Competitive dynamics among entrepreneurial firms
Ming Jer Chen
How entrepreneurial firms compete has received some attention from strategic management and entrepreneurship scholars alike. Strategy re searchers have approached this issue by focusing on how firms with low market shares compete against their larger rivals and by offering such normative advice as ‘‘be flexible and move fast’’ (Hambrick, MacMillan, and Day, 1982). Chen and Hambrick (1995) found that relatively smaller industry players differ from their larger counterparts in their competitive behaviors, as typified by such attributes as propensity for action and response speed. The entrepreneur ship literature has applied Porter’s (1980) and Miles and Snow’s (1978) typologies of strategy to examine competition in the context of small and medium size firms. Extending from Miller (1983), Lumpkin and Dess (1996) formalized the construct of entrepreneurial orientation and highlighted the importance of competitive ag gressiveness and proactiveness in such vital entrepreneurial activities as new entry and new venture creation.
Consistent with Hitt et al. (2001), this essay stresses the integrative nature between entrepre neurial and strategic actions in competition re search. Its purpose is twofold. It first reviews some of the key concepts and findings advanced in competitive dynamics research in the strategy literature. Second, and more importantly, it shows how these concepts can be used to facili tate entrepreneurship research in the study of 38 competitive dynamics among entrepreneurial firms competition. The discussion below considers entrepreneurial firms both from the ‘‘orientation perspective’’ of Lumpkin and Dess (1996) and from the more conventional view that incorpor ates firm size and age as the key organizational features in the entrepreneurship research domain. Hence, the ideas here apply equally to emerging, or new, firms and to those small and medium size firms that may tend to be more limited in market scope and constrained by their resources.
Competitive Dynamics
Over the last decade, strategy scholars, taking the Austrian and Schumpeterian perspective, have produced some useful ideas in the study of competitive dynamics (see the review by Smith, Ferrier, and Ndofor, 2001). First, by using the individual competitive move as the unit of analysis, researchers are able to analyze competition by studying the exchange of actions and responses. Likewise, this approach enables analysis of competitors through pairwise com parison between each rival in an industry with a focal firm along some market and resource di mensions (Chen, 1996). Second, researchers have developed a set of variables (such as likeli hood and speed) that can be used to characterize competitive actions and responses. Research has shown that the exchange of actions and re sponses affects firm performance (Smith, Fer rier, and Ndofor, 2001) and that a firm’s responses can be predicted by such factors as the defender’s dependence on the markets under attack and the signaling of an attacker’s actions (Chen and MacMillan, 1992).
Extended from the firm specific perspective, Chen (1996) proposed the idea of competitive asymmetry: the notion that a given pair of firms may not pose an equal threat to each other. The idea that each competitive relationship is unique and not necessarily symmetrical derives in part from the resource based view of the firm and, more importantly, from Tversky’s (1977) sem inal work on the features of similarity. The basic idea is that similarity between two objects should not be treated as a symmetric relation: statements of similarity are directional and depend on which element of the comparison is the ‘‘subject’’ and which the ‘‘referent’’ (Tversky, 1977: 328). The metric distance function, then, states that d(a, b) 6¼d(b, a). Market and resource conditions, such as firm size and structure, are important contributing factors for competitive asymmetry.
Research Implications
Competitive dynamics research has tended to sample from large established firms. Its central ideas and premises, however, can be extended to an array of research issues that are pertinent to the study both of entrepreneurially oriented or ganizations and of firms that are relatively smaller or younger, or which are limited in market scope or resource endowment. For example, competitive dynamics research has fre quently found that a bias for actions (or launch ing lots of actions) is positively related to performance. Does the same phenomenon hold for entrepreneurial ventures – or are they better off initiating fewer actions, due to size and re source issues and possible needs for stealth?
Similarly, competitive dynamics research has found beneficial effects of a broad competitive repertoire. Does this apply to entrepreneurial ventures? Or, due to liabilities of age and size, are entrepreneurial ventures better off relying on a simple, narrow, competitive repertoire, until they have overcome the early stage limitations of age and size and have the resources and legit imacy to expand their competitive repertoire?
One of the key issues for entrepreneurial ven tures is how to anticipate incumbent firm re sponse. Market commonality (the degree of a competitor’s presence in the markets in which it overlaps with a given entrepreneurial firm) and resource similarity (the extent to which a given rival possesses comparable strategic en dowments to those of the firm) hold promise as analytical tools for anticipating response. To what extent can an entrepreneurial firm plan the extent of its market commonality with rivals in an attempt to ‘‘manage’’ incumbent response?
An entrepreneurial firm often seeks to under take innovative actions or expand into untapped or unrecognized markets where it has the oppor tunity to create local dominance. How can it protect such niches when established firms decide to move in? Specifically, how can it undertake actions that may escape the attention of established industry players, delay their reac tions, exploit their response barriers, and min imize the magnitude of their responses?
An entrepreneurial venture, by virtue of its flexibility, often can create competitive asym metry vis a` vis its established rivals. What are some conditions under which it can maintain and take advantage of such asymmetry? To what extent can it defend itself by counter attacking in the established firm’s home market, rather than in its own home market under attack? An entrepreneurial firm may also undertake actions to redirect (or even misdirect) its larger rivals so they will invest or expand in businesses or markets that will be potentially beneficial to the firm. What are some market conditions and strategic considerations for making this kind of competitive maneuvering?
In many cases, an entrepreneurial firm is under pressure to compete or cooperate with entrenched firms. How should market and re source considerations (i.e., market commonality and resource similarity) affect the firm’s timing in cooperative moves and its decisions for part ner selection? How can the firm utilize its social capital and network to expand its market scope and resource profile in its fight with larger rivals, or take advantage of government policy to help it compete overseas?
Investigation of these issues should advance competition research in the entrepreneurial con text. Moreover, it has the potential to contribute equally to competitive dynamics research, which so far – due largely, perhaps, to data and infor mation constraints – have not given adequate attention to the study of entrepreneurial firms. Such investigation may help broaden the con ventional consideration of competition as a head on, war like activity. In light of globalization, development of an expansive view of competi tion may be especially pressing. The notion of indirect competition, for instance, may lead to the treatment of competition as non confronta tional, subtle rivalrous behavior. Accordingly, the study of such ideas as competitive–coopera tive interdependence may open new frontiers for both entrepreneurship and strategic manage ment researchers.
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