Planning: creating a strategy
What is strategy?
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 makes a large number of assumptions, many of which may not hold true. The team creates 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 the overriding constraint of very limited resources. They invest 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 an entrepreneurial team can make is designing 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 particular set of customers and design a solution specifically for them. This choice 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 an interesting market.
The initial customer segment is sometimes referred to as the “beachhead customer.”
Read more about choosing the target customer here.
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.
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.
The four P's of marketing provide the framework for constructing the business model.
Read more about constructing a business model here.
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.
The process of building sustainable competitive advantage involves three steps:
- Determine what is valued by the chosen customer (this comes from the analysis of customers).
- Determine what resources the venture will use to deliver value (this comes from an analysis of how the firm will deliver and capture value).
- Determine whether these resources pass the VRIN test (valuable, rare, inimitable, nonsubstitutable).
If a new new venture has hit upon a set of resources that pass the VRIN test, then these should be the focus of the firm's investment. In this way, a new venture can establish sustainable competitive advantage.
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.
Read more about sustainable competitive advantage in a new venture here.
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.
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. Maybe they are risk takers akin to an expert poker player who tries to beat the house in Las Vegas. Perhaps the discussion here can give some concrete meaning to this perspective. Entrepreneurs deal in environments where there are many unknowns. There is insufficient information to assign probabilities to various outcomes. However, entrepreneurs must 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. The essence of entrepreneurship is dealing with uncertainty.
We offer an approach to managing uncertainty. The goal is the most efficient use of resources.
- Identify the discrete assumptions that must be true for your venture to succeed.
- Rank order the points of uncertainty (assumptions) in decreasing order of risk to the venture — this is the sequence of execution.
- Find a way to resolve each point of uncertainty for the lowest cost (time and money).
- Factor in any issues of overall timeliness and interdependencies.
- Use these milestones as a framework for your plan.
- Commit sufficient resources to achieve the next milestone.
- Make corrections as you learn (“pivot”).
Read more about how to build a roadmap for a new venture here.
The four dimensions of entrepreneurial strategy