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.
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
2. Competitor’s resources—The types of internal resource endowments a competitor has
2. Actor’s Reputation—Whether a company should respond to a competitive challenge
Discussion Question 44: 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?
Discussion Question 45: What are some examples of companies you are familiar with that
refrain from intense competition because of stronger rivals competitive resources and/or
reputation?
F. Choosing Not to React: Forbearance and Co-opetition
There may be many circumstances in which the best reaction is no reaction at all. This is known
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
Discussion Question 46: 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?
Discussion Question 47: What are some examples of companies you are familiar with that have
been successful through collaboration and cooperation rather than competition?
STRATEGY SPOTLIGHT 8.6 discusses how the action of co-opetition between rivals can cross
The SUPPLEMENT below provides examples of how Tesla has chosen to “co-opetate” with
Extra Example: Tesla Allows Competitors to Use Its Patented Technology
Tesla Motors has invited other firms who want to design and build electric cars to use Tesla’s proprietary
technology. While many firms see patented technology as a key resource to protect and monopolize, Tesla
sees multiple potential benefits from sharing the technology embedded in its several hundred patents.
First, according to Elon Musk, Tesla’s CEO, his primary goal is to spur the wider development and
manufacturing of electric cars. Electric cars accounted for less than 1 percent of all cars sold in 2013.
Musk reasons that having a larger number of competitors offering electric autos will help them gain
acceptance in the market place as mainstream products. Second, as the number of electric cars being
manufactured grows, the overall industry can achieve greater economies of scale. For example, if multiple
manufacturers adopt Tesla’s patents for charging stations, it can help Tesla quickly open more charging
stations and allow suppliers to become more economically efficient. Finally, as other firms leverage Tesla’s
technology, it means that Tesla is setting the technology trajectory and will leave competitors following in
technology development. In Musk’s view, patents aren’t that important if a firm is sufficiently innovative.
As he stated, “You want to be innovating so fast [that] you invalidate your prior patents.”
Source: Ramsey, M. 2014. Tesla Offers Open Licenses to Its Patents. wsj.com, June 12: np.
Discussion Question 48: What are the advantages and disadvantages of co-opetition and
forbearance? Can you think of examples of companies that have used these approaches?
IV. Issue for Debate
The United States has the reputation for being a nation with a vibrant entrepreneurial culture.
However, there is some evidence that this has declined in recent decades. Overall, the number of new
Discussion Question 49: How concerned are you about the drop in the rate of
entrepreneurship?
Students may express significant concerns about this issue. Entrepreneurial businesses are
However, students may not care much about this issue if their goal is to work for an established
firm, not a start-up firm. If students voice this perspective, the instructor may want to push them to think
As discussed again below, the drop in entrepreneurial start-ups may be driven by a different
cause, which may signal the effects on the economy and may not be as significant as we might otherwise
fear. In the past, established firms were often hostile to innovative ideas created by employees. This led
Discussion Question 50: What do you think are the primary causes of the decline?
As discussed in the mini–case, one driving factor may be economic insecurity. The effects of the
recent economic recession may be limiting the degree to which people are feeling comfortable with taking
Increased regulation may be also limit the ease of getting a start-up off the ground. As discussed
in the case, start-ups are saddled with increasing regulations regarding licenses and other costs. At the
There could also be larger forces at work. First, students may bring up social trends, such as an
increased interest in work-life balance that limits the desire to create a start-up. Individuals may be less
A side debate that can be drawn out of this discussion is whether the reduction in the rate of
Discussion Question 51: What actions should be taken to increase the rate of new business
start-ups? How effective will these actions be?
Students could bring up a wide range of ideas on how to increase the rate of start-ups. One way to
organize the discussion is to categorize them into three basic categories: those that reduce the barriers to
Actions to reduce the barriers to entrepreneurship:
Deferred student loans or other debts for entrepreneurs
Reduced regulation to make it easier for firm start-ups
oReduce red tape when starting up firms (such as an overall review of licensing
oOther examples could include pushing government to avoid selective regulation to
protect entrenched industries. For example, students could argue for a push
against government regulations for ridesharing firms, such as Uber, that are
Actions to create opportunities for entrepreneurship
Build business incubators in communities
Include entrepreneurship programs with seed funding in high schools and community
Better funding for Small Business Administration start-up investment and mentoring
Actions to create incentives for entrepreneurship
Reduced corporate tax rates for job creating startups
Create entrepreneurship zones where start-up businesses get infrastructure support, tax
Favorable capital gain taxation rates for investments in start-up firms
The discussion of how best to increase the rate of entrepreneurship can revolve around which of
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
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
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.
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 whom within the firm they should approach. Should they write a proposal first
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
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
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
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
Competitive Dynamics: There is always internal competition within organizations: among
business units and sometimes even among individuals within the same unit. What types of
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
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
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
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
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
The entry of a new company into a competitive arena is like a competitive attack on incumbents in
that arena. Such actions often provoke a competitive response that may, in turn, trigger a reaction to the
response. As a result, a competitive dynamic—action and response—begins among close competitors. In
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.
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
(Note to instructors) We think there is great value to asking students to identify multiple examples and to
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
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
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
threat of imitation from existing firms. In order to make it more costly to imitate their strategy,
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
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.
(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
Application Questions and 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
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
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
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
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
Expertise in providing
information to customers
Lending Tree High commonality
with E-Loans
Expertise is in providing
information to customers
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
Advertise its awards
and good
Lending Tree Expand services to other
market-making arenas for
Advertise its good
service and free
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 setting up their own websites that compete with them, so
(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
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 industrywide efficiencies. One example by which E-Loans and Lending Tree could do co-
(Note to instructors) Students may come up with a variety of suggestions regarding co-opetition.
actions could be interpreted as the firms setting price, output levels, or quality of product?
2. Using the Internet, research the Small Business Administration’s website (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
(Note to instructors) This list is only a start of what is available. One goal of this assignment is to increase
3. Think of an entrepreneurial firm that has been successfully launched in the past 10 years. What
kind of entry strategy did it use—pioneering, imitative, or adaptive? Since the firm’s initial entry,
how has it used or combined overall low cost, differentiation and/or focus strategies?
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
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
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,
Second, imitation may threaten the value of the firm, which harms shareholders and firm value. The first
2. Intense competition, such as price wars, is 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
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