Strategy is making choices. Strategy involves deciding what to do and, importantly, what not to do. In a new venture, three main considerations guide strategic thinking.
1. No constraints: As this is a new venture, the strategy is not constrained by commitments to current customers, reputation and brand, current resources and skills, and the many other things that must be borne in mind when making strategic decisions in an established company.
2. Uncertainty: There are many unknowns at the outset. The entrepreneurial team is making a large number of assumptions, many of which may not be true. The team is creating strategy in an environment where there is considerable learning and many changes and revisions may be called for.
3. Scarce resources: Although the team does not have any strategic constraints, they face they face the overriding constraint of very limited resources. They are investing primarily their own time and effort and possibly a little capital. They must be focused on using the limited resources as efficiently as possible.
We organize the basic strategic choices of the entrepreneurial team under four headings. The first three constitute the substance of the strategy. The fourth is a guide the team will follow as they systematically test their assumptions and make adjustments and revisions to their approach.
Target customer: Potential customers are different. It may appear that potential customers all have the same need, but circumstances, context, and specific details of the need vary. These differences all matter. One of the biggest mistakes a entrepreneurial team can make is to design a solution that is generic and addresses a portion of the needs of all customers but does not fully satisfy any particular customers. Such a solution has a great deal of difficulty getting traction. The team should try to understand as much as possible about different customers. They can then focus on a specific set of customers and design a solution specifically for them. This choices is guided by the process of dividing customers into groups based on relevant criteria (“segmenting”) and then choosing a segment where:
· The need is severe or the value of the solution is compelling
· The segment is large enough to constitute and interesting market.
The initial customer segment is sometimes referred to as the “beachhead customer.”
Business model: The term business model is used to denote many different but related concepts in entrepreneurial strategy, including sometimes to refer to the entire plan of the new venture. We use it here to refer to the product or production side of the venture.
Sustainable competitive advantage: Every new venture must have a plan for how it will be the company that reaps the rewards of exploiting the opportunity it has identified (rather than some other start-up or incumbent firm). This plan will guide the choices or investments that the venture will make in building skills, capabilities, and assets.
Roadmap (milestone planning): Finally, building a roadmap is making the decisions of what to do when, and making these decisions in an environment of high uncertainty.
The four dimensions of entrepreneurial strategy
The analysis at this stage should result in
The business model is a description of how the new venture plans to make money. It involves two parts: what the company will provide and how much and how the customer will pay.
Value / price analysis: This analysis begins with the description of value of the solution to the target customer.
A further step in this analysis forms the basis for the company’s marketing and distribution plans. This involves understanding how the company can most efficiently gain access to the customer. We break this into three questions:
Many entrepreneurs address this issue by creating a competitive matrix. This is a table that looks like this.
This of course is a description of how the team’s product is different from the competitors, not how it is better.
To be a description of how the product is better, the features listed would have to be the critical factors for adoption by the target customer. And this point highlights the fact that a one product is not generally better than another. Rather it is better for a particular user for a particular purpose. So a useful product competitive matrix would have to be based on an analysis of a specific customer set and an understanding of the requirements that are valued by that customer. This is an important and necessary part of competitive advantage. But having a superior product is not the same as having sustainable competitive advantage.
Sustainable competitive advantage derives from assets and capabilities of the firm. These, of course, are the foundation of the firm’s products and services. The following are some of the things that may confer sustainable competitive advantage:
· Tangible assets such as financial resources, physical resources (real estate, reserves of raw materials)
· Intangible assets such as IP, patents, research facilities, reputation, human resources
· Expertise and motivation of individuals
· Routines / processes
· Organizational design and relationships
We say that a set of capabilities constitute sustainable competitive advantage if they pass the VRIN test. That is, the assets and capabilities must be:
· Valuable: This is the reference to the customers. The assets and capabilities must produce things that are valued by a set of customers.
· Rare: Obviously, if the capabilities were wide-spread, they would not confer advantage.
· Inimitable: Again, if the capabilities were easily imitated, they would not remain rare.
· Nonsubstitutable: If there were another way to reproduce the products, services, or other beneficial effects of the capabilities, they would not remain a source of competitive advantage for very long.
Obviously, no competitive advantage can last forever. So how long is long enough to constitute sustainable competitive advantage? There is no one answer to this question. The answer depends on the timescale of the particular industry. In pharmaceuticals, firms look for intellectual property that can remain protected for decades. In the new world of technology, a year’s advantage may be all that can be hoped for.
The concept of sustainable competitive advantage and approaches to analyzing and achieving it are explained in Sustainable competitive advantage.
According to common lore, entrepreneurs are risk takers. Good entrepreneurs are certainly not risk takers in the sense of someone who climbs into a barrel and goes over Niagara Falls. Perhaps they are risk takers in the sense of an expert poker player who tries to beat the house in Las Vegas. But perhaps the discussion here can give some concrete meaning to this perspective. Entrepreneurs deal in an environment where there are many unknowns. There is not sufficient information to assign probabilities to various outcomes. However, entrepreneurs are willing to make judgments about probable outcomes and then act on those judgments. Entrepreneurs, at least implicitly, make judgments about probabilities based on incomplete and imperfect information. If the essence of entrepreneurship is dealing with uncertainty.
We offer an approach to managing uncertainty. The goal is the most efficient use of resources.
This approach and the reasoning behind it are explained in Knowing what unknowns to know.