Strama Module 8 PDF

MODULE IN
Strategic Management
8
EHM
SAMCIS
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“Strategic management is not a
box of tricks or a bundle of
STRAMA
techniques. It is analytical
thinking and commitment of
resources to action. But
quantification
INSEalone is not
planning. Some of the most
important issues in strama
COURSE LEARNING OUTCOMES
cannot be quantified at all.”
-Peter Drucker- At the end of the module, you should
be able to:
1. Analyze the role of opportunities,
resources, and entrepreneurs in
successfully pursuing new ventures
2. Identify and describe the three types
of entry strategies – pioneering,
imitative, and adaptive – commonly
used to launch a new venture
3. Apply how the generic strategies of
overall cost leadership, differentiation,
and focus are used by new ventures
and small businesses
RT RELATED PICTURE HERE 4. Analyze how competitive actions,
such as the entry of new competitors
into a marketplace, may launch a
cycle of actions and reactions among
STRATEGIC close competitors
MANAGEMENT 5. Apply 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
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 1
“Whether it’s broke or not, fix it – make it
better. Not just products, but the whole
company if necessary.”
-Bill Saporito
Module 8: Entrepreneurial Strategy and Competitive Dynamics
Discussion Outline
New technologies, shifting social and demographic trends and changes in the
business environment create opportunities for entrepreneurship. New ventures, which often
emerge under such conditions, and small businesses, which are a major engine of growth
in the U.S. economy, must rely on sound strategic principles to be successful. Effective
strategies are needed to enter new markets and overcome intense competition from rivals
who are threatened by new entrants. This module addresses how entrepreneurial firms
create new value, achieve competitive advantages, and combat competitive rivalry. The
module is divided into three major sections:
1. The first section examines the role of opportunity recognition in the new value
creation process. It describes characteristics of entrepreneurial opportunities
and two phases of the opportunity recognition process—opportunity
discovery and opportunity evaluation. It also addresses the role of
entrepreneurial resources and the qualities of entrepreneurial leadership that
are important to success.
2. The second section addresses entrepreneurial strategies. Three different types

of new entry strategies are discussed—pioneering, imitative, and adaptive.
The section also addresses the role of “blue ocean” strategies in providing
advantages to new entrants. Then, the generic strategies and combination
strategies are addressed in terms of how they apply to new ventures and
entrepreneurial firms.
3. The third section addresses competitive dynamics. The entry of competitors

into a competitive arena often evokes a cycle of actions and responses. This
section examines the factors that must be considered when considering a
competitive response—the seriousness of the threat, the ability to mount a
competitive response, the types of strategic actions needed, the likelihood of
competitive reaction, and forbearance and co-opetition as options to a
counterattack.
Small business and entrepreneurship play an important role in fueling the Philippine
economy. Elsewhere in the US, small businesses create 65 percent of all new jobs, and they
also generate innovative, patentable ideas at a much higher rate than larger firms.
The SUPPLEMENT below discusses the importance of four species of entrepreneurs

identified by Linda Rottenberg.
 Extra Example: The four species of entrepreneurs
Linda Rottenberg has worked with hundreds of entrepreneurs looking to get their
businesses off the ground and ramped up. She argues that for entrepreneurs to succeed,
they need to have self-knowledge regarding the type or species of entrepreneur they are
and to tailor how they manage the entrepreneurial venture to their type.
The four species of entrepreneur are diamonds, stars, transformers, and rocket ships. Each
have their own strengths, as well as key issues they need to be sensitive to.
Diamonds These are 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. The classic examples of this are
Mark Zuckerberg, Ted Turner, and Steve Jobs. They both bent realities to fit
their vision. Their Achilles heel is that they tend to tune others out, but
successful diamonds are conscious of their need to listen and learn, willing to
take criticism from others, and can build a strong team around themselves.
Stars These are dynamic trend spotters 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. Examples include Martha Stewart, Lance Armstrong, and Jay Z.
To be successful, stars need to be sure to build a strong support team and
organization that can help them deliver on the promise of their personality.
Essentially, they need to make sure there is a strong organization to handle
the boring details of operations and customer service.
Transformers Some entrepreneurs see established industries as settings open for

transformation. These transformers modernize systems, redefine operating
rules, and change the way products are delivered. Examples include Howard
Schultz of Starbucks, the man who transformed both how customers saw a
cup of coffee and how it was delivered. To ensure success, transformers need
to be both disciplined in working through the details and financial logic of
their transformations and also mindful of continuously looking forward for
additional opportunities to transform the market. Their innovations are often
easily imitated, leading to the need to be diligent in implementation and
working to stay one step ahead of the imitators.
Rocket Ships These entrepreneurs are 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. Examples include
Michael Dell, Bill Gates, and Jeff Bezos. Rocket Ships can benefit by
surrounding themselves with individuals who are more creative and higher in
emotional intelligence. Successful rocket ships are also sensitive to the need
to consider qualitative data and others’ emotional reactions even though it
doesn’t come naturally to them.
The key point is that there is no optimal species of entrepreneur. But success comes in two
steps. First, an entrepreneur needs to know herself. Second, she needs to acknowledge the
strengths she can leverage and be aware of her weaknesses. Third, she needs to surround
herself with others who complement her strengths and weaknesses.
Source: Rottenberg, L. 2014. The Four Species of Entrepreneurs. Wsj.com, October 4: np.
 Discussion Question 1: What are some examples of entrepreneurs you are familiar
with who are diamonds, stars, transformers, and rocket ships?
I. Recognizing Entrepreneurial Opportunities
New value can be created in many different contexts including start-up ventures,
major corporations, family-owned businesses, non-profit organizations, and established
institutions.
For an entrepreneurial venture to create new value, three factors must be present—
an entrepreneurial opportunity, the resources to undertake it, and an entrepreneur or
entrepreneurial team willing to pursue it.
FIGURE 1 identifies the three factors that are needed to successfully proceed:
opportunity, resources, and entrepreneur(s).
FIGURE 1. Opportunity Analysis Framework
A. Entrepreneurial Opportunities
Business opportunities come from many sources. For entrepreneurial start-ups,

opportunities often come from past work experience, hobbies, or chance encounters.
Established firms get ideas from customers, suppliers, or advances in technology. Most
opportunities emerge due to some change in the business environment.
The SUPPLEMENT/EXTRA EXAMPLE below illustrates how an entrepreneur saw an

opportunity in the combination of the exploding use of portable electronic devices and a
growing societal concern regarding electronic waste.
 Extra Example: An ATM for Portable Electronics
Each year, users in the United States dispose nearly 400 million pieces of electronic waste.
Less than 20 percent of this waste is recycled and, instead, ends up in landfills. This issue is
even more extreme with portable electronic devices. A survey by Nokia found that less
than 3 percent of people worldwide recycle their cell phones. Since these electronic
devices contain toxic substances, such as mercury, lead, cadmium, and arsenic, disposing
of this waste in landfills creates the potential for environmental contamination. Mark Bowles
looked at this not solely as a potential environmental disaster but also as a business
opportunity.
He saw real potential in developing a business that would allow users to sell their used cell
phones and other portable electronic devices. In 2008, he founded ecoATM and took
three years to develop an ATM-like machine that manages transactions with customers
wishing to sell their portable electronics. The machine scans the devices a user brings and
can recognize over 4,000 types of phones, MP3 players and tablets. It then uses a
constantly updated database to price the device based on model and condition. The
average price for a device is $25, but a newer smartphone can fetch up to $300. The
machine validates the users ID and extracts the serial number from the device to ensure
that thieves aren’t selling stolen devices.
The company resells 75 percent of the devices to firms that refurbish them and sell them to
consumers. The remaining 25 percent go to certified electronics recyclers.
As of June 2013, the firm had 350 ecoATMs operating in 24 states. They place the machines
in high traffic locations, such as shopping malls, to make it easy for individuals to sell their
electronics. The business is growing rapidly, with several hundred thousand devices
purchased in 2012, and is serving to improve the environment while also generating nice
returns for ecoATM. As Bowles states, “We’re using technology to solve a problem that
technology created.”
Source: Duncan, K. 2012. Green machine. Entrepreneur. June 12: 51.
 Discussion Question 2. What are other business opportunities that have come out of
the drive to increase environmental sustainability?
Not all good ideas are viable business opportunities. To identify, assess, and select
opportunities, entrepreneurs engage in an opportunity recognition process. The process
involves two phases—opportunity discovery and opportunity evaluation.
Opportunity discovery may occur unintentionally because the discovery of

opportunities is often spontaneous and unexpected. Or, discovery may occur as the result
of a deliberate search for new venture opportunities or creative solutions to business
problems.
The second phase is opportunity evaluation, which involves evaluating an

opportunity to determine whether it is strong enough to be developed into a new venture.
Business ideas are tested by various methods, including talking to customers about market
potential and discussing operational requirements. Opportunity evaluation involves
feasibility analysis to assess costs and benefits.
 Discussion Question 3: Which do you think is more important to launching a

promising new venture and building a successful business—opportunity discovery or
opportunity evaluation?
The SUPPLEMENT/EXTRA EXAMPLE below illustrates how a business incubator can

provide support with the opportunity discovery and opportunity evaluation processes.
 Extra Example: Developing Business Ideas at the Foundry
The Foundry, a business incubator affiliated with the University of Utah, aims to help young
entrepreneurs get their business ideas moving forward. The university has rented space in
downtown Salt Lake City. Over 60 aspiring entrepreneurs have shared the space in the
facility. They learn from each other as they develop their business ideas—including
discussions about business ideas that foster opportunity discovery and discussions of their
progress and challenges they face as they work through the opportunity evaluation
process. They also get expert advice from business executives and professors from the
Eccles School of Business, the University of Utah’s Business School. The issues they deal with
in evaluating and developing their business ideas include patent and intellectual property
protection, organizational strategy, finance, public relations, marketing, and development
of a web presence.
In the first six months of operation, the Foundry triggered the creation of 18 registered
businesses that generated over $220,000 in revenue. The benefits for the entrepreneurs
have been clear. They get advice as they develop their business ideas, they build a social
network to leverage as they launch their businesses, and they are encouraged by and
driven to move forward by their peers.
Source: Saadi, S. & Tozzi, J. 2010. An incubator hatches student startup in Utah. Bloomberg
Businessweek. September 23: np.
 Discussion Question 4. What are the potential benefits and risks of relying on peers
as these entrepreneurs evaluate their entrepreneurial ideas?
Discussion Question 5. How can entrepreneurs who don’t have access to a business
incubator develop a set of advisors needed to develop and evaluate their business
ideas?
A critical element of opportunity recognition is assessing to what extent an

opportunity is viable in the marketplace. For an opportunity to be viable it must have four
qualities:
1. Attractive There must be market demand for the product or service.

2. Achievable It must be practical and physically possible.
3. Durable It must be attractive long enough for the development and
deployment to be successful.
4. Value-creating The benefits must surpass the cost of development by a
profitable margin.
 Discussion Question 6: What are some examples of new venture start-ups that you
are familiar with? Consider the opportunities that these new ventures are based on.
Did they have the four features described above? What do you think will be the
consequences if these ventures do not have these qualities?
B. Entrepreneurial Resources
Resources are an essential element of a successful entrepreneurial launch. For start-

ups, the most important resource is usually money. However, human and social capital are
also important during the early days of a new venture and throughout the life of a small
business. In this section, we address some of the resource requirements of entrepreneurial
firms.
1. Financial Resources
Start-up firms need financing. The level of available financing is often a strong
determinant of how the business is launched and its eventual success. The majority of new
firms are low-budget start-ups launched with personal savings and the contributions of
family and friends. Bank financing, public financing, and venture capital are often
available only after a company has started to conduct business and generate sales.
Crowdfunding, the funding of a venture by pooling small investments from a large

number of investors, has emerged in recent years as a means to fund entrepreneurial firms.
Funds are typically raised on websites that invite and list funding opportunities, such as
Kickstarter.
 Discussion Question 7: When you think about start-up firms that you are familiar with,
what kind of funding did they use to get their initial start? Personal savings? Family
and friends? Credit cards? Selling shares of ownership in the business?
Discussion Question 8. What are the advantages of using a crowdsourcing
approach for raising money for new businesses? Are there any downsides to raising
funds this way?
If personal savings and bootstrapping efforts are insufficient to finance the business,
entrepreneurs may turn to other sources of funds such as angel financing and venture
capital. Both are forms of private equity financing. Venture capital may be an important
source of funding as well as managerial advice for new ventures. To obtain it, however,
entrepreneurs must sell shares of ownership in their firm.
 Discussion Question 9: What are the advantages and disadvantages of selling

shares of ownership to venture capitalists?
Discussion Question 10: What about selling shares to other investors such as family,
friends, or strategic partners? What are the advantages and disadvantages of
having these kinds of investors?
Bootstrapping, which is the practice of relying on one’s personal resources and

resourcefulness to minimize borrowing and avoid selling part of the business to investors, is
another approach to new venture financing.
 Discussion Question 11: When, if ever, might closely controlling spending have a
negative effect on start-up success? That is, are there strategic implications from
taking the practice of bootstrapping too far?
2. Human Capital
Bankers, venture capitalists, and angel investors that invest in start-up firms and small
businesses agree that the most important asset an entrepreneurial firm can have is strong
and skilled management. Ventures started by entrepreneurial teams are more likely to
succeed in the long run than ventures founded by “lone wolf” entrepreneurs.
3. Social Capital
New ventures founded by entrepreneurs with extensive social contacts are more
likely to succeed than ventures started without social networks. If the founders have
contacts that will vouch for them, they gain exposure and build legitimacy faster.
The social capital of entrepreneurs can be both built and leveraged through
strategic alliances. Three types of strategic alliances and their intended goals are
discussed.
 Discussion Question 12: What other ways might social networking practices
enhance the social capital of start-up entrepreneurs?
4. Government Resources
The Philippine government is an important resource for many young and small
businesses. It provides support for entrepreneurial firms in two key arenas—financing and
government contracting.
C. Entrepreneurial Leadership
Launching a new venture requires a special kind of leadership. It involves courage,

belief in one’s convictions, and the energy to work hard under difficult circumstances. In
this section, we address three entrepreneurial leadership characteristics—vision, dedication
and drive, and commitment to excellence.
1. Vision
The entrepreneur has to envision realities that do not yet exist. It may consist of a
new product or a service, a competitive challenge such as beating a competitor, or a
personal goal such as building something from scratch, being one’s own boss, making a
difference, or achieving financial security. In every case, entrepreneurs exercise a kind of
transformational leadership that aims to create something new.
 Discussion Question 13: Can entrepreneurs learn to develop vision or do they have
to be “born with it?”
2. Dedication and Drive
Dedication and drive are reflected in hard work. They require patience, stamina,
and a willingness to work long hours. Drive involves internal motivation, and dedication
calls for an intellectual commitment to the enterprise that keeps the entrepreneur going
even in the face of bad news or poor luck. Entrepreneurs typically have a strong
enthusiasm, not just for their venture but for life generally.
 Discussion Question 14: What are some examples of entrepreneurs who have strong
dedication and drive?
Discussion Question 15: Why do some people believe that drive and dedication are
negative qualities? Under what circumstances are these qualities negative? What
are the consequences?
3. Commitment to Excellence
Entrepreneurs sometimes launch businesses without understanding what it will take

to succeed. To achieve excellence, therefore, venture founders and small business owners
must understand the customer, provide quality products and services, manage the
business knowledgeably, and, expertly, pay attention to details, and continuously learn.
 Discussion Question 16: What are some examples of entrepreneurial firms that have
demonstrated a strong commitment to excellence?
Discussion Question 17: What are the potential consequences for start-up firms that
do not strive for excellence?
II. Entrepreneurial Strategy
To be successful, new ventures must evaluate industry conditions, the competitive

environment, and market opportunities in order to position themselves strategically. In this
section, we consider several different strategic factors that are unique to new ventures.
Tools and techniques such as five-forces and value chain analysis can also be used
to guide decision making among new ventures and small businesses. In terms of five forces
analysis, two factors are especially important—barriers to new entry and threat of
retaliation by incumbent firms.
A. Entry Strategies
The idea of an entry strategy or “entry wedge” describes several approaches that
firms may take to get an initial foothold in an industry.
1. Pioneering New Entry
A young firm with a radical new product or highly innovative service may engage in
pioneering—creating new ways to solve old problems or meeting customers’ needs in a
unique new way. If the product or service is unique enough, a pioneering new entrant may
actually have little direct competition.
There are many potential pitfalls. Customers may not accept the new product or
service; competitors may quickly imitate it; sustaining an advantage may require heavy
expenses on advertising or protecting intellectual property.
 Discussion Question 18: What are some examples of companies you are familiar with
that started with pioneering new venture concept? What made it pioneering? How
radical was it? Did it change an existing industry or create a new one?
2. Imitative New Entry
Imitators look for opportunities to capitalize on proven market successes. An

imitation strategy is used when products or services that have been successful in one
market niche or physical locale can be effectively introduced in another segment of the
market.
If a strategy is easy to imitate, then a major pitfall is that it may be difficult to ever
build a sustainable competitive advantage. On the other hand, franchises are built on the
concept of imitation—and duplication. Franchising is a type of imitation strategy that often
works very well because customers value reliable products that they can trust.
that use an imitation strategy?
3. Adaptive New Entry
Most new entrants are 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. Such firms are adaptive
because they are aware of marketplace conditions and conceive entry strategies to
capitalize on current trends.
Pitfalls of an adaptive strategy include 1) the value proposition may not be

perceived as unique; 2) close competitors could copy the new firm’s adaptation as a way
to hold onto its customers; and 3) once an adaptive entrant achieves initial success, the
challenge is to keep the idea fresh.
 Discussion Question 20: What are some examples of new ventures that have been
launched using a business concept that is an adaptation of an existing business?
The SUPPLEMENT/EXTRA EXAMPLE below describes how Slice Corporation took a

single idea for a product and turned it into a catalog of improved cutting devices.
 Extra Example: Cutting a Path to Success
TJ Scimone had an idea to develop better designed, and aesthetically pleasing cutting
tools. He founded his firm, Slice, in 2008 to create and build ultramodern versions of staple
kitchen tools, such as vegetable peelers and cheese graters, but he found real success in
the market when he turned to building a better cutting device. He started with a pocket-
sized ceramic blade for opening shrink-wrapped packages, such as DVDs. The firm now
designs and sells a range of box cutters, scissors, and other cutting devices that are familiar
but very distinct due to Slice’s efforts to offer true innovation in established product
categories. Scot Herbst, the firm’s director of industrial design summarized the firm’s
adaptive strategy when he said, “We look for simple, incremental twists to existing
products. All it takes is a functional twist here and an ergonomic twist there to make it
better than what the competition is offering.”
Slice’s ability to develop new interpretations of old implements is evident in its Auto-
Retractable Box Cutter. As Simone stated, “box cutters are scary and antiquated tools—
most of them are dangerous and ugly.” In their design, Slice makes several changes to
improve the utility and safety of the box cutter. First, Slice uses a ceramic blade that can
last ten times longer than steel. To improve safety, it uses a rounded tip on the blade and a
protective housing that reduces blade exposure. Slice also devised a wrap-around handle
that is fits the contours of the users hand, as well as a rubberized grip to enhance comfort
and limit the possibility that the box cutter will slip in the user’s hand. Finally, Slice built the
cutter in a hook shape so users could easily hook it on their belts. This element was built in
when Slice realized that most accidents with box cutters occurred when users were either
putting the cutter in or taking it out of their pockets.
With their innovative designs on these basic products, Slice has received professional
acclaim and market success. For example, one of its products received the Chicago
Athenaeum Museum of Architecture and Design Good Design Award. On the market side,
its products have seen solid demand and are now distributed through Home Depot, Crate
& Barrel, Amazon.com, the Container Store, and major office-supply chains.
Sources: Ankeny, J. 2013. Sharp-sighted: Slice’s professional-grade tools don’t cut corners
on safety or style. Entrepreneur. June: 23.
 Discussion Question 21: Can you think of other products that could use the mindset
that Slice takes to cutting tools? Are their products where the basic design is well
established but could also be greatly improved upon?
Discussion Question 22: What are some examples of companies you are familiar with
that use an adaptive entry strategy?
Considering the strategic choices that a new entrant has, which new entry strategy
is best? None of the strategies is inherently better than another. Nevertheless, some
research suggests that entering new markets may provide greater opportunities than
seeking growth in existing markets.
B. Generic Strategies
In general, new ventures are single-business firms using business-level strategies. This
section addresses how overall low cost, differentiation, and focus strategies can be used
by new ventures to achieve a competitive advantage.
1. Overall Cost Leadership
Entrepreneurial firms achieve success by doing more with less. By holding down costs
or making more efficient use of resources than larger competitors, new ventures can often
offer lower prices and still be profitable. 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. The Internet offers other cost saving
alternatives.
 Discussion Question 23: What advantages do young firms have relative to larger
firms in terms of keeping costs to a minimum? What are the disadvantages of trying
to maintain overall lower costs?
2. Differentiation
Both pioneering and adaptive entry strategies involve some degree of

differentiation. 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
changes the way business is conducted. Offering something that is different enough to be
better is an aspect of an adaptive entry as well.
A differentiation strategy is generally thought to be expensive to enact, however.

Yet those activities that tend to be expensive—innovation, technology, customer service,
distinctive branding—are also areas where new ventures can make a name for
themselves.
 Discussion Question 24: What are some examples of new ventures that have used a
differentiation strategy in order to succeed?
Discussion Question 25: 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? Explain.
3. Focus
Focus or “niche” strategies provide an effective entry strategy for many new firms. A
niche represents a small segment within a market. A young or small firm can play an
important role in such a market space if there is an opportunity to thrive in that
environment.
Typically, a focus strategy is used to pursue a niche. Here’s why: If a start-up wants to
enter a mature industry, it often has to take business away from an existing competitor.
Thus, 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. By
contrast, if a start-up enters a market with a broad or aggressive strategy, it is very likely to
evoke retaliation from a more powerful competitor.
 Discussion Question 26: Could there be an industry condition or other business

circumstance in which it would be good for a new start-up to enter with a broad or
aggressive strategy rather than a niche strategy? What would it be? (In a growth
industry, a more aggressive strategy is likely to be more effective.)
 Discussion Question 27: What are the advantages and disadvantages of a focus
strategy?
Many of the industries that small firms participate in have thousands of participants
that aren’t direct competitors. For example, they may be separated geographically. These
industries are considered “fragmented.” Therefore, small firms only need to focus on the
market share in their trade area. This may be defined as geographical area or a small
segment of a larger product group.
 Discussion Question 28: What are the advantages of competing in a fragmented

industry? What are the disadvantages?
C. Combination Strategies
One of the best ways for new ventures and small businesses to achieve success is
with combination strategies. By combining the best features of low cost, differentiation,
and/or focus strategies, young and small firms can often achieve something that is truly
distinctive. Entrepreneurial firms are often in a strong position to offer a combination
strategy because they have the flexibility to approach situations uniquely.
 Discussion Question 29: What are the key ways in which a combination strategy
differs from the generic strategies?
III. COMPETITVE DYNAMICS
New entry into markets nearly always threatens existing competitors. 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. Thus, studying
competitive dynamics helps explain why strategies evolve and reveals how, why, and
when to respond to the actions of close competitors.
 Discussion Question 30: In general, do you believe competition is beneficial or

damaging to incumbents in an industry? In what ways is competition beneficial or
damaging?
FIGURE 2 identifies the factors that that competitors need to consider when
determining how to respond to a competitive act.
FIGURE 2. Model of Competitive Dynamics
In the sections below, we will review the elements that contribute to a competitor’s
decision to launch a competitive attack.
A. New Competitive Action
Why do companies launch new competitive actions? There are several reasons:
• Improve market position

• Capitalize on growing demand
• Expand production capacity
• Provide an innovative new solution
• Obtain first mover advantages
When a company enters into a market for the first time, it is like an attack on existing
competitors. Attacks come from many sources besides new entrants. Some of the most
intense competition is among incumbent rivals’ intent on gaining strategic advantages.
Toyota, with the Prius, is discussed as an example.
 Discussion Question 31: What are some examples of new entrant companies you
are familiar with whose entry into a market evoked a competitive response? What
was the response? What was the impact of the response on the new entrant? On
the incumbent?
There are five strategies for improving competitive position and consolidating gains
in preparation for another attack from Hardball: Are You Playing to Play or Playing to Win?
by George Stalk, Jr. and Rob Lachenauer, as follows:
1. Devastating rivals’ profit sanctuaries
2. Plagiarizing with pride
3. Deceiving the competition
4. Unleashing massive & overwhelming force
5. Raising competitors’ costs
B. Threat Analysis
Prior to actually observing a competitive action, effort is needed to become aware

of potential competitive threats. Awareness of the threats posed by industry rivals allows a
firm to understand what type of competitive response, if any, may be necessary.
Two factors are used to assess whether or not companies are close competitors:
1. Market Commonality—whether or not competitors are vying for the same

customers and how many markets they share in common.
2. Resource Similarity—the degree to which rivals draw on the same types of
resources to compete.
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.
In general, the same set of conditions holds true with regard to resource similarity.
That is, 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.
 Discussion Question 32: Think of two close rivals among the companies you are
familiar with—two clothing stores or two auto manufacturers. Do they have a high or
low degree of market commonality? What are the implications of that?
Discussion Question 33: What are the implications of two close rivals having very
similar resources?
C. Motivation and Capability to Respond
Once attacked, competitors are faced with deciding how to respond. Before
deciding, however, they need to evaluate not only the type of response, but also their
reasons for responding and their capability to respond.
There are several factors to consider. First, how serious is the impact of the
competitive attack to which they are responding? Second, 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?
Another consideration when planning a competitive challenge involves assessing

the 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? For example, young or small firms may be
able to respond quickly because they are more nimble than large firms. However, they
may not have the financial resources to follow-through on an attack.
 Discussion Question 34: What are some of the reasons a company might be
motivated to respond to a competitive attack?
Discussion Question 35: What types of assets or resources that a company might
possess gives them a strong capability to respond? What are the implications of
that?
D. 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.
1. Strategic actions represent major commitments of distinctive and specific

resources.
2. Tactical actions include refinements or extensions of strategies.
that responded to a competitive attack? What type of response was used? Was the
action successful? Did the response evoke a counterattack?
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.
Guerilla offensives and selective attack provide an alternative for firms with fewer
resources. Some companies limit their competitive response to defensive actions.
 Discussion Question 37: Think of a young firm that you are familiar with that is trying
to build up its business and grow. What kind of competitors is the company up
against? Considering its rivals, what would be the best type of competitive actions
the company could take? Frontal assault? Guerilla tactics? Offensive actions?
Defensive actions?
The SUPPLEMENT/EXTRA EXAMPLE below addresses tactics that can be used by small
companies to stay ahead of their bigger rivals.
 Extra Example: Aldi’s Price Warrior Tactics
One of the most common and effective tactical actions is to compete on price. It can be
done without a large investment or a major change in strategy. And, in fact, it is one of the
best ways that smaller or more focused firms can compete with larger rivals.
Three tactics are especially effective for companies aiming to compete on price:
1. Focus on just one or a few consumer segments.
2. In that segment, provide at least one benefit that is better than that of larger rivals.
3. Add to the mix highly efficient operations to keep costs down.
That’s how Aldi, the German retailer (which, in the U, also owns Trader Joe’s) has survived
and thrived in highly competitive markets in Europe. Aldi stores tend to be smaller than
comparable discounters—rarely larger than 15,000 square feet. The outlets carry only
about 700 products and 95 percent of them are store brands. The typical big box
supermarket carries in excess of 25,000 different products. One consequence is that Aldi
has a relatively easier supply chain to manage. Because volume sales on its narrow
product line are high, another plus is that it is able to negotiate better price concessions
with suppliers.
It also excels in customer service. Plenty of checkout lines are provided so customers don’t
have to wait in line and its scanning technology is super-fast, which gets people through
the lines even faster. The smaller stores and simpler operations make it easier to start up
new stores and position them in neighborhoods where the real estate costs are lower. Using
these tactics, Aldi has grown to 4,100 stores in Germany and 7,500 worldwide.
Source: Kumar, N. 2006. Strategies to fight low-cost rivals. Harvard Business Review,
December: 104–112.
that have used tactics similar to Aldi’s? How effective have the tactics been?
E. Likelihood of Competitive Reaction
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. It may also lead to a 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:
1. 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.
2. Competitor’s resources—The types of internal resource endowments a
competitor has must be evaluated when assessing its capability to respond.
3. Actor’s Reputation—Whether a company should respond to a competitive
challenge depends on who launched the attack against it. Some
competitive actors have the ability and motivation to mount overwhelming
counterattacks.
 Discussion Question 39: What are some examples of close competitors you are
familiar with? Do they have a high or low degree of market dependence? How will
that affect their likelihood of response?
that refrain from intense competition because of stronger rivals’ competitive
resources and/or reputation?
F. Choosing Not to React: Forbearance and Co-opetition
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. Competition among the big automakers is provided as an example.
Related to forbearance is the concept of “co-opetition.” This is a term that was

coined to suggest that companies often benefit most from a combination of competing
and co-operating. For example, close competitors that differentiate themselves in the eyes
of consumers may work together behind the scenes to achieve industrywide efficiencies.
 Discussion Question 41: Under what circumstances would a strategy of forbearance

be the best course of action? What are some examples of companies you are
familiar with that chose forbearance rather than a competitive response?
that have been successful through collaboration and cooperation rather than
competition?
 Discussion Question 43: What are the advantages and disadvantages of co-
opetition and forbearance? Can you think of examples of companies that have
used these approaches?
IV. 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 capital 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 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 that
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.
Application Questions and Exercises
1. Reflecting on Career Implications
 Opportunity Recognition: What ideas for new business activities are actively
discussed in your environment? Could you apply the four characteristics of an opportunity
to determine whether they are viable opportunities? Can you identify an entrepreneurial
venture you would like to lead?
 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 now and in the future?
 Competitive Dynamics: Think of a rival you have in life. Competitive dynamics can
provide a useful framework for analyzing and winning these rivalries, but the situation
should be made concrete. What specific action a rival took? Then go through the steps in
FIGURE 2 above (threat analysis, motivation & capability to respond, and then consider a
response. For the potential response, consider the likelihood of competitive reaction.
2. Companies succeed by reinventing themselves. Consider Apple, which has recently

transformed itself from a computer firm to a music and communications company.
Related to this, can you come up with similar examples?
3. Explain how the combination of opportunities, resources, and entrepreneurs helps

determine the character and strategic direction of an entrepreneurial firm.
4. Describe the three characteristics of entrepreneurial leadership: vision, dedication and

drive, and commitment to excellence.
5. Think of an entrepreneurial firm that has been successfully launched in the past 10
years. What kind of entry strategy did it use—pioneering, imitative, or adaptive? Since
the firm’s initial entry, how has it used or combined overall low cost, differentiation
and/or focus strategies?
6. Select an entrepreneurial firm you are familiar with in your local community. Research
the company and discuss how it has positioned itself relative to its close competitors.
Does it have a unique strategic advantage? Disadvantage? Explain.
7. Imitation strategies are based on the idea of copying another firm’s idea and using it
for your own purposes. Is this unethical or simply a smart business practice? Discuss the
ethical implications of this practice (if any).

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MODULE IN

Module 8: Entrepreneurial Strategy and Competitive Dynamics

2. The second section addresses entrepreneurial strategies. Three different types

3. The third section addresses competitive dynamics. The entry of competitors

The SUPPLEMENT below discusses the importance of four species of entrepreneurs

 Extra Example: The four species of entrepreneurs

Transformers Some entrepreneurs see established industries as settings open for

I. Recognizing Entrepreneurial Opportunities

FIGURE 1. Opportunity Analysis Framework

Business opportunities come from many sources. For entrepreneurial start-ups,

The SUPPLEMENT/EXTRA EXAMPLE below illustrates how an entrepreneur saw an

 Extra Example: An ATM for Portable Electronics

Source: Duncan, K. 2012. Green machine. Entrepreneur. June 12: 51.

Opportunity discovery may occur unintentionally because the discovery of

The second phase is opportunity evaluation, which involves evaluating an

 Discussion Question 3: Which do you think is more important to launching a

The SUPPLEMENT/EXTRA EXAMPLE below illustrates how a business incubator can

 Extra Example: Developing Business Ideas at the Foundry

A critical element of opportunity recognition is assessing to what extent an

1. Attractive There must be market demand for the product or service.

Resources are an essential element of a successful entrepreneurial launch. For start-

Crowdfunding, the funding of a venture by pooling small investments from a large

 Discussion Question 9: What are the advantages and disadvantages of selling

Bootstrapping, which is the practice of relying on one’s personal resources and

Launching a new venture requires a special kind of leadership. It involves courage,

2. Dedication and Drive

Entrepreneurs sometimes launch businesses without understanding what it will take

II. Entrepreneurial Strategy

To be successful, new ventures must evaluate industry conditions, the competitive

1. Pioneering New Entry

2. Imitative New Entry

Imitators look for opportunities to capitalize on proven market successes. An

3. Adaptive New Entry

Pitfalls of an adaptive strategy include 1) the value proposition may not be

The SUPPLEMENT/EXTRA EXAMPLE below describes how Slice Corporation took a

 Extra Example: Cutting a Path to Success

1. Overall Cost Leadership

Both pioneering and adaptive entry strategies involve some degree of

A differentiation strategy is generally thought to be expensive to enact, however.

 Discussion Question 26: Could there be an industry condition or other business

 Discussion Question 28: What are the advantages of competing in a fragmented

III. COMPETITVE DYNAMICS

 Discussion Question 30: In general, do you believe competition is beneficial or

FIGURE 2. Model of Competitive Dynamics

• Improve market position

Prior to actually observing a competitive action, effort is needed to become aware

1. Market Commonality—whether or not competitors are vying for the same

C. Motivation and Capability to Respond

Another consideration when planning a competitive challenge involves assessing

D. Types of Competitive Actions

Once an organization determines whether it is willing and able to launch a

1. Strategic actions represent major commitments of distinctive and specific

2. Tactical actions include refinements or extensions of strategies.

 Extra Example: Aldi’s Price Warrior Tactics

The final step before initiating a competitive response is to evaluate what a

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

1. Market Dependence—If a company has a high concentration of its business

F. Choosing Not to React: Forbearance and Co-opetition

Related to forbearance is the concept of “co-opetition.” This is a term that was

 Discussion Question 41: Under what circumstances would a strategy of forbearance

New ventures and entrepreneurial firms that capitalize on marketplace opportunities

To successfully launch new ventures or implement new technologies, three factors

In addition to strong opportunities, entrepreneurial firms need resources and