The strategic choice canvas is yet again another great post from Ricardo dos Santos. Ricardo was a thought leader in my session on ‘Failing Forward’ at the IIR’s Back End of Innovation 2013 conference. We at SmartOrg have used for decades similar canvas format in strategy and innovation, called a strategy table. Here is a best practice guide showing how it can be used for innovation.

And now, on to Ricardo’s blog:

The Strategic Choice Canvas

Based on your assessment of the current situation facing your startup or innovation, the Gut Check (including a good grasp of the past and changing conditions ahead), it is time to put your core idea and inertia through the strategy ringer, or a set of decision-making criteria that should improve your prospects for maximizing or over-indexing the value that you can create (based on what you know now and believe to be true).

No strategic planning framework can claim to be perfectly comprehensive, but I believe the following six sets of interdependent choices should provide sufficient guidance for a new venture’s strategy, covering both the theoretical and practical aspects of strategy I’ve been conferring to this point.

The six interdependent strategic choices are:
    1. Company Building Intention 2. Business Model Type 3. Value Integration & Control 4. Vertical Market Specialization 5. Competitive Positioning, & 6. Product Scope

1.  Company Building Intention:

  • Early Exit
  • Niche Player
  • Large Company

An Early Exit strategy usually implies a sale to an incumbent before that incumbent thinks it is wiser to build vs. buy.   This is a risky strategy if the startup does not build any capability to commercialize and simply showcases attractive technology to be acquired, but it can be an effective strategy in several circumstances, and especially in certain industries with extremely long product lifecycles, such as biotech.  If you follow this strategy, you have to favor business development efforts, early and often with strategic investors (with the goal of lining up at least one major buy-out agreement).

A Niche Player is usually the least risky strategy if the goal is simply survival, as it implies a more conservative capital raise, a trade-off for the bigger upside of being the market leader in a large market.   For a technology company, the niche strategy can include the ‘R&D licenser’ or project contractor variant, where the founders realize that they are best at inventing than commercializing, and thus prefer to stay small, leveraging the infrastructure of others to diffuse their innovations, while they move on to the next discovery.

A Large Company strategy is also risky in that it usually implies a longer time to the mainstream market, high capital requirements (peak-funding), and the ownership dilution and loss of control dilemma – Certainly it’s the strategy to follow if ‘go big or go home’ prevails as key to the vision and values of founders and investors.

It is important to understand your intention so as to prioritize the associated exercises necessary for achieving strategic congruency (e.g. corporate partnerships, pass-through license agreements with Universities, relations with VC’s, etc.). This doesn’t mean to say that you can’t change your company building intention as you progress – Qualcomm, my ex-employer, started out as a niche-player with founders explicitly not wanting to build a large company (and chiefly allergic to VC’s), but when the CDMA opportunity for cellphones arose, well, plans changed (sans VC’s).

2.  Business Model Type:

  • Original Equipment Manufacturer
  • Components
  • Consumables
  • Software
  • Services
  • Intellectual Property
  • Multi-Sided-Platform
  • Hybrid

An Original Equipment Manufacturer (OEM) business model is the quintessential way to provide value directly to an end customer (B2C or B2B). I’m mostly talking about hardware goods, where traditional product development & marketing, systems integration and supply chain management are the requirements to play.   If you’re not good at either of those things (or hate the added uncertainty), you may want to consider the component business model instead.   Sometimes you have no choice but to start off in this category as a vertically integrated player, if you’re inventing an entirely new product category and then move to a select horizontal position as the market matures – this is how the Qualcomm story unfolded (first it made phones and cell-tower infrastructure to drive CDMA adoption before settling on its components + IP strategy).

A Components business model is the way to provide value-inside to someone else dealing directly with the end customer (thus B2B).  You can compete on cost or technology leadership and it isn’t always clear how much attention you must pay to the end user vs. your B2B customers. (You’ll occasionally hear advertisements from players in this model, e.g. BASF “We don’t make a lot of the products you buy, we make them better”).  Industry maturity and structure is vital to selecting this strategy – You want the right amount of customer concentration and lots of capable suppliers.  You’re mostly hedging that this is a wiser choice vs. risking direct competition with deeply entrenched OEMs.  A vertical integration into reference designs, API’s, etc. is an alternative way to get closer to the end-user, while not competing with your B2B customers.

A Consumables business model is the gift that keeps on giving, if you’re able to earn the loyalty of your customers (B2C or B2B).  You can compete on innovation and or high-switching costs.  This model is often coupled with an OEM platform, on top of which the consumables get consumed (yep, the famed razor, razor-blades model).  Depending on the industry, the underlying platform can also be opened to partners’ consumables (see MSP’s below). Not all consumables are alike – the highly differentiated earn a much higher premium, but in return, the platform may become a loss leader.   Most life-science-tool firms such as the Next Gen Sequencing OEM leaders Illumina & LifeTech operate a complementary consumables model in their core research markets and have recently forayed into higher-margin clinical consumables, namely diagnostic assays.

A Software business model is the ultimate scaling machine (B2C or B2B).  This is quite a broad and fast moving space and thus hard to generalize a description.  Certainly you’re looking for scalability in both the product and distribution, taking advantage of the cloud as much as the next guy, with security and performance as some of the tradeoffs.   The B2B software space seems to be back in vogue, but with the proliferation of consumer devices, this should remain an attractive B2C space. There is a marked difference in software businesses that are heavy IP dependent (software is the embodiment of clever algorithms) vs. those that are platforms and those that are automation time-savers.   For programmers (and it’s becoming easier to program), starting a business has become ‘free’ – so don’t expect this category to subside anytime soon.

A Services business model is the ultimate non-scalable machine (B2C or B2B).  Of course I’m being facetious – but not really – services businesses depend primarily on committed, skilled people and those are usually hard to find (for the right price).  It is also non-trivial to export a services business to another geography – So something to ponder if you’re planning world domination through a services business model.  In some industries, the advantage of a services model is that it can get off with relative little time and money and it can likewise be used as a testing ground for other more scalable models.  In the oncology diagnostic business that I operate in today, a services business is not governed by the FDA, and thus the preferred route of many innovators such as Myriad, Genomic Health, and Foundation Medicine – this may change!

An Intellectual Property business model is usually combined with a more orthodox approach to making money from products and or services, but it can be executed as a stand-alone choice.   Intellectual Property dependent industries include high-tech, biotech, but also music and other arts.   The monetization schemes for IP include licenses and royalty streams – or winning court settlements, in case of the repugnant patent ogres.   An IP model may have to include an investment in continued R&D, not simply a team to negotiate licenses.   This is the model ARM and Qualcomm have followed successfully, providing licenses for everyone at a fair price while continuing to invest in R&D (that makes the make vs. license decision a no-brainer for its customers).

A Multi-Sided-Platform (MSP) business model is probably the most exotic model to follow, requiring a high-degree of complexity to balance the needs of end users from those of customers and strategic partners, which are by definition, different stakeholders.  The typical example of this model is the advertising-driven internet platforms such as Google, Facebook and Twitter, but it also includes e-commerce sites such as Amazon, Ebay, and Rakuten, video-gaming consoles such as Sony’s PSP and MS’s Xbox, payment enablers such as PayPal and Square, and Operating Systems such as iOS, Android and Windows.   The key to a successful MSP is to provide tangible value and a common language to all stakeholders, for example by reducing search, transaction, startup, and/or marketing and operational costs.

A Hybrid business model combines elements of the generic choices described above.   It is very common to see hybrid models in established tech and industrial businesses such as IBM, Apple, Microsoft, Google, Qualcomm, Amazon, GE, Siemens, etc. and also in other industries such as healthcare.   Some industries, including consumer packaged goods and automotive, are just starting to adapt hybrid business models combining products and services.   As a startup, it is certainly a more difficult choice to adapt a hybrid business model vs. choosing a more simplified path, at least initially as a go-to-market strategy.   The theory would certainly advise against simultaneously introducing a new product and service.  However, a complementary model could rapidly follow, e.g. launching an Idea Management System corporate software, followed by innovation professional services.

The description of the various business model types isn’t meant to contrast one vs. the other to say which is better in general (although there are those among the investment community that hold strong preferences).  The choice of generic business model type (aka. how you plan to make money) has to be tailored to each given startup’s circumstances as well as execution preferences.  Depending on the opportunity, one may or may not have the luxury (or burden) of choice.  What’s important to stress is that the business model choice is certainly critical to prioritizing the research activities, hirings, and other investments that the startup will undertake.  It is also a moving target – certainly searching for the right, scalable business model is par for the course at first – lest a hasty decision result in irreversible waste.

3.  Value Integration & Control

The degree of Value Integration & Control certainly overlaps with your choice of generic business model, but it professes something different: This is less about the primary way to make money as it is about choosing which segments of the value or network chain are critical to tightly integrate, own and or control by other means (to maintain quality, supply, and margin, but most of all, the customer experience and innovation-edge over the product or service being sold).

This practice was best exemplified by almost everything Steve Jobs did (who was the hands-down master of this topic) “I’ve always wanted to own and control the primary technology in everything we do” SJ – that certainly included software (directly), and later, content distribution (through clever negotiating), not simply the beautiful hardware we more easily associate with Apple.

A desire for greater integration and control does of course entail hiring people with different skill sets, purchasing or leasing additional assets, etc. – so a tough tradeoff when getting off the ground.  View strategic partnerships as a possible remedy, keeping in mind who will own the relationship with the customer.  Certainly consider outsourcing of some or all of the things you have to make (unless you can’t keep control or inadvertently creating a competitor) – a rule of thumb followed by Japanese auto-companies may help “Don’t outsource for lack of knowledge, only for lack of capacity”.

4.  Vertical Market Specialization

The degree of Vertical Market Specialization is a tough choice faced only too-often by tech-driven companies and those offering any sort of platform.    This choice, more than any other, ultimately determines who your end users and customers really are.  The ultimate answer may dictate branching out across various verticals to maximize growth, but at first, this is difficult to execute – at least as an initial go-to-market strategy, tackling a single-vertical (customer segment) is the standard advice – This makes sense if we ultimately believe in the concept of a product-market fit and a scalable growth engine to match – the specifics are hard to design if they must meet the requirements of multiple verticals from the start.

In the largest vs. first-to-market vertical tradeoff, most startups choose first-to-market, before ‘crossing the chasm’ to the mainstream. I didn’t label this choice as Vertical Industry as that’s over simplistic – best to dissect markets by Jobs-to-be-Done and other methods that get to the reasons people buy stuff vs. industry SIC codes. But industry verticals can still be helpful in narrowing down your search, especially in the B2B space.