Strategizing for startup part 1

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Paolo Aversa Lecturer in Strategy Cass Business School [email protected]

Strategizing for Start-Ups Part I

Simone Santoni Research Fellow Cass Business School [email protected]

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Why should we learn strategy?


Madonna Louise Ciccone 1958 Born Bay City, Michigan

1977 Arrives NYC with $10 in her pocket

1983 Release of 1st record album

1983 to 2004 Sells 120 million record albums

2004 More #1 singles than any other woman

1988 to 2006 World s highest earning female entertainer

2004  Re-Invention world tour grosses $125m

2006 Another hit album, another sell-out world concert tour

2008 Ranked 2nd in the Billboard Hot 100 All-time Top Artists

Enters the Rock and Roll Hall of Fame…


Why should a start-up have a strategy?


Why should a start-up have a strategy? • Because it is more complicated to start a journey when one has

no direction.

• Because we need other people to know where we are going so that they can follow us.

• Because nobody would give us credit (or money) without a long term plan, even if we look smart and determined.

• Because it is a mandatory section of each business plan or investment pitch.

• Because even when we have to change our direction, we have to know what was the original way in place.


What makes a strategy successful?


What makes a successful strategy

Source: Grant, 2013


Madonna’s successful strategy Clear, consistent, long-term goal: Single-minded quest for stardom through her Madonna persona. Profound understanding of the competitive environment: Awareness of the new economics of the music business, the marketing potential of social networking and needs of her fans. Objective appraisal of unique, idiosyncratic resources: Exploited her innate theatricality, eccentricity, design capability despite her average musical skills and physical look. Effective implementation: Devotion to living the Madonna character; wiliness to create new images on almost a yearly basis


“I don’t sell cars. I sell engines. The cars I throw in for free since something has to hold the engines in.” “Second is the first of the losers.” “Consistency is the most important thing in business.”

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www.cass.city.ac.uk ©PaoloAversa2015 Enzo Ferrari, 1898-1988


What happens when a successful strategy loses its identity?



Strategy responds to one specific question: How do firms create and sustain competitive advantage?


The basic strategy framework

Source: Grant, 2013


What is strategy?

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“Strategy is the great work of an organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.”

Sun Tsu, The Art of War (512 B.C.)


How would you define what is a “strategy”?


Other definitions of strategy “The determination of the long-run goals and objectives of an enterprise; and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” Alfred Chandler, Strategy and Structure “Strategy is a pattern of resource allocation that enables firms to maintain or improve their performance.” Jay Barney, Gaining and Sustaining Competitive Advantage “A diagnosis, a guiding policy, a set of coherent actions.” Richard Rumelt, Good Strategy Bad Strategy

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How to formulate a strategy?


Some examples “We want to do it all and we want to do it now”

Freddie Mercury, Lead Singer, Queen, 1989

Eckhard Pfeiffer, CEO Compaq, 1998

“Our game plan is to be an infrastructure technology company using our

R&D resources to compete against Dell and leaving IBM to focus on business processing”

Mark Hurd, CEO, HP, September 2005

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www.cass.city.ac.uk ©PaoloAversa2015 ©"2013"Robert"M."Grant"www.contemporarystrategyanalysis.com"

Describing Strategy Current Positioning & Future Direction

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Strategy: Decision or process?

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STRATEGY AS DESIGN

Planning and rational choice

STRATEGY AS PROCESS

Many decision makers responding to multitude of external and internal forces

INTENDED STRATEGY EMERGENT STRATEGY

REALIZED STRATEGY

Source H. Mintzberg, The Rise and Fall of Strategic Planning

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The roles of strategy

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Decision Support Improves the quality of decision making

Improves performance by setting high

aspirations

Coordination & Communication

Target

Creates consistency and unity


The two main levels/types of strategy

Corporate strategy: defines in which industries a firm should compete ! diversification: how to differentiate risk Business strategy: defines how to compete in a specific industry ! competitive strategies and business model: how to create, deliver and capture value

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Corporate Strategy

Business Strategy

Functional Strategies

Corporate Direction

Business Unit A Business Unit B

R&S HR Production Marketing-Sales

R&S HR Production Marketing-Sales Tactics

The different levels of strategy


Corporate strategy

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Corporate strategies and diversification • “Corporate Strategy is the way a company creates value through the configuration and coordination of its multi-market activities” (Collins and Montgomery, 1997)

• It can be classified into: • Vertical integration • Horizontal integration • Geographical integration

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Vertical scope Product Scope Geographical Scope

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[A] Single Integrated Firm [B] Several Specialized Firms linked by Markets

P3 P2 P1 C3 C2 C1

P3 P2 P1 C3 C2 C1

V3

V2

V1

V1

V2

V3

(Source Grant, 2013)


Business strategy

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2 main business strategies

• Cost advantage: offer an existing product or service at a more competitive price

• Differentiation advantage: offer something that the others do not offer, at a premium price

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Some example of leaders in cost advantage?

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Some examples leaders of differentiation advantage?

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10 pitfalls of strategy

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One: Don’t confuse strategy wish vision/mission/objective. Vision: what we want to be. Mission: why we exist. Objective: what we want to achieve. Two: Don’t’ confuse strategy wish planning or data analysis. A strategy should not be longer than half a page.

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Three: You have to be distinctive. Imitating your competitor may put you in a very difficult position. Four: Don’t think that “strategic” means “important”. It means “long term”.

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Five: Don’t believe that only important (strategic) people can develop important (strategic) ideas. Six: Don’t confuse strategic planning with strategy. You should not change strategy every year, but you should update your strategic planning.

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Seven: Don’t keep your strategy secret. Strategy needs to be communicated and shared with your team. Eight: Don’t believe that one can impose a strategy. Great ideas won’t go far if all the team members don’t push to the same direction.

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Nine: Don’t believe that strategy cannot be changed It can be adjusted, but major changes should be justified by extraordinary events. Ten: Don’t believe that questioning your strategy means that it is wrong. Sometimes you might realize it is perfect for another time and place.

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The objectives of the industry analysis • To understand how industry structure drives competition, which

determines the level of industry profitability

• To assess industry attractiveness

• To use evidence on changes in industry structure to forecast future profitability

• To formulate strategies to change industry structure to improve industry profitability

• To identify Key Success Factors


Why should one learn how to run an industry analysis?


Why should one learn how to run an industry analysis? • To better understand the competitive environment.

• To better show to potential stakeholders we understand our competitive environment (it is definitely something that should be included in any business plan).

• To assess how the environment might change in the future.


Porter’s Five Forces Framework



Rivalry between existing firms The extent to which industry profitability is depressed by aggressive price competition depends upon: • Concentration (number and size distribution of firms) • Diversity of competitors (difference in goal, cost strategies,

etc.) • Product differentiation • Excess capacity and exit barriers • Cost conditions o Extent of sale economies o Ratio of fixed to variable costs


Threat of substitutes Extent of competitive pressure from producers of substitutes depends on: Buyer’s propensity to substitute The price-performance characteristics of substitutes Switching costs and lock-in effects


Bargaining Power of Buyers The extent to which buyers are able to depress profitability depends on: Buyer’s price sensitivity •  Does the item comprise a big percentage of the buyer’s total costs? • Whether purchased item is a commodity or differentiated? •  How intense is competition between buyers? •  Is the item critical to the quality of the buyer’s own output Relative bargaining power •  Size and concentration of buyers relative to sellers •  Buyer’s information •  Ability to backward integrate •  Note: Analysis of supplier power is symmetric


Bargaining power of suppliers The extent to which suppliers are able to depress profitability depends on: Suppliers’s price sensitivity •  Does the item comprise a big percentage of the supplier’s total costs? • Whether purchased item is a commodity or differentiated? •  How intense is competition between suppliers? •  Is the item critical to the quality of the firm’s own output Relative bargaining power •  Size and concentration of customer firms relative to suppliers •  Supplier’s information •  Ability to backward integrate


Threat of new entrants Entrants’ threat to industry profitability depends upon the height of barriers to entry The principle sources of barriers to entry is: • Capital requirements • Economies of scale • Network effects • Absolute cost advantage • Product differentiation • Access to channels of distribution • Legal and regulatory barriers • Retaliation


Let’s apply the 5 Forces Model to the Search Engine industry


Bring Home • You should know what is (and what is not) a strategy

• You should know how to properly formulate a strategy

• You should know how to run an industry analysis

• You should know why it is important to understand your industry


But it helps to better identify where than line lies, and how to go beyond it.

It is in the nature of human kind to want to explore,

to find your line and go beyond it.

Having a plan does not mean lacking creativity or vision.

A good strategy can help better see where that line lies, and what is the best way to go beyond it.


[email protected]

Thanks for your participation. See you next Wednesday!