Why beginning ventures should focus on agility and direction.
Entrepreneurship and a clear, longterm strategy are often seen as opposites in the eyes of modern business founders. They view strategy as the pursuit of a defined path, which in advance is systematically developed. Entrepreneurship on the other hand is seen as the epitome of opportunism. Good entrepreneurs should pivot continuously, riding the waves of analysed information and shifting markets. It is easy to understand why entrepreneurs see strategy and entrepreneurship as two polar opposites. The reality that they need to understand however is that strategy and entrepreneurship — paradoxically — are in desperate need of each other. For strategy without entrepreneurship is just planning, but entrepreneurship without strategy creates chaos.
Many entrepreneurs (myself included) fail to understand that, rather than limiting entrepreneurship, an effective strategy encourages it. But why does an effective strategy improve early business? Early business is improved by a clear strategy because it clarifies which bounds are set wherein experimentation and innovation can take place. The same point can be made for the leadership of established firms. These executives often don’t understand how multiple-horizon planning, stage-gate proces and other corporate tools to manage strategic growth often undermine innovation.
It’s of course easy to then conclude that beginning entrepreneurs and executives should then just combine the best of both worlds. The truth however is a little different, because combining the top-down orientation of executives and strategic management with the bottom-up orientation of lean startups is extremely difficult. So is there even a method of taking the best of both worlds?
At Wavyr we believe there is a way. Our vision is that companies should see strategy as a lean proces itself. Out of this vision comes our framework: LSP (Lean Strategy Proces). This framework protects companies from inelastic planning, which can result out of a closed down strategy and chaotic experimentation, which happens in a lot of lean startups. The LSP-framework function like a big canvas, which is the vision and future of a company, in which then can be heavily experimented. This means that every idea has to pass the company’s vision before being realised. This ensures that every employee can be as creative as possible in pursuing worthwhile ideas, while also ensuring that everyone is one the same page.
The Challenges for Beginning Ventures
The definition of entrepreneurship is often regarded as the pursuit of opportunity without regard to the resources that are currently controlled. This showcases the basic challenge for beginning ventures, because every startup has a shortage of money, intellectual property, talent, and so on. This challenge is of course partially solved by acquiring resources. But after these resources are acquired the internal challenge arises: how does the company wisely make use of the acquired resources? Should they be conserved or deployed? This is where strategy comes in. The strategy tells the company what not to do. And knowing what not to do might be one of the best pieces of advice that a company can receive.
Beginning entrepreneurs, even more then executives of established firms, should therefore recognise the following essential principles:
When a company does A, the opportunity cost is that the company cannot also do B. Especially in startups with limited resources, possibilities are mutually exclusive. For example, when a company assign two software engineers to function C, this means that these engineers can not also develop function D. This means that when a company decides to customise the product with function C for new customer X, the company cannot release version 2.0 of their product which requires function D. This means that by making a particular choice the product will be delayed or new customer X might not buy the product. This is what’s called the opportunity cost. It’s very important for entrepreneurs with limited resources to realise that the choices that they make can impact the company in such a fundamental way.
Every made choice forms a new unique path with a different outcomes and unforeseen implications. This means that a company can make choice A now and decide to move choice B three months into the future. Circumstances will definitely have changed by then. Competitors might launch new services or products or suppliers might sign contracts with other firms. The judgement of potential new customers might have changed because of their experience with other newer services. Maybe even a essential employee for choice B leaves the company. This clarifies why every choice you make is an irreversible rejection of something else.
Choices are interdependent of each other. The decision that Alex of Product Development makes, has impact on the choices for Eric in Marketing.Companies should therefore focus on actives that are essential for the company as a whole and not just for one specific part of the firm. In established firms this already happens because of organisational constraints. These constraints help to realise consistency in new initiatives and ideas. Startups however don’t have these constraints, because of the the lack organisation. Because there are not organisational boundaries, it’s even more important for the entrepreneurs to set them.
Simple market tests aren’t useful for every product or industry. The lean startup fanclub is happy to evangelise agility and adaption with rapid testing. This is of course an effective method for incremental improvements or innovations, but this is not the case for every product of industry. Some ideas cannot not be test with quick fixes of cheap experiments. Take Tesla, Elon Musk could not have tested with a simple and cheap cardboard go-kart if the consumer was interested in a high-performance electric vehicle. These kind of innovations require substantial upfront investment, and often the development of whole new infrastructures.
Even though adaption rates are increasing, some business wil grow more slowly. Customers often need to time to understand and value a new product or suppliers don’t have the experience to deliver with reliability and cost-effectiveness.
Strategy to the rescue
But how can strategy come in and solve these challenges for entrepreneurs? As described above, a well-formulated strategy is indispensable for the creation of a successful company. A good strategy helps entrepreneurs in 4 important ways:
Alignment of the whole company. In tiny startups, it might be possible to coordinate the activities of the organisation by daily personal interaction. This will however no longer work if the company grows to a larger organisation. Good project management and some bureaucracy might even help with this for a little bit, but the only truly effective way of empowering every employee is a clear strategy. When a leader articulates a very clear strategy, it will ensure that every aspect of the organisation will be designed to support it’s distinctive value proposition (e.g: the type of new employees that will be hired, what kind of IT systems will be developed and so on).
Making the necessary commitments. After deciding what opportunities the company will be fulfilling, they will first need to make the required investments. Of course every investments needs to be tested to minimise the risk and maximise the the value of each investment. But every once in a while an investment has to be made where there will be a chance of no return. For example the opening of a new office in a certain location. It’s very important in such cases to proceed after a very carefully conducted analysis of the situation is made. The investment must of course fit the overal strategy of the company.
Keep focus. Many ventures without strategic boundaries will spread on too much opportunities. Because they lack the resources to win in every market, the are very likely to fail in every market. There a dozens of examples of starting companies with early high growth that then fail to focus on the original and single goal of the company. They will start to spread their limited resources on a variety of opportunities and will lose their dominant position in the original game that they were winning. After that it’s only down hill for the company, their workforce is to diversified and the growth is gone. It’s therefore really important to keep focus on the original strategy and to focus on just one market. So entrepreneurs will always have to make a very careful assessment of when it becomes truly sustainable for a company to enter a new market, without losing their dominance in their original market.
It’s important to realise that this argument can also be made for the type of customers that a new company takes on. Many entrepreneurs — driven by the need to generate cash — respond to every new possible customer. Even though the new customer might be not in the target set. It’s therefore important that a strategy dictates what kind of customers the company will take on and what kind of customers the company will not accept.
Pursue a viable opportunity. A good strategic analysis clarifies what markets promise lasting succes and which markets only offer illusions combined with immediate returns. Many firms fail because they focus on the immediate returns instead of the markets that will deliver on the long term.
Entrepreneurs can of course always focus on a quick exit of their business by selling it to a potential buyer. Their are many example of beginning ventures being sold without a lasting business model. But even in these kind of companies a strategic move can be found: the entrepreneur realises that the business is not sustainable on the long term and decides to focus on immediate returns to attract a potential buyer.
Their many missteps that can be made, from entering a fast growing market without a careful analysis of the company’s chances to launching a new product line without guaranteed returns. An initial strategic screen can saving ventures from going down the wrong path.
Fusing together: Deliberate and Emergent strategy
So if a strategy assists in solving the challenges of an entrepreneur, then it must also embrace entrepreneurial elements. Because entrepreneurial elements allow the the firm to explore the correct innovations and how to continually refine and perfect them. Because entrepreneurship consists of empowered local experimentation. This experimentation is necessary for every company and industry, no matter the size. So how is it correctly implemented into a strategy?
Vision. A lean strategy should definitely start with perhaps the only aspect of a strategy that should be permanent. The vision of the company legitimises the existence of the organisation. The vision should be motivational and compelling. A vision might be aspirational and even a little unachievable.
Deliberate strategy. The deliberate strategy will identify the broad market position in which the firm can use it’s unique capabilities to satisfy customer needs of a way that no competitor can. We believe that the tree key elements for a strategy are objective, scope and competitive advantage. So what are they and how do these elements work?
Objective. This is the articulation of the near-term goal that is measured to define succes for the venture. The objective of the organisation will drastically change the course that the company will follow. Some examples of possible objectives are: going public in 4 year or building a sustainable company or looking for a buyout. No matter which objective is chosen, a different path will definitely be followed. Different metrics will need to be measured. And a lot of other decisions will be influenced by the chosen objective.
Scope. This is by far the critical strategic element. Because the scope will create boundaries for the company. These boundaries will decide what business the company will take on and what not. The scope can be viewed as a guide rail that the company stays on course.
Competitive advantage. It’s of the uttermost importance for every company to truly understand why it will win customers over competitors. The reason why you’re company will win is your competitive advantage. This advantage is what should help the company with satisfying the customer need and address the customer pain point. You’re competitive advantage might as an example be a summary of superior features. This distinctive value proposition will align the organisation’s activities and shape the future of the company.
The last part of the LSP framework is the emergent strategy. Because when a strategy is implemented, many throughout various levels of the organisation make countless decisions per day. All these decisions together will, over time, alter the position of the company and define the exact form of the strategy. This is the emergent aspect of the strategy.
The strategy then provides a framework for the interpretation of the market feedback. Only with a clear strategic perspective will organisations effectively learn from experiments. When the outcome will be a simple no-go decision, every gained skills and piece of information will go down the drain. But if the firm carefully analyses what went right or wrong a wise adjustment of the strategy can be created.
A good example would be Instagram. Instagram’s original strategy was to develop a private phone app. This able would enable friends fo check in at location, make plans and earn points by hanging out. However when the users reacted negatively to the app, not every was tossed out immediately. The founders instead focus on just one thing, and being tremendous at it. Because their good analysis showed that the majority of the users were posting a lot of pictures, they decided to spent eight weeks to develop a photo-sharing app. The rest is history.
Strategy matters. Maybe even more to entrepreneurs than to big corporates. Yet lean methods also offer a large amount of value. As my article showed, the two are not in conflict. Their reconciliation in Wavyr’s LSP is however what will offer hope for entrepreneurs in every type of organisation to become powerful innovators. Because combining strategy with experimentation all firms will increase their chances of achieving lasting succes.