Welcome back to the last session of strategy, entrepreneurial strategy
So far we have discussed about the general concept of the strategy
and also you practiced in strategy campus
I'm pretty sure that those are really helpful for you
I'm going to apply this general concept of the strategy into the startup field
In this session, we are going to talk about
the strategy as a simple rule
I already explained that
What is a strategy?
Strategy is a company's theory about where to play and how to win
But the more important thing in the startup field
we need to understand the concept of the simple rule
In this session,
I want to introduce the concept of a strategy as a simple rule
Scholars in the field of entrepreneurship suggest this concept
and they argue that
when business becomes complex, strategy should be simple
Think about the startups situation
You don't have money, you don't have knowledge
you don't have experience, you don't have people
but you try to start with the unmet, opportunity
You try to target unknown people
You try to solve the uncertainty
Something like that
your situation is pretty complicated
But think about it, although your situation is complex
your strategy should be very simple
Looks like a very simple advice
Looks like a very simple principle
Looks like a very simple, guideline
If you have a very simple and reliable guideline, reliable advice
then it will be very helpful for you to make a great decision
Then you use a few simple rules
And these simple rules enable you guys to stay agile
and help you get the opportunity
much faster than anybody else
Remember, strategy as a simple rule
Your strategy doesn't have to be complicated
if you have a complicated strategy, it is useless
It is meaningless
Your strategy should be simple, just two or just one or two
And there are different types of simple rules
The first one is how to rule
Second one is boundary rules
Third one is priority rules
And fourth one is timing rule
And the last one is exit rule
So the scholars suggest those five types of simple rules
Let's look at line by line
The first, how to rule
How to rule defines the key features of how processes are executed
For example, what makes our process unique?
So I want to give you an example of how to rule
This is Best Buy
Not recently, many years ago
Amazon.com attacked Best Buy throughout their strategy
so the Best Buy became the victim of showrooming
you already understand this story from your card news before this entire session
Anyway, the Best Buy, what did they do?
They adopted Geek Squad
Geek Squad is the Best Buy in-house tech support team
and installation team
And this Geek Squad plays a critical role in helping
Best Buy compete with Amazon.com
When you got attacked from your enemy
you need to think about how to avoid this situation
This is how to rule
Remember, how to rule is a very simple rule
What about second rule, which is the boundary rule?
Boundary rule means you should set the limitation
limit on what kind of opportunities to pursue
Think about, there are a bunch of different types of opportunity
Then you cannot pursue all of them
You just focus on your area
this is a boundary rule
I want to give you an example from the Cisco
You know the Cisco?
Cisco is one of the fastest growing companies in the world
the main product of Cisco was kind of connecting devices
Without Cisco's product, we cannot access the internet right now
And then in early days of the Cisco
Cisco faced a tremendous challenge from the market
That's why Cisco had to develop the new types of technology
which is the switch technology
But Cisco realized that they were already late in this
the new types of technology
That's why they changed their mind
from developing in-house about the new technology
to acquiring existing company
that already produced these types of product
switch product
That's why Cisco decided to engage in M&A activities
with relatively small company
But interesting is at that time
Cisco followed the boundary rule
They set the limit about
what kind of company should we engage in as M&A activities
They list down the potential the target company
So the potential target company
should have less than 75 employees
and kind of engineering driven company
the culture should be fit very well with the Cisco
and geographically very close
and just one hour driving close company
So they list out those kind of criteria
and then they try to find out the company that meet those criteria
This is one of the example of boundary rule
Without any boundary rule
you cannot do anything
So setting up the boundary is very important
Third rule is priority rule
So what is the priority?
Priority is kind of a ranking order of your task
Think about as a startup, you have a lot of tasks to do
but you cannot do at the same time
you must make a rank order of your task
Which one is the top priority?
Which one is the second priority?
Something like that
Your daily activities
or your business activities is based on your priority
For example, look at the Intel
When Intel allocate manufacturing
their decisions was based on grocery margin
It means that they allocate a lot of work at the area
where they can make a lot of money
Which is pretty simple
Yes, again, your business activities
should be based on your priority
This is a priority rule
Let's move on
Timing rules
Timing rule coordinates the rhythm and speed of the action
Let's go back to the case of Cisco again
Cisco tried to develop a new technology which is a switch
Then again, they tried to develop this technology in-house first
But at that time, they realized that we are already late
then the CEO makes a big decision
If we don't have resources to develop
the component or product within six months
then we say it is already late
Then we need to proceed to the next option
If we cannot develop it within six months
the next option would be we will purchase existing companies
in order to meet the consumer need
this is the timing rule
Last but not least is the exit rule
The exit rule is about kind of giving up the rule
when to give up and what to give up
and how to give up, something like that
Many times we do not think about this exit rule
but it is very critical
This is a company that produces hearing aids
And inside this company, there are a lot of projects
And then this company has a very unique exit rule
Your project will be shutting down
if your key members leave the project
Wow, it is pretty simple
and there is a very clear message when to exit
when to exit, when to give up
Think about your startup journey
Probably you try to make something valuable product or service
but you cannot pursue this idea
forever and for a long time without any performance
In order to keep going
you should have some kind of relevant performance
In this case
in this case, you should have the exit rule
when to give up this project or how to give up this project
and what to give up
For example
if you do not attract 1,000 consumers within three months
then we will pivot this service or product
and we target to another idea
Something like that
this is kind of a good example of exit rule
so far we have discussed about strategy as simple rules
and remember there are five different types of simple rules
and this simple rule concept is very important
The concept of this simple rule is very important
considering the dilemmatic situation
What is a dilemmatic situation?
Dilemma refers to a situation in which
a difficult choice has to be made between two different things you could do
You can do A and also you can do B
But right now you should make a decision
Which one?
Which one is the path that you pursue?
As a startup, you can meet many dilemmatic situations
In this case
I will introduce three frequently met dilemmatic situations for startups
although there are many dilemmatic situations
First one, it is a funding dilemma
The dilemma question would be,
should we take VC funding or bootstrap the businesses?
What do you mean by the bootstrapping the businesses?
Bootstrapping businesses,
you just run the businesses without the external funding
You do everything by yourself
with your money or with your friend's money, something like that
The core issue about this is that the VC
venture capital company brings the speed and capital
But
But it will lead to the dilution of your equity
and the pressure about the performance
On the other hand, bootstrapping
offers the incredible control power for you
but slower growth
This is the funding dilemma
You can do either one but you need to choose one of them
Second dilemmatic situation is about outsourcing
outsource versus in-house
Dilemmatic question in this case is
Should we build the technology in-house or outsource development?
Or should we sell our product service by ourselves or outsource it?
Core issue in this dilemma situation is that
in-house development, in-house sales ensure incredible control
and you can protect your property
But it is time-consuming
On the other hand, outsourcing is faster but riskier
You can see the different
different benefits and different disadvantages
Let's look at the third dilemmatic situation
Profit first or growth first?
Your critical question would be
Should we target the early profit
or should we focus on growth first?
That is a critical question
Core issue in this case
early profitability lower your risk
but early growth first, increase network effect
In the digital area
in the digital area
create network effect is very important for you
So anyway, there is a percent coins
but you need to choose one of them
This is a kind of a dilemmatic situation
Let's begin with the funding dilemma
Let's look at the paper
In 1984, Mayors and Majuloof published this interesting paper
They argued that in reality
there is information asymmetry
between two parties and transaction costs exist
When they analyzed many big companies
they found that the companies raised the outsiding funding
or inside funding in the following orders
They raised just internal fund first
and they got the debt after then
Then later, they raised the outside equity financing
Equity financing is the kind of a last step
This is called as the packing order theory
Packing order theory argued that again
the companies follow the financing orders
There is another research that applied packing order theory into the startup
And the researchers interviewed 20 Scottish startups
they concluded that
startups also prioritize internal funding first
They follow the internal funding first
and then they later pursue additional funding source
Different thing is they often cannot access the debt
Because the bank do not like startup
The bank do not lend the money to the startup
that's why the startup cannot access the debt
they move directly to the equity funding
after the internal financing
This is the difference between startup and big company
the packing order theory does not apply in this area
However, early equity financing is
often kind of a strategic movement for the startup
What do you mean by that?
Although startup cannot access the bank
so they move to the external equity financing
But when they increase, when they raise the outside funding
then they try to find out the great mentors at the same time
In other words, they want to get the money from the great mentors
Why?
Because the great mentors can increase the company's value
Because mentors have friends, mentors have knowledge,
mentors have experience
that's why startup want to partner with them
Let's look at the graph
there are 20 cases
And then, one means just the first step
when they get the money
all of 20 startups approach the internal financing
Internal financing means they use their own money, it's the owner's money
And then, what about the second step?
From the large company, from the pecking order theory
large company probably go to the bank to get the debt
But the startups, different case
the startups went to the angel investor first
Why angel investors?
Because angel investors are good mentors
That's why, so many startups went to the angel investor first
How many? 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12
12 out of 20 companies went to the angel investors first
And what about the others?
Some of them went to the bank luckily
and some of them got the grant
Some of them goes to their family members
Anyway, this is a kind of pecking order theory
What has to do with pecking order theory with the funding dilemma?
We can apply the pecking order hypothesis in your startup financing
in the dilemmatic situation
The first, you need to expand the internal fundings
You focused on internal funding
Then, you can seek the debt financing
So please reinvent your earning and you engage in bootstrapping
and you try to get the grant outside
and you rely on loan guarantee program,
supported by the government
These are all activities about
expanding your internal funding
Second, angel investment in the seed stage is very important
because it is kind of a second step for you as a startup
But in this case, your equity
I mean, equity share for the angel investors is less than 10%
And you'd better find out, good mentors as angel investors
You can secure good angels
securing good angel
is a strategy for increasing your company values
when you pursue outside funding,
your movement should be strategic
You'd better reduce information asymmetry between
you and the investors
If there is a huge gap between you and investors in terms of the information
angel investors try to
or other outside investors want to get more equity
because they need some premium,
because they don't have much information for you
So that's why they want to protect themselves
we want to avoid this kind of situation
That's why we want to
put the effort to reduce some information gap
between you and the investors
How? You build trust with investors
and you recruit experts
and you establish some kind of board of directors
Those activities can reduce the information gap between
you and your investors
Then you can get great
negotiation power between you and your investors
This is how to avoid funding dilemma
I hope that this is helpful for you to
understand the dilemma situation in terms of funding
Let's move on to second dilemma situation
which is the outsource versus in-house development
Look at this picture
This picture is the medical devices
And this picture, this medical device is called CT
Have you heard about the EMI?
EMI is a music company, British music company
But the EMI, British music company developed
the world's first commercial CT scanner in the early 1970s
Did you know that?
Wow, they developed, music company developed
advanced medical devices which is a CT
Wow, it's very interesting
But the problem was EMI didn't have any knowledge about hospital
any knowledge about medical devices
They don't have any experience, infrastructure
and strategy to sell medical devices at hospital
because they don't know this field
That's why they faced the kind of a dilemma situation
about outsource versus in-house
in terms of the sales and service or installation
Again, although they developed this technology
they don't have any experience, knowledge
about sales, service and installation
This is a dilemma situation
Should the EMI develop their ability in-house
or they outsource this capability to the other side
EMI made a decision to outsource the sales
and distribution of their CT scanners to a third-party company
In other words, EMI will make CT scanners in their factory
they will contract with
a third-party company that distributes the product
that distributes the product
The third-party company will sell
the CT scanner produced by EMI
to the hospitals
This is the process
Then, what happened?
When the third-party company distributed
the CT scanner to the many hospitals
and this news spread out very quickly
Then later, GE,
which is one of the strong competitor in the medical devices area
and Siemens
another strong competitor in the medical devices area,
heard about this news
They quickly developed the faster and much better CT scanners
There could be strong competitors immediately
Then later, what happened?
GE and Siemens integrated their manufacturing, sales
and services together because they had experience
They had knowledge about hospitals and medical devices
they had the previous network
They integrated those knowledge, those capabilities together
Then, what happened?
EMI lost market leadership
but GE and Siemens dominated this market
Why?
Because consumers like to have GE and Siemens CT scanner
Why?
Because they need to get the service right away
if there is some problem
But if they got the EMI CT scanner
they should talk with the third-party distributor first
and then third-party distributors talk
And EMI made the decision what to do
Then, back and forth
It will take tons of time
That's why consumers didn't like it
Again, GE and Siemens dominated this market
In this case
What would have been done by EMI?
EMI should have developed those kinds of capabilities in-house
in order to protect their properties, protect their secrets
Let's move on
There are several criteria about the dilemmatic question
of outsourced versus in-house
Let's look at the first criteria, cost
The first question to ask is
Will outsourcing reduce cost without
sacrificing your quality?
In many cases, startups operate with a limited budget
so if outsourcing to a third party can deliver the same
or even better quality at low prices
Then it may be a smart move
So again, you can outsource
only if savings exceed in-house costs
In this case,
EMI can save the money when they contract with a third party
In terms of the money, in terms of cash, they can save the cost
But if we consider the consumer's satisfaction
then they lost many things
So we need to consider those hidden factors as well
Second criteria is strategic value
You ask yourself
Is this task critical to our competitive advantage or not?
If the task is core to your businesses
Then, what are you going to do?
You may want to keep it in-house
If your task is non-core, then you can outsource it
So the outsource is possible only if your task is non-core
Let's go back to the CT case
When you install CT scanner in the hospital
probably the consumer service and maintenance
and the feedback
those are all very critical tasks for your CT scanners
So these tasks are not non-core tasks
These tasks are core tasks
You should not outsource your service sales
and consumer satisfaction
The EMI's decision was wrong in terms of the strategic value
Let's move on to another criteria, expertise gap
Ask yourself
Do we lack the skills or technology internally?
Start ups cannot be good at everything
If another vendors
or another third-party company
have superior knowledge and better tools
or specialized technology,
it might be more efficient to outsource
Outsource is available
if your third-party company can offer superior capability
than anybody else
Think about the EMI CT scanners
Although the third-party distributors
can have some kind of sales capability or service capabilities
but their capabilities are not as
not as great as GE and GMEN's
So that's why in terms of expertise gap
the EMI should not be
outsourcing the sales and service
Let's move on to the last one, the last criteria, which is risk
And you ask yourself, can we manage the potential risk?
In this case,
the potential risk would be your technology leaked
The risk is often the deal breaker
Even if outsourcing is cheaper
you must evaluate whether sensitive data or your property
or your technology or reputation might be exposed
If your technology is exposed
and if your secret is leaked and if your data is stolen
you should not outsource your activities
So, the outsource is available only if there is minimal risk
Minimal risk
What do you think?
Is it helpful for you to understand about
outsource versus in-house
the dilemmatic situation?
Let's move on to the last dilemmatic situation
which is profit-first versus growth-first
Let's look at eBay
eBay started small at home
And then the founder, Pierre Omidyar
started eBay as his hobby
at that time, he had a daily job
he managed his hobby website at night
And the only way to access eBay at that time
was to write a check
And then consumers sent out the check to Pierre's home
Pierre should handle this check at night, after work
So anyways, Pierre Omidyar never gave up the profit, never gave up money
So, eBay was based on profit-first strategy
The good thing is eBay was always profitable and successful
So one year later, eBay was very successful
and within a short period of time, eBay went to IPO
This is the power of profit-first strategy
And what about growth-first strategy?
Let's look at Amazon.com
Amazon started in 1994
After that, within eight years
Amazon didn't make any money
because Amazon reinvented much on their operations
Amazon never saved money
and never pursued the profit and they just focused on the growth
Why?
Because they needed some kind of consumers
and their only focus is to attract new consumers
New consumers, new consumers
They focused on market share
What about the result of Amazon.com?
Right now, Amazon.com is a world-top e-commerce company
So, the growth-first strategy worked very well
Either one is fine but your problem is, which one?
Which one is my strategy?
This is kind of a dilemmatic situation
So I want to introduce some of the relevant research
in terms of the profit-first versus growth-first dilemma situation
Look at him
His name is Dr. David Dixon
and he is a well-known professor in the field of entrepreneurship
Luckily, I took his class when I was a PhD student
He published a lot of paper, and he's an economist
Many years ago, he studied about the better strategy
Which one is a better strategy for early startup, profit or growth?
Wow, his research topic fits very well our, dilemmatic situation
To solve this question
he analyzed 3,500 Australian small companies
during 1995-1998
He analyzed 1,470 Swedish small companies during 1997 and 2000
Then what about the result?
Result was very interesting
The result showed that the companies that focused on profit
from the beginning
Ultimately became high-gross ventures and high-profit companies
If you are a startup
you'd better focus on profit first, like eBay
Do not focus on growth
If you focus on the growth at first, it will be very dangerous
What about Amazon.com?
Amazon.com is successful
Yes, Amazon.com is successful, but it is an exception
You know what I mean?
On average from his research, on average
focusing on the profit first from the beginning
would be the better strategy for you, on average,
although there is some exception
Wow, it's a very interesting guideline
So many people think about
Is it true?
One of the scholars in France
decided to replicate, Dr. Davidson's study
They replicated the research of Davidson at 2009, previous study
They analyzed, how many?
664,000 European small companies
representing 40% of all the European small companies
during 2011 to 2019
What about the result?
The results
the results are consistent with Dr. Davidson's study
Results are the same
It means that
the focusing profit first from the beginning
is a great strategy for the startup
Wow, it's a problem solved
the last dilemma situation, solved
What do you think?
Is it helpful for you to understand
and understand the dilemma situation
and helpful for you to make a critical decision
in terms of these dilemma situations?
This is the kind of power of the strategy
I recommend you guys to think like
a strategy person in all the time