critical issues about_strategy_entrepreneurs

Critical competitive strategy issues everyentrepreneur should consider beforegoing into business

Alan Davis, Eric M. Olson⁎

College of Business, University of Colorado at Colorado Springs, 1420 Austin Bluffs Parkway,Colorado Springs, CO 80918, USA

Abstract

The topic of formulating and implementing competitive strategy is usually consideredfrom the perspective of a large, well established, and oftentimes multi-divisionalcorporation. Achieving a sustainable competitive advantage, however, is every bit oreven more critical to the survival of smaller startup businesses. Although muchresearch has been performed on how startup companies create value for theirconstituencies and on how they launch products, few attempts have been made toapply classical large-company strategy ideas to startups. In this paper we considereleven distinct differences between how large, established firms and their smallerstartup counterparts consider strategy initiatives with an eye to guiding entrepre-neurs toward higher probabilities of success. The eleven differences are building onmarket strengths, size of market, relationship to resources, presence of constraints,visibility of and by competitors, investor expectations, shareholder/investor risktolerance, process, portfolio management, triage, and time horizon for results.© 2008 Kelley School of Business, Indiana University. All rights reserved.

KEYWORDSEntrepreneurship;Startup firms;Competitive strategies

1. Management's most valued tool

It is a well-accepted principle that no single compet-itive strategy is inherently superior to any other in itspotential to generate high returns for shareholders.While Hyundai, Dell, Wal-Mart, and Days Inn success-fully compete in the United States by pursuing alowcost strategy, counterparts Porsche,Apple,Target,and the Ritz-Carlton succeed by pursuing a premium

differentiation strategy. However, these examples allhave one thing in common: they are mature firms. Dostartups really have the same options? In this article,we examine differences between mature firms andstartups, defining a “startup” as a privately held busi-ness that has recently begun operation.

Unlike management techniques such as TQM andprocess reengineering, which have declined in popu-larity, strategic planning continues to be both themostwidely adopted management technique and thetechnique that managers are most satisfied with bya significant margin (Rigby, 2005). Established firms

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⁎ Corresponding author.E-mail addresses: [email protected] (A. Davis),

[email protected] (E.M. Olson).

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recognize the importanceof conducting formalmarketanalyses, portfolio management, cost-benefit anal-yses, and so on, in order to optimize their allocation ofscarce resources and stay ahead of changing marketconditions. In contrast, startup firms usually lack theresources to allow for such a formal process. Still, forthese firms to survive infancy, they, too, need to un-derstandcustomers, suppliers, competitors, and issuesof market volatility (Slater & Olson, 2002).

We have found that neither Porter's (1980) classicmodel nor Slater and Olson's (2002) revised model ofstrategic forces are adequate to surface the dif-ferences between how established companies andstartup companies formulate and execute strategy.For that reason, we have chosen to create a newunderlying model. In much the same way that Slaterand Olson based theirmodel on Porter's by combiningsimilar forces and adding new, relevant ones,wehavebased our five-forces model on Slater and Olson'smodel by combining similar forces and adding newones. The resulting model is shown in Figure 1. In thismodel, we capture four external forces (e) and oneinternal force (i):

1. Suppliers (e): These were represented by bothPorter's and Slater/Olson's models, but wehave added a new sub-category that capturesthe suppliers of financial capital. As we willsee, financial suppliers have little effect onlarge company strategy formation but play amajor role in startup strategy formation.

2. Customers/Markets (e): Here we have com-bined three of Slater/Olson's forces into one

because they are closely related: CustomerPower, Market Change Growth, and MarketChange Turbulence.

3. Competition (e): Following the lead of Slater/Olson, we have combined Porter's original threeforces (Competitors, Potential Entrants, andSubstitutes) into one.

4. Regulation (e): Industry and Government reg-ulations can have a major effect on strategy inboth large and small companies.We have there-fore added this new category of force to ourmodel.

5. Internal Culture (i): The culture within a compa-ny can also have a profound effect on the choicesof corporate strategy.With this inmind, we haveadded this new force.

2. The differences

Based upon a combination of practical experienceand literature review, we have identified 11 criticaldifferences between how senior executives in largeestablished companies and entrepreneurs in smallerstartups conceive, define, and implement strategy.The practical reality is that startup firms typicallydo not have the time and resources to engage informal strategic planning processes. The question asto whether this is good or bad has no obvious answer.On one hand, we can assert that adopting a soundstrategy-development process could be critical to astartup's survival and prosperity. On the other hand,

Figure 1 Our five competitive forces model

212 A. Davis, E.M. Olson


we could assert that taking the time to do so destroysthe startup's precise competitive advantage; that is,the ability to be fast to market. As stated so adeptlyby Bhide (1994, p.150):

However popular it may be in the corporateworld, a comprehensive analytical approach toplanning doesn't suit most startups. Entrepreneurstypically lack the time and money to interview…potential customers, let alone analyze substitutes,reconstruct competitors' cost structures, or pro-ject alternative technology scenarios. In fact, toomuch analysis can be harmful; by the time anopportunity is investigated fully, it may no longerexist…. [A] study of 2,994 startups showed thatfounders who spent a long time in study, reflec-tion, and planning were no more likely to survivetheir first three years than people who seizedopportunities without planning.

Nonetheless, it is important to understand thedifferences betweenestablished companies and start-ups so entrepreneurs can better understand whichstrategy ideas from large corporations are applicableto them, andwhich are not. We have organized the 11differences into five general categories, as shown inFigure 1. The 11 differences identified here areintended to provide entrepreneurs with an efficientchecklist to help them understand the aspects ofstrategy that are critical to consider in theearly stagesof a business' life.

• Suppliers1. Relationship to resources2. Investor expectations3. Shareholder/Investor risk tolerance4. Time horizon for results

• Customers/Markets5. Building on market strengths6. Size of market

• Competition7. Visibility by (and of) competitors8. Portfolio management9. Triage

• Regulation10. Constraints

• Internal Culture11. Process

3. Supplier-related strategic differences

The academic literature recognizes that suppliers ofraw materials and/or basic labor have a majorinfluence on a company's competitive strategy. For

example, thepresence of exclusive relationshipswithunique suppliers can enable a company to success-fully pursue either a unique differentiation strategyor a low-cost strategy. However, a 2002 surveyconducted by Industry Week reported that only 18%of respondents perceived suppliers as fundamentalcontributors to strategy success (Osborne, 2002). Webelieve that such suppliers provide identical benefitsto both large corporations and startups. However, theunique role played by financial suppliers has addi-tional strategic implications for startups, as seen inthe following sections. Specifically, these sectionselaborate on the differentmindsets necessary to leada startup with respect to how the strategy drivesresource availability, and how the strategy mustsatisfy investors' expectations for financial return,risk, and liquidity.

3.1. Relationship to resources

Execution of a strategy usually demands the presenceof resources. However, established companies andstartups have very different perspectives on resourceswhile they are crafting strategy.

Advice to the entrepreneur: Your strategy mustconsider the degree to which it can attract invest-ment capital as much as considering whether it willwork effectively to generate revenue and profit.

3.1.1. The established company perspectiveGeneral Managers (GM) of separate divisions withina larger corporation compete with each other forresources. Ultimately they must convince top man-agement that their division's opportunities andcorresponding strategies hold the promise of greateropportunity for growth and return on investment thanthe opportunities and corresponding strategies iden-tified in other divisions. In addition, because divisionsare saleable assets, GMs may also need to convincetop management regarding the critical fit of the divi-sion's offerings to the strategic focus of the corpora-tion. For example, when Hewlett-Packard wasdivided into two companies, it was determined bytop management that computers and printers wouldbecome the focus of the new Hewlett-Packard, whiledivisions such as Test and Measurement were incon-sistent with this vision, and were consequentlyrelegated to what would become Agilent.

At the CEO level, successful companies usuallyhave cash reserves from operations and can applythese to new strategies. Established companieswithout sufficient cash can often make secondaryofferings of stock to generate the necessary cash.However, for the most part, the availability of re-sources drives the feasibility of implementing a newstrategy. In contrast, as we will see in the following

213Critical competitive strategy issues every entrepreneur should consider before going into business


paragraphs, the effectiveness of the conceived strat-egy in startups often dictates whether resourcesbecome available.

3.1.2. The startup perspectiveThe CEO of a new startup must think as much, ormore, about attracting investors as about attractingcustomers and creating products and services. Onone hand, this could be considered a diversion fromthe basic business goal of increasing revenue andprofit, and providing a satisfactory return for theinvestors. On the other hand, a startup withoutresources will not survive long enough to achieve itsbusiness goals. As a result, one of the primaryfactors that make a good strategy work for a startupis its ability to attract resources, and thus investors.So, unlike the large corporation, where the feasi-bility of a strategy will be assessed by whetherexisting resources are sufficient to support it, thestartup's strategy will be assessed by whether it canattract sufficient resources.

A startup company proceeds through a series ofstages: seed, early stage, growth stage, mezzanine,and public. In the seed stage, strategy is relativelyunimportant. The initial investors are often fairlyunsophisticated, including friends, family, and fools(the three Fs). Often, the founders will write a smallcheck to purchase founders' shares, make a smallloan to the company, or agree to work without asalary. Such loans, stock purchases, and sweatequity are often driven by a shared vision or “coolidea” as opposed to a well-crafted strategy. Duringthe early stage, private equity in the form of angels isusually solicited. Angels are a lot more sophisticatedthan the three Fs, and will always demand to see astrategy. The practicality, excitement, and riskinherent in that strategy will often determine if theangels choose to invest. The same can be said for thegrowth stage, where the even more sophisticatedventure capitalists (VC) are usually the source offunding. However, because VCs are investing otherpeople's capital and are investing for their careers (asopposed to angels who generally invest their owncapital and generally do not consider investing instartups as their career), they are evenmore rigorousin the assessment of business strategy and moredemanding. By the time the company has evolved to amezzanine level, it has generally become big enoughto allow the usual strategy dynamics of a larger, moreestablished company to apply.

3.2. Investor expectations

Investors desire returns; strategies deliver returns.Thus the financial return expectations of investorsdrive the selection of a suitable strategy.

Advice to theentrepreneur: If your strategy createsa steady flow of income but no increase in corporatevaluation (i.e., growth), your strategy will fail.

3.2.1. The established company perspectiveBlue Chip and/or value stocks differ from growthstocks in their volatility or beta weights. Stocks withbeta weights of 1.0 generally track the overallmarket's performance. This means a lower upsidewhen themarket takes off, but also a lower downsidewhen the market tanks. Mature firms are marked bysteady long-term growth, which produces acceptablereturns for shareholders who value a stress-free nightof sleep. In contrast, growth stocks have higher betaweights, meaning their values fluctuate more dra-matically – both up and down – when market con-ditions change. Fidelity Investments reports that overthe life of the stock market, public equity invest-ments have outpaced US Treasuries on average be-tween 6% and 7% per year. This spread covers the riskfactor that themajority of investors arewilling to livewith. Public stocks also vary with respect to whethertheir yields are returned in the form of growth orincome to their shareholders.

3.2.2. The startup perspectiveUnlike larger companies, investors in startups rarelydesire income. Usually they are looking for growth.Internal rate of return (IRR) expectations are alsoquite a bit higher than in larger, less-risky companies;these expectations typically vary from 15% to 40%over US Treasury yields depending on the type ofinvestor and the stage of the company (Mugrabi,2007). Because the return expectations are so muchhigher, business strategies are expected to be moredramatic, more exciting, and more risky as well.

Unlike larger companies,most investors in startupsare happy to have no liquidity in the short term.However, investors in startups generally will demanda liquidity event within three to five years. Let'sassume that a potential investor is interested inmaking a $10 million investment in a startup, andexpects a 35% IRRwith a liquidity event in 5 years. Theinvestor will first analyze the startup's strategy forfeasibility, and assess whether the pro forma finan-cials are believable for that strategy. Then, based onthose financials, and the multiples implied by thetype of business the company is in (which of course isdriven by the strategy), the investorwill calculate theexpected valuation of the company in five years. Ifthe investor desires a 35% IRR on the $10 million in5 years, he/shewill expect approximately $45millionin proceeds. By dividing the corporate valuation in5 years by the desired return of $45 million, theinvestor will be able to determine the percentage ofthe company to demand for the $10 million



investment. In this case, let's assume that thestrategy is compatible with the pro forma financials,and the industry multiples implied by the strategytogether with those financials suggest that thecompany will be valued at $100 million in 5 years.The investor will then decide that he/shewill need toacquire 45% of the company for their $10 millioninvestment to achieve the desired return. If this issatisfactory with current shareholders, then a deal islikely. If not, there are many alternatives:

1. Alter the strategy so the company becomesadifferent kindof company (e.g., perhaps sellinghigh-priced services and giving away its productsat cost instead of selling high-priced productsand giving away its services at cost). This wouldcause all parties to use different multiples todetermine the company's future valuation. Witha higher valuation, the investor's future value($45million) for their $10million investmentwillrepresent a smaller percentage of the company.

2. Alter the strategy so the company's pro formafinancials are better. Of course, this can onlywork if the new strategy passes the tests thatwere explained earlier. With higher numbers inthe pro forma financials, the company will bevalued higher, and as in the previous case, theinvestor's future value ($45 million) for their$10 million investment will be a smallerpercentage of the company.

3. Have the investor invest a smaller amount.

4. Find another investor who has lower IRRexpectations.

5. The founders can sell more of the company tothis investor than the current shareholders de-sire and accept the resulting dilution.

Notice how the strategy plays a central role indriving the fulfillment of investor expectations instartups. Note that none of this negotiation processexists in more established companies.

3.3. Shareholder/investor risk tolerance

Shareholders in publicly traded companies are farless risk tolerant than their counterparts in startups.

Advice to the entrepreneur: Entrepreneurs do notneed to be as wary of high-risk strategies as largecompanies. However plenty of attention should stillbe given to risk awareness, risk management, and riskreduction.

3.3.1. The established company perspectiveAs a general rule, shareholders in established com-panies are relatively conservative, and they usually

expect consistent returns quarter-to-quarter, or atleast year-to-year. Dramatic changes to strategy oftenresult in less than stellar short-term results in returnfor much more favorable longer-term results. When apublicly traded company needs to make dramaticchanges in strategy, it risks highly unfavorableresponses from its shareholders. On occasion, privateequity firms step in, acquire the company, eliminatethe public shareholders, formulate and execute thedramatic new strategy, and then return the companyto the public at a much higher valuation. This hap-pened in November 2006 when private equity firmssold off 27.5% of their shares in Hertz Car Rental afterholding it for less than a year (Kim, 2006).

3.3.2. The startup perspectiveGenerally, investors in startup companies lack theconservatism of their established company counter-parts. Because they desire a higher return, they arewilling to take larger risks; in fact, some actuallythrive on this risk (i.e., the risk is not just tolerable,it is desirable). Therefore startup strategies almostalways include larger risks, and almost always in-clude a few years of less-than-favorable returns fol-lowed by dramatic growth.

3.4. Time horizon for results

Execution of every new strategy implies a short-termloss stemming from the investment in the strategy,followed (hopefully) by a longer-termgain. Theexpec-tations for how soon a strategy will result in positivereturns are quite different in established companiesand startups, and thus must drive the selection ofstrategy.

Advice to the entrepreneur: When crafting a strat-egy for your startup, aim for returns that correspondto expectations of your investors, typically 3-5 yearsfor software-intensive companies and 5-9 years forbiotechnology companies.

3.4.1. The established company perspectiveWhile CEOs and GMs must be concerned with the long-term viability of the company, the fact remains thatthe market value of a firm is projected continuously.Investors measure performance against an annual ROIstandard. Investors often flee from stocks whosemarket values drop relative to their competitors.While the market value of an individual stocksupposedly signifies a firm's infinite profit potential,these assessments are murky at best. The inherentliquidity of publicly traded stocks gives most inves-tors the ability to abandon their investments at anytime. Thus, senior managers in established firmsmust constantly be cognizant of short-term marketperceptions, and must plan and implement only



those strategies that offer a relatively short-termresult. Actually, most CEOs of large companies arelikely to executemany new strategies in various partsof the business simultaneously, thus ensuring theshort-term negative effects of longer-term strategiesare overshadowed by other more conservativestrategies.

3.4.2. The startup perspectiveIn general, investors in startups are more tolerant ofshort-term losses than shareholders in larger com-panies. The lack of liquidity of privately held stock ofcourse gives investors few options other than toler-ance. As a result, strategies in startups can, and usu-ally do, take advantage of this situation. Typically, itwould be acceptable for a startup's strategy to digdeeply into the company's current assets, perhapseven so deeply that the company would become vul-nerable to self-destruction. In fact, it is usually ex-pected that a startup will use every resource availableto it in order to achieve longer-term results. This con-trasts dramatically with more established companies,where strategies that create short-term losses arerarely tolerated, and strategies are expected to pro-duce short-term and long-term beneficial returns.

Investors in startups generally expect to have aliquidity event (such as an initial public offering or anacquisition) within 3 to 5 years of their investment forinformation technology companies, and within 5 to9 years of their investment for biotechnology compa-nies (Burkland, Mill, & Truchado, 2005). On thepositive side, this expectation drives CEOs to avoidstrategies that produce only short-term results. On thenegative side, this also can eliminate strategies thatwill produce very long-term positive results.

4. Customer/market-related strategicdifferences

Ultimately, the success or failure of a business strat-egy is determined by the response to that strategy bythe buyers of the product and/or service. It wouldseem that this fact would account for few differencesbetween startup and established businesses. How-ever, some distinct differences exist. In the followingsections, we elaborate on how the two kinds of com-panies differ in their approach to selecting newmarkets, specifically with respect to how these newmarkets relate to the company's current market pre-sence and how the size of these new markets effectsthe decision to conquer it.

4.1. Building on market strengths

It is easy to claim that companies should craft strat-egies that leverage current market successes. But

what does that mean for entrepreneurs who have noexisting market successes?

Advice to the entrepreneur: Since you cannotbuild a strategy that leverages past successes,instead build a strategy in which the market isrelatively easy to penetrate. That generally meansyou should be addressing a major pain of thecustomer, and fully understand how you are goingto find the target customer. The most painful way ofdoing business is being forced to conduct “missionarysales;” that is, where you first have to convince thecustomer that he/she has a problem, and thenoffer asolution.

4.1.1. The established company perspectiveMost new product decisions in established compa-nies tend to be more conservative in nature with aneye towards risk avoidance. Evidence of this wasprovided by a study by Booz, Allen, and Hamilton(1968), which noted that only 10% of all new productsintroduced each year by established companies canbe truly considered new-to-the-world innovations.Strategies to sell existing products in new markets ornew products to existing customers, as shown inFigure 2, allow a firm to capitalize on at least onecomfort zone. Strategies that simply modify anexisting product (e.g., altering the surface graphicsof skis from one year to the next), or re-price anexisting product (e.g., Marlboro's price reduction),further reduce overall risk as the firm continues towork with existing customers and existing products.

4.1.2. The startup perspectiveUnlike larger companies, startups generally have noexisting products or services, and no existingcustomer base. In fact, if they had existing productsor existing customers they would not be startups bydefinition. Therefore, they have no choice but tocraft a higher risk strategy, one that enters theuncharted territory of the upper right quadrant of

Figure 2 Leveraging existing products or customers



Figure 2. Startups are always considered to be higherrisk endeavors than their larger counterparts. Thetechniques that a startup company uses to capturesuch uncharted territory are inherently differentthan those used for capturing either horizontally orvertically. These techniquesmust by their very naturebe more dramatic, more extreme, and require moreenergy per revenue dollar gained.

Typical strategic techniques for such a maneuverinclude: (a) flanking (Trout & Ries, 1986) the com-petitor with an attack on an uncontested area as DECdid with IBM in the mini-computer business in the1970s (Shein, DeLisi, Kampas, & Sonduck, 2003), witha lower-cost product as executed by Days Inn againstHoliday Inns in the 1970s, with a higher-cost productas exemplified by Orville Redenbacher's gourmetpopcorn in 1975 (Sherman, 1996), with a smaller prod-uct as executed by Volkswagen, Toyota, and Datsunagainst the big three US auto makers, with a funnierproduct as in the case of Elope's funny hats, or with asuperior distribution method as in the case of Enten-mann's Bakery against Dunkin Donuts; or (b) usingguerrilla tactics (Trout & Ries, 1986) by finding newways to segment an existing market, and then clearlydifferentiating products and services to targetmembers of that market sub-segment. Examples ofthis include Alienware's re-segmentation of the PCspace by targeting just game players (Alienware,2007), and Crain's Chicago Business's geographic re-segmentation, which eroded Business Week's com-manding position as a business news source, at leastin the Chicago area. Smaller companies are oftensuccessful using guerrilla tactics because they havemuch less overhead than their large company coun-terparts. These same techniques can be used bylarger companies (or divisions within larger compa-nies) who are having major difficulties; the “turn-around expert” hired to lead the company out ofthese difficulties often must employ similarly dra-matic strategies. However, most larger, more estab-lished companies focus their strategic thinking ondefending their leadership position, employing offen-sive strategies to upstage the leader when they are ina #2 or #3 position, andmaking dramatic supply chaincost reductions. None of these strategies make sensefor a startup.

4.2. Size of market

To be visible, large companies need to execute strat-egies that can succeed on a large scale, and thatimplies they must conquer large markets. Small com-panies need to execute strategies that can succeed aswell, but that implies that large markets are almostalways beyond their consideration.

Advice to the entrepreneur: Although you want toconvince others that yourmarket is potentially huge,your strategymust take into account the necessity tofocus during your early years. That means you needto employ the rifle shot, not the shot-gun approachto capturing your customers.

4.2.1. The established company perspectiveLarge, multi-divisional firms like Wal-Mart, whoseannual sales are in the hundreds of billions of dollars,must pursue some combination of savings or salesincreases on the order of billions or tens of billionsof dollars in order to meet market performance ex-pectations. Corporate-level projects on the order of$10 million are simply insufficient to meet thesegoals. In contrast, a program that promised a$10 million increase in same-store sales would besignificant to a branchmanager. Such actions could goa long way towards meeting corporate and marketexpectations if replicated across all stores. There-fore, a market targeted by an effective corporatelevel strategy must be large. For Wal-Mart, thistranslates into a corporate-level decision to push intoChina with a 20-year goal of expanding to the pointwhere revenues from that country are on par withthose generated in the US.

4.2.2. The startup perspectiveIn marked contrast, an increase in annual revenuesof $10millionwhen existing revenues are non-existentis quite impressive. Three primary considerations foran early startup are to demonstrate that theirproducts and services will sell, that their process forselling the products and services scales up, and that alarger potential market exists for their products andservices. When these three have been demonstrated,investor confidence soars. However, initiating suchproof by trying to sell to a very large market from thestart is usually a prescription for disaster. Brand guruAlRies (1996) noted that the future of a startup companydepends on focusing. In an established company, aprimary consideration for a workable strategy is thesize (generally, the larger the better) of the targetmarket. In a startup, a primary consideration for aworkable strategy is also the size (generally, thenarrower the better) of the target market.

5. Competition-related strategicdifferences

Although the fundamental role of competitionremains unchanged, there are still some distinctdifferences between established companies andstartups with respect to how competition is treated.The following sections detail the differences with



respect to the degree of visibility between the com-petition and the company in question, and howthe company selects products or services (portfoliomanagement) or the features of those product/ser-vices (triage), that will achieve success relative tocompetition.

5.1. Visibility by and of competitors

The larger the company, the more visible it is to itscompetitors. As a result, strategies executed by largecompanies are obvious to competitors, who canattempt to copy the strategy or otherwise subvertit. This is not the case for smaller companies.

Advice to the entrepreneur: You must fully under-stand your competition: current competition, poten-tial entrants, and substitutes. But once you knowwhere they are, you do not need to spend too muchtime worrying about them seeing you. In all like-lihood, you can proceed without them discoveringyour startup. Even after they spot you, they fre-quently will make little or no attempt to defendthemselves from an attack by such a small company.

5.1.1. The established company perspectiveA sophisticated, mature company spends considerableresources monitoring its competition. This “competi-tion” generally consists of what it considers seriousthreats; that is, companies of roughly the same size ofitself, or companies with significant market share.Rarely do they monitor activities of startups unlessthey are searching for an acquisition. Their competi-tors are generally behaving in a similar manner. Thus,large companies must develop strategies that willwork in spite of the fact that their competitors willquickly observe their maneuvers. Apple, with very lowmarket share, has traditionally been very secretiveabout its product offerings. Relying upon theircompetency as an innovator, Apple keeps projectswell under wraps until Steve Jobs is ready for his nextmedia event. However, bigger competitors mayactually take the opposite approach. Microsoft mayactually signal the market well in advance of theirintention to move into new areas (e.g., video games)as a means to discourage potential competitors frompursuing that path.

5.1.2. The startup perspectiveA startup is usually unknown to its competitors. Astrategy that would be foolhardy for an establishedcompany might be feasible for a startup due to itsinherent ability to proceed “under the radar” of thecompetition. Blue Ribbon Sports managed to makethe jump from startup to industry powerhouse, atleast in part, due toAdidas's failure to react quickly tothe firm's low-cost overseas production strategy and

the novelty of its Nike branded products (Katz, 1995).Only on occasion do established companies payenough attention when a small company has founda way to seriously outflank them in a niche marketwith a large up-side potential. This was the case, forexample, in 2006 when Dell “noticed” startup Alien-ware's amazing success in the gaming PC market, andquickly acquired them to prevent additional damage(Alienware, 2007).

5.2. Portfolio management

Portfolio management is that part of strategy thatcarefully selects the mix of products/services to beoffered to a company's customers. This type ofplanning is far more prevalent in larger companiesthan smaller companies for the simple reason thatlarger companies usually have a mix of products orservices, rather than just one or two.

Advice to the entrepreneur: If you are contem-plating more than one product or service, pay closeattention to how they complement, not competewith, each other.

5.2.1. The established company perspectiveEstablished companies must remain aware at alltimes of how prospective products and services willaffect current products and services. Aside from afew companies like Apple and HP, who pride them-selves on constantly developing new technology tooutperform their current products, most companiesinsure that new products either (a) complementother existing products in the portfolio, or (b) serve ina chain of “sell up” strategies where buyers of one ofthe company's products will naturally buy up to thenext best model.

Competing with one's own products is just part ofthe portfolio management concern. In addition,managers seek to capitalize on fixed assets (e.g.,their plant), established distribution channels, andmarket strengths such as brand equity to expandproduct offerings and ultimately increase sales andprofits. For Porsche, the move to develop an SUVcould be seen as a radical departure from theirnormal business, but the reality is that this newproduct extended the quality and performancereputation of Porsche to a new market segment.They were therefore able to leverage their existingdistribution channels to conquer an entirely newmarket segment.

5.2.2. The startup perspectiveIn contrast, a startup's strategy is expected to focus onjust one business (Ries, 1996), and often on just oneproduct. Thus, a startup will usually select a singlenarrow vertical market to penetrate successfully,with a longer-term plan to either expand its target



market to other markets, or to expand its product orservice offerings to the captured market. Thereforethe concept of portfolio management really does notexist in a startup.

5.3. Triage

Once portfolio management is completed, and aspecific product or service is selected, triage is theprocess of determining exactly which features thenew product or service should exhibit in order toachieve the best return for investment for thecompany (Davis, 2003). Unlike portfolio manage-ment, triage decisions are a focus of strategy im-plementation for all sizes of companies.

Advice to the entrepreneur: Stay involved in theproduct definition process for as long as possible. Thegreatest strategies can be ruined by poor selection ofproduct features. You have the vision, so make surethat vision gets implemented to your satisfaction.

5.3.1. The established company perspectiveOnce executives in large companies declare thecompany's strategy or participate in portfolio selec-tion, the focus of first-line managers, or even in-dividual contributors, is on selecting specific featuresof products or services. This is often accomplishedwithout wearing a “strategy” hat. Features areselected based on the narrow view taken by relativelyjunior employees. This is acceptable; after all, suchindividuals are hired for their tactical abilities, nottheir strategic perspective, and in many cases theymay know the customers better than executivemanagement does. When triage is performed in largecompanies, it is often performed using intimidationinstead of through a group process that merges thebest ideas from multiple strategic and tactical per-spectives. This is dangerous because decisions madeduring triage sessions often determine the success orfailure of a product in themarket, and these decisionsare being made in a manner invisible to the execu-tives, who are often left pondering why the productfailed to capture the attention of the intended buyers.

5.3.2. The startup perspectiveIn contrast to larger companies, startup executivesare usually involved in every aspect of corporatestrategy from the most abstract to the most specific.Therefore, not only will the corporate executives beinvolved in determining the businesses, the products,the services, and the targetmarket, but theywill alsobe closely involved in triage and will have a say inprecisely what features will be present in the com-pany's offerings. Therefore, startup managementdoes consider feature selection to be strategic, andthat might account for why startups are often more

successful at launching new products than largercompanies. The point we are making here is that insmall companies, strategic thinking goes down to thedetails, while in larger companies, strategic thinkingoften stops at the executive level.

6. Regulation-related strategicdifferences

Established companies and startups must both abideby the laws and regulations of their respectiveindustries and government. But some regulationsapply only to larger companies, and some apply toonly smaller companies, as described below.

6.1. Constraints

Advice to the entrepreneur: If you are new to entre-preneurship, you will quickly discover that few ruleswill control what you do. Start by making your corevalues, your vision, and your mission clear, and allowthose to be your guide.

6.1.1. The established company perspectiveEstablished companies live with both regulatory andshareholder constraints, and their strategies must res-pect this. Predatory pricing, restraint of trade, pricecollusion, anti-trust, affirmative hiring practices, andpension policies are just a few of the policy concernsthat may result in legal actions being taken againstestablished companies whose strategies cross the line.In addition, the industry in which the company is doingbusiness often has its own regulatory requirements. Ashas been previously addressed, shareholders can placeconstraints on firms by demanding that annual returnsbeat the market average. Shareholders may also pushpersonal or social agendas (e.g., boycotting of storesselling adult magazines or periodicals that printcigarette advertisements, or supporting charitiesthat might be associated with controversial programssuch as reproductive issues). Reacting to socialconcerns about the role food companies have playedin the controversy over obesity in the US, PepsiCo,Inc. now ties executive bonus programs to strategiesthat focus on the development of healthier foods(Terhune, 2006).

6.1.2. The startup perspectiveDue to the lower public visibility, startups are muchless constrained. Of course, their strategies must ad-here to the law, but the fact is that fewer laws exist tocontrol them. Typically, the constraints that startupsare more concerned about include non-competitionagreements between current employees and theirformer employers, solicitation of a former employer's



customers, and predatory hiring, as opposed to anti-trust or affirmative action. However, industry-specificregulations (e.g., FDA regulations on appropriate test-ing of drugs) are as applicable to startups as they are toestablished companies.On the securities side, startupshave the legal right to ignore many of the regulationsplaced on more established companies; for example,startups are not required to conduct annual financialaudits, although many strongly advise them to do so.

7. Internal culture-related strategicdifferences

The internal cultures of startups are fundamentallydifferent than that of more established companies(Heffernan, 2007). This fact leads to some distinctdifferences in the strategies that are viable in the twodisparate types of companies, as explained below.

7.1. Process

Advice to the entrepreneur: Learn quickly how todeliver a 20-second elevator pitch that fully explainsyour company at an abstract level, and a 20-minutepresentation that fully explains your company at anabstract level. You will have many opportunities touse these. If these presentations don't excite thelistener, then nothing else you can say will.

7.1.1. The established company perspectiveAs stocks are typically traded at the corporate ratherthan the divisional level, and competitive strategiesare executed at lower levels, the process of establish-ing and/or reviewing competitive strategies is multi-stage. In a top-down model, senior management con-siders current product and/or service offerings and thelikelihood that these offerings will allow the parentcompany to meet investor expectations. The macroview of CEOs and presidents is focused on determiningwhat business or businesses the corporation should bein. These are very big issues because the outcome ofsuch analyses might result in a significant structuralchange to the corporation. Among the options seniormanagers have are the purchase of an existingbusiness, the internal start up of a new business line,the merger of existing divisions, and the sale oroutright closure of existing divisions. Examples ofcorporate-level strategic decisions include the divisionof Hewlett-Packard into two separate companies (HPand Agilent), General Motors' closure of the Old-smobile division, andUnited Airlines' formation of low-cost carrier Ted. These decisions were made afterlengthy analyses, and with the approval of theirrespective boards of directors. Once the decision asto what business or businesses the corporation is going

to be in is made, divisional general managers are thenresponsible for determining how the individual divi-sions will compete (e.g., low cost vs. differentiation).Typically, these generic strategies are not subject tofrequent or dramatic changes. Rather, they are inplace to direct the efforts of the division's employees.Generic competitive strategies are implemented atthe product level. In firms such as 3 M, new productideas may spring from formal committees or fromcreative individuals. New proposals are subjected to aformal set of analyses to test viability. Many projectswill receive initial seed money to test technicalstandards or market reactions to concept products,but ultimately these numbers will be winnowed downto those deemedmost likely to succeed. One criticismof this process is that even in companies with a strongreputation for innovation, the recent pull is towardmore conservative offerings where risk levels aresmaller. The big four recording companies have beencriticized for their devotion to formulaic musicofferings. While their focus on Billboard's Top 40 pro-duced predictable sales levels for a long time, theadvent of the Internet has now created an alternativedistribution channel for heretofore overlooked inde-pendent bands.

7.1.2. The startup perspectiveThe process for defining and establishing a strategyin a startup is far simpler. Usually the principals ofthe company share a common vision; they select astrategy that makes sense given that vision, thecorporate goals, and market conditions. Theycapture it in a business plan, which can either bea formal written document or a PowerPoint briefing.If the company is to be angel-funded, the businessplan is presented to potential investors, and privatemeetings are held between the founders and theangels. If the company is to be VC-funded, theinvestors will typically invite the company to make a15 to 20 minute presentation. Entrepreneurs mustbecome effective at capturing the essence of theirbusiness model and strategy in such “elevatorspeeches,” or they will not be successful. It isquite rare for a startup's strategy to include short-term acquisitions of other companies or eliminationof current businesses.

8. Implications on strategy selection

As noted at the outset of this article, there are manyequally sound strategies that large firms may pursue.Ikea and EthanAllen both succeed in selling furniture,although their approaches are very different. It isworth noting, however, that while both companiesare in the furniture business, the products they offerare not exact substitutes. Ethan Allen, by design,



pursues a higher price point than Ikea. Still, both ofthese large companies experience economy of scalesavings that could not be replicated by an individualcraftsman working alone on a piece. By definition, anestablished company has managed to make the jumpfrom the small number of customers defined as inno-vators or early adopters to the much larger segmentof the marketplace defined as early or late majoritybuyers (Moore, 2002).

Startups rarely succeed based on a low-cost, low-price, low-margin strategy. The reason is simple: lowcosts generally result from economies of scale, andsmall companies by definition do not enjoy the bene-fits of economies of scale. Large corporations canmaintain such a strategy due to high volume. Almostevery successful startup relies on distinct product orservice differentiators, rather than low cost, toenable them to capture small market segments.There are a few exceptional cases; these occur whena startup has developed a fundamentally new way toreduce costs (in which they often license thetechnology to a larger company and make theirrevenues through licensing fees), or has developed aunique relationship with a supplier who is able toprovide materials at lower cost, although sometimesnot at a volume commensurate with the needs of alarger company. One such example is Nine DragonsPaper, founded in 1985, whichwas created based on alow-cost supply of USwaste paper imported in unused(and thus low-cost) containers to China, where it wasthen recycled into new packaging supplies and sold athigh margins (Barboza, 2007). Much more commonare examples of strongly differentiated strategies forstartups. For example, in 1995eBayprovided a uniqueservice differentiator: convenient on-line auctions;not low-cost or low-price (Cohen, 2003). GovWorks.com, in 1998, provided a unique service: access togovernment bureaucracy (Noujaim&Hegedus, 2001).In 1939, Bill Hewlett and David Packard started theircompany based on unique test equipment notavailable from other sources (Packard, 2006).

9. Final thoughts and contributions

Whether a company is an established firm or newstartup, having a strategic directive is a criticalcomponent in increasing the probability of success-fully meeting customer and investor demands. Theconsiderations for developing and implementingsuccessful competitive strategies in startup firms,however, differ significantly from those processes inestablished firms in 11 critical areas. Investors instartups, and customers who purchase initial pro-ducts or services from startups, tend to view theworld differently than mainstream public investors

and customers of large corporations. Understandingwhy these constituencies view the world so differ-ently is a critical component in understanding howthese two types of firms can and should formulateand implement alternative competitive strategies.

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