BY PETER S. COHAN
On Monday my 39-student MBA class, “Strategy and the CEO,” discussed the concept of strategy. While the term is often used in business, it is dimly understood. And to make matters worse, big company strategy is not the same as startup strategy.
As I argued in my book, Hungry Start-up Strategy, choosing and implementing the right strategy is vital for a venture’s survival.
For big companies, the goal is to maximize return on shareholders’ investment and arriving at that means making two fundamental strategic choices:
Choosing where to compete. The idea is to pick an industry that is big, growing fast, profitable and likely to remain so. One attractive industry is transporting oil via pipelines. The typical player earns a return on equity of over 100 precent.
Deciding how to win the selected market. Two basic strategies work here: differentiation undertaken by a company that gives customers more of what they want, thus boosting their willingness to pay (think Starbucks) or serving as a low-cost producer whereby the enterprise charges the lowest price in an industry (such as McDonald’s).
A big company’s selection of the right choices can help it earn more profit than its rivals and perhaps enable it to enjoy faster stock-price appreciation.
But a startup has a different goal and therefore must make different strategic choices: New ventures face huge odds in trying to avoid perishing and they lack the cash to pay suppliers’ bills and to compensate workers what their labor is worth.
After interviewing more than 200 entrepreneurs, I’ve come to the conclusion that making the following six decisions in the right way can help boost a start up’s odds of success.
1. Pick goals. Why would a talented person take a pay cut to work with a new venture and why would someone with deep pockets write it a check? The right mission can inspire terrific talent. And if a startup commits to an IPO or acquisition, this could help convince an investor that the firm will make him or her richer.
2. Choose markets. The venture could theoretically sell its product to anyone in any market. An entrepreneur should pick a market about which he or she feels deep passion and that is big enough to help the firm become a $100 million company even if the founder only receives 10 percent of it.
3. Raise capital. An entrepreneur needs money to pay suppliers and employees but also wants to maintain control of the venture. To keep control, a company can borrow on its credit card or crowdfund until it has proved that customers will pay for its product. Then the entrepreneur can sell a stake to a venture capitalist to cover the last mile before an IPO.
4. Select a team. The entrepreneur can’t do everything — so he or she needs to hire and motivate A-level talent. The stock options offered will only help with recruiting the talent if the entrepeneur has already built successful startups and provides an emotionally compelling mission.
5. Obtain market share. Potential customers don’t want to buy from a company that’s probably going to fail in six months. To overcome this problem and gain market share, the startup should do two things: Find a customer who has pain that has no cure and deliver the cure at a price that makes the product irresistible — what I call a quantum value leap.
6. Respond to change. Once customers buy the product in droves, the entrepreneur should be kicked upstairs to monitor changing customer needs, new technologies and upstart competitors to figure out additional products to build and fresh markets to conquer.
In discussing strategy, my students latched on to the idea of gaining share by offering a quantum value leap. The class discussed how Akamai Technologies, a Cambridge, Mass.-based provider of services that speed up the Internet, does this by boosting its customers’ revenues.
Akamai’s CEO, Tom Leighton, shared with me last week how Walmart found that customers are more likely to buy online if the pages load in less than two seconds. Akamai’s quantum value leap lies in delivering web pages faster, thus boosting its customers’ ecommerce revenue.
By continuing to invest in technology that speeds content delivery as technology evolves — such as the growing use of smart handheld devices and the cloud — Akamai has adapted to change — thereby maintaining its industry lead.
And since Leighton was the firm’s co-founder and chief technology officer before becoming CEO, he has been able to apply startup strategy to his $1.6 billion public company.
Without a strategy, an entrepreneur might miss the chance to go where Akamai has.