Lean Strategy

Start-ups need both agility and direction

S trategy and entrepreneurship are often viewed as polar opposites. Strategy is seen as the pursuit of a clearly defined path – one systematically identified in advance – through a carefully chosen set of activities. Entrepreneurship is seen as the epitome of opportunism – requiring ventures to pivot in new directions continually, as information comes in and markets shift rapidly. Yet the two desperately need each other. Strategy without entrepreneurship is central planning. Entrepreneurship without strategy leads to chaos.

What many entrepreneurs fail to grasp is that rather than suppressing entrepreneurial behaviour, effective strategy encourages it – by identifying the bounds within which innovation and experimentation should take place. But executives who want their established firms to be more entrepreneurial often don’t fully appreciate how stagegate processes, multiple-horizon planning, and other corporate tools for managing strategic growth initiatives can undermine innovation.

The reality is, integrating the bottom-up approach of lean start-ups with the top-down orientation of strategic management remains devilishly hard. Is there a way to get the best of both worlds?

Yes. The solution is something I call a lean strategy process, which guards against the extremes of both rigid planning and unrestrained experimentation. It emerged from the more than 20 years I’ve spent studying and working with entrepre-

neurial ventures and large companies. In this framework, strategy provides overall direction and alignment. It serves as both a screen that novel ideas must pass and a yardstick for evaluating the success of experiments with them. Strategy allows – indeed, encourages – frontline employees to be creative, while ensuring that they remain on the same page with the rest of the organisation and pursue only worthwhile opportunities.

The Entrepreneur’s Challenge

Howard H. Stevenson of Harvard Business School defines entrepreneurship as “the pursuit of opportunity without regard to resources currently controlled”. This highlights the fundamental challenge confronting entrepreneurs: They all suffer from a shortage of money, talent, intellectual property, access to distribution, and so on. While acquiring additional external resources is partly the answer, the internal challenge is to wisely shepherd, conserve, and deploy the resources the venture does possess. That is exactly what strategy is all about. Indeed, the single best piece of advice for any company builder is this: Know what not to do. Strategy helps you figure that out.

Much more so than leaders of established firms, entrepreneurs need to recognise these fundamental principles:

The opportunity cost of doing A is that you cannot also do B. In a resource-constrained venture, choices are mutually exclusive. If you allocate two software engineers to customise a product for a new customer, you will delay the release of version 2.0 of the product by three months. No amount of experimentation will get around this problem.

Every choice creates a unique path with a different outcome and unforeseen implications. This is why you cannot simply do A now and B later – because circumstances will almost certainly have changed. Competitors will have launched their own version 2.0. Key suppliers will have signed contracts that commit all their capacity to others. Potential customers’ judgements about the service will already be clouded by their experience with a competitor’s version. The employee who would have been instrumental in pursuing B will have left the company. Every choice is an irrevocable rejection of something else. Decisions are interdependent. If John in marketing does A, it has ramifications for Peter in product development, and vice versa. Any venture needs to ensure that the scarcest resource – people’s time – is spent on the tasks that are critical to the organisation as a whole, not just to one department. In an established firm, operating units are subject to many organisational constraints: the brand’s positioning, a shared sales force, and so on. Those constraints help ensure consistency among initiatives and innovations. A new venture, however, lacks organisational parameters; the world is its oyster. This makes it even more important for entrepreneurs to set boundaries. Simple market tests aren’t always useful. The lean start-up camp celebrates agility and adaptation through rapid testing. That may be an effective way to innovate incrementally and fine-tune an offering’s fit with the market, but some ideas simply cannot be evaluated in a series of quick, cheap experiments. Though few concepts require all- ornothing investments, as the launch of Federal Express did, many do entail substantial up-front expenditures. Innovations that bring to market truly novel products and services, like steel minimills and electric cars, often involve building complete ecosystems and require long-term investments. While adoption rates are accelerating (Facebook achieved 100 million users in just over four years, WhatsApp in two years), some businesses will mature more slowly. Customers may need time to appreciate the value of a new product, or suppliers may need to work down a cost or experience curve to deliver at a reasonable price. Businesses such as accountable care organisations in health care and Tesla’s lithium ion batteries would never have gotten off the ground had they been expected to demonstrate immediate success. What’s more, quick A/ B tests that capture customer preferences may fail to account for various alternatives’ longer- run impact on brand reputation and purchasing behaviour. Such tests

THE SINGLE BEST PIECE OF ADVICE FOR ANY ENTREPRENEUR IS THIS: KNOW WHAT NOT TO DO

also focus too heavily on initial usage. Sometimes immediate traction with target customers is ephemeral: Users tire of the novelty or – like Groupon’s customers – find that repeated use is uneconomical. This is one reason that consumer-packaged-goods firms are careful to distinguish trial from repeated use.

How Strategy Can Help

In a world governed by the principles discussed here, a strategy that articulates the firm’s overall direction is indispensable. It helps entrepreneurs do four things:

Choose a viable opportunity. Rigorous strategic analysis can distinguish markets that promise enduring success from those that offer only the illusion of substantial, if immediate, returns. Many a new firm has failed because it pursued the latter. The archetypal example is a business with low barriers to entry. Consider Groupon again. Its innovative model of online coupons for local retailers and service providers quickly generated sales. Unfortunately, anyone and her mother could also launch such a site – and did. Demand for the service proved transitory, and no one has made any money in the business.

Yes, an entrepreneur can make a quick killing by starting such a business and then selling it to a strategic (or foolish) buyer. A classic example is Minnetonka. It brought to market a series of innovations – from Softsoap to the pump dispenser for toothpaste – that had no protection from copycats. Yet as the first mover, the company could grow rapidly before selling out to established firms: Colgate-Palmolive bought its softsoap business, and Unilever bought the other product lines. However, this business model still reflects a strategic choice: Knowing that the business cannot be sustainable, the entrepreneur does everything possible to minimise long-term commitments and maximise the gross margin and sales while looking for the exit.

Another misstep is entering a large and growing market without analysing whether the firm will be able to build a sustainable competitive advantage in it. Best Buy, Mattel’s line of Barbie dolls, eBay, and a slew of others entered China thinking that anyone could make money there – only to fail. It may be much wiser to pursue several smaller, less risky opportunities that together could create a successful long-term business.

An initial strategic screen can save a venture from going down the wrong path: one that might be readily validated by a market test of a minimum viable product but is unlikely to support a long- term business. At Eleet, a start-up based in Providence, Rhode Island, the founders (one of whom is my son) initially developed eight possible B2B and B2C use cases for their concept, providing chauffeurs to drive you in your own car. For a few hundred thousand dollars, the team could have rapidly tested some of those use cases. But before trying out even one, the founders analysed the target markets and recognised that a B2B version would be the most sustainable. As a result, they set aside the B2C use cases and instead ran tests that demonstrated the existence of high-volume B2B users, firms that would provide the service to their employees in lieu of limousine service. They’re now in the early stages of trying to build that business. (Full disclosure: I’ve advised, invested in, or served as a board director for Eleet and several other companies mentioned in this article.)

Stay focused on the prize. Ventures that lack strategic bounds try to do too much and spread themselves too thin. Because they fail to concentrate their available resources, they can’t win in any key market.

Sophia Amoruso, founder of Nasty Gal, initially succeeded in building a business that resold vintage