Strategizing for startup part 1

www.cass.city.ac.uk ©PaoloAversa2015
Paolo Aversa
Lecturer in Strategy
Cass Business School
Paolo.Aversa.1@city.ac.uk
Strategizing for Start-Ups
Part I
Simone Santoni
Research Fellow
Cass Business School
Paolo.Aversa.1@city.ac.uk&
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.”
9
www.cass.city.ac.uk ©PaoloAversa2015Enzo 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?
“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
18

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
20

©"2013"Robert"M."Grant"
www.contemporarystrategyanalysis.com"
Describing Strategy
Current Positioning & Future Direction
21"
Strategy: Decision or process?
22"
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

©"2013"Robert"M."Grant"
www.contemporarystrategyanalysis.com"
The roles of strategy
23"
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

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-SalesTactics
The different levels of strategy
Corporate strategy
26

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
27
Vertical scope Product Scope Geographical Scope
28
[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
29
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
30

Some example of leaders in cost advantage?
31
Some examples leaders of differentiation
advantage?
32

10 pitfalls of strategy
33
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.
34

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”.
35
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.
36

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.
37
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.
38

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.
Paolo.Aversa.1@city.ac.uk
Thanks for your participation.
See you next Wednesday!

Strategizing for startup part 1

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