In this essay I am going to discuss about creating a strategy for startups, in contrast to the conventional methods of strategy development for mature companies. An industry which is its early stage, is fragmented and has an unpredictable future direction (primarily because of lower entry barriers) is ideal for startups to enter (Ex. Apple, Microsoft, and Facebook). On the other hand, a mature industry, which is becoming fragmented, can be also a good place for startups to disrupt (Ex. low cost airlines disrupted the air travel industry, electric car manufacturers disrupted the automotive industry and potential disruption by 3D printing in manufacturing industry). My focus will be on how startups need to think about business strategy differently.
What is a startup?
Thousands of new businesses are being registered every year in every country. In Canada, more than 25 thousand new businesses were registered in the year 2012 and this is kind of a norm (The World Bank). So, are all of them startups? How do we differentiate between a startup and a small business? Venture Capitalist Paul Graham defines a startup as “a company designed to grow fast” (Graham, 2012). According to him, two factors differentiate startups- intention to grow rapidly and scalability (Graham, 2012). But, why do some startups fail to grow? In my observation, the basic difference is divergent and convergent thinking. A divergent thinking style is about creating possibilities – various possible solutions to a single problem, various possible uses for a single technology and ability to imagine various possible outcomes of an incident. People with divergent thinking see the world around them as dynamic or malleable rather than static and concrete. They see opportunity in uncertainty. On the other hand, people with convergent thinking focus on getting and sticking with one ‘right’ answer. They see the industrial, social and political systems around them as fixed, inflexible and static. Research confirms that people who use divergent thinking are more successful entrepreneurs (Ames & Runco, 2005). Divergent thinking helps in adaptation of a single technology or service as solution to various problems in the present or in the future. Apart from thinking styles of founders, other reasons are failure to create a sustainable competitive advantage (which limit the reach of the company), entering an industry which has already consolidated and has limited growth prospects, entering an industry with established competitors and you do not have enough differentiation, value chain with customers and/or suppliers with relatively high bargaining power etc.
What is Business Strategy?
“Strategy” seems to be one of the most overused words ever. Everyone seems to have strategy for anything they want to do. Jokes apart, in simple words, strategy is a high level plan to achieve one or more goals in uncertain conditions (Freedman, 2013). As the definitions are not focus of my essay, I am just quoting a definition of business strategy by Dr. Michael Watkins which I find reasonable “A business strategy is a set of guiding principles that, when communicated and adopted in the organization, generates a desired pattern of decision making. A strategy is therefore about how people throughout the organization should make decisions and allocate resources in order accomplish key objectives.” (Watkins, 2007). So, Strategy by definition is about overarching policies at an organizational level rather than planning for every decision. Strategy is not that regular as we are led to believe and if your organization needs to strategize for every decision making then indicatively your organization does not have any strategy.
Now, I am moving towards the core of this article – how to develop a strategy?
Strategic thinking vs. Strategic planning
When people talk about developing strategy, in most cases, they mean Strategic Planning. Most tools taught in business schools relate to strategic planning which views the future as predictable and industry structure as static. Strategic Planning is systematic, sequential and non-iterative in nature. It considers uncertainty as risk and manages it accordingly. It chooses a goal based on past data or conventional wisdom and then plans out what needs to be done to achieve that particular goal (pick one and run with it).
Strategic Thinking on the other hand is about creating a capacity of strategic foresight. It considers the industry structure as dynamic and malleable, explores many possible futures and considers uncertainty as inescapable and potential advantage (Liedtka, 1998). In simple words, Strategic Thinking focuses more on creating options for future growth based on unique insights and creating opportunities rather than focusing only on achieving year-end goals. It takes creativity (divergent thinking) along with the analytical ability involved in the strategic planning. Strategic planning says you do not need to reinvent the wheel; strategic thinking says what happens if we do? One of the key word of strategic thinking is “unique” which leads to differentiation and helps build core competency. Fitting in is not a strategic advantage, being a misfit can be.
Before I discuss further about Strategic Thinking, I want to discuss a little about different strategic styles.
The classification is based on predictability (How far into the future and how accurately can you confidently forecast demand, corporate performance, competitive dynamics, and market expectations?) and malleability (To what extent can you or your competitors influence those factors?) (Reeves, Love, & Tillmanns, 2012)
The four styles are Classical, Adaptive, Shaping and Visionary.
The Classical strategic style is another name for Strategic Planning. It is the most known style and popular in mature industries such as Oil & Gas etc.
The Adaptive strategic style is about creating flexibility so that the organization can adapt to changing environments. The industry direction is not predictable and the organization does to try to change the industry structure but try to catch up. Most relevant examples are fashion retailing. As tastes change quickly and the retailer does not have control over the market structure, their best bet is to create flexibility so that they can adapt quickly.
When the industry direction is predictable and the organization wants to change the industry structure, it uses a Visionary strategic style. This pertains bold moves to change the industry structure, although the industry direction is predictable. Tata’s foray into ultra-affordable cars with Nano is an example.
The last strategic style Shaping requires most Strategic Thinking and most relevant for startups. The industry is not predictable, but malleable. It can be a young industry without predictable demand or a mature, but fragmented facing stagnation. This is the ideal industry for a startup to disrupt. Obviously, Shaping strategy is often associated with entrepreneurs and startups. Microsoft and Apple shaped the personal computer industry. Facebook’s Internet.org is also a similar strategic move bringing people without internet access in the industry – creating a new market for themselves. Elon Musk is shaping various future industries.
“Although a view of strategy as a positioning problem is legitimate, it is insufficient if the goal is to occupy the high grounds of tomorrow’s industries. If strategy is seen only as a positioning game, it will be difficult for the company to avoid becoming trapped in an endless game of catch-up with farsighted competitor.”
– (Hamel & Prahalad)
Basic framework for Strategic Thinking
The building block of Strategic Thinking is synthesizing hypothesis about the possible futures observing the trend or making assumptions about the potential future events and then performing diagnosis with data when it becomes available. The diagnosis points towards the possible course of action (Beaufre, 1965).
In their book, Competing for the Future, Hamel and Prahalad try to combine strategic thinking with strategic planning. The divide the whole process of strategy formation in three steps:
- Competition for Industry Foresight and Intellectual Leadership: This involves synthesizing hypothesis about the future shape and size of the industry. This is about comprehending the undercurrents of the system – the economic drivers, demography, technological landscape etc.
- Competition to Foreshorten Migration Paths: This step is about influencing the future direction of the industry development. Towards the end of this stage there is a race to accumulate competencies required in the future, prove out product and service concepts, attracting critical strategic partners, creating necessary infrastructure in view of the now almost predictable future.
- Competition for Market Position and Market Share: This is the Strategic Planning stage. The industry shape and size is intelligible, the players are defined and competitive advantages of players are defined and known to their competitors. Innovation is limited to the product line extension, efficiency improvement and marginal product differentiation.(Hamel & Prahalad, pp. 50-51)
Note: The first two steps are iterated.
Strategic Thinking in Action – Microsoft
At core, Strategic Thinking is about flexibility, which can result in future growth. I obviously do not know what kind of alternative futures Microsoft considered when they started in 1975. But, the Software industry was nascent, segregated and unpredictable. There were many possible futures at that time- software industry could shape up into a very competitive industry with numerous small players, software developers could remain subsidiaries to computer hardware companies(thus computer manufactures controlling the margin of software developers), computer manufactures could decide to develop their own operating systems and software (as in Macs) etc.
Some decisions that shaped the industry in favor of Microsoft:
- Licensing the MS-DOS to IBM instead of selling the rights – This decision gave Microsoft flexibility about future growth areas and in turn made development of Software industry as a distinct industry possible. Operating System developers retained their negotiating power.
- Opening up to third party developers for creating applications for Microsoft – This decision transformed the operating system from a product to a platform with infinite possibilities. Microsoft benefited from the Network Effect, which simply means that a good or service becomes more valuable when more people use it. People like an OS where they can run most applications and application developers like working for an OS which most people use. This chicken and egg phenomenon created a loyal user and developer base for Microsoft. Now, Operating System developers are in the center of the Computer industry. People choose Operating Systems first and developers create software for particular Operating System not for particular computer manufacturer.
When the industry matured Apple and Microsoft emerged as the major players deciding the industry dynamics. In case of Operating System, Microsoft already created a lead that is difficult to bulge. According to web analytics firm Net Applications 91% of users use some version of Windows Operating System followed by Mac at 7.72% (Net Market Share, 2015).
Ames, M., & Runco, M. A. (2005). Predicting Entrepreneurship From Ideation and Divergent Thinking. Creativity and Innovation Management, 10.
Beaufre, A. (1965). An introduction to strategy. Frederick A. Praeger.
Freedman, L. (2013). Strategy. Oxford University Press.
Hamel, G., & Prahalad, C. (n.d.). Competing for the Future . Boston: Harvard Business School Press.
Liedtka, J. (1998). Linking Strategic Thinking with Strategic Planning. Strategy and Leadership, 30-35.
Net Market Share. (2015, October 02). Desktop Operating System Market Share. Retrieved from http://www.netmarketshare.com: https://www.netmarketshare.com/operating-system-market-share.aspx?qprid=8&qpcustomd=0
Reeves, M., Love, C., & Tillmanns, P. (2012). Your Strategy Needs a Strategy. Harvard Business Review.
Watkins, M. (2007). Demystifying Strategy: The What, Who, How, and Why. Harvard Business Review.