Strategy in a start-up

The strategy development process set out in this chapter is not that different for a start-up, whether serving an existing market or creating a new one. You need to assess your likely opening competitive position in the main segments where you intend to compete and develop a strategy to enhance that competitiveness over time.

There are three key differences:

• ■Your competitive position is in the future rather than the present tense.
• ■It will be affected adversely from the outset by a low rating against all key success factors pertaining to experience.
• ■Your backer will want to know whether it is defensible once achieved.

Your competitive position in a new venture is a judgement on the future. For an established business, the debate revolves as much around the present and recent past as it does around the future. It revolves around the weighting of KSFs and/or your ratings against specific KSFs, as evidenced by customer, supplier and other interviews, each of which will be based as much on fact and performance track record as on judgement.

But, for a start-up, the debate will, in large part, be conjecture, especially if your venture is in a new market. So, your arguments must be stronger. And you must find evidence from any possible source.

Best of all for a business-to-business start-up is a letter of intent from a prospective customer – even better, a handful of them. Failing that, and this is the same for a business-to-consumer start-up, your evidence must lie in your rigorous analysis of market demand, competition and your competitive distinctiveness.

Your argument must set out what customer need or want or benefit you are filling – and why your offering will serve that need better than current providers, whether direct or indirect.

Your storyline must be simple, focused and clear. It should be deliverable as an elevator speech.

You have no business as yet. You are invisible. Your storyline is a promise to the customer – of delivery sometime in the near future.

And your challenge is to get your backer to buy into that storyline.

The second difference in a start-up, your initial rating against those KSFs that demand experience, you can do little about. Your rating against market share will be near zero at the outset and that against some cost-related factors, especially those relating to scale, will also be low.

Likewise, your rating against some differentiation factors. Your lack of track record may count against you in areas such as consistency of product quality, delivery, customer service and sales and marketing.

In that case, how will your firm compete? It’s not easy being a new entrant to an existing market. You are inevitably facing a lowly competitive position relative to the leaders at the outset. However, if you are addressing a growing market and/or you can differentiate your product or service sufficiently, things should improve.

Your competitive position in three to five years’ time should have improved measurably – your market share rating should be up, your unit costs down and your service performance improved.

But this analysis further highlights what we discussed (in Chapters 2 and 3) about segmentation. If your new venture does not serve an existing market but creates its own new niche, then all changes. The analysis of competition will be undertaken not for the market as a whole but for your addressed product/market segment. And, if that is a new segment, created by your new venture, you effectively have no direct competition.

But there are two caveats:

• ■You will have indirect competition (as discussed in Chapter 4).
• ■You may, in due course, face direct competition from new entrants, who will be after your niche.

This brings us to the third of the main differences between strategy for a start-up and that for an established business: its defensibility.

Remember the definition we used for strategy: ‘Strategy is how a company deploys its scarce resources to gain a sustainable advantage over the competition.’ The all-important word for a start-up in a new market is ‘sustainable’.

If your new venture succeeds, you will be targeted. Competitors will eye your newly carved space with envy. They will come after you. And soon.

How will you protect yourself against that competitive response? Your backers need to know this. If they are venture capitalists, they will be looking for an exit after five years or so. Could this be when your competitors have started taking chunks out of your market share? If so, your backers will find it difficult to sell out, or only at a discounted price. If there’s a strong chance of that scenario from the outset, they won’t back you.

There are a number of ways you can try to sustain your competitive advantage:

• ■patent protection of key products
• ■sustained innovation, staying one step ahead in product development
• ■sustained process improvement, staying ahead in cost competitiveness and efficiency
• ■investment in branding, identifying in the mind of the customer the particular benefit brought by your offering with its name
• ■investment, for business-to-business ventures, in customer relationships.

However you aim to do so, this must form a key component of your business plan. Set out here not only how you are going to achieve a competitive advantage in this newly created market, but also how you will sustain it.

For further reading on strategy in a start-up, or indeed for further thoughts on market demand (see Chapter 3) and competition (Chapter 4) in start-ups, along with more case studies on what worked, what didn’t and why, try John Mullins’s terrific book, The New Business Road Test (5th edition, Pearson, 2017). This is essential reading on all the preparatory work and research you should undertake before drawing up a business plan for a start-up, especially in a new market.