Nearly 10,000-word strategic notes for startups. After reading this, you will be excited to start your own business!

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Huxiu Note: This article is from The Medium and translated by Liang Chao of TECH2IPO/Chuangjian.

Running a company without a strategy is like breathing in an oxygen-free environment.

This article aims to summarize some specific and fundamental entrepreneurial lessons. As part of the discussion, the author will try to provide some specific and easy-to-use practical frameworks that founders of startups in their infancy can use in their ongoing attempts to explore the actual operation of their companies, thereby helping them complete the process of growing from a startup to a business. Before talking about the big principles, let's first introduce some basic concepts and definitions.

Definition #1: What is a startup? A startup is essentially a temporary organization that seeks to find a solution to a problem and, in the process, a repeatable, scalable, profitable business model with incredibly high growth potential. The hallmarks of a startup are trial and experimentation, and in order to survive, every startup must learn and become adept at conducting the necessary trials and experiments on the road to a successful business model. As an investor, I certainly hope that every early-stage startup I invest in will grow into a mature company.

Strategy is about making choices and making trade-offs; strategy is about being deliberately different.

—— Michael Porter, renowned professor at Harvard Business School and the “Father of Competitive Strategy”

Definition #2 What is strategy? The strategy of an early stage startup is a series of deliberate choices designed to create a sustainable competitive advantage that allows it to compete with competing startups and even market players in the relevant market. The startup combines all factors in the environment to create and deliver value to users while also capturing some value and benefits for itself and its investors. Strategy tells the startup what to do and what not to do in the process of exploring a repeatable, scalable and profitable business model.

The picture shows the chapter "Strategy is a series of cascading choices" from "Everything for Winning" co-authored by AG Lavray and Robert L. Martin

Additional thoughts and perspectives on strategy

1. Strategy can be tangible or vague. It can be tangible in the organizational hierarchy or vague at the top of the hierarchy.
2. Strategy helps startups decide how to use internal and external resources and capabilities to achieve their ultimate goals and objectives.
3. For growth-stage startups or mature companies, an effective strategy can help companies make choices and compare trade-offs in the following areas: supply chain management, product development, channel distribution, human resources, corporate financing, R&D, and company operations.
4. For startups that are still in the early stages of development, strategy actually includes choices and trade-offs in the following areas: value positioning, customer segmentation, customer relationships, key businesses, key resources, key partners, cost structure, and revenue sources.

The picture shows the "Business Model Canvas" created by Alexander Oswald, from "Business Model Generation"

Strategic decision-making tool for early-stage startups

Five Forces Analysis: Michael E. Porter published a paper titled "How Competitive Forces Shape Strategy" in the Harvard Business Review in 1979. In this paper, Porter proposed the "Five Forces Model" that later became famous around the world, elaborating in detail the direct impact of the five forces on strategy.

Threat of new entrants: As the number of direct competitors grows, startups can anticipate the intensity of the competition they face. As direct competitors, the value positioning of these new startups in the same market is almost the same as that given to customers by the pioneering startups. The threat of new entrants means the upper limit of profitability. The greater the threat, the less profit the pioneering startups can grab. The greater the threat, the higher the cost of competing entities in the same competitive field and market. Therefore, it is increasingly important for startup founders to think about how to build a "moat" for business economic benefits. In his work, Michael Porter discussed the seven main sources of entry barriers, namely supply-side economies of scale, demand-side economies of scale, customer switching costs, capital adequacy, independence from scale first-mover advantage, unequal distribution channels, and government policy restrictions.

Suppliers’ bargaining power: Given that suppliers’ main income does not rely on orders from startups, if suppliers are more professional and specialized than startups, then they have more bargaining power. The following factors can help suppliers’ strong bargaining power: suppliers’ products are unique and irreplaceable, startups’ (demand side) supplier conversion costs are too high, and there is a lack of other suppliers that can provide products or services. All these factors will give suppliers strong bargaining power, so suppliers are very likely to close deals at higher prices, and the corresponding costs will be passed on to the startups’ customers.

Bargaining power of buyers: This is the other side of the bargaining power of suppliers. Strong buyers can weaken the profitability of startups (suppliers of products and services). The factors that can boost buyers’ strong bargaining power include the following: the huge purchase volume of buyers (relative to the size of the startup), the awareness of buyers or the realization that the cost of switching suppliers is negligible, and the suppliers’ products or services cannot have any impact on buyers’ ability to maintain and improve the quality of their products or services in terms of quality, reliability, or even substitutability.

Competitive threat of substitutes: If you ask the founders of startups, “Who are your competitors?”, they may answer, “We don’t have any competitors!” I will definitely shake my head and doubt whether these startup founders really understand the meaning of substitutes. We can quote Michael Porter’s statement in the “Five Forces Model” theory, “providing the same or similar functions as the original product in another way (product)”. For example, if video conferencing is used to replace business travel, the significant difference between the way new startups perceive their customer value proposition and the way customers perceive the same value proposition of substitute products (services) will obscure the competitive threat of video conferencing (substitute products and services). You can understand the meaning of substitutes in the following ways, such as asking yourself, “How do customers currently meet their needs or solve problems?” or carefully pondering, “Is it because of the reduction of customer costs that they choose their own products?” The profitability of the industry will be squeezed by high-threat substitutes. For example, chat or instant messaging apps pose a competitive threat to social networks Twitter and Facebook.

Facebook is sensitive to these competitive threats and has strengthened its strategic position through a series of large-scale mergers and acquisitions (such as Instagram, Oculus Rift and Whatsapp). The threat of substitute products or services will become very high in the following situations: 1. If customers want to switch to substitute products or services and customers do not care about performance and price; 2. If the cost of customers switching to substitute products or services is very low or even negligible. To understand how the competitive threat of substitutes works, you can look at the real case of how Facebook increases its advertising revenue through its users' massive search for information and challenges Google's advertising business; or you can review how the trend from "desktop computing-centric to mobile computing-centric" has a significant impact on various "desktop computing-centric" businesses; or the current debate on the relationship between startups and employees in the context of the on-demand economy and the inspiration brought by startups on both sides.

Competition among existing competitors: Think of Uber and Lyft, Microsoft IE and Netscape Navigator, Apple iTunes, Spotify and Pandora, Apple iOS and Google Android, Apple iPhone and Samsung Galaxy, Apple Watch and other smart wearable device designers and manufacturers that have sprung up in the market. Intense competition among existing competitors is often reflected in price competition, ubiquitous sales and marketing, and relatively short product and service upgrade cycles. Considering the threat of new entrants, fierce competition among existing competitors leads to competitors fighting for every inch of land in relatively mild and relatively closed and exclusive markets. In addition, the competitors foresee that the "battlefield" in the future will also be a market area where every inch of land will be fought for. The fierce competition in the popular on-demand ride-sharing service is a good example of the above phenomenon. Intense competition among existing competitors often weakens profitability in two ways: the intensity of competition and the basis for competition. The factors that exacerbate the intensity of competition among existing competitors include similar size of competitors, slow growth, high exit barriers, high levels of market and industry commitments, and low information transparency. A common mistake made by existing competitors is to engage in a cannibalistic price war, which leads to a comprehensive reduction in the user experience of their respective customers. Perhaps the competitors will adopt other strategies. Under the conditions of homogeneous market competition, the above-mentioned cannibalistic price wars are easy to break out. Competitors will face high costs and low profits. In the situation of shrinking market demand, it is difficult for these competitors to quickly adjust production capacity, so there will be excess products. Ideally, competitors in a competitive situation should find ways to improve the profitability of the industry and market and at the same time increase the entry barriers of the industry.

Factors affecting strategy: The word "strategy" seems simple, but this word has caused endless debate among management theorists, academic experts and management practitioners.

Michael Porter believes:

It is extremely common to mistake visible characteristics of a particular industry for its underlying structure, and it is particularly important to avoid this trap.

Michael Porter cites four factors that influence industry strategy and competition:

1. Industry growth rate
2. Technology and Innovation
3. government
4. Complementary products and services

The key is for startup founders and investors to analyze the "five forces" used to shape development strategies under the above different factors. These factors are not good or bad, but they must be analyzed and evaluated specifically using the "five forces theory" in the context of industry development.

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Jack Bauer, the star of the American TV series 24: Live Another Day, always calculates everything before anyone else.

In the TV series 24: Live Another Day, Jack Bauer tells a group of heavily armed terrorists planning an attack on London: "You may think I'm at a disadvantage; I bet I'm not."

Definition #3: What is game theory? Quoting the definition from Wolfram Mathworld, game theory is both a new branch of modern mathematics (game analysis, such as involving conflicts of interest between multiple parties) and an important discipline in operations research. In addition to its mathematical elegance and complete solutions for simple games, the principles of game theory are applied to complex game confrontations such as cards, checkers, and chess, as well as real-world problems such as economics, property division, politics, and war.

There are two branches of game theory: combinatorial game theory and classical game theory.

Combinatorial game theory involves two highly skilled players who are evenly matched (Go, chess, and checkers are included in the scope of combinatorial game theory). Obviously, there is no chance in combinatorial game theory, and the two sides take turns to win the game.

In classical game theory, in which players make moves, bets or strategize simultaneously, hidden information and chance often come into play, a branch of economics.

#p#

So how can game theory be widely used?

Business as usual - strategy through game theory: In their 1995 Harvard Business Review article, "Strategy through Game Theory," Adam M. Brandenberg and Barry Nailbof offer advice to startup founders on the choices they make as they move from launching a startup to growing it into a mature business.

Unlike war and sports, business is not about winning or losing, and it is not about how well you run your business. The success of a company is not based on the failure of other companies. No matter how well you run your business, if you make a mistake, your company will fall into the gutter. The essence of business success is that you run your business well.

Here are the views from the article "Developing Strategy through Game Theory":

1. There are two basic forms of games: games with rules and games that are free to play. Business is a complex mixture of these two.
2. To help entrepreneurs build strategies, founders and investors must be forward-looking and predict the development of the game by analyzing the impact of the actions of all competing entities (players). This includes determining the current actions that are beneficial to the future development of the startup by forward and backward reasoning about the future. For games with rules, game theory provides principles. Every action will have corresponding feedback. But this is not Newton's third law of motion. This feedback is not equal in size and opposite in direction.
3. Startup founders must embrace "allocentrism" (the ability to understand others and their behavioral tendencies) and stay away from egoism. For example, startup founders should pay more attention to competitors' actions, wishes, expectations, ambitions, goals and objectives, etc., and reduce excessive attention to their own actions. "To look forward and look back, you must be familiar with other competitors. To evaluate the value you bring, you must ask other competitors what you can bring to them, not what they can bring to you."
4. Startup founders should seek out and create “coopetition” relationships (win-win and win-lose opportunities). Because win-lose strategies often produce unexpected and counterproductive results, it is important to consider the possibility of both wins and losses. Since price wars reestablish the status quo, such strategies make each competitor worse off. Starting a price war strategy is a lose-lose move.
5. The complex relationships between the startup’s customers and suppliers, substitutes and complements weave a web of value that is crisscrossed horizontally and vertically. It is very important for startups to look at competitors in the value web. The startup itself is located at the intersection of the horizontal and vertical axes of the value web. The startup trades with its competitors in the vertical axis (the flow of resources and funds to and from the startup and its customers and suppliers). The startup does not have a transactional relationship with substitutes or complements, but only a correlational relationship. Generally speaking, strategists do not pay much attention to how to transform the interaction relationship with substitutes or complements in order to create a win-win situation in the startup’s value web. The author recommends that you draw the value web and monitor the changes in various elements of the game.
6. The various elements of a game are as follows: players, which generally include customers, suppliers, substitutes, complementors, and competitors. Added value, which is what each competitor brings to the game. Rules, business rules are never fixed and are not transparent, and competitors in the game will agree to modify the rules. Strategy, which is the short-term actions of competitors in the game to shape the perception of other opponents. Scope, which is the boundary of the game. Startup founders may consider expanding or reducing the scope of the game to match the final result they agree on.
7. "Strategic traps" In the value network, startups do not need to change the game at the expense of other competitors. Startups do not need to be the best example of success. In itself, the uniqueness of the best is not a necessary and sufficient condition for success. Founders who ignore the observation and learning of the entire game will bring expensive lessons, because in the game, the actions of the competitive subject on one set of competitors will have corresponding effects on other competitors in the vertical and horizontal axes of the value network.

Goal Grid - A tool to clarify goals and objectives. For startup founders, the goal grid is attractive because it asks four questions:

• What do you want to get?
• What do you want to keep?
• What do you want to avoid?
• What do you want to eliminate?

Then, by retelling these questions, connect these questions to the real-life problems you are trying to solve:

• What is it that you want but don't have? You should try to acquire these things.
• What do you already have? You should try to keep those things.
• What are the things you lack that you don't want? You should try to avoid these things.
• What do you currently have that you don't want? You should try to eliminate these things as quickly as possible.

The specific analysis can be demonstrated by the following target grid diagram:

Some points about the target grid:

1. As a tool, the goal grid is very flexible and can be used to analyze problems at multiple levels of an organization, both as an enterprise-level strategic plan and as a strategic plan at the team or even individual level.
2. This type of analysis easily frees the goals grid from the whole idea of ​​a strategic planning cycle. There is nothing stopping someone or a small team within a startup from creating any cycle that uses the goals grid to achieve their goals. For example, in some specific scenarios, a reading goals grid planning and updating cycle makes sense, but in other situations, a quarterly update cycle makes more sense. Of course, there are still some situations where updating the goals grid plan on a weekly basis makes sense.
3. A case study published on the Internet fully demonstrates the power of simulation systems. The product priority system built by 40 engineers helped the online radio Pandora gain 70 million monthly users.
4. Even in the search or early stages, the goal grid should be used for every component of your startup’s business model.

Asset/Customer Reuse Matrix:

Sometimes people don’t think of strategy as something that can be paralyzed by the sheer volume of information that goes into the development process. Any organization, whether it’s a startup, an enterprise, or a department, can use this framework to narrow down the options.

In the analysis chart below, the vertical axis represents assets or "asset reusability", while the horizontal axis represents customers or "customer reusability".

Generally speaking, actions in Quadrant 1 rely on assets that the startup already has to create products that customers will like and adopt. Actions in this quadrant are relatively easy for startups to execute. Actions in Quadrants 2 and 4 are relatively easy in the decision matrix, but difficult in other matrices. In Quadrant 2, it is more difficult for the startup to find new customers than to sell to existing customers, but this also depends on assets that the startup already has or can easily acquire. In Quadrant 4, the startup sells to existing customers, but this corresponds to not leveraging assets that it already has or can easily acquire.

Quadrant 3 is where you must not take actions. In this area, startups develop products using assets they do not own or cannot easily acquire, and sell them to potential or difficult to acquire customers. In this area, the actions of startups are difficult to execute on both the vertical and horizontal axes of the decision matrix.

As shown in the figure, once conditions are ripe, it is relatively easy for actions marked as A, B, C and D to migrate from the corresponding quadrants to the quadrants pointed by the arrows. For actions A and B, startups can easily grasp new customers by developing tight and sticky products. We can also use a similar thinking process for actions C and D. The key for startup founders is how to transfer actions A, B, C and D to the Quadrant 1 matrix as quickly as possible.

Actions marked with E are more challenging. Generally speaking, avoiding these actions at all costs is the best choice. For startups, taking such actions is often a risk to their own resources and will result in a lot of losses. To take these actions, startups must carefully analyze the scientific support needed to develop new products and estimate the costs of creating new demand and acquiring new customers. Sometimes, it is just a choice of timing; but at other times, complex real-life situations create an impenetrable fog that makes it impossible to assess risks and weigh costs, so that these actions cannot be transferred into the other three feasible quadrants. DNFD does not mean "don't act rashly under any circumstances", if you understand it as "you need to have a very good reason to do this thing", it is closer to the essence of DNFD. Therefore, when careful analysis leads to only one conclusion, you really have to do this thing (execute the action marked with E) or be killed by others.

DNFD strategic analysis framework diagram (Basic principle: In theory, it is easiest to sell products developed using existing assets to existing customers)

DNFD Strategic Analysis Framework Diagram Practical Case Analysis

1. Should Apple launch a tablet computer? Apple's iPod, iPhone, iTunes, and App Store have achieved global success. Suppose you are aware of the above facts and are asked to analyze and decide whether Apple should develop and market the iPad tablet computer. How would you decide? You should know immediately that users of iPods or iPhones are likely to want a tablet computer like the iPad. The various application requirements that are not good enough on iPods or iPhones and are not very popular on laptops and desktop computers will prompt users to choose the iPad. In addition, with the deep R&D and marketing capabilities accumulated by Apple in iPod, iPhone, iTunes, and App Store, it will definitely help Apple successfully develop and produce the iPad tablet computer and market it globally.

2. Should Facebook launch its own games? When social game company Zynga decided to develop its own game platform instead of relying on Facebook as the only distribution channel for its games, some people might speculate that Facebook would launch its own games to fight back against this former partner. Through the DNFD strategic analysis framework, from the perspective of an outsider's assessment of the situation, this strategic move makes little sense.

However, one might ask, can Facebook easily release popular games among its own user base with its strong capabilities? If the answer is yes, will such games enjoy high popularity among Facebook users?

The next question is what trade-offs Facebook needs to make if it wants to develop its own games. Perhaps this heuristic analysis is not straightforward enough. To ask it another way, if Zynga's games are popular all over the world, how much activity does the average Zynga user have on Facebook in a year? Is this a benefit from Zynga's game user base? Is it a huge benefit, a significant benefit, or a small benefit?

Facebook has not actually made any moves towards becoming a game publisher. However, Facebook acquired virtual reality device maker Oculus Rift, and it is unclear whether Facebook/Oculus will enter the game publishing market.

3. Should Facebook build its own data centers? It is now late 2008 and you are asked to analyze whether Facebook should build its own data centers. Your analysis will be the basis for Facebook to decide on its future direction. What are your conclusions? What kind of company is Facebook? What is Facebook's business? Why is Facebook worried about building its own data centers? Who will be the customers in five, ten, or even fifteen years? What are the company's assets? Will customers still be willing to accept Facebook's products easily? Can Facebook still afford the R&D and other costs of building its own data centers? What opportunity costs will Facebook face if it builds its own data centers? What advantages and disadvantages does Facebook gain by building its own data centers? Is building its own data centers more important than other strategic actions?

What form should strategic planning take? The goal of strategic planning is to provide a map for people to act in the company. Good strategy is inseparable from execution and operations. It is the responsibility of management to ensure that all people in various positions and responsibilities of the company thoroughly understand the company's strategy in depth and detail.

Strategic planning covers the following areas:

product

What are the most critical features of a startup’s product at a particular stage of development?

For example, what features should a minimum viable product have? What features should it not have? Why?

How does the startup identify its customers? Why do customers buy these products? Why do some potential customers choose not to buy these products? What would change their purchasing choices? What product features will help the startup win the market? What are the characteristics of competitive or alternative products in the startup's market and value network? How should the product be positioned relative to this characteristic? What are the gains and losses of these choices?

finance

How can startups increase revenue? How can they cut costs?

operations

How can a startup get better at creating products? How can a startup get better at delivering products? How can a startup ensure that its operating structure evolves with the times? How can a startup ensure that its operations become a source of continued competitiveness and differentiation while protecting and strengthening its current position in the value network? How can a startup ensure that its rigid operating structure does not become a competitive disadvantage?

growing up

How do startups acquire new customers? How do startups strengthen the stickiness of existing customers? How do startups win back lost customers? How do startups expand into new markets? What adjacent markets should startups consider entering and what risks will they face? What geographic markets should startups consider entering? What do startups need to do in the areas of marketing, sales, advertising, and public relations related to growth?

Talent

What does a startup need to do to attract the best talent to achieve its goals? How can a startup develop talent among existing team members? How can a startup inspire employees to achieve goals that they didn’t know or believe they could achieve before?

Once upon a time, when I was working with others to develop strategies, these plans would gradually take shape in my notebooks. As time went on, these strategic notes became Word documents, and finally presentations to guide company managers in developing overall strategies. The most important initial work is to learn about customers, communicate directly with creators, and convey and implement the company's value proposition to customers. Strategic planning should be easily understood by all personnel in the organization and can be constantly updated to adapt to the goals and objectives of the startup.