Strategy models for start-ups
In the rush of the entrepreneur towards the initiation phase of selling the developed products or services, he uses the most accessible strategy or the first strategy that has been identified. In the first phase the business benefits due to the promptness of the entrepreneur, but in the later phases it loses the advantage in favor of the businesses with superior strategic plans.
To solve this problem, there are four strategies that can be adopted by start-ups to initiate the rapid launch of products or services on the market, while still benefiting from the advantage of a complete development strategy. Cases where business becomes sustainable and develops exponentially as a result of a spontaneous strategy are extremely rare. Developing the whole business based on a spontaneous strategy ultimately leads to vulnerability to competitors, who can design and implement more effective strategies to market their products or services.
This can be exemplified by the competition between Shai Agassi and Elon Musk. Israeli entrepreneur Agassi has spent over $850 million to build an ecosystem to support his company, “Better Place.” He has worked with manufacturers such as Renault and Nissan to develop electric vehicles whose batteries can be changed by drivers, in order to achieve extended range. However, the idea was not enthusiastically received, and Better Place went bankrupt in 2013 after producing less than 1,000 vehicles. The problem was solved by Elon Musk, providing Tesla with already-equipped vehicles to be able to withstand longer distances, giving users greater confidence.
The premises for developing strategies
To select potential strategies, each entrepreneur must consider the opportunity costs. This can be achieved by establishing an approach following the analysis of the following: collaboration-competition and integrability-prompt execution.
Type of approach
|Access to resources and suppliers, which allow the capture of a wider market segment
|Confrontation with delays due to the bureaucracy specific to more developed companies
|Generating innovation in the industry and added value for customers
|Presence in a market segment with competitors that have higher financial resources
|Intellectual property protection increases bargaining power
|Priority setting for intellectual property control raises trading costs with partners and customers
|Allows for the rapid marketing of products or services
|The absence of contingency plans involving new competitive threats
Intellectual Property Strategy (integrability and collaboration)
A start-up approaching this type of strategy focuses on generating and developing ideas and innovation, avoiding commercialization and direct interaction with customers. Thus, the business must find partners to deliver to customers products or services using the generated idea. The partners must have customer segments close to their businesses and must have technological and technical means by which they can create products or services with extended integrability compared to the systems already on the market. This “idea factory” approach allows a start-up to take fewer risks and create, over time, technologies that can positively influence the development of a particular industry.
An example of this type of approach is the Dolby company, which invented and patented audio engineering technologies (stereo technologies, background noise reduction, etc.), becoming a global audio technology standard for over 50 years. Dolby was credited for enhancing the emotional intensity of iconic films by creating a captivating atmosphere through means of sound, even though they never interacted directly with the music producers, film producers or moviegoers. Among the companies that used Dolby for its technology are: Sony, Bose, Apple and Yamaha.
Entrepreneurs pursuing a strategy like that of Dolby must invest carefully in development and research but also pursue a secure legal framework that ensures the protection of their innovation. The intellectual property strategy has also proved useful in other segments of activities such as biotechnology, search engine services and product technologies that use semiconductor materials.
Value chain strategy (collaboration and prompt execution)
This type of strategy involves the allocation of the resources of the start-up in order to commercialize the products or services and to increase the daily competitive advantage. Instead of controlling intellectual property and raising barriers to entry, businesses with such an approach focus on creating added value for the entire industry.
Amazon Web Services is one of the concrete services that contribute to the creation of a value chain of an industry. This service provides a cloud computing platform and an API service for a broad and diverse set of companies. The service from Amazon emulates through the Internet virtual spaces that perfectly simulate real attributes of real computers such as processors, graphics processors and RAM. Amazon Web Services is the intermediary between companies that provide computers and companies that need services through the cloud, thus creating the value chain. Netflix, Facebook, LinkedIn and other similar companies use Amazon Web Services for their services, bringing the latter business revenues of over $25 billion in 2018.
Entrepreneurs who want to implement the Amazon strategy must adopt a horizontal thinking, with the aim of being an irreplaceable link in the value chain. Start-ups adopting this strategy must employ sales agents and specialists who have the necessary qualifications to discover new partners in the supply chain and to integrate the new innovations.
Architectural strategy (competition and integrability)
Entrepreneurs who pursue this approach have the opportunity to grow the start-ups that have control over intellectual property but at the same time compete with the rest of the business in the industry. An idea that is developed using this strategy is risky and inaccessible to most people, being a business model to be applied at the scale of companies such as Google or Facebook. The architectural strategy involves a unique chance of the start-up to develop a value chain of its own, thus being the business that develops technical and technological means that it sells through its own channels to its clients.
The company that represents one of the most concrete examples for this type of strategy is Apple. The corporation that exceeded the threshold of one trillion dollars in market capital in 2019 designs, develops, builds and markets electronic equipment and promotes, according to the architectural strategy, the existence of an integrated platform for all their hardware and software products. The integrated environment for all services and products of the corporation has the role of introducing and retaining the customer in the value chain, in which the interaction with the company is constant. Following the Apple case, the company has been benefiting from the public’s attention since the beginning, under the guidance of Steve Jobs, emphasizing the importance of a leader and visionary in developing a start-up by approaching the architectural strategy.
Disruptive strategy (competition and prompt execution)
This strategy focuses on the rapid commercialization of the business idea and the direct confrontation of the competition. Entrepreneurs pursuing this strategy should aim to redefine the standards of the value chains and the companies that dominate these chains. Due to the speed of execution that this strategy implies, the idea or innovative element with which the start-up has contributed to the development of the industry cannot be protected. The purpose of this strategy is to take over the leadership of the industry development direction and maintain this position.
A symbol of this strategy is Netflix, which started out as a company that sent DVDs by mail, because it was an easier way for moviegoers to rent and return movies. Later, the company developed a recommendation engine, which aimed to improve the customer relationship, soon becoming a digitally transposed method by which the general public could rent movies. This bankrupted many competitors who tackled the classic business strategy and had physical locations to rent DVDs with movies.
The decision-making process
The first step towards reaching a consensus regarding the final strategy that your start-up should adopt is identifying the strategic directions by which the business aims to reach the goal and ranking according to the four strategies described above. Strategic planning must simulate the reality, for this purpose, the formulation of strategic directions must be supported by industry information and experiments.
Decisional factor #1: the customer segment
Decisional factor #2: technological factors
Decisional factor #3: Organizational culture
Decisional factor #4: the competition environment
Each decision affects the future course of the business, being summed up at the opportunity cost of selecting one strategy to the detriment of another. At the same time, the entrepreneur’s vision is essential, not only in the decision-making process, but also in the process of implementing the strategy. A business should think about reducing future costs, but to allow capitalizing on opportunities to develop the business from the start-up phase to the escalation phase.
This guide does not minimize or eliminate the uncertainty of starting a business, but a professional team of business consultants can use this guide to form a coherent business development framework. If you want to build a business plan and you want to eliminate the indecision around the planning of the strategic direction, contact the Idea Perpetua team, which can help you through efficient methods to successfully develop a start-up.
About the author:
Junior Business Consultant
Daniel is pursuing a BBA (Bachelor of Business Administration) program at the University of Bucharest. At Idea Perpetua, Daniel implements projects in Entrepreneurship Consulting, Consulting in Digital Innovation and Consulting in Investments. At the same time, Daniel is oriented towards solving the problems of entrepreneurs and start-ups through a creative, innovative and efficient approach aimed at optimizing systems, automating processes, validating and scaling business models.