Does Startups need Strategy?

Many entrepreneurs worry that exploration will delay commercialization. So they go with the first practical strategy that comes to mind.

Problem:

In the cut-throat competition and saturation in the market, entrepreneurs often run with the first possible strategy they identify, to get to market. As a result, they end up losing out to second or even third movers with superior strategies.

As there is the range of opportunities in the innovation space, it is easy to get overwhelmed. Entrepreneurs do not want to spend time weighing the alternatives.

What could be done in this scenario which brings the possibility of getting success rate higher, will be the focus of this article.

A IBM study titled “Entrepreneurial India” says that 90% of Indian startups will fail because of lack of innovation.

For example:

• PepperTap
• Shopo (the marketplace for Indian designs)
• Stayzilla (the hotel aggregator)
• Taskbob (the hyperlocal, home service provider)
• Finomena (a finance startup)

These startups have shut down their doors due to couple of reasons and the major or underlying reason is these startups could not find out strategies to sell their services or products to customer. Or we could say these startups could not find out alternatives for the go-to-market strategies that align with the users’ motivation and hold values.

The mistake, which startups or founders do, as Richard Branson claimed, “In the end you (have) to say. ‘Screw it, just do it’ and get on and try it.”

Most of the time, entrepreneurs who does not think of alternatives, leave their startups vulnerable to competitors.

Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space.

The Entrepreneurial Strategy Compass

The framework for the entrepreneurs developed by the Joshua Gans, Erin L.Scott and Scott Stern, will help them think differently about problems.

The simple quadrant will help entrepreneurs think about their strategic orientation as a new company. Basically, the questions are:

• Do you collaborate or compete? (attitude towards incumbents)
• Do you build a moat or storm a hill? (attitude toward the innovation)

Collaborate or compete?

With the support of established players, startups could utilize the resources and supply chains that can enable them to enter a larger and better-established market more quickly. The cons of this that incumbent is likely to hold greater bargaining power in the relationship.

Competing against established players in an industry means the startups-up has more freedom to build the value chain it envisions. However, it means, startup is backed by greater financial resources and has established business infrastructure.

Build a moat or storm a hill?

Companies can have more gain from maintaining tight control over a product or a technology through investments in protecting IP. Though IP protection would be expensive, but it can exclude the startup from the direct competition. The challenge remains with the transaction cost and bringing innovation to market which works for customers and partners.

In contrast, concentrating on quickly going to the market speeds up commercialization and development, which typically means startup is willing to experiment and iterate on their ideas directly in the marketplace.

Zeroing in on these questions greatly simplifies the process of strategic reflection.

Case Study taken to explain framework: RapidSOS

RapidSOS is a technology company in the emergency communications field. It brings 911 calls into the smartphone age. Emergency-response systems had evolved in a premobile era, which meant that few of them could accurately identify the location of callers who were using mobile phones, compromising response times and medical outcomes. After attracting early-stage financing at business plan competitions, Martin and Horelik (founders) reached a crossroads: How should they take their technology to market?

The framework helps to build the 4 distinct strategies that guide a venture’s decisions regarding customers, technologies, identity and competitive space.

Both new and established entrepreneurs would benefit from researching these conceptual strategies.

The Entrepreneurial Strategy Compass

4 Decisions:

• Making choices about which customers to target.
• What technologies to apply?
• What organizational identity to assume?
• How to position the company against which competitors?

For each compass quadrant the company should identify which customers to target, which technologies to focus on, what identity to assume, and whom to compete with and how. All four paths will look plausible, which will become the striking validation of the founders’ idea.

If only one viable vision of the future exists, the entrepreneur probably doesn’t have much of a business to begin with.

The founding team does not just make the choice; it has to live the choice.

Alignment between strategy and purpose is crucial for motivating founders and persuading early stakeholders to travel the chosen path.

Explaining: The Four Decisions

At least four domains of decision making are crucial for every venture. Although any company will face additional choices that are particular to its context, a start-up that has not wrestled with at least these four decisions is unlikely to create and capture value on a sustainable basis.

Understanding through Amazon’s story.

Customers

Identifying customers and understanding their needs is usually the first step in any go-to-market strategy. But the target customer is not necessarily the first customer — and it is important that you understand the relationship between the two. You validate your product by getting the right early adopters. Amazon’s decision to initially target book readers was a strategic choice. Its leadership recognized that books were a beachhead from which the company could expand into other retail categories.

Technology

Technology and customer choices are interrelated. Amazon could have built a simple online ordering system to service existing stores. Instead its goal was to let consumers buy the long tail of books that could not be stocked physically at the local mall. Thus the company had to invest beyond transaction services to build a database and a search engine capable of guiding readers through millions rather than thousands of books.

Identity, Culture, and Capabilities

Choices in this category should both create a narrative about what the company will stand for and communicate to all stakeholders what behavior to expect and what capabilities it will develop. Readers loved Amazon’s offer, and Wall Street quickly saw how much money the company could make. But Amazon’s founder, Jeff Bezos, wasn’t building a bookstore. He wanted to create the “everything store.” That would require that ordinary consumers trust they were getting a good deal, which meant that Amazon would focus relentlessly on lowering prices, despite pressure from investors for early returns.

Competitors

Amazon defined its competition as other retailers and chose to compete aggressively by offering consumers more choice, greater reliability, and lower prices. In its early days it could easily have chosen to work with existing retailers — perhaps even defining them as customers. Competitors would have been other search and logistics service providers, and the company could have established itself as a premium service provider by adding more value for booksellers.

The Strategies

The Intellectual Property Strategy & The Disruption Strategy

Two of the strategies show the diverse nature of how an entrepreneur can approach the market. The “intellectual property strategy” involves an entrepreneur bringing something new to the market, retaining ownership in the product, and seeking to collaborate with those already established. Consider this a partner-driven approach. The opposite method is the appropriately titled “disruption strategy.” With the disruption strategy, established businesses are targeted as competitors by an entrepreneur looking to shake up the market.

The Value Chain Strategy & The Architectural Strategy

“The value chain strategy” shares some traits of the disruption strategy since it involves competing, but not too aggressively. An entrepreneur who employs this method becomes the new member of the market, a member seeking to eek out his/her own share.

Probably the most difficult strategy involves an “architectural strategy.” With this method, a new value chain, one outside the existing established market is created. Entrepreneurs who create a value chain generally seek to keep others from entering it. The social network industry is filled with examples of the architectural strategy.

Explaining: The Architectural Strategy

Whereas the value chain strategy is the domain of quiet achievers, entrepreneurs who choose and succeed with an architectural strategy tend to have very high public profiles. This strategy allows start-ups to both compete and achieve control, but it is out of reach for many if not most ideas and incredibly risky when it is feasible. This is the domain of Facebook and Google.

Entrepreneurs who follow an architectural strategy, design an entirely new value chain and then control the key bottlenecks in it.

They may not be the originators of an underlying innovation — search engines existed prior to Google, and social networks prior to Facebook — but they bring it to a mass market through careful alignment of customer, technology, and identity choices.

Facebook committed early to not charging users, even though the dynamics of social media would lock them into the platform. Google adopted the motto “Don’t Be Evil” so that it could achieve dominance without the pushback that had plagued other digital firms such as IBM and Microsoft. But in each case pivots were taken off the table.

Conclusion

None of the four strategies can be referred to as the best strategy. One particular entrepreneur may be better suited for a particular strategy than the other three. That’s fine.

The framework will help to design the choice successfully and channel imagination toward the realization of founders’ ideas.

Taken from the Harvard Business Review article: “Strategy for Startups”.