On Monday my 39-student MBA class, "Strategy and the CEO," discussed the idea of strategy. As the term is often found in business, it really is dimly understood. Also to make matters worse, big company strategy isn’t exactly like startup strategy.
As I argued in my own book, Hungry Start-up Strategy , choosing and implementing the proper strategy is essential for a venture’s survival.
For big companies, the target is to maximize return on shareholders’ investment and coming to which means making two fundamental strategic choices:
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Choosing where you can compete. The theory is to pick a business that’s big, growing fast, profitable and more likely to remain so. One attractive industry is transporting oil via pipelines. The normal player earns a return on equity of over 100 precent.
Deciding how exactly to win the selected market. Two basic strategies work here: differentiation undertaken by a company that provides customers more of what they need, thus boosting their willingness to pay (think Starbucks) or serving as a low-cost producer whereby the enterprise charges the cheapest price within an industry (such as for example McDonald’s) .
A big company’s collection of the right choices might help it earn much more profit than its rivals as well as perhaps enable it to take pleasure from faster stock-price appreciation.
But a startup includes a different goal and for that reason must make different strategic choices: New ventures face huge odds in trying in order to avoid perishing plus they lack the money to pay suppliers’ bills also to compensate workers what their labor will probably be worth.
After interviewing a lot more than 200 entrepreneurs, I’ve come to the final outcome that making the next six decisions correctly might help boost a startup’s probability of success.
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1. Pick goals . Why would a talented person have a pay cut to utilize a new venture and just why would someone with deep pockets write it a check? The proper mission can inspire terrific talent. And if a startup commits to an IPO or acquisition, this may help convince an investor that the firm can make her or him richer.
2. Choose markets. The venture could theoretically sell its product to anyone in virtually any market. A business owner should select a market about which she or he feels deep passion and that’s big enough to greatly help the firm turn into a $100 million company even if the founder only receives ten percent of it.
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3. Raise capital. A business owner needs money to pay suppliers and employees but also really wants to maintain control of the venture. To keep control, a company can borrow against its credit card or crowdfund until it has proved that customers can pay for its product. Then your entrepreneur can sell a stake to a venture capitalist to cover the last mile before an IPO.
4. Decide on a team. The entrepreneur can’t do everything — so they must hire and motivate A-level talent. The commodity offered is only going to help with recruiting the talent if the entrepeneur has recently built successful startups and an emotionally compelling mission.
5. Obtain market share. Potential c ustomers don’t need it from a company that’s likely to fail in half a year. To overcome this issue and gain market share, the startup must do two things: Look for a customer who has pain which has no cure and deliver the cure at a cost that makes the merchandise irresistible — what I call a quantum value leap.
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6. React to change. Once customers choose the product in droves, the entrepreneur ought to be kicked upstairs to monitor changing customer needs, new technologies and upstart competitors to determine additional products to build and fresh markets to conquer.
In discussing strategy, my students latched to the notion of gaining share by supplying a quantum value leap. The class discussed how Akamai Technologies, a Cambridge, Mass.-based provider of services that increase the web, does this by boosting its customers’ revenues.
Akamai’s CEO, Tom Leighton, distributed to me the other day how Walmart discovered that customers will buy online if the pages load in under two seconds. Akamai’s quantum value leap is based on delivering webpages faster, thus boosting its customers’ ecommerce revenue.
By continuing to purchase technology that speeds content delivery as technology evolves — including the growing usage of smart handheld devices and the cloud — Akamai has adapted to improve — thereby maintaining its industry lead.
And since Leighton was the firm’s co-founder and chief technology officer before becoming CEO, he has had the opportunity to apply startup technique to his $1.6 billion public company.
With out a strategy, a business owner might miss the opportunity to go where Akamai has.
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