CH-8 Entrepreneurial Strategy and Competitive Dynamics – Strategic Management: Creating Competitive Advantages : Book Guide

Chapter 8 Entrepreneurial Strategy and Competitive Dynamics Summary/Objectives 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 chapter addresses how entrepreneurial firms create new value, achieve competitive advantages, and combat competitive rivalry. The chapter 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. Lecture/Discussion Outline The introductory case is Digg, a 2004 start-up that created a news sharing social network site. Digg allows users to post news stories, and then members would vote on the news stories posted. Those with the most votes rise in prominence on the site. The firm was estimated to be worth $200 million in 1998 and was speculated to be an acquisition target of Google. But the deal never materialized, and its prospects changed quickly. It was purchased by Betaworks for the paltry sum of $500,000 in 2012. Two major problems plagued the startup. First, its strategy was easily imitated and improved upon by other social network sites. Second, Digg was unable to build the systems and competencies needed to meet the traffic it was generating and, thus, raised the ire of its users. The case illustrates that even with a bold and innovative idea, an attractive market, and strong investors, the business is likely to suffer if there are limited barriers to entry and the firm fails to deliver a high quality user experience.  Discussion Question 1. What could Digg have done to better leverage its innovative idea? Response guidelines: Students should understand that new ventures in IT are difficult because they are often easily imitated. The resource-based view of the firm, described in Chapter 3, describes this problem. In general, the technology that Digg invented was not difficult for competitors to copy. So the one big resource that Digg possessed was its brand image along with the loyalty of users to that brand. To that end, Digg made it difficult for users to remain loyal because of its poor execution. In particular, Digg: • Did not build up its hardware capacity to accommodate the growing volume of users • Did not upgrade its technology early enough to avoid having the site go offline • Did not make the site sufficiently user-friendly Answer: Digg could have better leveraged its innovative idea by focusing on user experience and engagement to build a stronger community, and strategically partnering with key industry players to enhance its platform's visibility and scalability.  Discussion Question 2. Can you think of other internet firms that have failed and recovered? If so, what lessons can Betaworks draw from these experiences to help Digg recover? Response guidelines: Students should understand that most every successful Internet firm had a rocky road to success. Amazon.com went for many years before earning a profit. Its successful business model involved new sources of revenue – such as using information about consumers to better serve advertisers – that were not available at the time of the firm’s beginning. Google is constantly entering new markets and developing new business models. Some of these are notable failures. One notable Google failure is its venture into China. Others are noted on the website [http://www.wordstream.com/articles/google-failures-google-flops]. Even Apple did not have success with its Apple Maps project. Given that failures in entrepreneurial IT ventures are common, the lessons for Betaworks may include: • Maintain a consistent effort to understand users and what they want. • Make the needed investments to satisfy users. • Continue to innovate and take chances on new ventures – some will likely be successful. • Work to understand why users value your product instead of competitors’. • While nobody knows exactly how new ventures in IT succeed, it makes sense to focus on the brand equity of Digg. That is a unique resource. Then work to keep loyal users by constantly exceeding their expectations. The possible points listed above, along with other suggestions by students, should lead to a useful discussion. Small business and entrepreneurship play an important role in fueling the U. S. economy. Small businesses create 65% of all new jobs in the U.S., and they also generate innovative, patentable ideas at a much higher rate than larger firms. Answer: Twitter and Netflix are examples of internet firms that failed but recovered by pivoting their strategies and innovating their business models. Betaworks can draw lessons on adapting to market changes and investing in user-centric improvements to help Digg recover. The SUPPLEMENT below discusses the importance of three categories of entrepreneurial ventures identified by small business researcher David Birch – “elephants,” “mice,” and “gazelles.”  Extra Example: David Birch’s Categories of Entrepreneurial Ventures There are many ways to categorize entrepreneurial ventures. For purposes of strategic analysis, it is useful to note three differences among entrepreneurial firms because these distinctions have strategic implications — size, age, and growth goals. Growth goals are often used to distinguish between entrepreneurial firms and small businesses. Small businesses are generally thought to have low or modest growth goals. By contrast, entrepreneurial firms generally favor growth. The three factors — size, age, and growth goals — are captured in a model of entrepreneurial firms that was developed by David Birch, the famed small business researcher — elephants, mice, and gazelles. Elephants As the name suggests, these are large firms. They also tend to be older and are the types of firms that appear in the Fortune 500. They have some disadvantages: they can not change direction quickly and it is sometimes difficult to get them to move forward at all. They also have obvious advantages: they can be hard chargers and move quite forcefully because of their overall power in the marketplace. Mice This term refers to the many small firms that power the U.S. economy. Mice typically do not have as much market power as large firms, but they can change direction quickly in response to changes in business conditions. Gazelles Gazelles are the firms that seek rapid growth and above average profitability. Their value proposition often includes a radical innovation or the implementation of a new technology. However, the majority of gazelles are not in high-tech fields. Gazelles are not necessarily young either — many have growth spurts only after a long period of gradual development. Among small and medium-sized businesses, gazelles often get the most attention because of their strong contribution to job growth. The Small Business Administration (SBA) estimates that gazelles (of which there were about 400,000 in a recent year) create as many new jobs as mice (of which there were about 17 million in the same recent year). Sources: Anonymous. 2002. A report from Advocacy’s 25th anniversary symposium. SBA Office of Advocacy, February 22, www.sba.gov/advo/; Birch, D. 1979. The Job Generation Process. MIT Program on Neighborhood and Regional Change. Cambridge, MA: MIT Press; and Case, J. 2001. The gazelle theory. Inc. Magazine, May 15, www.inc.com.  Discussion Question 3: What are some examples of business that you are familiar with that are elephants, mice, or gazelles? Answer: Elephants include global giants like Amazon and Apple, which have vast resources and market influence. Mice might be small, niche businesses like a local bookstore or artisan bakery, with limited scale but a focused market. Gazelles are rapidly growing firms such as Stripe or Peloton, known for their swift expansion and innovation. Discussion Question 4: What are some of the reasons a small company might prefer to remain a mouse rather than become a gazelle? Answer: A small company might prefer to remain a mouse due to lower risk exposure and greater operational control. Rapid growth can bring increased complexity, financial strain, and diluted company culture, making steady growth a more attractive and manageable path. 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. EXHIBIT 8.1 identifies the three factors that are needed to successfully proceed: opportunity, resources, and entrepreneur(s). 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 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 U.S. 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% 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 5. What are other business opportunities that have come out of the drive to increase environmental sustainability? Answer: 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. STRATEGY SPOTLIGHT 8.1 describes how the background and concerns of an individual led to the creation of a firm focusing on healthy Latin American food. 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 6: Which do you think is more important to launching a promising new venture and building a successful business – opportunity discovery or opportunity evaluation? Answer: Both opportunity discovery and opportunity evaluation are crucial, but opportunity discovery is often more important initially because it involves identifying unmet needs or innovative ideas that can form the foundation of a promising new venture. Without discovering a viable opportunity, evaluation becomes irrelevant. Once an opportunity is identified, opportunity evaluation becomes essential to assess its feasibility, market potential, and competitive landscape, ensuring that the venture can be successfully developed and scaled. The SUPPLEMENT 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 startups in Utah. Bloomberg Businessweek. September 23: np.  Discussion Question 7. What are the potential benefits and risks of relying on peers as these entrepreneurs evaluate their entrepreneurial ideas? Answer: Benefits of relying on peers for evaluating entrepreneurial ideas include receiving diverse perspectives and constructive feedback, which can help refine and improve the idea. Peers can also provide validation and support, increasing confidence and identifying potential pitfalls. Risks include the possibility of groupthink, where peers may reinforce each other’s biases, and lack of objectivity, which can lead to overlooking critical issues. Additionally, peers may have limited expertise or experience in certain aspects, potentially leading to incomplete evaluations. Discussion Question 8. 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? Answer: 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 9: 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? Answer: Examples of new venture start-ups include Beyond Meat, which capitalizes on the growing demand for plant-based alternatives, and Airbnb, which leverages the trend towards sharing economy and unique travel experiences. These ventures often exhibit the four features of opportunity recognition, market demand, competitive advantage, and resource accessibility. If these ventures lack these qualities, they may face difficulty in scaling, achieving market fit, or sustaining competitive differentiation, leading to reduced growth potential or failure. Without these features, new ventures risk poor market reception and inadequate financial returns. STRATEGY SPOTLIGHT 8.2 discusses how Metabolix, a small Massachusetts-based firm, is leading the charge for green plastics. The SUPPLEMENT below references a book by Peter Drucker that outlines different types of opportunities that give rise to new venture creation.  Extra Example: Drucker’s Seven Sources of Innovative Opportunities Management guru Peter Drucker’s classic book Innovation and Entrepreneurship provided a list of sources of potential opportunities that is still regarded as one the best. The book devotes a chapter to each source. These chapters, and the whole book, present numerous valuable insights into the entrepreneurial process. Here is Drucker’s list: “The first four sources lie within the enterprise, whether business or public-service institutions, or within an industry or service sector. They are therefore visible primarily to people within that industry or service sector. They are basically symptoms. But they are highly reliable indicators of changes that have already happened or can be made to happen with little effort. These four source areas are: • The unexpected — the unexpected success, the unexpected failure, the unexpected outside event; • The incongruity — between reality as it actually is and reality as it is assumed to be or as it ‘ought to be;’ • Innovation based on process need; • Changes in industry structure or market structure that catch everyone unawares. The second set of sources for innovative opportunity, a set of three, involves changes outside the enterprise or industry: • Demographics (population changes); • Changes in perception, mood, and meaning; • New knowledge, both scientific and nonscientific.” Source: Drucker, P. 1985. Innovation and Entrepreneurship. New York: HarperBusiness.  Discussion Question 10: What are some examples of companies that have used one or more of the opportunity sources mentioned by Drucker as an impetus for starting the venture? Answer: Apple leveraged the "unexpected occurrences" opportunity source by turning the rise of personal computing and user-friendly interfaces into a revolutionary product with the Macintosh. Tesla capitalized on "incongruities" in the automotive industry by focusing on electric vehicles and sustainable energy. Uber used "process needs" by identifying inefficiencies in traditional taxi services and creating a more flexible, app-based ride-hailing solution. Each company identified and acted on specific opportunities that disrupted existing markets and created significant value. Teaching Tip: It is often useful to have students brainstorm or speculate about new venture opportunities as a way to explore the strategic implications of entrepreneurship. Drucker’s list provides a good framework for doing that. Ask students to think of a venture concept based on one of the seven sources of opportunity. Then, have them evaluate the idea in terms of the types of issues presented in Chapters 2, 3, and 4 of the text. For example, ask what competitive forces might affect a new venture that was based on the idea (Ch. 2), what resources would such a venture need and what value proposition would it set forth (Ch. 3), and what intellectual and human capital would be required to make it work (Ch. 4). 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. STRATEGY SPOTLIGHT 8.3 discusses steps investors can take to evaluate businesses that are raising funds on a crowdfunding site.  Discussion Question 11: 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? Answer: Start-up firms often use a mix of personal savings and funding from family and friends for their initial capital. For instance, Dropbox and Warby Parker initially relied on personal funds and support from friends and family. Some start-ups also use credit cards for short-term funding. As they grow, they may seek additional funding by selling shares of ownership to angel investors or venture capitalists, such as Airbnb, which raised significant early-stage funding from venture capital. The SUPPLEMENT BELOW describes the prominence of video game startups on the crowdfunding site Kickstarter.  Extra Example: The Dominance of Video Games on Kickstarter When Kickstarter launched in 2009, the site was touted as a place for musicians, artists, designers, and entrepreneurs to go to in order to raise funds for their projects. What Kickstarter found was that its users really wanted to bankroll video game developers. As of September 2012, five of the ten largest projects funded through Kickstarter were video game related. For example 63,000 people backed the OUYA open-source game console with a total investment of $8.6 million. Kickstarter members were so enthusiastic about OUYA, that they provided over 900% of the initial funding request by OUYA. Why are video game related businesses so popular on Kickstarter? It relates to both the members of Kickstarter and the desires of video game developers. First, many of Kickstarter’s members are tech-savvy individuals who have the disposable income to spend on games and invest in game developers. They also appreciate the opportunity to get free and reduced-price games that the developers produce. Second, game developers appreciate the ability to generate significant investment from a wide pool of potential users. According to Aubrey Hesselgren, a game developer, as the cost of developing games has escalated, some of the big name game developers, such as Electronic Arts and Activision, have become risk-averse and unwilling to bet large sums on new games. Instead, they largely invest in sequels of already popular games. This has led game developers to turn to crowdfunding sites, such as Kickstarter. Also, raising money from fans, frees up the developers to develop the games as they wish, rather than having a corporate investor dictate elements of the game. Source: Anonymous. 2012. Crowdfunding video games: Money to play with. The Economist. September 8: 64.  Discussion Question 12. What other types of businesses, other than video games, are ripe for crowdfunding as a primary means of financing? Answer: Consumer products like innovative gadgets and eco-friendly items are well-suited for crowdfunding, as they can generate significant interest and pre-orders from potential buyers. Creative projects, such as films, music albums, or artistic endeavors, also benefit from crowdfunding, allowing creators to gauge interest and secure funding upfront. Additionally, social enterprises and community-based initiatives can leverage crowdfunding to engage supporters and fund projects that align with their mission and values. Discussion Question 13. What are the advantages of using a crowdsourcing approach for raising money for new businesses? Are there any downsides to raising funds this way? Answer: 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 14: What are the advantages and disadvantages of selling shares of ownership to venture capitalists? Answer: Selling shares to venture capitalists offers advantages like access to substantial funding, valuable industry expertise, and networking opportunities. However, it also involves disadvantages such as significant equity dilution, loss of some control, and high expectations for rapid growth and returns. Discussion Question 15: 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? Answer: Selling shares to family, friends, or strategic partners provides advantages like easier access to funding, potentially lower pressure, and alignment with personal or strategic interests. However, disadvantages include potential strain on personal relationships, limited funding compared to venture capital, and the risk of misaligned expectations or limited business expertise. EXHIBIT 8.2 shows how the different sources of funds used to finance startup and ongoing entrepreneurial firms. Teaching Tip: There are wide differences in funding amounts between informal investments and venture capital investments as discussed in the text. Ask students what the strategic implications of these differences might be. For example, are firms that rely only on informal investments less important to the economy than firms that garner large venture investments? The obvious answer might seem to be “yes” but perhaps there are other issues to consider such as the importance of small businesses to the U.S. economy. In contrast, it could be argued that investments by families and friends reduce U.S. individual savings rates. Also, the high failure rate of firms that receive venture capital is potentially detrimental to the U.S. economy in terms of overall wealth creation. 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. The SUPPLEMENT below describes how some start-up entrepreneurs have resorted to an unusual form of bootstrapping—bunking together to cut monthly expenses.  Extra Example: Bootstrapping Bunkmates What’s the latest cost-slashing trend for the geekerati? Bunking together to get their start ups off the ground. According to adherents, “going lightweight” cuts monthly expenses by up to two-thirds. “We looked at the economy and said, ‘This is the right thing for us to do,’” says Adam Bouhenguel, who lives in a “super-geeked-out” Boston apartment with Josh Wilson, his co-founder at Tsumobi.com, a maker of social network software for mobile devices. Then there’s Marcus Nelson, who co-founded UserVoice.com, an online suggestion box. In 2008, Nelson, his wife, Emily, and their two children moved from Wasau, Wisconsin to a Santa Cruz, California beach bungalow with partner Richard White. “We sleep with our laptops,” says Nelson, who estimates the monthly expenses come to $15,000, a third of what they might be with separate living and office spaces. Are venture capitalists taking note of such frugalities? Longtime Silicon Valley angel investor Ron Conway says he is: “I love to invest in scrappy entrepreneurs.” Source: Conlin, M. 2009. Startups in the house. BusinessWeek, April 27: 11.  Discussion Question 16: 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? Answer: Closely controlling spending can negatively affect start-up success when it leads to underinvestment in critical areas like product development, marketing, or talent acquisition. Bootstrapping too far may result in missed growth opportunities and hinder the firm's ability to scale effectively. While cost control is important, excessive frugality can impair competitive positioning and innovation, ultimately limiting the start-up's potential to capture market share and achieve long-term success. 2. Human Capital Bankers, venture capitalists, and angel investors that invest in start-up firms and small businesses agree 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. The SUPPLEMENT below describes how crowdsourcing is extending the social capital of entrepreneurs by enabling them to make new contacts in the graphic design business.  Extra Example: Using Crowdsourcing to Tap into Social Capital Chicagoans Ross Kimbarovsky, 38, and Michael Sampson, 49, are using crowdsourcing to bring the spirit of friendly competition to the graphic design business—and help thousands of struggling entrepreneurs in the process. Their company, CrowdSpring.com, allows buyers to run competitions for company logos, Web sites, T-shirts and the like. For buyers of designs, that means more choice at a fraction of the cost; for aspiring designers, it means a shot at stealing workers from entrenched design firms. “The beauty of our site is that it doesn’t matter if you have a degree from the Rhode Island School of Design or if you’re a grandma in Tennessee with a bunch of free time and Adobe Illustrator,” says Samson. “If the client likes the grandma’s work better, then she’s going to get the job.” In other words, through a form of social networking, CrowdSpring.com is vastly increasing the contacts that both designers and buyers of designs can draw from. An established design firm like Razorfish or Critical Mass might demand a $5,000 retainer to take on a project; CrowdSpring lets customers load rough specs into the site and pledge as little as $200 to the winner (higher purses, however, lure more artists). Designers compete by posting their work, gratis, for all to see, and buyers can offer instant feedback. CrowdSpring’s cut: 15 percent of the pledged amount, meaning that on a $500 project, $500 goes to the winning designer and $75 to CrowdSpring. If at least 25 designs come in, buyers are obligated to buy one, even if they don’t like any of them; if fewer than 25 come in, buyers can get their money back. On the supply side, freelance designers – some 80,000 in the U.S – need lots of help. Sarah Urbanek couldn’t find a drop of work until she went on CrowdSpring, where the 28-year old Titusville Florida designer has since snared 37 projects. “It’s been a total savior to me,” she says. Despite competition from the established design community and sites such as Elance.com and Guru.com, CrowdSpring is thriving. Over 25,000 projects have been completed through crowdspring. “We have clients chasing good designers rather than desperate designers chasing work,” says Kimbarovsky. They now bill themselves as “the world’s #1 marketplace for logos and graphic design.” Source: Steiner, C. 2009. The creativity of crowds. Forbes, February 16: 62-66, www.crowdspring.com.  Discussion Question 17: What other ways might social networking practices enhance the social capital of start-up entrepreneurs? Answer: Social networking practices can enhance the social capital of start-up entrepreneurs by expanding their professional connections, providing access to advisors, mentors, and industry experts who can offer valuable guidance and support. They facilitate collaborative opportunities and partnerships with other businesses or influencers. Additionally, active social networking can help build credibility and visibility, attracting potential customers, investors, and talent to the start-up. 4. Government Resources The U.S. 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. Teaching Tip: Examples of how young firm start-ups were aided and/or encouraged by mentors, experienced businesspeople, and local or federal government support programs are typically very interesting to students. Although we provide a few examples, it is always useful to ask students what examples they can come up with — both from their studies as well as from personal experience. It also provides an opportunity to get some of their perspectives on the role of public agency assistance versus private contacts and personal relationships as a way to foster entrepreneurial development. 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 18: Can entrepreneurs learn to develop vision or do they have to be “born with it?” Answer: Entrepreneurs can learn to develop vision through experience, education, and exposure to diverse perspectives. While some individuals may have a natural inclination toward visionary thinking, skills such as strategic planning, market analysis, and creative problem-solving can be cultivated. Mentorship and continuous learning also play a crucial role in honing a visionary mindset. Thus, while inherent traits can help, vision can indeed be developed and refined over time. 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 19: What are some examples of entrepreneurs that have strong dedication and drive? Answer: Examples of entrepreneurs with strong dedication and drive include Elon Musk, who has relentlessly pursued ventures like Tesla and SpaceX despite numerous setbacks, and Sara Blakely, who founded Spanx with unwavering commitment despite early rejections. Discussion Question 20: Why do some people believe that drive and dedication are negative qualities? Under what circumstances are these qualities negative? What are the consequences? Answer: Some believe drive and dedication can be negative when they lead to workaholism, neglect of personal relationships, or unhealthy stress levels. When overemphasized, these qualities can result in burnout, impaired decision-making, and a lack of work-life balance, ultimately affecting both personal well-being and business effectiveness. 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 21: What are some examples of entrepreneurial firms that have demonstrated a strong commitment to excellence? Answer: Examples of entrepreneurial firms demonstrating a strong commitment to excellence include Apple, known for its focus on innovative product design and quality, and Netflix, which has consistently invested in high-quality content and user experience. Discussion Question 22: What are the potential consequences for start-up firms that do not strive for excellence? Answer: Start-up firms that do not strive for excellence may face subpar product quality, customer dissatisfaction, and increased competition from superior offerings. This lack of focus can lead to poor market differentiation, loss of credibility, and higher failure rates, ultimately undermining their chances of long-term success and growth. 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. STRATEGY SPOTLIGHT 8.4 discusses Pandora, an entrepreneurial venture with a pioneering solution to the delivery of music. 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 23: 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? Answer: Tesla pioneered electric vehicles with high-performance specs and long-range capabilities, radically changing the automotive industry by pushing electric cars into the mainstream. Uber revolutionized personal transportation with its ride-hailing app, creating a new business model and altering the taxi industry. Airbnb transformed short-term lodging by enabling peer-to-peer rental services, effectively creating a new segment in the hospitality industry. Each of these companies introduced innovative concepts that significantly disrupted traditional industries. 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. Fixx Services, Inc. is presented as an example. 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.  Discussion Question 24: What are some examples of companies you are familiar with that use an imitation strategy? Answer: Samsung is known for its imitation strategy by closely following and adapting innovations from competitors like Apple, often improving on them and offering similar features at competitive prices. Xiaomi employs a similar approach in the smartphone market, replicating successful features of high-end devices while keeping costs low. H&M and Zara frequently use imitation strategies in fashion by quickly replicating high-fashion trends and making them accessible to a broader market. These companies leverage imitation to stay competitive by offering familiar innovations and trends at lower costs. 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. EXHIBIT 8.3 provides examples of four young firms that pursued adaptive strategies – under Armour, Mint.com, Plum Organics, and Spanx. 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 25: What are some examples of new ventures that have been launched using a business concept that is an adaptation of an existing business? Answer: Warby Parker adapted the traditional eyewear retail model by offering stylish, affordable glasses online with a home try-on program, disrupting the optical industry. Blue Apron modified the meal kit delivery concept by focusing on convenient, pre-portioned ingredients for home cooking, building on existing food delivery trends. WeWork adapted the co-working space model by creating a flexible, community-driven workspace environment, transforming traditional office leasing. These ventures took existing business ideas and tailored them to address modern consumer needs and preferences. The SUPPLEMENT 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 26: 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? Answer: Kitchen appliances like blenders or food processors could benefit from Slice’s mindset, incorporating safety-focused, innovative design elements to enhance user experience. Personal care products, such as razors or electric toothbrushes, also have established designs but could be improved with user-centric innovations that address comfort, efficiency, and safety. Discussion Question 27: What are some examples of companies you are familiar with that use an adaptive entry strategy? Answer: 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. Netflix used an adaptive entry strategy by shifting from DVD rentals to streaming services, evolving with consumer preferences. Amazon adapted its strategy by expanding from an online bookstore to a comprehensive e-commerce platform and then into cloud computing with AWS. Starbucks adjusted its entry strategy by tailoring store formats and menu offerings to local markets globally, enhancing its international expansion success. 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 Low Cost 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 28: 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? Answer: Young firms often benefit from greater flexibility and lower overhead costs, allowing them to operate with minimal infrastructure and adapt quickly to cost-saving opportunities. Their smaller size often leads to leaner operations and less bureaucracy. However, trying to maintain overall lower costs can have disadvantages, such as limiting investment in growth, innovation, and quality improvements. This focus on cost minimization may also lead to compromised employee satisfaction and customer service, potentially affecting long-term sustainability and competitiveness. STRATEGY SPOTLIGHT 8.5 discusses the overall low cost leadership strategy of Vizio, Inc., a new entrant in the flat-panel TV business. 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 as 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. Amazon.com and the WD-40 Company are mentioned as examples.  Discussion Question 29: What are some examples of new ventures that have used a differentiation strategy in order to succeed? Answer: Tesla used a differentiation strategy by offering high-performance electric vehicles with cutting-edge technology and unique design. Apple differentiates itself with its premium, user-friendly products and a cohesive ecosystem. Beyond Meat distinguishes itself with innovative plant-based meat alternatives that appeal to health-conscious and environmentally aware consumers. Discussion Question 30: 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. Answer: A differentiation strategy often works better for new ventures as it helps them stand out in a crowded market by offering unique value or innovation. New ventures can leverage distinctive features, technology, or branding to capture niche markets and build a loyal customer base. Cost leadership may be challenging due to the need for economies of scale, which established firms typically achieve more easily, making it less feasible for startups to compete effectively on price alone. 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 31: 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.) Answer: A new start-up might benefit from a broad or aggressive strategy in a fast-growing industry with high market potential and low competition. For instance, emerging technology sectors like artificial intelligence or renewable energy offer expansive growth opportunities where capturing significant market share early can establish a strong competitive position. An aggressive strategy in such a dynamic environment allows the start-up to quickly scale operations, secure major partnerships, and build brand recognition before competitors can catch up. The SUPPLEMENT below presents the example of Imprivata, an entrepreneurial firm that found that its business flourished when it focused on a particular set of customers.  Extra Example: Finding Success by Taking a Narrower Focus Imprivata, a Massachusetts-based firm, produces technology solutions to allow users to log in and out of multiple-user computers with the swipe of a card or a fingerprint rather than through the use of usernames and passwords. They provided their systems to banks, financial institutions, and healthcare providers. The firm was finding success in the market and saw sales grow 8% from 2008 to 2009. But the firm’s CEO, Omar Hussain, thought the firm could do even better. His solution was to drop 60% of its customers. He decided to stop designing and selling systems to banks and other financial service firms and focus the firm’s business on the healthcare sector. By making this shift, Imprivata could stop trying to design general systems for multiple market sectors, and instead, focus on developing systems that met the specific security and productivity needs of doctors, nurses, and other healthcare providers. They also emphasized the design to streamline the process of providing healthcare. Imprivata has seen its focus lead to market success. Its healthcare business grew 40% in 2012 and now has sales over $50 million. Its technology is now used in over 1,100 hospitals in the United States. Sources: Schiller, K. 2013. A narrower focus: A tech company sees gains by turning its attention away from 60 percent of its clients. Entrepreneur. June: 46.  Discussion Question 32: What are the advantages and disadvantages of a focus strategy? Answer: Advantages of a focus strategy include the ability to serve a specific market segment more effectively by tailoring products or services to their unique needs, leading to strong customer loyalty and higher profit margins. It also allows firms to specialize and become experts in their niche, which can create a competitive advantage. Disadvantages include limited market size and potential vulnerability to changes within the niche. Focused firms might also struggle to adapt if the segment shrinks or becomes less profitable, and may face higher risks if competitors enter the niche with broader strategies. Discussion Question 33: Is Imprivata limiting it opportunities by focusing on one market segment? Should they look to expand outside of the healthcare market? Answer: Emphasize that 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 34: What are the advantages of competing in a fragmented industry? What are the disadvantages? Answer: Advantages of competing in a fragmented industry include the opportunity to capture market share by consolidating smaller players, leveraging niche expertise, and offering specialized products or services that cater to specific customer needs. Fragmented industries often present growth opportunities for firms that can innovate or differentiate themselves. Disadvantages include intense competition from numerous small players, which can lead to price wars and lower profit margins. Additionally, scaling operations may be challenging, and achieving economies of scale might be difficult due to the diverse nature of the market. 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. STRATEGY SPOTLIGHT 8.6 highlights the combination strategy of Warby Parker a firm specializing in online retail of eyeglasses.  Discussion Question 35: What are the key ways in which a combination strategy differs from the generic strategies? Answer: A combination strategy integrates elements of both differentiation and cost leadership, aiming to offer unique value while also maintaining competitive costs. Unlike generic strategies, which typically focus on either cost leadership or differentiation, a combination strategy seeks to blend these approaches to cater to a broader market. This strategy involves balancing innovation and cost efficiency, which can be complex but allows firms to appeal to multiple customer segments simultaneously, potentially gaining market share and competitive advantage in diverse ways. 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 understand why strategies evolve and reveals how, why, and when to respond to the actions of close competitors.  Discussion Question 36: In general, do you believe competition is beneficial or damaging to incumbents in an industry? In what ways is competition beneficial or damaging? Answer: Competition is generally beneficial to incumbents as it drives innovation, improves efficiency, and leads to better products or services for consumers. It encourages firms to adapt and evolve, which can strengthen their market position over time. However, competition can also be damaging by increasing pressure on profit margins, leading to price wars and potentially reducing profitability. Incumbents may also face higher costs for marketing and maintaining market share, which can strain resources and impact long-term stability. EXHIBIT 8.4 identifies the factors that that competitors need to consider when determining how to respond to a competitive act. 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 37: 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? Answer: Uber's entry into the taxi market prompted incumbent taxi services to adopt app-based booking systems and adjust their pricing models to compete. Netflix's move into streaming led traditional media companies to invest heavily in their own streaming platforms and exclusive content. These competitive responses often increased operational costs for new entrants but also accelerated innovation and market penetration. For incumbents, it meant adapting quickly to avoid losing market share, sometimes leading to improved services and heightened competition. The SUPPLEMENT below provides the example of Judicata to suggest that new entrants often introduce a new dynamic into a marketplace for which incumbents often have difficulty responding to immediately.  Extra Example: Judicata aims to “Map the Legal Genome” Attorneys and their staff who are researching prior court cases and related case law documents typically turn to Lexis-Nexis and Westlaw, the dominant legal research databases. These systems have been around to decades and require users to enter search terms and then painstakingly read through the volumes of references that the search spits out. This tends to be a very labor intensive and costly process. Judicata aims to move into this space by providing a more user friendly and less time intensive process. Judicata’s system relies on natural language search technologies, text analytics, and advanced search tools to create systems that allow users to bore down quickly to the most relevant case law on a particular topic. Rather than providing the users with a list of possibly relevant cites, Judicata provides structured output with key findings from the legal literature. For example, Judicata quickly allows users to systematically differentiate the findings on cases for which the plaintiff was a male compared to when a plaintiff was a female. The entrenched incumbents are finding it difficult to respond to Judicata since their systems are based on decades of programming that they have developed. It is too costly to scrap that code and build up a more advanced system. Additionally, though their systems are not terribly user friendly, users have grown accustomed to the structure of the user interface and would resist any major changes to a new interface. Source: Primack, D. 2013. A startup tries to hack the law. Cnnmoney.com. May 29: np; Halliburton, A. Judicata raises $5.8M second round to build out advanced legal research systems. Techcrunch.com. May 28: np.  Discussion Question 38: Do you think Judicata will be able to change the legal research business. How should Lexis-Nexis and Westlaw respond to this entry? Answer: Judicata has the potential to disrupt the legal research business by leveraging advanced technologies like artificial intelligence to deliver more precise and efficient legal insights. If successful, it could offer significant improvements in search accuracy and user experience, potentially challenging the dominance of established players. Lexis-Nexis and Westlaw should respond by enhancing their technology to incorporate AI and machine learning for more advanced research capabilities. They should also focus on improving user experience, reducing costs, and innovating their service offerings to retain their customer base. Additionally, strategic partnerships or acquisitions could help them integrate new technologies and maintain competitive advantage. EXHIBIT 8.5 outlines 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. 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 39: Think of two close rivals among the companies you are familiar—two clothing stores or two auto manufacturers. Do they have a high or low degree of market commonality? What are the implications of that? Answer: Nike and Adidas are close rivals in the athletic wear market, exhibiting a high degree of market commonality as both target similar customer segments and compete in the same global markets. This high market commonality leads to intense competition, driving both companies to continually innovate and differentiate their offerings to capture market share and respond swiftly to each other's strategic moves. Discussion Question 40: Think of two close rivals among the companies you are familiar—two clothing stores or two auto manufacturers. Do they have a high or low degree of resource similarity? What are the implications of that? Answer: Nike and Adidas also have a high degree of resource similarity, as both possess extensive brand portfolios, strong distribution networks, and substantial R&D capabilities. This similarity means they compete not only on product features and marketing but also on leveraging similar resources, intensifying the competitive rivalry and necessitating continuous improvements in their resource deployment and strategic initiatives. 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? STRATEGY SPOTLIGHT 8.7 describes the increasingly intense rivalry between Amazon and Apple. 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 41: What are some of the reasons a company might be motivated to respond to a competitive attack? Answer: A company might be motivated to respond to a competitive attack to protect market share, maintain customer loyalty, and defend profitability. Addressing an attack can also prevent competitors from gaining strategic advantages, such as increased market presence or better brand recognition, and to reassert its market position by demonstrating resilience and capability. Discussion Question 42: What types of assets or resources that a company might possess gives them a strong capability to respond? What are the implications of that? Answer: Financial resources, strong brand equity, and advanced technology give a company a strong capability to respond effectively. These assets allow a company to invest in counter-strategies, enhance product offerings, or adjust pricing. The implication is that possessing such resources enables a company to quickly adapt and maintain competitive advantage, potentially mitigating the impact of the attack and reinforcing its market position. 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.  Discussion Question 43: What are some examples of companies you are familiar with that responded to a competitive attack. What type of response was used? Was the action successful? Did the response evoke a counterattack? Answer: Apple responded to Samsung's competitive attack in the smartphone market by launching innovative features like Face ID and new models. This response was successful in reinforcing Apple’s market position and driving sales growth. Samsung then counterattacked by introducing competitive features and aggressive pricing strategies, leading to an ongoing cycle of innovation and competitive responses. Similarly, Coca-Cola responded to Pepsi's aggressive marketing campaigns with its own ad campaigns and product innovations, which helped maintain its market share despite Pepsi’s challenges. EXHIBIT 8.6 provides several examples of strategic and tactical competitive actions. 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 44: 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? Answer: Peloton, a young firm in the fitness industry, faces competition from established companies like NordicTrack and ProForm. Given the strong presence of these rivals, a guerilla tactics approach could be effective for Peloton, using targeted promotions, unique partnerships, and niche marketing to carve out a distinct market segment. Engaging in offensive actions such as innovative product features and superior user experiences could also help differentiate Peloton and capture market share. A frontal assault might be less effective due to the entrenched position of larger competitors, while defensive actions would be more relevant if Peloton were responding to direct competitive threats. The SUPPLEMENT 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 better than larger rivals do. 3. Add to the mix highly efficient operations to keep costs down. That’s how Aldi, the German retailer (which, in the U.S., 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.  Discussion Question 45: What are some examples of companies you are familiar with that have used tactics similar to Aldi’s? How effective have the tactics been? Answer: Trader Joe’s and Costco use tactics similar to Aldi’s by focusing on cost leadership and limited selection to drive down prices. Trader Joe’s achieves this with private-label products and a streamlined supply chain, which has been highly effective in building a loyal customer base and maintaining competitive pricing. Costco employs bulk buying and membership models to offer low prices, which has proven effective in attracting price-sensitive shoppers and achieving strong sales growth. Both companies’ tactics have resulted in significant market share and brand loyalty, similar to Aldi’s success. 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 46: 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? Answer: Nike and Adidas are close competitors in the athletic wear market, with a high degree of market dependence on each other. This interdependence makes them highly likely to respond to each other’s moves, such as pricing changes or new product launches, to protect market share and brand positioning. The high market dependence means that any significant action by one is likely to provoke a response from the other, ensuring a dynamic competitive environment. Discussion Question 47: What are some examples of companies you are familiar with that refrain from intense competition because of stronger rivals competitive resources and/or reputation? Answer: New Balance often refrains from intense competition with giants like Nike and Adidas due to their strong competitive resources and global reputation. Instead, New Balance focuses on niche markets and differentiation, such as domestic manufacturing and unique designs, to avoid direct confrontation with larger rivals. This strategic positioning allows them to leverage their strengths while mitigating the risks of competing head-to-head with more dominant players. 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 industry-wide efficiencies.  Discussion Question 48: 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? Answer: A strategy of forbearance is best when a company faces a significantly stronger competitor or when engaging in direct competition could be detrimental to both parties. Forbearance is often used to avoid costly price wars or reputational damage. Apple, for instance, chose forbearance regarding Google’s Android operating system early on, focusing instead on its own ecosystem. Similarly, Samsung sometimes opts for forbearance in its competitive tactics against Apple, avoiding direct confrontations that could escalate. Discussion Question 49: Under what circumstances would a strategy of co-opetition be the best course of action? What are some examples of companies you are familiar with that have been successful through collaboration and cooperation rather than competition? Answer: Co-opetition is ideal when companies can benefit from mutual collaboration while still competing in other areas, particularly in markets where joint efforts can lead to innovation or shared growth. Microsoft and IBM collaborated on the development of software and hardware solutions while remaining competitors in the broader tech market. Starbucks and PepsiCo partnered to distribute ready-to-drink coffee beverages, benefiting from each other’s distribution networks while continuing to compete in their core markets. STRATEGY SPOTLIGHT 8.8 discusses how the action of co-opetition between rivals can cross over into illegal collusion, as seen in the European soap business. The SUPPLEMENT below provides examples of companies that decided to “co-opetate” rather than respond to situations competitively.  Extra Example: Choosing Forbearance and Co-opetition Over Cut-Throat Competition Forbearance and co-opetition have benefited many companies whose first reaction was to compete. Consider the following examples: Forbearance Lee Labrada, founder of a line of low-carb food products name CarbWatchers was surprised one day when he was surfing the Internet and found a company using the very same name for a low-carb weight loss center in New York City. Because he trademarked the name, Labrada figured he could solve the problem by sending a cease and desist letter. But then he had a better idea. When the owner of the New York company called to resolve the problem, he suggested she carry his products in her store. Both would profit from the partnership as well as build their brand awareness. “We came to a meeting of the minds,” says Labrada, one that helped his company grow to $20 million in yearly sales. Co-opetition MicroUnity, Inc., a designer of microprocessors for communications, accepts the fact that it is small. As a result, the private software company has found it far more beneficial to cooperate and collaborate with competitors—especially large ones—than to compete. In fact, MicroUnity CEO John Moussouris has developed what he calls his “big tent” theory and claims, “If you have a new technology that can make money for a lot of related companies, then you can get other companies to help fund the deployment.” When MicroUnity recently worked on a technology to improve computers’ high-speed communications, it involved chip vendors, network operators, content providers and others. All of these companies stood to profit from MicroUnity’s innovation. “The ideal situation for a small company,” said Moussouris, “is to have the booth near the entrance of the big tent but to allow lots of other folks to come in.” Clearly, these companies have found alternatives to cut-throat competition. Would a competitive approach have worked better? It’s impossible to say. But the paths they did choose have greatly benefited their respective companies. Sources: Torres, N. L. 2005. Love thine enemy. Entrepreneur, March: 102; Buchanan, L. 2003. The Innovation Factor: A Field Guide to Innovation. Forbes, www.forbes.com, April 21; and, Hansen, S. 2001. You had your chance!” Inc. Magazine, www.inc.com, November.  Discussion Question 50: What are the advantages and disadvantages of co-opetition and forbearance? Can you think of examples of companies that have used these approaches? Answer: Co-opetition allows firms to leverage each other’s strengths for mutual benefit, fostering innovation and shared resources, as seen in Microsoft and IBM's collaboration on software. However, it risks creating dependencies and blurred competitive boundaries. Forbearance helps avoid costly conflicts and maintains market stability, as Apple did with Google's Android. Yet, it might lead to missed opportunities or perceived weakness. Both strategies require careful management to balance competitive and cooperative dynamics effectively. I IV. Issue for Debate When we discuss opportunity evaluation in the text, we identify four key issues to be evaluated opportunity attractiveness, achievability, value creation potential, and durability. While all four are a challenge to fully evaluate, opportunity durability may be the most difficult to assess. Durability may be low because of volatility in market demand (the opportunity may be a short-lived fad) or due to easy competitive imitation. In the case of Scottsdale Quarter, the issue is primarily about whether demand for the destination stores will last.  Discussion Question 51: Will customers find shopping at a mall like Scottsdale Quarter valuable over the long run or will the novelty of these types of shops wear off? Answer: Typical stores in malls generate repeat traffic because the need for the products the stores sell are recurring. Shoppers look to clothes and shoe stores to update their wardrobe on a regular basis. They also visit these and other stores in the mall to purchase gifts for recurring events, such as Christmas, birthdays, and anniversaries. In contrast, the destination stores in Scottsdale Quarter may not generate the same type of repeat traffic. Some students might take the pessimistic view, noting that there could be fatigue after visiting the businesses in this mall. For example, after visiting Making Meaning a few times, customers may grow tired of trying out new types of craft activities. Similarly, after attending a number of hair styling parties at Drybar, the novelty of the experience will likely wear off. Others may see the situation more positively. The mall has seen early success in keeping traffic coming in. These students may also identify local businesses in their towns, such as pottery painting stores, that have been open for a while. They may also argue that there has been a lifestyle shift recently where shopping has either gone online or lost its luster as a leisure activity. They may see these event-oriented stores as better reflecting a longer term trend in changes in shopping behavior. The instructor may wish to move the discussion more in the direction of actions this mall could take to keep traffic up. One option is by looking to regularly rotate in and out some of the event stores to keep the offerings fresh. Another option is to focus on drawing in customer segments that will generate new potential customers regularly. For example, they could focus on young shoppers, such as teens, that turn over regularly. They could also focus on tourists and seasonal visitors since the Phoenix/Scottsdale area is a tourist heavy area as well as a region that attracts winter-only residents. The long-term value of shopping at a mall like Scottsdale Quarter will depend on its ability to continuously offer unique experiences, quality products, and community engagement. If it fails to innovate and adapt, the novelty could wear off, leading to decreased customer interest.  Discussion Question 52: What is likely to happen in future tough economic times? Will stores like these weather future recessions better than typical mall stores? Answer: Some students may argue that this type of mall is vulnerable to economic downturns since the types of stores and activities offered are discretionary luxuries that customers may avoid during a recession. Others may argue that their business will be resilient for at least two possible reasons. First, the wealthy are typically the least affected during a downturn. Therefore, this mall may not feel much pain during a recession. Second, while recessions trigger individuals to cut back on major discretionary purchases; such as new houses, cars, and cruises; consumers often hold on to affordable luxuries; such as gourmet chocolates, a spa treatment, movie night, and outings with friends. During tough economic times, stores like those in Scottsdale Quarter may struggle if their higher-end or niche appeal doesn't align with reduced consumer spending. Their ability to weather recessions will depend on their value proposition, flexibility, and customer loyalty compared to typical mall stores.  Discussion Question 53: Can mall operators translate the experience of Scottsdale Quarter from a fairly upscale market to malls in less well-off areas? Answer: The initial discussion will likely focus on whether the mall, as it is described, will work in a more modest income area. Some may argue that consumer attitudes and preferences run across socio-economic categories and that there is strong potential for this type of concept in more modest income areas. Others may argue that this concept is a focused differentiation type of mall that will only work well in high income areas. The instructor may want to push this discussion in a slightly different direction. In answering the question above, students may get stuck discussing undertaking an imitative entry of the concept in a different market segment. A more challenging (and potentially interesting) way of framing this question is to push for the students to identify a type of adaptive entry that would work in a more modest income area. How would you adjust this concept to fit with the demand conditions in different types of markets? Mall operators can adapt elements of Scottsdale Quarter's upscale experience to less affluent areas by focusing on affordable luxury, community engagement, and unique shopping experiences that resonate with local consumers while remaining cost-effective.  V. Reflecting on Career Implications Below, we provide some suggestions on how you can lead the discussion on the career implications for the material in Chapter 8.  Opportunity Recognition: What ideas for new business activities are actively discussed in your work environment? Could you apply the four characteristics of an opportunity to determine whether they are viable opportunities? If no one in your organization is excited about or even considering new opportunities, you may want to ask yourself if you want to continue with your current firm. Students should be aware that firms succeed by reinventing themselves. Consider Apple, which has recently transformed itself from a computer firm to a music and communications company. IBM used to specialize in mainframe computers, but now does very little in that business. Students may be able to come up with similar examples from their work or their experience. Therefore, firms should have a capability for generating and evaluating new opportunities. It would be useful to practice this process using an example from a student’s employing organization. For this example, ask students to apply the four qualities for viability: attractive, achievable, durable, and value creating. In discussion, develop a balanced assessment for each quality. As for the prospects of a firm that does not look for new opportunities, opinions may vary. But it is worthwhile to at least have students vote or debate as to whether such a firm merits students’ employment. The exercise will force students to consider the value of entrepreneurship to their firm’s success, and whether such entrepreneurship is something they want to get involved with.  Entrepreneurial New Entry: Are there opportunities to launch new products or services that might add value to the organization? What are the best ways for you to bring these opportunities to the attention of key managers? Or might this provide an opportunity for you to launch your own entrepreneurial venture? The specifics of successfully bringing up new opportunities to key managers will vary for each student and each organization. There are no right answers. However, it is very important to have students consider the prospect. Ask students who within the firm they should approach. Should they write a proposal first or discuss the issue informally? What factors, such as cannibalism of existing products, affect on current operations, or risk tolerance, may reduce the likely success of the opportunity? Role play would be appropriate if you have the time. Also, ask students to identify an entrepreneurial venture they would like to lead. Perhaps only a couple of students would be willing to admit to considering any venture, but it would be useful to name these and talk through the opportunity. Such thinking about pursuing ventures is an important first step to entrepreneurship. The value of this discussion is to expand students’ thinking about such opportunities.  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 within your firm? The goal of this discussion is to pursue the details involved in entrepreneurship. Resources are an important consideration, but the amount and type needed will vary for each venture. So, it is important to anchor the discussion by first identifying a specific venture. Consider first the skills and capabilities of the team that make it unique, and consider how the venture will lead to a durable competitive advantage. Will the venture need specific human capital, relationships with suppliers, attractive location (such as a restaurant), special equipment, or a trademark (to promote brand loyalty)? Make a list. Then match this list against the resources that the student(s) currently have access to. How will the needed assets be obtained? The goal here is to be creative. Can special equipment be borrowed, rented, shared, or bought at an estate sale? Let students come up with difficulties and objections, and if the discussion goes well, these objections can at least be addressed. There may be a seed of optimism planted in some students. And extension is to look at the entrepreneurial resource acquisition process within the context of a “normal” job. Students may appreciate that in many situations, such as preparing a proposal for a deadline, it may be necessary to improvise. If the projector fails at a presentation, students may need to make paper copies of the slides. If the copier runs out of color ink, then you need a “plan B”. Students should be able to identify such situations they have faced, and may appreciate the value of entrepreneurial resource acquisition.  Competitive Dynamics: There is always internal competition within organizations: among business units and sometimes even individuals within the same unit. What types of strategic and tactical actions are employed in these internal rivalries? What steps have you taken to strengthen your own position given the “competitive dynamics” within your organization? Students should be asked to identify a rivalry they have at work (or in any aspect of life). Competitive dynamics can provide a useful framework for analyzing and winning these rivalries, but the situation should be made concrete. It may be useful to ask a student about a specific action a rival took. Then go through the steps in Exhibit 8.4 – threat analysis, motivation & capability to respond, and then consider a response. For the potential response, consider the likelihood of competitive reaction. Students may see that the framework applies to even these situations, and the exercise will help them to understand how competitive dynamics works.  VI. 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 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 which 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. End of Chapter Teaching Notes Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Summary Review Questions 1. Explain how the combination of opportunities, resources, and entrepreneurs helps determine the character and strategic direction of an entrepreneurial firm. Response: The character and strategic direction of an entrepreneurial firm refers to the new products and markets it enters, as well as the type of alliances formed, types of financing pursued, and other aspects of strategy. Opportunities determine what types of new investments that are likely to succeed. Resources determine the ability of the entrepreneur to pursue the opportunity. And entrepreneurs themselves determine the willingness (or risk tolerance) and ability to allocate the resources to pursue the opportunity. Answer: The combination of opportunities, resources, and entrepreneurs shapes an entrepreneurial firm's character and strategic direction by aligning market needs with available assets and the vision of the founders, guiding decisions on business models, growth strategies, and competitive positioning. 2. What is the difference between discovery and evaluation in the process of opportunity recognition? Give an example of each. Response: Discovery is the process of becoming aware of a new business concept. For example, Howard Schultz of Starbucks discovered the coffee-and-conversation café concept while in Europe. Opportunity evaluation is the analysis of the opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture. For an opportunity to be viable, it needs to be attractive, achievable, durable, and value creating. For example, evaluation of the Starbucks opportunity involved market testing, analysis of the investment needed to establish the stores, assessment of the entry barriers and first mover advantages to ward off the competition, and estimation of the difference relative to other establishments that offered similar value to customers, such as libraries and bookstores. (Note to instructors) We think there is great value to asking students to identify multiple examples and to identify not-yet-exploited opportunities. Answer: Discovery involves identifying a new market need or opportunity, such as finding a gap for a new tech gadget. Evaluation assesses the viability of that opportunity, like analyzing the market potential and feasibility of the gadget before development. 3. Describe the three characteristics of entrepreneurial leadership: vision, dedication and drive, and commitment to excellence. Response: Entrepreneurial vision involves realities that do not yet exist and an ability to communicate that vision to others in a way that excites and motivates them. Entrepreneurial dedication refers to an ability to work hard and to keep going even in the face of bad news or poor luck. Entrepreneurial commitment to excellence refers to entrepreneurs’ relentless desire to learn and improve the venture as well as to surround themselves with high quality talent. Answer: Entrepreneurial leadership is characterized by vision (the ability to foresee future opportunities and trends), dedication and drive (persistent effort and enthusiasm to pursue goals despite challenges), and commitment to excellence (a relentless focus on achieving high standards and continuous improvement). 4. Briefly describe the three types of entrepreneurial entry strategies: pioneering, imitative, and adaptive. Response: Pioneering new entry refers to creating new ways to solve old problems or meeting customers’ needs in a unique new way. Pioneering new entry is often a radical new product or highly innovative new service that changes the way business is done in an industry. Imitative new entry improves on market success, and looks for 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. Adaptive new entry is between pure pioneering and pure imitation. It involves offering a product or service that is somewhat new and sufficiently different to create new value for customers and capture market share. Answer: Pioneering involves entering a market with a novel idea or product that creates a new category or solves an unmet need. Imitative focuses on entering an established market by replicating successful models or products with improvements or cost efficiencies. Adaptive entails entering a market with an existing concept but modifying it to better fit local needs or preferences. 5. Explain why entrepreneurial firms are often in a strong position to use combination strategies. Response: Existing firms, especially large firms with established corporate cultures, policies and bureaucracies, have limited flexibility to serve all segments of a market or to use technology optimally. The competitive advantages of existing firms are established, which determines their strategies such as overall low cost, differentiation, and/or focus. Entrepreneur firms do not have any history, and are therefore more flexible to exploit the opportunities neglected by existing firms. Once entrepreneur firms have demonstrated that they are successful, there is a strong threat of imitation from existing firms. In order to make it more costly to imitate their strategy, entrepreneurs can use their flexibility to employ combination strategies to make their advantage more durable. Answer: Entrepreneurial firms can leverage combination strategies by integrating multiple approaches—such as differentiation and cost leadership—allowing them to adapt quickly and exploit niche opportunities while maintaining flexibility and innovation. 6. What does the term competitive dynamics mean? Response: Competitive dynamic refers to intense rivalry among competitors vying for the same customers in a marketplace. A model of competitive dynamics involves a series of actions and reactions, starting with a new competitive action, which is analyzed and then assessed as to how a competitor can respond. Then a competitive reaction is devised and assessed as to difficulty for a competitor to in turn respond effectively. If the reaction is carried out, then the cycle is repeated. Answer: Competitive dynamics refers to the ongoing actions and reactions among firms within an industry, including how they respond to each other's moves, adapt strategies, and vie for competitive advantage. 7. Explain the difference between strategic actions and tactical actions and provide examples of each. Response: 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. Examples of strategic actions include entering new markets, new product introductions, changing production capacity, and mergers/ alliances. Examples of tactical actions include price cutting, product/ service enhancements, increased marketing efforts, and new distribution channels. (Note to instructor) We think it is useful for students to come up with their own examples and their own reasoning for whether the examples are strategic or tactical actions. The list above just includes categories of actions, and given the nearly limitless number of possible actions (in the past, present, and future), the need to classify them will be important to future managers. Answer: Strategic actions involve major, long-term changes affecting a firm's direction, such as entering a new market or merging with another company. For example, Amazon's acquisition of Whole Foods is a strategic action. Tactical actions are smaller, short-term adjustments aimed at addressing immediate issues, like a promotional campaign or a price discount. An example is a retailer running a seasonal sale to boost sales. Application Questions Exercises 1. E-Loan and Lending Tree are two entrepreneurial firms that offer lending services over the Internet. Evaluate the features of these two companies and, for each company: a. Evaluate their characteristics and assess the extent to which they are comparable in terms of market commonality and resource similarity. Response: These firms use an imitative entry strategy. Market commonality is the extent to which competitors are vying for the same customers in the same markets. They offer services similar to what banks normally offer. E-Loans offers savings accounts and consumer loans for vehicles, home equity, and mortgages. Lending Tree offers a similar array of services. Lending Tree is a market maker. It matches customers with banks and financial institutions that do provide services. Lending Tree provides consulting services for free to customers, and takes no fees for its services. Its geographic range is limited to the U.S. Through its Tree.com family, it offers a growing array of other services. E-Loans is a subsidiary of Banco Popular, an international bank. It actually does offer customers savings accounts and some other basic services. It does originate loans and does charge fees for some of its services. E-Loans also provides a great deal of its services, similar to Lending Tree, through partners. Its scope of operations is also the U.S. In terms of resource similarity with other traditional banks, these new firms differ greatly from normal banks. Resource similarity is the extent to which rivals draw from the same types of strategic resources. E-Loan and Lending Tree have fewer costs in terms of offices and employees. The lower costs mean that these firms can pass on the savings in the form of lower fees and interest rates. However, the lack of loan officers and offices might mean that these firms are not as close to the customer as bricks-and-mortar banks. The distance might mean that E-Loan and Lending Tree have a deficit in customer information, and are less able to accurately determine the risk profile of potential customers, so their loan portfolios may be relatively rich in underperforming loans. The table below describes how Lending Tree and E-Loans compare with respect to market commonality and resource similarity. Company Market Commonality Resource Similarity E-Loan High market commonality with Lending Tree Expertise in providing information to customers and in providing financial services. Charges fees for services. Lending Tree High commonality with E-Loans Expertise is in providing information to customers and referring them to partners. Paid by partner firms. Answer: E-Loan and Lending Tree both operate in the online lending space, offering similar services but with differing focuses and features. Market commonality is high as both target consumers seeking loans online. Resource similarity varies: Lending Tree has a broader platform with extensive lender networks, while E-Loan may focus more on direct consumer loans, affecting their resource deployment and market approach. b. Based on your analysis, what strategic and/or tactical actions might these companies take to improve their competitive position? Could E-Loan and Lending Tree improve their performance more through co-opetition rather than competition? Explain your rationale. Response: Based on the above description of their operations, some strategic and tactical actions that E-Loans and Lending Tree may take include the following: Company Strategic Actions Tactical Actions E-Loan Make investments in providing more services in-house rather than through partners. Expand operations internationally. Advertise its awards and good performance. Improve response to customer inquiries. Recruit more partners. Lending Tree Expand services to other market-making arenas for the public such as auctions, product evaluations, and services such as a stock broker. Advertise its good service and free advice. Work to reduce perceived bias in advice by restructuring relationships with partners. E-Loans and Lending Tree currently follow low cost focus strategies. It is likely that there are few barriers to entry for large banks for set up their own web sites that compete with them, so combination strategies might be a good way to go. Lending Tree has made some inroads by providing customers information such as blue book values for used cars, free credit reports, car insurance and the like. E-Loan advertises its awards and site security, an effort to develop brand equity. (Note to instructor) Students may come up with a variety of other suggestions for strategic and/or tactical actions. We think it is valuable to consider these. For each suggestion, ask the student if it is a strategic or tactical action. Then ask if the action leads the firm to a combination strategy. And lastly, rate the difficulty that an established bank would have imitating the action. The idea of an action-reaction cycle may lead to an illustration of the competitive dynamics model. Co-opetition is a combination of competition and cooperation. For example, close competitors that differentiate themselves on the consumer side may actually collaborate behind the scenes to achieve industry wide efficiencies. One example by which E-Loans and Lending Tree could do co-opetition is by sharing information on customer’s risk profiles. Or the online banks could assist bricks-and-mortar banks in setting up their online operations in exchange for an equity stake in the business. In each case, the competing formats would be able to address their competitive weaknesses through cooperation. (Note to instructors) Students may come up with a variety of suggestions regarding co-opetition. For each, ask the students if the action would be perceived as collusion. Is there any chance the actions could be interpreted as the firms setting price, output levels, or quality of product. Answer: To improve their competitive positions, E-Loan and Lending Tree could enhance their strategic alliances with financial institutions or integrate advanced technologies for better service. Co-opetition might benefit them by sharing resources and data to create a more robust lending platform, thus potentially increasing market reach and operational efficiency while mitigating competitive pressures. 2. Using the Internet, research the Small Business Administration’s Web site (www.sba.gov). What different types of financing are available to small firms? Besides financing, what other programs are available to support the growth and development of small businesses? Response: The Small Business Administration offers a wide range of services including market information, financial analysis, compliance with regulations, business plan development, referrals to others in the locality who can provide more textured advice, and advice for disposal of assets (should the business fail). In terms of financing, the SBA offers disaster assistance loans, grants, and information on contracting opportunities with the federal government. (Note to instructors) This list is only a start of what is available. One goal of this assignment is to increase students’ awareness of this government resource. Answer: The Small Business Administration (SBA) offers various financing options including SBA loans, microloans, and venture capital. Besides financing, the SBA provides programs for business counseling, training, disaster assistance, and access to government contracts to support small business growth and development. 3. Think of an entrepreneurial firm that has been successfully launched in the last 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? Response: (Note to instructor) For each example, have the student first describe the firm and what it does. Then ask about the firm’s competitive advantages. And once identified, how these advantages are not easily copied by other firms in the industry. After establishing these, a context is set for the discussion about entry strategy and combination strategy. Answer: Entry Strategy: DoorDash used an adaptive entry strategy by entering the food delivery market, leveraging existing demand for convenience but differentiating through a robust logistics platform. 4. 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. Response: (Note to instructor) For each example, have the student first describe the firm and what it does. Then ask how the firm is able to limit imitation. Answer: Firm Example: The Pie Hole (Los Angeles) Positioning: The Pie Hole has positioned itself uniquely by offering gourmet pies and a distinctive, cozy café experience. Strategic Advantage: Its unique recipes and niche focus on high-quality, artisanal pies set it apart from typical bakeries and dessert shops, attracting a loyal customer base. Disadvantage: Limited product range compared to competitors with broader offerings may restrict customer appeal. Ethics Questions 1. 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). Response: There are at least two primary problems with imitation strategies. First, the firm that invented or developed the idea has intellectual property that is protected by law. Imitation risks violating the patent, copyright, trademark, or trade secrets of the competitor. Violation of intellectual property rights subjects the firm to legal action. Second, imitation may threaten the value of the firm, which harms shareholders and firm value. The first mover on an idea is likely to have first mover advantages and be able to keep one step ahead of the imitator. As a result, the imitation strategy may not succeed to the extent that costs are covered. Answer: Imitation strategies can be seen as both strategic and ethical, provided they respect intellectual property rights and avoid direct copying of patented or trademarked innovations. Ethically, imitation crosses into questionable territory if it involves deceit or infringement on others' intellectual property. 2. Intense competition such as price wars are an accepted practice in the United States, but cooperation between companies has legal ramifications because of antitrust laws. Should price wars that drive small businesses or new entrants out of business be illegal? What ethical considerations are raised (if any)? Response: We would answer the question with “depends.” If a price war represents a large firm lowering prices below a small firm’s cost, but still above the large firm’s cost, then consumers are likely to get a sustainable benefit. The tactic seems ethical and a challenge to small firms to either focus operations on a market niche or offer customers some other value that justifies the higher price. Price wars are unethical if the large firm tactic is to lower prices below their costs. In this case, the large firms are trying to drive the small businesses out of the market only to raise prices later. Consumers only derive a temporary benefit in terms of price and lose the vigorous and legal competition that would result in product/service improvements as well as low price. Predatory pricing is also illegal under antitrust legislation, but the possibility of successful legal action by small firms is low in the current legal environment. Answer: Price wars that drive out small businesses can be ethically problematic as they may harm competition and limit consumer choices in the long term. However, such practices aren't illegal unless they involve predatory pricing with the intent to monopolize, which is a concern under antitrust laws. Solution Manual for Strategic Management: Creating Competitive Advantages Gregory G. Dess, Alan Eisner, G.T. (Tom) Lumpkin, Gerry McNamara 9780077636081, 9781259245558