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A strategic framework for start-ups

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Jose Eduardo Custodio

The View From Taft

A strategic framework for start-ups

When I started my small business seven years ago, I didn’t use any of the tools I teach in my Strategic Management class. It’s not that I went into it without much study because I did a lot of the usual trading area surveys, site feasibilities, and financial analyses. Maybe it was because the business is a franchise, or because the decision to start it was more tactical in nature. Regardless, I found the traditional strategy tools more suited for larger companies.

Like many entrepreneurs, I still dream of starting a venture that would change the world — or at least the Philippines. I often wonder if there are tools more suited for small businesses.

Recently, I came across the article “Strategy for Start-ups” in the May-June 2018 issue of the Harvard Business Review.

Authors Joshua Gans, Erin Scott, and Scott Stern propose the use of an Entrepreneurial Strategy Compass. They argue that every new venture must consider two competitive trade-offs: “Do we collaborate or compete with established players?” and “Do we build a moat or storm a hill?” An entrepreneur’s decisions on these two aspects will lead to any of four generic strategies depicted in the quadrant.

Under the Intellectual Property Strategy, the venture collaborates with existing players and works zealously to protect the product or technology it develops. Ray Dolby developed noise reduction technologies and started Dolby Laboratories. The company went on to become a global standard by licensing its proprietary technology to product developers and manufacturers such as Sony and Bose.

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The Disruption Strategy involves the decision to compete with the incumbents and work for the quick commercialization of the product or technology (“storm a hill”). Netflix disrupted the movie rental industry (and cable television eventually) and expanded rapidly in the United States. One can argue that Uber used the same strategy worldwide except that other players were quicker to establish similar services in other parts of the world (e.g., Didi Chuxing in China and Grab in Southeast Asia). Both companies are known for their high rates of cash burn as they aggressively sought customers. Netflix’s model became harder to replicate when Netflix built significant barriers by emphasizing high quality content.

Ventures that follow the Value Chain Strategy work with the industry by building unique capabilities to become preferred partners. Foxconn developed competencies to bring new products to the market at scale and on time, thereby becoming the preferred outsourced manufacturer of companies such as Apple.

The Architectural Strategy seeks to “design an entirely new value chain and then control the key bottlenecks in it.” They compete with existing players while bringing their innovation to market through a deliberate, planned process. Google and Facebook are the poster children for this quadrant. Both companies were adamant about not charging users, and instead devised innovative ways of earning money through the “eyeballs” generated by their sites.

The article is sure to provoke a lot of discussion regarding strategy and entrepreneurship. Some of the companies cited as examples can also be viewed from other quadrants. Google, for example, can also be thought of as using a Disruption Strategy because its decision to provide the product for free also led to rapid adoption.

Entrepreneurs tinkering with the “next big thing” would do well to consider the points raised by the authors. But they should be aware that other keen observers argue that there is no “science for start-ups.” Research by Anthony K Tjan and Julian Lange suggests that plans make no statistical difference in a start-up’s success. Disciples of this philosophy advocate the no-plan plan. They say that you should just launch your product, learn from your customers quickly, modify, and scale as quickly as you can.

Would I have used the Entrepreneurial Strategy Compass if I had known about it seven years ago? It does not apply to the franchise business I started given that franchise concepts are already tested in the marketplace. I will continue to look for tools that are better suited for such ventures. I may even develop my own set of tools! However, I will definitely think of this compass if ever I do discover the next big product or service.

 

Jose Eduardo Custodio is a Lecturer at the Management and Organization Department of the Ramon V. Del Rosario College of Business at De La Salle University.

jose.eduardo.custodio@dlsu.edu.ph

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