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Strategy Emerges
Friday, October 1, 1999



In an article published in the March 1994 issue of the Harvard Business Review, Amir Bhide noted that more than two-thirds of the entrepreneurs of fast-growing companies started their businesses with either a simple strategy or no strategy at all. “However popular it may be in the corporate world, a comprehensive analytical approach to planning doesn’t suit most start-ups,” says Bhide. “Entrepreneurs typically lack the time to interview a representative cross-section of potential customers, let alone analyze substitutes, reconstruct competitors’ cost structures, or project alternative technology scenarios.”

Entrepreneurs face extreme levels of uncertainty about customer needs and shifting markets. Often their strategy is shortsighted, directed toward merely raising capital or meeting the next milestone. As an emerging company’s shareholder interests are quite different from those of a large company, strategy development in large companies and emerging businesses is very different.

Large vs. Small

“Whatever large companies do, they generally must meet their internal rate of return standards,” says Nimish Mehta, CEO of Impresse and former senior vice president at Oracle. “By contrast, startups are able to invest in markets that are sometimes riskier, but consequently have a much larger upside. Large companies build strategies of leverage of internal resources across multiple markets, while startups build strategies of leverage using partners and market discontinuities.” Do successful entrepreneurs realize no benefits from research and strategic planning? “Appearances to the contrary, successful entrepreneurs do not take risks blindly,” says Bhide. “Rather, they use a quick, cheap approach that represents a middle ground between planning paralysis and no planning at all.” Lately, larger companies are reluctant to compete in some emerging markets, as Wall Street has helped emerging companies create a barrier by rewarding operational losses with sustained high valuations. Larger companies will not accept losses. They value the relative attractiveness of investments and new opportunities through the intrinsic value lens. Intrinsic value is the discounted value of the cash that can be taken out of a business during its lifecycle. Obsession over intrinsic value creates a continuous tension between growth and profit. Larger companies lose on emerging opportunities, as their intrinsic value strategy does not permit innovative exit strategies like spinoffs or IPOs. A large company in general would prefer to close its promising new venture division rather than let it be acquired. While there is no rational explanation as to why larger companies do not consider potential exit scenarios while evaluating emerging opportunities, it is becoming more accepted that in order to unleash the entrepreneurial energy within a company, larger companies are compelled to do so.

Emerging companies generally find themselves imitating competitors who have moved into their space. By doing so they are forced to lower costs and lose on profits. Without continued profits they are not able to continue to invest in growth. Only a few emerging companies with fundamental strategic advantages are likely to prosper in the race—especially as larger, more established companies compete with them. It is generally accepted that Silicon Valley started with the creation of Hewlett Packard in a garage in 1939. In the last 60 years of entrepreneurial history in Silicon Valley, only a dozen or so companies—such as HP, Intel, Sun, Apple, etc.—have become Fortune 500 companies. Strategy is the critical difference between success and failure for both large and emerging companies.

Concise Advice

Like all other blue-blooded strategy-consulting firms, McKinsey&Company is interested in helping their customer’s revenues, profits and market capitalization grow. Since “the Firm,” (as it is known to its Fortune 500 clients) is to consulting as Cartier is to jewelry, let’s examine some of McKinsey&Company’s strategy advice for growing businesses.

Through research of high-growth companies like Nokia and Hewlett Packard, McKinsey&Company invented the metaphor “Staircase to Growth,” which was explained more thoroughly in a recent book called Alchemy of Growth: Practical Insights for Building the Enduring Enterprise. Authors Mehrdad Baghai, Stephen Coley, and David White demonstrate that corporate growth unleashes benefits beyond the obvious economic benefit as it revitalizes organizations and invigorates the people in them, creating energy, a sense of purpose and the glow of being on a winning team. “Growth is a noble pursuit,” write the Alchemy authors. “It creates new jobs for the community and wealth for shareholders. It can turn ordinary companies into stimulating environments where employees find a sense of purpose in their work. Growth’s transformative power is akin to the alchemy of old.”

There is a perpetual creative tension between current organizational capabilities and new capabilities necessary for corporate growth. The tension and battle of competing forces is most visible when annual capital budgeting decisions are made, as financial structure greatly influences corporate value creation and growth. Large companies typically are complex in that they have diverse businesses, some mature and some emerging opportunities. A well-managed large company is expected to make a profit, while growing. Assuming that companies know where they want to be, McKinsey consultants try to answer the question “How do they get there from here?” by suggesting that growth cannot be accomplished through bold leaps but through a series of measured steps. Each step, in turn, builds a new set of organizational capabilities and creates new options and opportunities for growth. McKinsey consultants suggest that companies that have achieved the best growth rates recognize that they can grow along the following seven strategic “degrees of freedom”:

* Maximizing the current customer base

* Attracting a new customer base

* Innovating through products and services

* Innovating through redesigning the value chain

* Improving industry structure through jv’s and acquisitions

* Expanding into new geographies

* Entering new business areas

Consultants maintain that organizations that fail to grow at above-average rates do so because they have not ensured that their current business operations are profitable and competitive. Executives are encouraged to manage growth concurrently across the following three time horizons:

* Defend and extend current core capabilities

* Build momentum of emerging growth engines

* Create options for future staircases

While this advice may not be totally applicable to emerging companies, they do grow, and they grow fast. At the same time, large companies such as Lucent and IBM consider themselves start-ups to realize new growth opportunities. While this might seem like a strange dichotomy, clearly emerging companies and large companies can learn from each other.

Thomas Kurian is manager of research at Omron. Write to thomas@siliconindia.com.

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