment to excellence.

17

Question

Why is vision such an important element of entrepreneurial leadership?

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

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

Organizations cannot function without a detailed and operational vision.

All of the above.

©McGraw-Hill Education.

Answer: A. See the discussion that follows.

18

Entrepreneurial Leadership: Vision, Drive & Dedication

Vision is an entrepreneur’s most important asset.

Requires transformational leadership

Ability to envision realities that do not yet exist

Ability to share this vision with others

Drive & dedication are necessary.

Involves internal motivation

Calls for intellectual commitment

Requires patience

Stamina, willingness to work long hours

Enthusiasm that attracts others

©McGraw-Hill Education.

Vision may be an entrepreneur’s most important asset.

Entrepreneurs envision realities that do not yet exist.

With vision, entrepreneurs are able to exercise a kind of transformational leadership that creates something new and, in some way, changes the world.

In order to develop support, get financial backing, and attract employees, entrepreneurial leaders must share their vision with others.

Drive and dedication are reflected in hard work.

Drive involves internal motivation; dedication calls for intellectual commitment that keeps an entrepreneur going even in the face of bad news or poor luck.

They both require patience, stamina, and a willingness to work long hours.

The dedicated entrepreneur’s enthusiasm is also important – it attracts others to the business to help with the work.

Q: Do you think entrepreneurs learn to develop vision or do they have to be “born with it”?

19

Entrepreneurial Leadership: Commitment to Excellence

Commitment to excellence is required.

Commit to knowing the customer.

Provide quality goods and services.

Pay attention to details.

Continuously learn.

Connect the dots.

Hire people smarter than themselves.

©McGraw-Hill Education.

Excellence requires entrepreneurs to commit to knowing the customer, providing quality goods and services, paying attention to details, and continuously learning.

Entrepreneurs who achieve excellence are sensitive to how these factors work together.

The most successful entrepreneurs often report that they owed their success to hiring people smarter than themselves.

20

Entrepreneurial Strategy

New ventures require an entrepreneurial strategy.

What are the industry conditions?

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

What is the competitive environment?

Might there be retaliation by established firms?

What are the market opportunities?

How should the firm actually enter a new market?

Firms must choose how to compete,

Entry strategies

Generic strategies

Combination strategies

©McGraw-Hill Education.

Once an opportunity has been recognized, and an entrepreneurial team and resources have been assembled, leadership must develop a strategy.

To be successful, new ventures must evaluate:

industry conditions,

the competitive environment, and

market opportunities.

A traditional strategic analysis may have to be altered to fit the entrepreneurial situation.

For instance, using the five-forces analysis, the new entry needs to examine barriers to entrants.

A second important factor is the threat of retaliation by market incumbents.

Part of any decision about what opportunity to pursue is a consideration of how a new entry will actually enter a new market, and, once it’s there, how it will compete. Given the condition of the overall market, what entry strategies, generic strategies or possible combination strategies are most appropriate?

21

Entry Strategies

New venture entry strategies need to:

Quickly generate cash flow

Build credibility

Attract good employees

Overcome the liability of newness

Choices include:

Pioneering new entry

Imitative new entry

Adaptive new entry

©McGraw-Hill Education.

As we talked about last week, one of the most challenging aspects of launching a new venture is finding a way to begin doing business that quickly generates cash flow, builds credibility, attracts employees, and overcomes the liability of newness.

The entry strategy will vary depending on how risky and innovative the new business concept is.

New entry strategies typically fall into one of three categories:

Pioneering new entry

Imitative new entry

Adaptive new entry

22

Entry Strategies: Pioneering

Pioneering new entry:

Create new ways to solve old problems.

Meet customers’ needs in a unique new way.

Will it be accepted by consumers?

Will it be disruptive to the status quo of an industry?

Will the advantage be sustainable against imitators?

©McGraw-Hill Education.

New entrants with a radical new product or highly innovative service may change the way business is conducted in an industry.

If the product or service is unique enough, a pioneering new entrant might actually have little direct competition.

However, there is a strong risk that the product or service will not be accepted by consumers.

A pioneering new entry is also potentially disruptive to the status quo of an industry.

If it is successful, other competitors will rush in to copy it. This can create issues of competitive sustainability.

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.

Q: What are some examples of companies you are familiar with that started with pioneering ? Did it change an existing industry or create a new one?

Toyota Prius

First computer

First internet browser

Pandora

23

Entry Strategies: Imitative

Imitative new entry:

Imitators have a strong marketing orientation.

Capitalize on proven market successes.

Introduce the same basic product or service in another segment of the market.

Can we do it better than an existing competitor?

Will someone then imitate us?

©McGraw-Hill Education.

Imitators 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.

Sometimes the key to success with an imitative strategy is to fill a market space where the need had previously been filled inadequately.

Entrepreneurs are also prompted to be imitators when they realize that they have the resources or skills to do a job better than an existing competitor.

But success triggers imitation. Entrepreneurs will need to consider how to maintain a sustainable competitive advantage.

Q: What are some examples of companies you are familiar with that started with imitation?

Example:

Square – processes credit card payments with a reader and their smartphone

Nintendo – video games popular; Nintendo offered in-home

24

Entry Strategies: Adaptive

Adaptive new entry:

Capitalizes on current market trends.

Offers a product or service that is somewhat new and sufficiently different.

Creates new value for customers.

Captures market share.

Does it do a superior job of meeting customer needs?

Can it be easily imitated?

How can we continue to keep it fresh and new?

©McGraw-Hill Education.

Most new entrants use a strategy somewhere between pure imitation and pure pioneering.

They offer a product or service that is somewhat new and sufficiently different to create new value for customers and capture market share.

An adaptive new entry involves taking an existing idea and adapting it to a particular situation.

However, unless potential customers believe the product or service does a superior job of meeting their needs, they will have little motivation to try it.

Second, there is nothing to prevent a close competitor from mimicking the new firm’s adaptation as a way to hold onto its customers.

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.

Q: What are some examples of new ventures that have been launched using a business concept that is an adaptation of an existing business?

Examples:

Uber

Amazon - bookstore

Online mortgage companies

Under Armour – moisture-wicking fabric

Mint.com – online software

Spanx – Combined nylon and Lycra, more comfortable than existing products

25

Generic Strategies for New Ventures

Overall cost leadership – advantage due to:

Simpler organizational structure & smaller size

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

Differentiation – can compete by:

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

Deploying resources in a radical new way

Focus – means ability to:

Use niche strategies that fit the small business model

©McGraw-Hill Education.

A new entrant must decide what type of strategic positioning will work best as the business goes forward.

Typically, new entrants begin with a single business model that is equivalent in scope to a business-level strategy.

One of the ways entrepreneurial firms achieve success is by doing more with less. By holding down costs or making more efficient use of resources than larger competitors, new ventures are often able to offer lower prices and still be profitable.

Under the right circumstances, a low-cost leader strategy is a viable alternative for new ventures. Compared to large firms, new ventures often have simple organizational structures that make decision making both easier and faster. The smaller size also helps new firms change more quickly when upgrades in technology or feedback from the marketplace indicate that improvements are needed.

Both pioneering and adaptive entry strategies involve some degree of differentiation. The new entry is based on being able to offer a differentiated value proposition.

However, differentiation successes are sometimes built on superior innovation or use of technology, which is challenging for young firms to implement relative to established competitors.

Focus strategies work for small businesses because there is a natural fit between the narrow scope of the strategy and the small size of the firm. If a startup wants to succeed, it has to take business away from an existing competitor. New firms can often succeed best by finding a market niche where they can get a foothold and make small advances that erode the position of the existing competitors.

Q: What are the disadvantages for a new venture, relative to a larger firm, in terms of keeping costs to a minimum?

Q: In general, do you think it is easier or more likely that a differentiation strategy would work best for a new venture, or an overall cost leader strategy?

Q: Can you think of an industry condition in which it would be good for a new start-up to enter with a broad or aggressive strategy rather than a niche strategy? Growth industry - Uber, Air BNB

Q: What are the advantages or disadvantages of a focus strategy? Bird??,

26

Question

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

focus

differentiation

overall low-cost

small business

©McGraw-Hill Education.

Answer: A. If a startup wants to succeed, it has to take business away from an existing competitor. Young firms can often succeed best by finding a market niche where they can get a foothold and make small advances that erode the position of the existing competitors. From this position, they can build a name for themselves and grow.

27

Combination Strategies for New Ventures

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

Holding down expenses by having a simple structure

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

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

©McGraw-Hill Education.

One of the best ways for new small businesses to achieve success is by pursuing combination strategies.

By combining the best features of low-cost, differentiation, and focus strategies, new firm’s can sometimes achieve something truly distinctive.

Entrepreneurial firms are often in a strong position to offer a combination strategy because they have the flexibility to enact combination strategies in ways that the large firms cannot copy.

For example, holding down expenses can be difficult for big firms because each layer of bureaucracy adds to the cost of doing business across the boundaries of a large organization.

Also, large firms often find it difficult to offer highly specialized products or superior customer services, while entrepreneurial firms can create high-value products and services through their unique differentiating efforts.

One of the major dangers for a new entrepreneur is that either a large firm with more resources or a close competitor will copy what the new entry is doing. A carefully crafted and executed combination strategy may be the best answer.

28

Competitive Dynamics

New entry threatens existing competitors.

Competitive dynamics helps explain why competitive strategies evolve and how to respond.

Need to identify new competitive action.

Engage in threat analysis.

Have the motivation and capability to respond.

Understand the types of competitive action.

Evaluate the likelihood of competitive reaction.

©McGraw-Hill Education.

New entry into markets, whether by startups or existing firms, nearly always threatens existing competitors.

As a result, the competitive actions of the new entrants are very likely to provoke negative response from companies that feel threatened.

Competitive dynamics defined as intense rivalry, involving actions and responses among similar competitors vying for the same customers in a marketplace.

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.

Studying competitive dynamics helps explain why strategies evolve and reveals how, why, and when to respond to the actions of close competitors.

New competitive action are acts that might provoke competitors to react, such as new market entry, price-cutting, imitating successful products, or expanding production capacity.

Threat analysis is a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning.

Q: In what ways is competititve beneficial to an industry? In what ways is competition damaging to an industry?

29

Competitive Dynamics Model

Exhibit 8.4 Model of Competitive Dynamics

Source: Adapted from Chen, M.J. 1996. Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration. Academy of Management Review, 21(1): 100-134; Ketchen, D.J., Snow, C.C., & Hoover, V.L. 2004. Research on Competitive Dynamics: Recent Accomplishments and Future Challenges. Journal of Management, 30(6): 779-804; and Smith, K.G., Ferrier, W.J., & Grimm, C.M. 2001. King of the Hill: Dethroning the Industry Leader . Academy of Management Executive, 15(2): 59-70.

Jump to Appendix 1 for long description.

©McGraw-Hill Education.

This model identifies the factors competitors need to consider when determining how to respond to a competitive act.

30

Competitive Dynamics: Why Launch Actions?

Why do companies launch new competitive actions?

To improve market position

To capitalize on growing demand

To expand production capacity

To provide an innovative new solution

To obtain first mover advantages

To strengthen financial outcomes & capture profits

To grow the business

©McGraw-Hill Education.

When a company enters a market for the first time, it is an attack on existing competitors. In addition, price-cutting, imitating successful products, or expanding production capacity are all examples of competitive acts that might provoke a reaction.

Companies are motivated to launch competitive challenges because they want to strengthen financial outcomes, capture profits that industry leaders enjoy, and grow their business.

They also may want to build their reputation for innovativeness or efficiency.

31

Competitive Dynamics: Incumbents

Competition among incumbent rivals can involve “hardball” strategies.

Devastating rivals’ profit sanctuaries

Plagiarizing with pride

Deceiving the competition

Unleashing massive & overwhelming force

Raising competitors’ costs

©McGraw-Hill Education.

Competitive attacks can come from many sources besides new entrants. Some of the most intense competition is among existing rivals intent on gaining strategic advantages.

“hardball” strategies are described in more detail in the text. While the “big boys” are competing, it’s possible an entrepreneur might be able to take advantage of some of these activities undetected. Later I have an example of this.

32

Competitive Dynamics: Threat Analysis

Threat analysis involves an assessment of:

Market commonality

Resource similarity

How serious is the threat?

Motivation & capability to respond means asking:

What type of competitive response is necessary?

What resources are needed to fend off a competitive attack?

Am I willing & able to launch an action?

Which competitive action should I take?

©McGraw-Hill Education.

Awareness of the threats posed by industry rivals allows a firm to understand what type of competitive response, if any, may be necessary.

Threat analysis is defined as a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning.

Competitive dynamics are likely to be most intense among companies that are competing for the same customers or who have similar sets of resources.

When any two firms have both a high degree of market commonality and highly similar resource bases, a stronger competitive threat is present.

Once attacked, competitors are faced with deciding how to respond: What is their motivation and capability to respond?

Before deciding, they need to evaluate not only how they will respond, but also their reasons for responding and their capability to respond:

How serious is the attack, and what might be the intent of the competitive response?

Is it merely to blunt the attack of the competitor, or is it an opportunity to enhance its competitive position?

Sometimes the most a company can hope for is to minimize the damage caused by a competitive action.

Companies also have to consider what strategic resources can be deployed to fend off a competitive attack. Does the company have an array of internal strengths it can draw on, or is it operating from a position of weakness?

Q: Think of 2 close rivals (2 clothing stores, 2 auto manufacturers). Do they have a high or low degree of market commonality?

33

Cisco vs. Arista Networks

Jayshree Ullal used to be a senior executive at Oracle, but she became frustrated at Cisco (firm moving its focus away from network switches, its traditional core product, to higher margin video conferencing and consumer electronics products.)

She took on the role of CEO at Arista Networks. Since then, this small startup has grown into a major player in the network switch market, challenging Cisco’s dominance in this business.

At first, Ms. Ullal directed the firm to avoid taking Cisco on directly, knowing Cisco could drive Arista out of business. The firm focused on narrow market segments in the switching market that were not critical to Cisco.

©McGraw-Hill Education.

34

Cisco vs. Arista Networks

The strategy worked, and Arista was able to build a foothold in the market. It worked to design a flexible switch that could be reprogrammed to serve a range of customers.

Once the firm was established, it moved to take Cisco on directly. Because Cisco’s focus was on other market segments, its technology development had lagged. Arista seized on the opportunity, selling switches that were cheaper, faster, and more flexible than Cisco’s competing products.

In the last few years, Arista has taken business from Cisco at a number of major customers, including Microsoft and Facebook. Its revenue grew nearly 500 percent from 2012 to 2016.

©McGraw-Hill Education.

For Cisco, the fight has become personal. John Chambers, Cisco’s chairman, reportedly saw Ms. Ullal’s efforts to take Cisco on directly as a personal betrayal. In 2013, an internal Cisco management presentation included a picture of Ms. Ullal on a bullseye with arrows in it. The presentation included the phrase, “Arm the field, stop the bleeding and fire back.” Cisco has since attacked Arista both in the market and in court. Cisco has developed an entirely new generation of automated and programmable switches to counter Arista’s growth. Cisco has also filed a lawsuit claiming Arista uses Cisco’s patented technology in its designs. Arista denied the allegations and responded that Cisco only sued because it couldn’t respond with better ideas and better products.

35

Competitive Dynamics: Actions

Types of competitive actions include:

Strategic actions

Entering new markets

Creating new product introductions

Changing production capacity

Pursuing mergers or alliances

Tactical actions

Doing price cutting (or offering increases)

Making product/service enhancements

Increasing marketing efforts

Developing new distribution channels

©McGraw-Hill Education.

Once an organization determines whether it is willing and able to launch a competitive action, it must determine what type of action is appropriate. The actions taken will be determined by both its resource capabilities and its motivation for responding.

Two broadly defined types of competitive action include strategic actions and tactical actions.

Strategic actions are major commitments of distinctive and specific resources to strategic initiatives.

Tactical actions are refinements or extensions of strategies usually involving minor resource commitments.

36

Competitive Dynamics: Reaction

Likelihood of competitive reaction depends on:

Market dependence

Competitor’s resources

The reputation of the firm that initiates the action – the actor’s reputation

Choosing not to respond is a choice & includes:

Forbearance – holding back on an attack

Co-opetition – both cooperating & competing

Working together behind the scenes to achieve industrywide efficiencies

©McGraw-Hill Education.

The final step before initiating a competitive response is to evaluate what a competitor’s reaction is likely to be. Evaluating potential competitive reactions helps companies plan for future counterattacks.

How a competitor is likely to respond will depend on three factors:

Market dependence is the degree of concentration of a firm’s business in a particular industry. If a company has a high concentration of its business in a particular industry, it has more at stake because it must depend on that industry’s market for its sales. New and small firms with a high degree of market dependence may be limited in how they respond due to resource constraints.

The competitor’s resources must also be considered. For instance, if the competitor is a small firm, it may be unable to mount a serious attack due to lack of resources. As a result, it is more likely to react to tactical actions such as incentive pricing or enhanced service offerings because they are less costly to attack than large-scale strategic actions.

Whether a company should respond to a competitive challenge will also depend on who launched the attack against it. Compared to relatively smaller firms with less market power, competitors are more likely to respond to competitive moves by market leaders. Competitors can also choose not to react at all.

Forbearance is a firm’s choice of not reacting to a rival’s new competitive action.

Co-opetition is a firm’s strategy of both cooperating and competing with rival firms.

Q: What are examples of companies that have been successful through collaboration and cooperation rather than competition?

37

Tesla

Tesla Motors has invited other firms who want to design and build electric cars to use Tesla’s proprietary technology. While many firms see patented technology as a key resource to protect and monopolize, Tesla sees multiple potential benefits from sharing the technology embedded in its several hundred patents.

First, primary goal is to spur the wider development and manufacturing of electric cars. Electric cars accounted for less than 1 percent of all cars sold in 2013. Having a larger number of competitors offering electric autos will help them gain acceptance in the market place as mainstream products.

Second, as the number of electric cars being manufactured grows, the overall industry can achieve greater economies of scale. For example, if multiple manufacturers adopt Tesla’s patents for charging stations, it can help Tesla quickly open more charging stations and allow suppliers to become more economically efficient.

Finally, as other firms leverage Tesla’s technology, it means that Tesla is setting the technology trajectory and will leave competitors following in technology development. “patents aren’t that important if a firm is sufficiently innovative”. As he stated, “You want to be innovating so fast [that] you invalidate your prior patents.”

©McGraw-Hill Education.

Question

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

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

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

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

All of the above.

©McGraw-Hill Education.

Answer: C. Smaller size makes them more nimble compared to large firms so they can respond quickly to competitive attacks. Because they are not well known, startups also have the advantage of the element of surprise in how and when they attack. Innovative uses of technology, for example, allow small firms to deploy resources in unique ways. Because they are young, however, startups may not have the financial resources needed to follow through with a competitive response. In contrast, older and larger firms may have more resources and a repertoire of competitive techniques they can use in a counterattack. Large firms, however, tend to be slower to respond.

39

Issue for Debate

How concerned are you about the drop in the rate of entrepreneurship?

©McGraw-Hill Education.

Concerned

Entrepreneurial businesses are typically the engine for innovation and job creation. Will a decrease lead to a reduction in economic growth?

New firms may support established firms as suppliers, customers, or partners.

Not Concerned

Today firms are more open to leveraging creative ideas developed by employees. In the past, firms were close-minded to innovative ideas created by employees so many employees left and started their own business.

40

Issue for Debate

What do you think are the primary causes of the decline?

©McGraw-Hill Education.

After recent recession, people may not be comfortable to take on the risk.

Higher education cost, may limit college graduates from being able to take on the risk or having cash to get started

Increased regulation may be limiting start-ups

Work-life balance; limits desire

Many entrepreneurs were immigrants; increasing growth in developing economics, some entrepreneurs may not immigrate to the U.S.

41

Issue for Debate

What actions should be taken to increase the rate of new business start-ups? How effective will these actions be?

©McGraw-Hill Education.

Reduce barriers

Deferred student loans or debt forgiveness

Reduced regulation

Create opportunities

Build business incubators

Expand entrepreneurship programs with seed funding in high schools, community colleges

Promote business plan competitions

Better funding for SBA for start-up investing/mentoring

Create incentive

Reduce corporate tax for job creating startups

Create entrepreneurship zones with infrastructure support

Favorable capital tax gain rates

42

Applied Sciences

Architecture and Design

Biology

Business & Finance

Chemistry

Computer Science

Geography

Geology

Education

Engineering

English

Environmental science

Spanish

Government

History

Human Resource Management

Information Systems

Law

Literature

Mathematics

Nursing

Physics

Political Science

Psychology

Reading

Science

Social Science

Home

Blog

Archive

Contact

google+twitterfacebook

Copyright © 2019 HomeworkMarket.com