The conventional startup mantra is about anticipating needs, building out a differentiated product, moving quickly to seize the early mover advantage, and building barriers to entry against followers. This works well in a “growing-budget” world. In a new article in Silicon India and Smart Techie, I posit that this conventional startup mantra needs updating.
The article is titled: Know the world before you ‘startup’. Essentially I make a case that there are two worlds out there. In one world, the (prospective) buyer has a “growing-budget”. In the other world, the buyer has a “flat-budget”. I explain the difference between the two worlds by using the European mobile operators as an example.
My basic point is that the conventional startup mantra doesn’t work in the “flat-budget” world. There are three significant differences:
- comparative selling vs. displacement selling
- leveraging disruptive technology vs. leveraging exogenous effects
- mastery over time-to-market vs. mastery over commoditization curve.
Comparative vs. displacement selling
Of the three differences, this one is the most obvious. It’s easy to see why the buying behavior depends on whether the budget is growing or flat…
In growing-budget world, comparative selling – buy my stuff because it’s better than the competition – works like a charm. Thing are more complex in a flat-budget world. Now knowing the customer pain-point isn’t sufficient. You also now need to know their business well enough to point to waste and inefficiency. You need to become good at displacement selling. Your enemy is not a competitive product alone, it is legacy and inertia.
Disruptive technology vs. exogenous effects
The argument here is that you need something outside the system to displace the status-quo in a flat-budget world. Disruptive technology alone doesn’t do the job. In fact, I believe, that disruptive technology in a flat-budget world favors the incumbents rather than the startups…
This is because flat budget world buyers prefer an evolutionary approach to adopting disruptive technology. Incumbents often catch-on to this bias. Look at how Avaya has successfully thwarted Cisco’s VoIP epabx attack on its customer base by contrasting the latter’s rip-out and re-install purchase approach with its evolutionary upgrade.
Indeed, disruptive technology by itself isn’t sufficient to build momentum among buyers in a flat budget world. One needs to solicit the help of exogenous factors. In other words, something outside the system has to help in displacing the status quo. Internet was that force for retailing. Before that merchant foundries shook up the embedded solutions market. Now data center virtualization is changing status quo for enterprise solutions.
Mastery over time-to-market vs. commoditization curve
In a flat-budget world, an early mover advantage is less important. More important is the ability to subsume the legacy. This means that…
a startup needs to master disintermediation, commoditization, or offshoring; not to reduce time-to-market but to help the customer do legacy stuff for less.
The growing-budget world is about market share or value-capture. So you think in terms of Sun Tzu’s Art of War or Adrian Slywotzky’s Profit Zone. To me, the flat-budget world is about change management. It’s about monetizing change in the value-chain, business model or organizational form.
Ideas are still evolving
Regular blog readers know that my ideas about different types of firm evolution are themselves evolving. A few weeks back I constructed the two startup worlds slightly differently. I had classified them into two opportunity types – one arising from new consumption and the other from value chain transformation – and looked at partnering (see the post: Musings about Role of Partnerships in Startups). This old classification, while appropriate, tends to get bogged down in semantics.
I am keen to hear back from you on this newer distinction between the two startup mantras. I continue to believe that the subtle but significant differences between the two startup mantras have big implications for entrepreneurs and VCs particularly because India will see both kinds of startups happen here. For obvious reasons, it will see growing-budget startups. But it will also see flat-budget startups. These will leverage disintermediation, commoditization, or offshoring to mostly focus on Western markets (since they are maturing rapidly).
Sharad,
As a fairly new student of business models one of the most frustrating aspect of learning has been the plethora of new terminologies that people use to slice and categorize the emerging busineeses.
I think your blog “A different startup mantra” is insightful but I don’t see why a simple “Added Value” model which has existed for ages not work here. Be it a growing or flat budget as long as the start-up increases the added value over the existing technology i.e. value to customer - cost to the producer it stands a chance of surviving. Your classification simply divides the “value added” portion of the equation in the form of cost savings and a “new need”. My fundamental disagreement is regarding disruptive innovation being restricted to a “growing budget” customer scenario. A disruptive innovation such as a new solar cell manufacured at a fraction of the cost of conventional solar cell would entail a disruptive innovation and also, addresses the cost savings aspect of the customer. Furthermore, some of the bottom-of-the-pyramid product solutions will involve disruptive innovation and will bring new customers into the market who would have otherwise not be able to afford the product, onceagain a cost side issue and change of existing behavior. Business innovations offer more examples of disruptive innovation on the cost side.
Unless we are defining disruptive innovation differently I am not convinced that the classification is necessarily mutually exclusive. May be there is a more subtle distinction that I am missing.
Suresh
Suresh, My point isn’t that disruptive innovation is restricted to growing-budget customer scenario. Instead, I suggest that disruptive technology becomes a friend of the incumbent supplier rather than the startup in a flat-budget scenario. So a startup has to harness other change factors, in addition to disruptive technology, to displace the status-quo. I cite the example of VoIP in the article. Another place to see this at work is in the patient transaction management area in the US healthcare market.
Overall, this article is less about business models and more about competitive strategy that startups can employ to win over incumbents. Traditionally VCs have looked for startups that have time-to-market, product differentiation and barriers to entry. These factors have been good predictors of a winning competitive strategy. Now things are changing. The growing-budget scenario is giving way to flat IT spends and even flat disposable incomes in the Western markets.
I watched all this play out first hand while working closely with European mobile operators. As they shifted from a growing-budget stage to a flat-budget stage, lots of things that worked before changed. The ideas that I have shared in this post came from those rich practical experiences.
Thanks for your comment. Keep writing. Hope to see you more often on this blog.
This article confused the hell out of me and I had to reread some five times to really get to the bottom of this
May be this happened because of the hangover of me reading this right after finishing up half of my current book - SPIN Selling where I am was reading about the implication questions and how to get implied problems into explicit problems etc to make a sale in large sales.
Whatever the reason might be, I see a lot of sense in this because we at S7 (S7 specializes in software porting and migration) face flat budget customer scenario day in and day out. Lot of our clients talk about how they are moving their legacy to newer platforms and technologies and would have handed over or planning to hand over the same to their ODC and we have to convince them that S7 is best doing anything related to migration, convince them that why migration experts are better suited for migration projects, why S7 process of migration is better etc etc - anyway the point here is we have to overcome that intertia and legacy (of handing over jobs to either their ODC or their all-in-one outsourcing partner) and is a kind of displaement selling. I am not sure whether the scenario I have explained fits the scenario what Sharad has explained as flat budget scenario or the displacement selling but that is what we face on a very very regular basis.
Manju
www.s7solutions.com