Entrepreneurial Strategy and Competitive Dynamics

Entrepreneurial Strategy and Competitive Dynamics

After reading this chapter, you should have a good understanding of the following learning objectives:

LO 8-1

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

LO 8-2

Three types of entry strategies—pioneering, imitative, and adaptive—commonly used to launch a new venture.

LO 8-3

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

LO 8-4

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

LO 8-5

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

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LEARNING FROM MISTAKES

The disappearing photo app, Snapchat, experienced a meteoric rise. Started by a set of Stanford undergraduate students in 2011, the app had a user base in excess of 150 million and had reached 10 billion daily video views by 2016. As the app grew in popularity, CEO Evan Spiegel and CTO Bobby Murphy found themselves in a long-term battle with Reggie Brown, a Kappa Sigma fraternity brother of theirs who claimed he was the original creator of Snapchat. According to Brown, he shared his idea for an app that would allow users to share photos that would quickly self-destruct with Spiegel. They then recruited Murphy to do computer programming for the app. That first app, Picaboo, evolved into the widely used Snapchat. While the app became a success, the collaboration did not. Spiegel apparently decided that Brown wasn’t adding much to the team. He and Murphy locked Brown out of the company’s system and disavowed any claims that Brown was one of the firm’s founders or had any ownership rights to the company. In 2013, Brown sued, leading to an eventual confidential settlement in 2014. By that time, the overall firm was valued at about $20 billion. While the financial details of the settlement were never made public, Spiegel publicly admitted that Brown was central to the creation of the app, saying, “We acknowledge Reggie’s contribution to the creation of Snapchat and appreciate his work in getting the application off the ground.”

The Snapchat experience is not at all uncommon. Facebook, Twitter, Tinder, Beats Electronics, and others faced internal drama about who was responsible for the firms’ start and who should reap the substantial financial rewards of their success. Why is this so common? Entrepreneurial teams are often composed of friends and family, leading the participants to expect that they can trust their partners and have no need for a written contract or statement of ownership. Luan Tran, the attorney for Brown, put it this way, “You don’t think not to trust people you know a lot, and you don’t think they are going to screw you. It’s good to trust, but it’s much better to memorialize your trust in a document.” Amir Hassanabadi, another attorney who regularly works with start-up firms, recommends the following for founders on day one of their venture, “Go out to dinner. Settle who’s who and what’s what. Then put it in writing.”1

Discussion Questions

1 Why do you think that so many start-up firms have these disputes?

2 Why do founders often fail to work up formal written contracts about ownership and credit?

3 Would you feel comfortable having that conversation early on with a partner in a new business? How would you initiate that conversation?

The Snapchat case illustrates how important it is for start-up firms to formalize the roles of founders and set up formal contracts that lay out responsibilities and ownership rights if they want to avoid later drama.

In this chapter we address entrepreneurial strategies. The previous three chapters have focused primarily on the business-level, corporate-level, and international strategies of incumbent firms. Here we ask: What about the strategies of those entering into a market or industry for the first time? In this chapter, we focus on strategic entrepreneurship—the actions firms take to create new ventures in markets. In Chapter 12, we focus on a related issue—how established firms can build or reinforce an entrepreneurial mindset as they strive to be innovative in markets in which the firm already competes.

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Companies wishing to launch new ventures must also be aware that, consistent with the five-forces model in Chapter 2, new entrants are a threat to existing firms in an industry. Entry into a new market arena is intensely competitive from the perspective of incumbents in that arena. Therefore, new entrants can nearly always expect a competitive response from other companies in the industry they are entering. Knowledge of the competitive dynamics that are at work in the business environment is an aspect of entrepreneurial new entry that will be addressed later in this chapter.

Before moving on, it is important to highlight the role that entrepreneurial start-ups and small businesses play in entrepreneurial value creation. Small businesses, those defined as having 500 employees or fewer, create about 65 percent of all new jobs in the United States and also generate 13 times as many new patents per employee as larger firms.2

LO 8-1

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

RECOGNIZING ENTREPRENEURIAL OPPORTUNITIES

Defined broadly, entrepreneurship refers to new value creation. Even though entrepreneurial activity is usually associated with start-up companies, new value can be created in many different contexts, including:

entrepreneurship

the creation of new value by an existing organization or new venture that involves the assumption of risk.

· Start-up ventures

· Major corporations

· Family-owned businesses

· Nonprofit organizations

· Established institutions

For an entrepreneurial venture to create new value, 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 opportunity.3 The entrepreneurial strategy that an organization uses will depend on these three factors. Thus, beyond merely identifying a venture concept, the opportunity recognition process also involves organizing the key people and resources that are needed to go forward. Exhibit 8.1 depicts the three factors that are needed to successfully proceed—opportunity, resources, and entrepreneur(s). In the sections that follow, we address each of these factors.

EXHIBIT 8.1 Opportunity Analysis Framework

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

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