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As a startup owner developing your business strategy, you should distinguish between internal and external strategy considerations. Unlike more established businesses, startups have strategy considerations that are specific to them. Moreover, the industry your startup operates in also determines important strategy considerations. However, generally speaking, there are specific strategy considerations common for all startups relating to external and internal factors. This article will provide an overview of strategy considerations for startups.
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External Strategy Factors For Startups
All businesses exist within a wider ecosystem beyond the dynamic between you and your competitors. Put another way, the extent to which you can outcompete against industry rivals depends on a series of broader factors related to the relationship between you and your:
- industry customers and clients; and
- suppliers.
Additionally, you should also consider the extent to which:
- competitors can enter the market; and
- customers can substitute your goods or services with another.
How Does Industry Impact Startups?
Below is a table looking at the way specific industries impact the relationship between these five forces:
| ‘Five Forces’ | Industry Impact |
| Customer Bargaining Power | Large retail giants like Sainsbury’s often dwarf the bargaining power of their suppliers. This means that the food suppliers have low bargaining power, which squeezes their profits. On the other hand, a life sciences startup that has developed a proprietary new biotech product and patented it has a monopoly over the product. This gives them strong bargaining power over its customers. |
| Supplier Bargaining Power | If you require a bespoke piece of expensive machinery, there may only be a single manufacturer that can produce it for you. This would negatively impact industry profits if the supplier also manufactures the same machine for your competitors. The same principle extends to labour. If you intend to launch a SaaS startup that requires a complex coding team to launch, you may have to pay more for labour costs. On the other hand, if you want to open a retail restaurant, the supply of labour is relatively cheaper. |
| Threat of New Entrants | If anyone can enter the industry because the entry costs are low, this will drive down profit. This is because if existing industry players overcharge, a new entrant can undercut them. Capital-intensive industries like heavy manufacturing deter new entrants because it is hard to raise sufficient capital to enter the market. This leads to fewer competitors, which can extract more profit from their market. However, certain service firms like recruitment and accountants have minimal operating and capital expenditures. This means prices are more competitive. |
| Product Substitutability | Can a customer go to another market and buy a different product to satisfy an identical or similar need? If so, your profit levels will be lower. Certain highly regulated professional services like law provide a service that cannot be substituted. Likewise, until recently, cigarettes were not substitutable, which is why tobacco has one of the highest industry rates of profit. Products with high substitutability include most restaurants and cafes. |
| Competitor Dynamics | The nature of your startup industry determines the points at which you and your customers compete in the external environment. For instance, if suppliers have strong bargaining power, you may obtain an advantage by developing a close relationship with one supplier, which, over time, may lower your operating expenses at a competitive level. |
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Internal Strategy Considerations
From an internal perspective, you can choose to compete with your competitors on product distinction or price. Rarely is it possible to do both. To this end, you should identify which assets you can acquire or enhance to compete on one or the other.
Startups often struggle to compete on price because price competition requires economies of scale. This, in turn, requires substantial capital investment to lower the cost per unit.
Instead, most startups compete on quality. Or, more accurately, they compete on product differentiation by identifying untapped markets. For instance, Uber created a service that provides real-time, near-instant booking of cabs, which taxi services did not provide.
Key Takeaways
Business strategies underpin all aspects of managing a business from its inception. Internal strategy considerations require you to identify which assets to acquire to develop a competitive edge over competitors. You can choose to do this by competing over price or product differentiation. Most startups find it easier to compete by differentiation because it requires less capital. External strategy considerations look to the industry to see what dynamics influence profit creation, such as your business relationship with suppliers and customers.
If you need help with your startup, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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