Chapter 8
Entrepreneurial Strategy and Competitive Dynamics…..….…. 248 (8-2)
Recognizing Entrepreneurial Opportunities…………….………….………….. 250 (8-5)
Entrepreneurial Opportunities……………………………………………………………………….……. 250 (8-5)
Entrepreneurial Resources…………………………………………………………………………….……. 253 (8-8)
Entrepreneurial Leadership…………………………………………………………………….….………. 257 (8-12)
Entrepreneurial Strategy………………………………………………………………… 260 (8-13)
Entry Strategies…………………………………………………………………………………………………. 260 (8-13)
Generic Strategies……………………………………………………………………………………………... 263 (8-16)
Combination Strategies………………………………………………………………………………………. 265 (8-17)
Competitive Dynamics……………………………………………………….…………… 265 (8-18)
New Competitive Action……………………………………………………………………………………... 266 (8-19)
Threat Analysis………………………………………………………………………………………………….. 268 (8-20)
Motivation and Capability to Respond………………………………………………….……………… 268 (8-20)
Types of Competitive Actions………………………………………………………………..……….……. 269 (8-21)
Likelihood of Competitive Reaction……………………………………………………………………… 271 (8-22)
Choosing Not to React: Forbearance and Co-opetition……………………………………..…… 271 (8-23)
Issue for Debate……………………………………………………………………….…….. 273 (8-24)
Reflecting on Career Implications…………………………………………………… 274 (8-26)
Summary……………………………………………………………………………….………. 274 (8-28)
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 case in LEARNING FROM MISTAKES is Digg, a 2004 start-up that created a
news-sharing social network site. Digg allows users to post news stories, and then members 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 lessons can we learn from Digg?
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
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
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.
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. Digg works to keep loyal users by constantly
Small business and entrepreneurship play an important role in fueling the U.S. economy.
The SUPPLEMENT below discusses the importance of four species of entrepreneurs
identified by Linda Rottenberg.
Extra Example: The four species of entrepreneurs
Linda Rottenberg has worked with hundreds of entrepreneurs looking to get their businesses off the ground and
ramped up. She argues that for entrepreneurs to succeed, they need to have self-knowledge regarding the type or
species of entrepreneur they are and to tailor how they manage the entrepreneurial venture to their type.
The four species of entrepreneur are diamonds, stars, transformers, and rocket ships. Each have their own strengths,
as well as key issues they need to be sensitive to.
Diamonds These are charismatic evangelists with bold innovations that are aimed at transforming people’s
lives. When they succeed, they change the game. When they fail, it is often dramatic and tragic.
The classic examples of this are Mark Zuckerberg, Ted Turner, and Steve Jobs. They both bent
reality to fit their vision. Their Achilles heel is that they tend to tune others out, but successful
diamonds are conscious of their need to listen and learn, willing to take criticism from others, and
can build a strong team around themselves.
Stars These are dynamic trendspotters and trendsetters who have big personalities and can see
how society is changing and what the next hot trends will be. They tend to be lone wolves who
project themselves boldly into their environments. Examples include Martha Stewart, Lance
Armstrong, and Jay Z. To be successful, stars need to be sure to build a strong support team and
organization that can help them deliver on the promise of their personality. Essentially, they need
to make sure there is a strong organization to handle the boring details of operations and customer
service.
Transformers Some entrepreneurs see established industries as settings open for transformation. These
transformers modernize systems, redefine operating rules, and change the way products are
delivered. Examples include Howard Schultz of Starbucks, the man who transformed both how
customers saw a cup of coffee and how it was delivered. To ensure success, transformers need to
be both disciplined in working through the details and financial logic of their transformations and
also mindful of continuously looking forward for additional opportunities to transform the market.
Their innovations are often easily imitated, leading to the need to be diligent in implementation
and working to stay one step ahead of the imitators.
Rocket Ships These entrepreneurs are brilliant experimenters who aim to build businesses that are evermore
cheaper, faster, and more efficient. They excel at using analytics to see opportunities for
streamlining operations. However, they can struggle to see creative, industry changing
innovations. Their narrow focus can limit the opportunities their firms see and pursue. Examples
include Michael Dell, Bill Gates, and Jeff Bezos. Rocket Ships can benefit by surrounding
themselves with individuals who are more creative and higher in emotional intelligence.
Successful rocket ships are also sensitive to the need to consider qualitative data and others’
emotional reactions even though it doesn’t come naturally to them.
The key point is that there is no optimal species of entrepreneur. But success comes in two steps. First, an
entrepreneur needs to know herself. Second, she needs to acknowledge the strengths she can leverage and be aware
of her weaknesses. Third, she needs to surround herself with others who complement her strengths and weaknesses.
Source: Rottenberg, L. 2014. The Four Species of Entrepreneurs. Wsj.com, October 4: np.
Discussion Question 3: What are some examples of entrepreneurs you are familiar with
who are diamonds, stars, transformers, and rocket ships?
I. Recognizing Entrepreneurial Opportunities
New value can be created in many different contexts including start-up ventures, major
For an entrepreneurial venture to create new value, three factors must be present—an
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
The SUPPLEMENT below illustrates how an entrepreneur saw an opportunity in the
Extra Example: An ATM for Portable Electronics
Each year, users in the United States dispose nearly 400 million pieces of electronic waste. Less than 20 percent of
this waste is recycled and, instead, ends up in landfills. This issue is even more extreme with portable electronic
devices. A survey by Nokia found that less than 3 percent of people worldwide recycle their cell phones. Since these
electronic devices contain toxic substances, such as mercury, lead, cadmium, and arsenic, disposing of this waste in
landfills creates the potential for environmental contamination. Mark Bowles looked at this not solely as a potential
environmental disaster but also as a business opportunity.
He saw real potential in developing a business that would allow users to sell their used cell phones and other
portable electronic devices. In 2008, he founded ecoATM and took three years to develop an ATM-like machine that
manages transactions with customers wishing to sell their portable electronics. The machine scans the devices a user
brings and can recognize over 4,000 types of phones, MP3 players and tablets. It then uses a constantly updated
database to price the device based on model and condition. The average price for a device is $25, but a newer
smartphone can fetch up to $300. The machine validates the users ID and extracts the serial number from the device
to ensure that thieves aren’t selling stolen devices.
The company resells 75 percent of the devices to firms that refurbish them and sell them to consumers. The
remaining 25 percent go to certified electronics recyclers.
As of June 2013, the firm had 350 ecoATMs operating in 24 states. They place the machines in high traffic
locations, such as shopping malls, to make it easy for individuals to sell their electronics. The business is growing
rapidly, with several hundred thousand devices purchased in 2012, and is serving to improve the environment while
also generating nice returns for ecoATM. As Bowles states, “We’re using technology to solve a problem that
technology created.”
Source: Duncan, K. 2012. Green machine. Entrepreneur. June 12: 51.
Discussion Question 4. What are other business opportunities that have come out of the
drive to increase environmental sustainability?
Not all good ideas are viable business opportunities. To identify, assess, and select
Opportunity discovery may occur unintentionally because the discovery of opportunities
STRATEGY SPOTLIGHT 8.1 describes how the insight that people craved positivity led
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
Discussion Question 5: Which do you think is more important to launching a promising
new venture and building a successful business—opportunity discovery or opportunity
evaluation?
The SUPPLEMENT 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 6. What are the potential benefits and risks of relying on peers as
these entrepreneurs evaluate their entrepreneurial ideas?
Discussion Question 7. How can entrepreneurs who don’t have access to a business
incubator develop a set of advisors needed to develop and evaluate their business ideas?
A critical element of opportunity recognition is assessing to what extent an opportunity is
viable in the marketplace. For an opportunity to be viable it must have four qualities:
1. Attractive There must be market demand for the product or service.
3. Durable It must be attractive long enough for the development and
4. Value-creating The benefits must surpass the cost of development by a profitable
Discussion Question 8: 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?
STRATEGY SPOTLIGHT 8.2 discusses how Method Products is building a strong
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
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
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
Discussion Question 9: 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?
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 percent 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 10. What other types of businesses, other than video games, are
ripe for crowdfunding as a primary means of financing?
Discussion Question 11. What are the advantages of using a crowdsourcing approach
for raising money for new businesses? Are there any downsides to raising funds this
way?
If personal savings and bootstrapping efforts are insufficient to finance the business,
entrepreneurs may turn to other sources of funds such as angel financing and venture capital.
Discussion Question 12: What are the advantages and disadvantages of selling shares of
ownership to venture capitalists?
Discussion Question 13: 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?
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
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
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 14: When, if ever, might closely controlling spending have a
negative effect on start-up success? That is, are there strategic implications from taking
the practice of bootstrapping too far?
2. Human Capital
Bankers, venture capitalists, and angel investors that invest in start-up firms and small
businesses agree that the most important asset an entrepreneurial firm can have is strong and
3. Social Capital
New ventures founded by entrepreneurs with extensive social contacts are more likely to
The social capital of entrepreneurs can be both built and leveraged through strategic
The SUPPLEMENT below describes how crowdsourcing is extending the social capital
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 15: What other ways might social networking practices enhance
the social capital of start-up entrepreneurs?