5 Fallacies and 7 Principles for developing business strategies
January 11, 2023
We witnessed mass layoffs in tech startups and the tech industry these days. Some believe it was the effect of the global recession outlook and the decline in VC funding. Some believe it was because of the over-hiring in 2021 due to the increasing demand for technological applications to serve the lockdown situation and for business recovery after covid. In this article, we look at the other aspect of these mass layoffs. The problem lies in strategy.
5 Fallacies in developing business strategies
Based on the analysis of theories developed by Michael Porter – Father of Competitive Strategy, Joan Magretta – An Expert at the Institute of Strategy and Competitiveness under Harvard Business School, pointed out 5 common fallacies in developing business strategies. They are: 1. Confusing between Value Proposition and Strategy2. Confusing between competitive advantage and the company’s strength3. Focusing on the scale, believing that the bigger the company is, the more profitable it will be.4. Confusing actions, plans, and goals with strategy5. Believing the industry with high growth is the most attractive market
Startups’ mass layoffs from a strategy perspective
So, we see that in tech startups, the mass layoffs were mainly because of the slump in VC funding. But why did VC funding affect startups that much? This is because the root of the problem lies in their strategy. We all know that most startups these days aim for VC funding, considering it as their strategy and goal, and depending on it to scale up instead of focusing on the inner financial strength and profitability of the firm. This makes the startups very vulnerable and unsustainable. And as discussed by Joan Magretta, focusing on the scale is one of the 5 fallacies in strategy development. By focusing on scale, startups will spend a lot of money to grow their business. Meanwhile, they do not have the strength in their own finance to sustain themselves in case the VCs cut off funding. That’s the reason why when VC funding in 2022 fell by 42% year on year, many startups need to implement job cuts to adjust their scale and for maintaining their financial capacity. So, what should startups do instead of focusing on the scale and depending on VC funding? We suggest 2 solutions. The first is using bootstrapping strategy to develop the startup on their own finance and capability. (You can discover more about bootstrapping strategy in our article here)The second is focusing on developing the right strategies for the company. In this article, we will point out 7 principles for developing business strategies.
7 Principles for developing business strategies
1. Creating the differentiation
New businesses should not try to copy the business model of existing competitors. Try to create differentiation and competitive advantage by creating new solutions, or delivering existing products in different ways, for your own success.
2. Systemic Thinking
Fragmented thinking and ad hoc approach cannot help you develop a successful strategy. To develop business strategies, you need to have a holistic approach, and then connect all activities within your organization to develop a synchronized and effective strategy.
3. Profit orientation
Only by creating profit, a business can exist. It is not the size, market share, or growth rate that determines the survival of a company. Any strategy that cannot create profit, should be abandoned to save your time, efforts, and expenses.
4. Doing research to understand the market
Understanding the market, staying ahead of the competition, and creating influence are ways for firms to create profit. Understanding the market and keeping focus is the best way to make suitable and effective decisions.
5. Defining target customers
You should focus on certain customer groups which are suitable for your products and services. Since it will help your strategy become more feasible and easier to access customers.
6. Learning to say “No”
Recognizing customers’ demands and purchasing trends in certain periods will help you identify which is important and necessary. Knowing what to do and what not to do has a similar significance in developing strategies.
7. Continuous improvement and innovation
The technology, market, and customers’ behaviors and demands are changing constantly. Having problems and errors in implementing your strategies is also unavoidable. Thus, businesses are required to continuously improve to adapt to those changes. Otherwise, your competitors will move ahead and leave you far behind.
Summary
The mass layoffs in tech startups showed a vulnerable and unsustainable strategy. It’s time for startups to rethink their strategy to aim for profit and sustainable development instead of focusing on the scale and aiming for VC funding.
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