Strategy4Startups: Creating a sound business strategy
A course in strategic management is a certainty for all undergraduate and Masters level University business programmes, so it is strange that most entrepreneurs and startup company business plans pay very little attention to strategy. In four years of venture capital consulting before my sabbatical, I evaluated around 200 business plans and spoke to many enterprising entrepreneurs but rarely have I even seen or heard much about their corporate or business strategy and not enough about how they intend to build competitive advantage in their business. Even where this is mentioned it is seldom well thought out.
Sun Tzu said in the Art of War, “Strategy is the great work of the organisation. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected”. Thus strategy is “the way” towards survival, the lack of which is the way to extinction. Generally 80% of startups will fail within 3 to 5 years, so having the right strategy is one way to avoid being just another statistic.
In Malaysia, the government linked and multinational corporations spend a lot of money inviting leading American academics, including from Harvard University, to speak to them about the latest in strategic thinking. However, startup companies cannot afford this luxury, hence the lack of real strategic thought in their business. It does not have to be this way. Even startups need strategic thinking to be successful and my next few articles will deal with the issue of strategy for startups. We start by looking at the role of strategy and formulating a basic strategic plan for the business, which is about formulating and implementing plans to position the company within its business domain to create and sustain a long-term competitive advantage over its competitors.
The building block of strategic management is a sound strategy for the firm beginning with goals that are simple, consistent and long term. The management team must have a profound understanding of the competitive environment and competitors and be able to objectively appraise the resources of the firm including its human resources, finances and talent pool to determine whether the firm can create a competitive advantage within its chosen domain. Once it has made this determination it needs to have a strategic plan to implement its chosen strategy and build a sustainable competitive advantage.
However, in the ICT space, the competitive environment is in a constant state of flux with new technologies constantly displacing older ones and this state of constructive destruction and constant change also needs to be managed and this is no mean feat. A simple change in technology or regulations can destroy entire companies in a flash and managing this potential for destruction also needs strategic planning and total management commitment. Despite this, strategic management in the ICT industry has many similarities to traditional business and the main strategic ideas are still important for the success of a startup.
The first lesson in strategic management is to determine the corporate strategy of the business. Basically this means deciding what business you want to be in and where you want to do it. Entrepreneurs have many ideas but need to differentiate between ideas and opportunities. The majority of ideas are not opportunities. An opportunity needs to be sustainable and be able to capture value and differentiate the business from others in the industry. Deciding what business to be in also depends on industry attractiveness i.e. is there plenty of scope for growth, profitability and is it possible for you to compete effectively and create competitive advantages within your chosen industry.
Deciding where you want to do this would relate to your knowledge of the market and whether the business is easily scalable nationally, regionally or globally. A web-based or telecommunications product based business may be global but one that requires local implementation like software services may need to grow organically beginning with a local presence.
The second lesson is to determine the business strategy and this relates to the “how” question - how you will achieve your corporate strategy. The main strategies here are whether you have a low cost leadership strategy or a differentiation strategy. A low cost strategy works primarily for commodity type goods and may be appropriate for data centres but most ICT businesses should use a differentiation strategy where some aspect of the service or product or both differentiates your firm from the competition.
Additionally, ICT companies should also use a “focused differentiation” strategy, where you not only differentiate yourself from the competition but also focus on a particular area or niche of the industry. Hence in say, logistics enterprise software, you should focus on a particular sector of the industry like shipping or warehousing and once you have established yourself in the sector only then would you expand into other sectors. This enables you to develop in-depth expertise in the area and also allows you to target a specific customer base. Trying to be everything to everybody in the domain makes strategy formulation and customer targeting as well as product or service development more complex.
Startups need to identify a niche in a particular industry in which they can add value and differentiate themselves from the competition. You have to also identify a particular need or gap in the industry that you can fill or find a problem that you can solve. Building a better mousetrap is not the answer as there are already far too many copycat businesses around. Determining your strategy from the beginning gives you greater focus and understanding and increases your chances of success. But that is only the beginning of a sound business strategy. In upcoming articles we shall explore other aspects of strategy including the different strategic models and how to apply them to a startup business.
Sun Tzu said in the Art of War, “Strategy is the great work of the organisation. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected”. Thus strategy is “the way” towards survival, the lack of which is the way to extinction. Generally 80% of startups will fail within 3 to 5 years, so having the right strategy is one way to avoid being just another statistic.
In Malaysia, the government linked and multinational corporations spend a lot of money inviting leading American academics, including from Harvard University, to speak to them about the latest in strategic thinking. However, startup companies cannot afford this luxury, hence the lack of real strategic thought in their business. It does not have to be this way. Even startups need strategic thinking to be successful and my next few articles will deal with the issue of strategy for startups. We start by looking at the role of strategy and formulating a basic strategic plan for the business, which is about formulating and implementing plans to position the company within its business domain to create and sustain a long-term competitive advantage over its competitors.
The building block of strategic management is a sound strategy for the firm beginning with goals that are simple, consistent and long term. The management team must have a profound understanding of the competitive environment and competitors and be able to objectively appraise the resources of the firm including its human resources, finances and talent pool to determine whether the firm can create a competitive advantage within its chosen domain. Once it has made this determination it needs to have a strategic plan to implement its chosen strategy and build a sustainable competitive advantage.
However, in the ICT space, the competitive environment is in a constant state of flux with new technologies constantly displacing older ones and this state of constructive destruction and constant change also needs to be managed and this is no mean feat. A simple change in technology or regulations can destroy entire companies in a flash and managing this potential for destruction also needs strategic planning and total management commitment. Despite this, strategic management in the ICT industry has many similarities to traditional business and the main strategic ideas are still important for the success of a startup.
The first lesson in strategic management is to determine the corporate strategy of the business. Basically this means deciding what business you want to be in and where you want to do it. Entrepreneurs have many ideas but need to differentiate between ideas and opportunities. The majority of ideas are not opportunities. An opportunity needs to be sustainable and be able to capture value and differentiate the business from others in the industry. Deciding what business to be in also depends on industry attractiveness i.e. is there plenty of scope for growth, profitability and is it possible for you to compete effectively and create competitive advantages within your chosen industry.
Deciding where you want to do this would relate to your knowledge of the market and whether the business is easily scalable nationally, regionally or globally. A web-based or telecommunications product based business may be global but one that requires local implementation like software services may need to grow organically beginning with a local presence.
The second lesson is to determine the business strategy and this relates to the “how” question - how you will achieve your corporate strategy. The main strategies here are whether you have a low cost leadership strategy or a differentiation strategy. A low cost strategy works primarily for commodity type goods and may be appropriate for data centres but most ICT businesses should use a differentiation strategy where some aspect of the service or product or both differentiates your firm from the competition.
Additionally, ICT companies should also use a “focused differentiation” strategy, where you not only differentiate yourself from the competition but also focus on a particular area or niche of the industry. Hence in say, logistics enterprise software, you should focus on a particular sector of the industry like shipping or warehousing and once you have established yourself in the sector only then would you expand into other sectors. This enables you to develop in-depth expertise in the area and also allows you to target a specific customer base. Trying to be everything to everybody in the domain makes strategy formulation and customer targeting as well as product or service development more complex.
Startups need to identify a niche in a particular industry in which they can add value and differentiate themselves from the competition. You have to also identify a particular need or gap in the industry that you can fill or find a problem that you can solve. Building a better mousetrap is not the answer as there are already far too many copycat businesses around. Determining your strategy from the beginning gives you greater focus and understanding and increases your chances of success. But that is only the beginning of a sound business strategy. In upcoming articles we shall explore other aspects of strategy including the different strategic models and how to apply them to a startup business.
27 February 2006
posted by Dr. Siva at 10:40 PM
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