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Scaling_up

Disciplined Art of Scaling-Up

In previous post I’ve covered topics related to business formation and new market entry, incl. business model development, prototyping minimal viable product or service, valuating new venture, making it investable, and getting founded. In this post, I relate to a phase of company’s development following market introduction –so called growth phase.

G. Duruflé, T.Hellman and K. Wilson in From Start-Up to Scale-Up Examining Public Policies for the Financing of High-Growth Ventures define scale-ups as start-ups that have successfully established market presence and experienced rapid growth.

For the sake of this post let’s assume that new market entrant finds itself in the growth phase when its product has been already tested and market demand for it exceeds its initial operations capacity. Growth phase for new ventures is intrinsically related with phenomenon of scaling-up – enlarging market presence and growing company’s operations capacity,  understood as ability to manufacture and deliver product or service.

Scaling up has been recently wider discussed in entrepreneurship and innovation policy making discourse. This phase of growing new businesses has proven to be critical for their survival and performance, and is often backed-up with new employments. Growth is also a phase when many new companies become overwhelmed with unexpected and surprisingly high demand for their products and services, and due to that they often fail by loosing production capacity or financial liquidity.

Scaling-up requires different set-up of methods and tools from public entrepreneurship ecosystem stakeholders. Recent research results published by Innovate UK pointed out factors contributing to successful scaling-up process. I’ll focus on those I find the most challenging and crucial – people, strategy & cash.

As strong management team is critical to a successful scale-up, company founders need to enlarge original team to find time for other matters, such as e.g. strategy. This requires recruiting right people and avoiding miss matches. One of approaches that helps that is value-based recruitment focused on assessing match of candidate with values and culture of the company.

Why it’s important to focus on values? They seem to be often inherent, whereas skills can be learned and mastered. In value-based recruitment you might request the candidate  to imagine they come back home extremely happy and excited after work in your company and then ask to explain to you what could have happened during the day in the firm so they feel like that. You’ll learn also learn about their values, motivations and development plans by asking what could have happened if they came back home sad and depressed.

In scaling-up phase you’ll rather follow lean approach toward recruitment which is also about using your network, asking for references and second opinions to find right candidates. You can find some more tips related to growing team in early stage venture at blog of Ben Yoskovitz.

In relation to people in growing phase you are also in situation of thinking on more or less formal organizational design, which might vary from functional, divisional through matrix ones – at least before maturity of your organizational allow you for to self-organizing teams and give individuals broad freedom to choose their own priorities and tasks. It’s also the moment you intensify thinking about harmonizing individual efforts toward defined goals of organization through set up of objectives and performance indicators for your co-workers. Some food for thought in this context comes from Peter Thiel – co-founder of Pay Pal we wrote about some time ago.

Second important item related to scaling-up  is strategy. By strategy I understand not getting first paying customers, but rather rigorous way to answering the question on where you’d like to be in the marketplace and how you’d like to get there in time for 3 to 5 years. You get there through strategy development process requiring formulation of ideas & options, their evaluation and selection, setting up main strategic direction backed up with clear objectives, resources you control and action steps you set-up and execute. And yeah, if you offer acouple of different products or services, you develop separate strategy for each and every of them.

Business strategy is not the mission and vision your customers will find on your website. When the outcomes strategy development start saying about market share you plan to own and profit margins you want to achieve – that will be pretty close to what business strategy is about. After time when you get convinced it’s your biggest trade secret embracing insights and know-how straight from the crater – you are there.

Here you’ll find some tools pretty useful in strategy development process, especially for market-position analysis part, which precedes discussion on strategic development directions. Some other approaches useful for analysis of your competitive environment might incl. Porter 6-forces, product life-cycle, or benchmarking. You can also get answers to questions asked by rigorous application of SWOT analysis framework.

Although the process and tools might sound abstract, as entrepreneur you should take your first steps to have strategy developed. Just consider to designate small strategy development team of your employees and ask them to meet regularly for advancing strategy formulation. In between, they can talk with vendors and customers and prospects, research competitors, and try some strategy development tools , which anyway will lead you further than not trying to tackle strategy at all.

As noticed by V. Harnish in Scaling Up nothing consumes cash as fast as growth phase. Therefore third most important ingredient in scaling-up  is cash flow management. V. Harnish advices a proactive approach toward management of growing company liquidity through conscious cash flow management and building reserves through e.g. dynamic pricing, competitive sourcing, lowering operating costs, collecting due amounts faster, reducing inventory and acceptable delaying payments to others. Some concrete practices the author recommends to consider relate to preparing in advance and sending error-free bills to customers on time or keeping 60 days’ cash on hand to cover potential expenses and avoid difficulties, which in scaling-up  should never be fixed with lines of credit.

Some non-obvious ideas for lowering operating costs and increasing company’s performance can be found in Exponential Organizations written by S. Ismail, M. S. Malone and Y. van Geest. Authors preach approaches of smart partnering, exploiting and leveraging other people’s assets and resources if one have none, using games, challenges, quizzes and competitions to tap mind power of people in their communities and engaging them in creating value which originally was though as something to purchase from the outside.

So, in what stage of development is the venture you support?

Chess

Why any Plan is Better than no Plan?

In one of my favorite MBA case study books I found a particularly interesting anecdote illustrating importance of always having some kind of plan, even if you feel it is not the accurate at all.
 
The anecdote was originally described by K.W. Weick in “Cartographic myths in organization” and goes like this:
 
During soldier maneuvers in the Alps, a troop of Hungarian soldiers got lost during the scouting mission. The weather was severe, snow was deep and conditions were freezing. After two days of wandering around, the soldiers gave up hope and became thought to frozen to death in the mountains. Then, to their great surprise, one of soldiers discovered a map in his pocket. Thrilled by this discovery, the soldiers were able to find way back and escape from the mountains. When they were safe back at the headquarters, they found out that the map was not of the Alps at all, but of Pyrenees. And what is the moral of this anecdote?
 
It often is that a plan (here a map) is not be perfect, but having it may give a sense of purpose and direction for moving forward. If the soldiers would waited for the right map they could have frozen to death. Map their found brought great deal of confidence motivated them to get up and go, look closely at cues of where they are and where they want to be.
 
Even if this anecdote is criticized in terms of its credibility, moral, and business applications in current times I still like it. Sometimes even leader is not sure where to go, and the plan they have is not good enough to get their teams out of the snowy mountains. However what leaders have to do is to instill confidence in people and get them moving even in general direction, so by going, listening carefully and learning as a team they can work out better idea how to capture the opportunity they chase.
 
 
                                                        Source: www.pinterest.com


Dzida! 

Rule #3: Successful Start-ups are Aggressive on Nearly Everything

Profit Income of Market Strategy (PIMS) research programme analysed performance and key success factors of thousands of business including performance of tart-ups in their first 5 years of life.

What are the key learning points for profitability and growth of start-ups from this research?

Rule #1 – Profitability is not a useful success metric for start-ups, as PIMS research shows that these start-ups which made money in 1st or 2nd year of operating performed worse later

Rule #2 – The key success metric of start-up success should change as the start-up progresses. It should vary from customer value in 1stand 2nd year to market share in 3rd and 4thyear to human resources and capital productivity later on

Rule #3 – Successful start-ups are aggressive on nearly everything. In increasing market share, which is single most important metric for start-ups –aggressiveness in marketing, business development, external support or consulting is essential and pays off

Rule #4 – Successful start-ups are clever on price, and what’s proved the best is aggressively huge product or service discount that competitors cannot adverse

Rule #5 – Start-up where the environment favors you and look for segments with few competitors

Rule #6 – Rule: Use customer value as a key driver of your choices – reason for existence of start-up is to deliver superior value to customers

So are you waiting on a lightning strike?

 Source: www.youtube.com
Dzida !

 

 

 

 

How Fast is Your Strategy?

So you know what’s a business model and now it’s time to start implementing it.

If you are a fresh starter and you are just entering the market with your service or product what you do in fact is “share-building strategy”. This kind of strategy refers to all companies in embryonic stage and is about developing competitive advantage like efficiency, quality, innovation or customer responsiveness to attract first customers by providing them knowledge about what you offer. This is how you do the ground for the “market share” you are going to build, and market share is the slice of cake you would like to bite referring business to delicatessens.

 

Once you attract customers and start selling what you offer is in fact “share-increasing strategy” and your slice of cake starts growing. Now your state of the art goes for focusing your resources to invest in product and services development to become a dominant competitor in the industry you operate.  “Share-increasing strategy” is in fact about attracting more customers to you from “weak” companies, which are already existing in the market.

 

And how you become dominant competitor in your industry and what’s more achieve leading position? Let’s take a look how it’s done in mature industries.

 

There are several ways for going for this, incl. in particular strategies for deterring entries of rivals. Deterring entries of rivals is important especially if you introduce an innovation, which can be reengineered and successfully followed by the others. One of the strategies for deterring entries of rivals is “product proliferation”. Sounds sophisticated? In fact it’s not, as it’s about communicating to the market that your product or service covers broad range of customers in terms of industries they operate and their size (small, medium, large). If you’ll not do it you may expect followers doing what you do, but specializing in particular type of industries or companies’ size. Product proliferation creates barriers of entry you need to fill the niches your competitors sooner or later will.

 

Another strategy you use to deter entries of rivals is “price cutting”. You do this by charging high prices for what you offer in the beginning of your business and focus on short-term profits, but then aggressively cut the prices to build your market share. When you do it you signal potential new entrants that if they enter the industry thy will not be able to cover their costs. Sometimes it goes with your “experience curve” and obtaining “economies of scale”, which are about delivering your services and products at lower prices once you master the production,  and when costs fall down with prices your profitability is still maintained. Here you must be careful with strong competitors, as in fact they are able to withstand short-term losses to achieve long-term successes.

 

Last strategy for deterring entries of rivals in embryonic businesses is strategy called “maintaining excess capacity”. It’s about demonstrating physical capability to produce more products or deliver services that your customers in fact currently demand. You do it to “warn” potential entrants that if the enter the market you would be able attack by increasing output of your products or services, cut prices down and make the entrance not profitable.

 

Above proposed approaches look nice, but let’s not forget that we operate in times called “era of tabulation”, and what matters is constant ability to adapt the business model and the strategy without generating losses to business environment you operate. Y. Doz and M. Kosonen call such ability “strategic agility”, which characterizes companies taking advantages of changes in their surroundings, working out the profit with not losing the pace.

 

“How strategic agility will help you stay ahead of the game” they wrote tells how big companies successfully do this. ut hey, weren’t all the big companies small one when they were starting?
<a href="http://www.amazon.com/gp/product/0273712446/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0273712446&linkCode=as2&tag=dzidaconsu-20&linkId=R6QDH3F6ZRRM2AAP">Fast Strategy: How strategic agility will help you stay ahead of the game</a><img src="http://ir-na.amazon-adsystem.com/e/ir?t=dzidaconsu-20&l=as2&o=1&a=0273712446" width="1" height="1" border="0" alt="" style="border:none !important; margin:0px !important;" />
Source: www. learningace.com

Dzida !