Entrepreneurial Strategy and Competitive Dynamics

CHAPTER 8
Entrepreneurial Strategy and Competitive Dynamics
Copyright Anatoli Styf/Shutterstock
1
Learning Objectives
After reading this chapter, you should have a good
understanding of:
8-1 The role of opportunities, resources, and entrepreneurs in
successfully pursuing new ventures.
8-2 Three types of entry strategies – pioneering, imitative, and
adaptive – commonly used to launch a new venture.
8-3 How the generic strategies of overall cost leadership,
differentiation, and focus are used by new ventures and small
businesses.
8-4 How competitive actions, such as the entry of new
competitors into a marketplace, may launch a cycle of actions
and reactions among close competitors.
8-5 The components of competitive dynamics analysis – new
competitive action, threat analysis, motivation and capability to
respond, types of competitive actions, and likelihood of
competitive reaction.
©McGraw-Hill Education.

2
Need for Entrepreneurial Strategy
Consider . . .
New technologies, shifting social and demographic trends, as
well as sudden changes in the business environment can create
opportunities for entrepreneurship.
However, business opportunities can disappear as quickly as
they appear.
What do new ventures and entrepreneurial firms need to do to
achieve and sustain a competitive advantage?
New ventures often face unique strategic challenges if they’re
going to survive and grow. Whether the firm is an
entrepreneurial startup, a small business, or an existing business
entering a market or industry for the first time, it must rely on
sound strategic principles to be successful. Entrepreneurial
activity influences a firm’s strategic priorities and intensifies
the rivalry among an industry’s close competitors. Even with a
strong initial resource base, entrepreneurs are unlikely to
succeed if their business ideas are easily imitated or the
execution of the strategy falls short. Not only is it important for
a firm to recognize an entrepreneurial opportunity, a firm must
understand the competitive dynamics that are at work in the
business environment in order to succeed with a growth
opportunity. It’s important to have an effective competitive
strategy. Note that here we focus on entrepreneurial strategy –
the actions firms take to create new ventures in markets – but
there’s also a related issue – how established firms can build or
reinforce an entrepreneurial mindset as they strive to be
innovative in markets in which they already compete. This will
be covered in Chapter 12.

3
Recognizing Entrepreneurial Opportunities
Entrepreneurship involves value creation and the assumption of
risk.
New value can be created in many contexts.
Startup ventures
Major corporations
Family-owned businesses
Nonprofit organizations
Established institutions
Ideas and opportunities can come from many sources.
Change or chance can uncover unmet customer needs.
Entrepreneurship = the creation of new value by an existing
organization or new venture that involves the assumption of
risk. Even though entrepreneurial activity is usually associated
with startup companies, new value can be created in many
different contexts. Startup venture ideas can come from: current
or past work experiences, hobbies or suggestions by friends or
family. For established firms, opportunities can come from:
existing customers, suggestions by suppliers, technological
developments. For all firms, change or chance events can
uncover unmet consumer needs.
4
Question
(1 of 4)
Three ingredients are critical in order for an entrepreneurial
startup to be successful. What are they?
good ideas, a team of investors, and a business plan
a viable opportunity, available resources, and a qualified and
motivated founding team
an opportunity, a marketing plan, and office space

management, marketing, and money
Answer: B. See the discussion that follows.
5
Entrepreneurial Opportunity Analysis
Exhibit 8.1 Opportunity Analysis Framework
Source: Based on Timmons, J.A., & Spinelli, S. 2004. New
Venture Creation (6th edition). New York: McGraw Hill/Irwin;
and Bygrave, W.D. 1997. The Entrepreneurial Process. In W.D.
Bygrave (Ed.), The Portable MBA in Entrepreneurship (2nd
edition). New York: Wiley.
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. 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.
6
Entrepreneurial Opportunity Recognition
Entrepreneurial opportunities require opportunity recognition.
Two phases of activity:
Discovery
Becoming aware of a new business concept
Evaluation

Analyzing the opportunity to determine whether it is viable or
feasible to develop further
Opportunity recognition = the process of discovering and
evaluating changes in the business environment, such as a new
technology, socio-cultural trends, or shifts in consumer demand,
that can be exploited. Changes in the external environment can
lead to new business creation, but the discovery of these new
ideas is not enough. They then need to be evaluated to find out
if they’re strong enough to become new ventures. Entrepreneurs
must go through a process of identifying, selecting, and
developing potential opportunities.
7
Entrepreneurial Opportunities: Discovery
Discovery phase – Becoming aware of the new business
concept. Ask: Where are the new venture opportunities? What
might be a creative solution to a business problem?
Can be spontaneous and unexpected
Can also result from a deliberate search
Are there frustrations with current products or processes?
Do stakeholders have unmet needs?
What do other markets or industries do?
Can we revive old ideas?
The discovery phase refers to the process of becoming aware of
a new business concept. Many entrepreneurs report that their
idea for a new venture came through some unexpected insight,
often based on their prior knowledge, that gave them an idea for
a new business. The discovery of new opportunities is often
spontaneous and unexpected. Opportunity discovery may also
occur as the result of a deliberate search for new venture

opportunities or creative solutions to business problems. Viable
opportunities often emerge only after a concerted effort. To
stimulate the discovery of new opportunities, companies often
encourage creativity, out-of-the-box thinking, and
brainstorming. A more structured search for entrepreneurial
ideas can come from looking at what’s bugging you – what
frustrations do you have with current products or processes? Or
from talking to suppliers, customers or front line workers to see
how needs aren’t being met, or borrowing ideas from other
markets or industries, or being inspired by history and reviving
good ideas that have slipped out of practice, but might be
valued in the market again.
8
Entrepreneurial Opportunities: Evaluation
Evaluation phase – Analyzing the viability of an opportunity
Talk to potential target customers.
Identify operational requirements.
Conduct a feasibility analysis.
What is the market potential?
Is the idea strong enough to create value, and therefore, profits
?
Viable opportunities have the following qualities:
They are attractive.
They are achievable.
They are durable.
They are value-creating.
The evaluation phase occurs after an opportunity has been
identified, and involves analyzing this opportunity to determine
whether it is viable and strong enough to be developed into a
full-fledged new venture. Ideas developed by new product
groups or in brainstorming sessions are tested by various

methods, including talking to potential target customers and
discussing operational requirements with production or logistics
managers. Feasibility analysis is used to evaluate these and
other critical success factors. This type of analysis often leads
to the decision that a new venture project should be
discontinued. Only if the venture concept continues to seem
viable would a more formal business plan be developed. Among
the most important factors to evaluate is the market potential
for the product or service. New ventures must first determine
whether a market exists for the product or service they are
contemplating. For an opportunity to be viable, it needs to have
four qualities. The opportunity must be attractive in the
marketplace; that is, there must be market demand for the new
product or service. The opportunity must also be achievable: it
must be practical and physically possible. The opportunity must
be durable or attractive long enough for the development and
deployment to be successful; that is, the window of opportunity
must be open long enough for it to be worthwhile. And finally
the opportunity must be value-creating and potentially
profitable; that is, the benefits must surpass the cost of
development by a significant margin. If a new business concept
meets these criteria, two other factors must be considered
before the opportunity is launched as a business: the resources
available to undertake it, and the characteristics of the
entrepreneur pursuing it.
9
Entrepreneurial Resources
Resources are essential for entrepreneurial success.
Financial resources
Human capital
Social capital
Government resources

Resources are an essential component of a successful
entrepreneurial launch. For startups, the most important
resource is usually money because a new firm typically has to
expend substantial sums just to start the business. However,
financial resources are not the only kind of resource a new
venture needs. Human capital and social capital are also
important. Many firms also rely on government resources to
help them thrive.
10
Entrepreneurial Financial Resources
Financial resources depend on the stage of venture development
& venture scale.
Initial, startup financing
Personal savings, family, and friends
Crowdfunding
Early-stage financing
Bank financing, angel investors
Later-stage financing
Commercial banks, venture capitalists equity financing
Entrepreneurial firms must have financing. In fact, the level of
available financing is often a strong determinant of how the
business is launched and its eventual success. Cash finances are,
of course, highly important, but access to capital, such as a line
of credit or favorable payment terms with the supplier, can also
help a new venture succeed. The types of financial resources
that may be needed depend on two factors: the stage of venture
development and the scale of the venture. The majority of new
firms are low-budget startups launched with personal savings
and the contributions of family and friends, and can also appeal
to the public through a crowdfunding website such as
Kickstarter. (See Case: Kickstarter) Crowdfunding = funding a
venture by pooling small investments from a large number of

investors, often raised on the internet. Angel investors = private
individuals who provide equity investments for seed capital
during the early stages of a new venture. These outside
investors favor companies that already have a winning business
model and dominance in a market niche. Once a venture has
established itself as a going concern, other sources of financing
become readily available, such as commercial loans taken out
by the business. Venture capitalists = companies organized to
place their investors’ funds in lucrative business opportunities.
Through venture capitalists, entrepreneurs can raise money by
selling shares in the new venture. Businesses with extensive
development costs or firms on the brink of rapid growth are
likely to turn to venture capitalists.
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Entrepreneurial Human, Social & Governmental Resources
Human capital
Strong, skilled management
Social capital
Extensive social contacts & strategic alliances
Technology, manufacturing, or retail alliances
Federal, state, & local government resources
Government contracting
Loan guarantee programs
Training, counseling, & support services
Bankers, venture capitalists, and angel investors agree that the
most important asset an entrepreneurial firm can have is strong
and skilled management. Managers need to have a strong base
of experience and extensive domain knowledge, as well as an
ability to make rapid decisions and change direction as shifting
circumstances may require. Startups with multiple partners are
more likely to succeed. New ventures founded by entrepreneurs
who have extensive social contacts are also more likely to

succeed. In addition, strategic alliances can provide a key
avenue for growth. By partnering with other companies, through
technology, manufacturing, or retail licensing agreements,
young or small firms can expand or give the appearance of
entering numerous markets or handling a range of operations. In
the United States, the federal, state, and local government
provides support for entrepreneurial firms in two key areas –
financing and government contracting. Through government
contracting, small businesses have the opportunity to bid on
contracts to provide goods and services to the government.
Regarding financing, the small business administration (SBA)
has several loan guarantee programs designed to support the
growth and development of entrepreneurial firms. The
government itself does not typically lend money but underwrites
loans made by banks to small businesses, thus reducing the risk
associated with lending to firms with unproven records. Local
offices offer training, counseling, and support services.
12
Entrepreneurial Leadership
Entrepreneurial leadership needs:
Courage
Belief in one’s convictions
Energy to work hard
Leadership personality traits:
Higher self-confidence, conscientiousness, openness to new
experiences, emotional stability
Lower agreeableness
Leadership characteristics:
Vision
Dedication and drive
Commitment to excellence
Launching a new venture requires a special kind of leadership.

Entrepreneurial leadership = leadership appropriate for new
ventures that requires courage, belief in one’s convictions, and
the energy to work hard even in difficult circumstances, and
that embodies vision, dedication and drive, and commitment to
excellence. Entrepreneurs tend to have the following personality
traits that distinguish them from corporate managers: higher
self-confidence; a higher degree of organization, persistence
and hard work in pursuit of goal attainment; more intellectual
curiosity; a higher ability to handle ambiguity, less likely to be
overcome by anxieties; and lower agreeableness, typically
looking out for their own self-interest, willing to influence or
manipulate others for their own advantage. However, ventures
built on the charisma of a single person may have trouble
growing “from good to great” once that person leaves. Thus, the
leadership that is needed to build a great organization is usually
exercised by a team of dedicated people rather than a single
leader. The leadership team must attract members who fit with
the company’s culture, goals, and work ethic. For a venture’s
leadership to be a valuable resource and not a liability it must
be cohesive in its vision, drive and dedication, and commitment
to excellence.
13
Question
(2 of 4)
Why is vision such an important element of entrepreneurial
leadership?
The entrepreneur has to envision realities that do not yet exist.
A vision statement must be part of the documentation used to
obtain venture financing.
Organizations cannot function without a detailed and
operational vision.
All of the above.

Answer: A. See the discussion that follows.
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Entrepreneurial Leadership:
Vision, Drive & Dedication
Vision is an entrepreneur’s most important asset.
Requires transformational leadership
Ability to envision realities that do not yet exist
Ability to share this vision with others
Drive & dedication are necessary.
Involves internal motivation
Calls for intellectual commitment
Requires patience
Stamina, willingness to work long hours
Enthusiasm that attracts others
Vision may be an entrepreneur’s most important asset.
Entrepreneurs envision realities that do not yet exist. With
vision, entrepreneurs are able to exercise a kind of
transformational leadership that creates something new and, in
some way, changes the world. In order to develop support, get
financial backing, and attract employees, entrepreneurial
leaders must share their vision with others. Drive and
dedication are reflected in hard work. Drive involves internal
motivation; dedication calls for intellectual commitment that
keeps an entrepreneur going even in the face of bad news or
poor luck. They both require patience, stamina, and a
willingness to work long hours. The dedicated entrepreneur’s
enthusiasm is also important – it attracts others to the business
to help with the work.
15
Entrepreneurial Leadership:
Commitment to Excellence

Commitment to excellence is required.
Commit to knowing the customer.
Provide quality goods and services.
Pay attention to details.
Continuously learn.
Connect the dots.
Hire people smarter than themselves.
Excellence requires entrepreneurs to commit to knowing the
customer, providing quality goods and services, paying
attention to details, and continuously learning. Entrepreneurs
who achieve excellence are sensitive to how these factors work
together. The most successful entrepreneurs often report that
they owed their success to hiring people smarter than
themselves.
16
Entrepreneurial Strategy
New ventures require an entrepreneurial strategy.
What are the industry conditions?
What are the barriers to entry? (Five-forces analysis)
What is the competitive environment?
Might there be retaliation by established firms?
What are the market opportunities?
How should the firm actually enter a new market?
Firms must choose how to compete,
Entry strategies
Generic strategies
Combination strategies

Once an opportunity has been recognized, and an
entrepreneurial team and resources have been assembled, a new
venture must craft a strategy. Entrepreneurial strategy =
strategy that enables the skilled and dedicated entreprene ur,
with a viable opportunity and access to sufficient resources, to
successfully launch a new venture. To be successful, new
ventures must evaluate industry conditions, the competitive
environment, and market opportunities in order to position
themselves strategically. However, a traditional strategic
analysis may have to be altered somewhat to fit the
entrepreneurial situation. For instance, a five-forces analysis
can be applied to the analysis of new ventures to assess the
impact of industry and competitive forces. First, the new entry
needs to examine barriers to entry. A second important factor is
the threat of retaliation by market incumbents. Part of any
decision about what opportunity to pursue is a consideration of
how a new entry will actually enter a new market, and, once it’s
there, how it will compete. Given the condition of the overall
market, what entry strategies, generic strategies or possible
combination strategies are most appropriate?
17
Entry Strategies
New venture entry strategies need to:
Quickly generate cash flow
Build credibility
Attract good employees
Overcome the liability of newness
Choices include:
Pioneering new entry
Imitative new entry
Adaptive new entry

One of the most challenging aspects of launching a new venture
is finding a way to begin doing business that quickly generates
cash flow, builds credibility, attracts employees, and overcomes
the liability of newness. The entry strategy will vary depending
on how risky and innovative the new business concept is. New
entry strategies typically fall into one of three categories –
pioneering new entry, imitative new entry, or adaptive new
entry. Pioneering new entry = a firm’s entry into an industry
with a radical new product or highly innovative service that
changes the way business is conducted. Imitative new entry = a
firm’s entry into an industry with products or services that
capitalize on proven market successes and that usually has a
strong marketing orientation. Adaptive new entry = a firm’s
entry into an industry by offering a product or service that is
somewhat new and sufficiently different to create value for
customers by capitalizing on current market trends.
18
Entry Strategies: Pioneering
Pioneering new entry:
Create new ways to solve old problems.
Meet customers’ needs in a unique new way.
Will it be accepted by consumers?
Will it be disruptive to the status quo of an industry?
Will the advantage be sustainable against imitators?
New entrants with a radical new product or highly innovative
service may change the way business is conducted in an
industry. This kind of breakthrough – creating new ways to
solve old problems or meeting customers’ needs in a unique new
way – is referred to as a pioneering new entry. If the product or
service is unique enough, a pioneering new entrant might
actually have little direct competition. However, there is a

strong risk that the product or service will not be accepted by
consumers. A pioneering new entry is also potentially disruptive
to the status quo of an industry. If it is successful, other
competitors will rush into copy it. This can create issues of
sustainability for entrepreneurial firms. For a new entrant to
sustain its pioneering advantage, it may be necessary to protect
its intellectual property, advertise heavily to build brand
recognition, form alliances with businesses that will adopt its
products or services, and offer exceptional customer service.
19
Entry Strategies: Imitative
Imitative new entry:
Imitators have a strong marketing orientation.
Capitalize on proven market successes.
Introduce the same basic product or service in another segment
of the market.
Can we do it better than an existing competitor?
Will someone then imitate us?
Imitators usually have a strong marketing orientation. They look
for opportunities to capitalize on proven market successes. An
imitative new entry strategy is used by entrepreneurs who see
products or business concepts that have been successful in one
market niche or physical locale and introduce the same basic
product or service in another segment of the market. See
Strategy Spotlight 8.3 for how Casper Sleep has shaken up the
mattress market. Sometimes the key to success with an imitative
strategy is to fill a market space where the need had previously
been filled inadequately. Entrepreneurs are also prompted to be
imitators when they realize that they have the resources or skills
to do a job better than an existing competitor. But success
triggers imitation. See the example of Square.
20

Entry Strategies: Adaptive
Adaptive new entry:
Capitalizes on current market trends.
Offers a product or service that is somewhat new and
sufficiently different.
Creates new value for customers.
Captures market share.
Does it do a superior job of meeting customer needs?
Can it be easily imitated?
How can we continue to keep it fresh and new?
Most new entrants use a strategy somewhere between pure
imitation and pure pioneering. That is, 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 in the sense that they are aware of marketplace
conditions and conceive entry strategies to capitalize on cur rent
trends. An adaptive new entry involves taking an existing idea
and adapting it to a particular situation. However, unless
potential customers believe the product or service does a
superior job of meeting their needs, they will have little
motivation to try it. Second, there is nothing to prevent a close
competitor from mimicking the new firm’s adaptation as a way
to hold onto its customers. Third, once an adaptive entrant
achieves initial success, the challenge is to keep the idea fresh.
If the attractive features of the new business are copied, the
entrepreneurial firm must find ways to adapt and improve the
product or service offering. An adaptive new entry approach
does not involve “reinventing the wheel,” nor is it merely
imitative either. It involves taking an existing idea and adapting
it to a particular situation. Exhibit 8.3 presents examples of four
young companies that successfully modified or adapted existing
products to create new value.

21
Generic Strategies for New Ventures
Overall cost leadership – advantage due to:
Simpler organizational structure & smaller size
Quicker decision making to upgrade technology & integrate
marketplace feedback controls costs
Differentiation – can compete by:
Offering a unique value proposition through innovation &
superior use of new technology
Deploying resources in a radical new way
Focus – means ability to:
Use niche strategies that fit the small business model
A new entrant must decide what type of strategic positioning
will work best as the business goes forward. Typically, a new
entrant begins with a single business model that is equivalent in
scope to a business-level strategy. One of the ways
entrepreneurial firms achieve success is by doing more with
less. By holding down costs or making more efficient use of
resources than larger competitors, new ventures are often able
to offer lower prices and still be profitable. Thus, under the
right circumstances, a low-cost leader strategy is a viable
alternative for new ventures. Compared to large firms, new
ventures often have simple organizational structures that make
decision making both easier and faster. The smaller size also
helps young firms change more quickly when upgrades in
technology or feedback from the marketplace indicates that
improvements are needed. They are also able to make decisions
at the time they are founded that help them deal with the issue
of controlling costs. Both pioneering and adaptive entry
strategies involve some degree of differentiation. That is, the
new entry is based on being able to offer a differentiated value
proposition. However, differentiation successes are sometimes

built on superior innovation or use of technology, which is
challenging for young firms to implement relative to established
competitors. Focus strategies work for small businesses because
there is a natural fit between the narrow scope of the strategy
and the small size of the firm. If a startup wants to succeed, it
has to take business away from an existing competitor. Young
firms can often succeed best by finding a market niche where
they can get a foothold and make small advances that erode the
position of the existing competitors. From this position, they
can build a name for themselves and grow.
22
Question
(3 of 4)
When an industry is mature, a _________ strategy may be
considered to be an effective approach for a new entrant.
focus
differentiation
overall low-cost
small business
Answer: A. If a startup wants to succeed, it has to take business
away from an existing competitor. Young firms can often
succeed best by finding a market niche where they can get a
foothold and make small advances that erode the position of the
existing competitors. From this position, they can build a name
for themselves and grow.
23
Combination Strategies
for New Ventures
Pursuing combination strategies can combine the best features
of low-cost, differentiation, and focused strategies.
Holding down expenses by having a simple structure

Creating high-value products & services by being flexible &
innovative
Offering highly specialized products or superior customer
service to a niche market
One of the best ways for young and small businesses to achieve
success is by pursuing combination strategies. By combining the
best features of low-cost, differentiation, and focus strategies,
new ventures can often achieve something truly distinctive.
Entrepreneurial firms are often in a strong position to offer a
combination strategy because they have the flexibility to
approach situations uniquely. They can often enact combination
strategies in ways that the large firms cannot copy. For
example, holding down expenses can be difficult for big firms
because each layer of bureaucracy adds to the cost of doing
business across the boundaries of a large organization. Also,
large firms often find it difficult to offer highly specialized
products or superior customer services, while entrepreneurial
firms can create high-value products and services through their
unique differentiating efforts. However, one of the major
dangers is that either a large firm with more resources or a close
competitor will copy what the new entry is doing. A carefully
crafted and executed combination strategy may be the best
answer. Nevertheless, competition among rivals is a key
determinant of new venture success.
24
Competitive Dynamics
New entry threatens existing competitors.
Competitive dynamics helps explain why competitive strategies
evolve and how to respond.
Need to identify new competitive action.
Engage in threat analysis.
Have the motivation and capability to respond.

Understand the types of competitive action.
Evaluate the likelihood of competitive reaction.
New entry into markets, whether by startups or by incumbent
firms, nearly always threatens existing competitors. As a result,
the competitive actions of the new entrants are very likely to
provoke negative response from companies that feel threatened.
Competitive dynamics = intense rivalry, involving actions and
responses among similar competitors vying for the same
customers in a marketplace. Intense rivalry among similar
competitors has the potential to alter a company’s strategy. New
entry is among the most common reasons why a cycle of
competitive actions and reactions gets started. It might also
occur because of threatening actions among existing
competitors, such as aggressive cost-cutting. Thus, studying
competitive dynamics helps explain why strategies evolve and
reveals how, why, and when to respond to the actions of close
competitors. New competitive action = acts that might provoke
competitors to react, such as new market entry, price-cutting,
imitating successful products, and expanding production
capacity. Threat analysis = a firm’s awareness of its closest
competitors and the kinds of competitive actions they might be
planning.
25
Competitive Dynamics Model
Exhibit 8.4 Model of Competitive Dynamics
Source: Adapted from Chen, M.J. 1996. Competitor Analysis
and Interfirm Rivalry: Toward a Theoretical Integration.
Academy of Management Review, 21(1): 100-134; Ketchen,
D.J., Snow, C.C., & Hoover, V.L. 2004. Research on
Competitive Dynamics: Recent Accomplishments and Future
Challenges. Journal of Management, 30(6): 779-804; and Smith,

K.G., Ferrier, W.J., & Grimm, C.M. 2001. King of the Hill:
Dethroning the Industry Leader . Academy of Management
Executive, 15(2): 59-70.
Jump to Appendix 1 for long description.
Exhibit 8.4 identifies the factors competitors need to consider
when determining how to respond to a competitive act.
26
Competitive Dynamics: Why Launch Actions?
Why do companies launch new competitive actions?
To improve market position
To capitalize on growing demand
To expand production capacity
To provide an innovative new solution
To obtain first mover advantages
To strengthen financial outcomes & capture profits
To grow the business
When a company enters a market for the first time, it is an
attack on existing competitors. In addition, price-cutting,
imitating successful products, or expanding production capacity
are all examples of competitive acts that might provoke a
reaction. Companies are motivated to launch competitive
challenges because they want to strengthen financial outcomes,
capture some of the extraordinary profits that industry leaders
enjoy, and grow the business. They also may want to build their
reputation for innovativeness or efficiency. The likelihood that
a competitor will launch an attack depends on many factors.
Some of these factors include competitor analysis, market
conditions, types of strategic actions available, and the resource

endowments and capabilities companies need in order to take
this competitive action.
27
Competitive Dynamics: Incumbents
Competition among incumbent rivals can involve “hardball”
strategies.
Devastating rivals’ profit sanctuaries
Plagiarizing with pride
Deceiving the competition
Unleashing massive & overwhelming force
Raising competitors’ costs
Competitive attacks can come from many sources besides new
entrants. Some of the most intense competition is among
incumbent rivals intent on gaining strategic advantages.
According to Boston Consulting Group authors George Stalk, Jr.
and Rob Lachenauer, “winners in business play rough and don’t
apologize for it.” Exhibit 8.5 outlines their five strategies for
playing “hardball.” While the “big boys” are competing, it’s
possible an entrepreneur might be able to take advantage of
some of these activities.
28
Competitive Dynamics: Threat Analysis
Threat analysis involves an assessment of:
Market commonality
Resource similarity
How serious is the threat?
Motivation & capability to respond means asking:
What type of competitive response is necessary?
What resources are needed to fend off a competitive attack?
Am I willing & able to launch an action?
Which competitive action should I take?

Awareness of the threats posed by industry rivals allows a firm
to understand what type of competitive response, if any, may be
necessary. Threat analysis = a firm’s awareness of its closest
competitors and the kinds of competitive actions they might be
planning. Competitive dynamics are likely to be most intense
among companies that are competing for the same customers or
who have highly similar sets of resources. Market commonality
= the extent to which competitors are vying for the same
customers in the same markets. Resource similarity = the extent
to which rivals draw from the same types of strategic resources.
When any two firms have both a high degree of market
commonality and highly similar resource bases, a stronger
competitive threat is present. Once attacked, competitors are
faced with deciding how to respond: What is their motivation
and capability to respond? Before deciding, they need to
evaluate not only how they will respond, but also their reasons
for responding and their capability to respond: How serious is
the attack, and what might be the intent of the competitive
response? Is it merely to blunt the attack of the competitor, or is
it an opportunity to enhance its competitive position?
Sometimes the most a company can hope for is to minimize the
damage caused by a competitive action. Companies also have to
consider what strategic resources can be deployed to fend off a
competitive attack. Does the company have an array of internal
strengths it can draw on, or is it operating from a position of
weakness?
29
Competitive Dynamics: Actions
Types of competitive actions include:
Strategic actions
Entering new markets
Creating new product introductions

Changing production capacity
Pursuing mergers or alliances
Tactical actions
Doing price cutting (or offering increases)
Making product/service enhancements
Increasing marketing efforts
Developing new distribution channels
Once an organization determines whether it is willing and able
to launch a competitive action, it must determine what type of
action is appropriate. The actions taken will be determined by
both its resource capabilities and its motivation for responding.
Two broadly defined types of competitive action include
strategic actions and tactical actions. Strategic actions = major
commitments of distinctive and specific resources to strategic
initiatives. Tactical actions= refinements or extensions of
strategies usually involving minor resource commitments. See
Exhibit 8.6 for some examples.
30
Competitive Dynamics: Reaction
Likelihood of competitive reaction depends on:
Market dependence
Competitor’s resources
The reputation of the firm that initiates the action – the actor’s
reputation
Choosing not to respond is a choice & includes:
Forbearance – holding back on an attack
Co-opetition – both cooperating & competing
Working together behind the scenes to achieve industrywide
efficiencies

The final step before initiating a competitive response is to
evaluate what a competitor’s reaction is likely to be. Evaluating
potential competitive reactions helps companies plan for future
counterattacks. How a competitor is likely to respond will
depend on three factors: market dependence, the competitor’s
resources, and the reputation of the firm that initiates the
action. Market dependence = degree of concentration of a firm’s
business in a particular industry. If a company has a high
concentration of its business in a particular industry, it has
more at stake because it must depend on that industry’s market
for its sales. Young and small firms with a high degree of
market dependence may be limited in how they respond due to
resource constraints. The competitor’s resources must also be
considered. For instance, if the competitor is a small firm, it
may be unable to mount a serious attack due to lack of
resources. As a result, it is more likely to react to tactical
actions such as incentive pricing or enhanced service offerings
because they are less costly to attack than large-scale strategic
actions. Finally, whether a company should respond to a
competitive challenge will also depend on who launched the
attack against it. Compared to relatively smaller firms with less
market power, competitors are more likely to respond to
competitive moves by market leaders. Competitors can also
choose not to react at all. Forbearance = a firm’s choice of not
reacting to a rival’s new competitive action. Co-opetition = a
firm’s strategy of both cooperating and competing with rival
firms.
31
Question
(4 of 4)
Which of the following might best describe the motivations and
actions of small firms as they respond to competitive attacks?
Because they lack legitimacy in the marketplace, small firms
need to signal their competitive actions long before they launch
those actions.

Small firms typically have more resources available as they
undertake competitive attacks.
Small firms are more nimble and can respond quickly to
competitive attacks.
All of the above.
Answer: C. Smaller size makes them more nimble compared to
large firms so they can respond quickly to competitive attacks.
Because they are not well known, startups also have the
advantage of the element of surprise in how and when they
attack. Innovative uses of technology, for example, allow small
firms to deploy resources in unique ways. Because they are
young, however, startups may not have the financial resources
needed to follow through with a competitive response. In
contrast, older and larger firms may have more resources and a
repertoire of competitive techniques they can use in a
counterattack. Large firms, however, tend to be slower to
respond.
32
Competitive Dynamics & Entrepreneurial Strategies
In summary: Entrepreneurial strategy involves new value
creation.
Threatens existing competitors
Changes the competitive dynamics of the marketplace
Entrepreneurial activity involves risk.
How should I enter a market?
How should I compete?
How should I deal with the competitor’s reaction?
The entry of a startup into a market for the first time, an attack
by a lower-ranked incumbent on an industry leader, or the

launch of a breakthrough innovation can all disrupt an industry
structure. Such actions forever change the competitive dynamics
of the marketplace. Thus, the cycle of actions and reactions that
occur in business every day is a vital aspect of entrepreneurial
strategy that leads to continual new value creation and the
ongoing advancement of economic well-being.
33
ADA APPENDICES
Description of Images
Appendix 1 Competitive Dynamics Model
Return to slide.
The graphic depicts the cyclical competitive dynamics model.
Describing the cycle of actions, the graphic shows the actions
and responses included in a competitive dynamic process.
Beginning with a new competitive action, next is a threat
analysis, followed by motivation and capability to respond, then
types of competitive action, and then to likelihood of
competitive action, which may lead back to new competitive
action.

Entrepreneurial Strategy and Competitive Dynamics

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