From a Joke in Silicon Valley to $25.5 Billion
Strategy Formation as a Visionary Process
by Marius Schober
“In order to carry a positive action we must develop here a positive vision.”
Entrepreneurs from around the globe seem to base their strategies differently than most business books and business schools teach us. It seems that successful entrepreneurs craft their strategies based on their own mental thoughts, their own intuition, their judgment, wisdom and experience rather than on strategy-formulation theories you can find in numerous business books.
If you look onto the list of the greatest valued companies and startups from around the globe you will see that the company’s success is often based on small strategic steps which were taken not as a collective but rather as a personal vision or construct of their leader. This is true for Apple, Microsoft, Google, Facebook, Android, Amazon, YouTube, Netflix, AirBnb, Instagram, LinkedIn and many more.
Is the founder's vision really the key point of their successful strategy formulation?
Strategic Thinking as Seeing
A clear vision is only a small part of a full strategy and it can formulate the foundation of a strategy. The problem with a single vision is that a vision does not tell us what exactly needs to be achieved to be successful in business. Therefore, a good strategy always states WHAT we want to achieve and HOW we want to achieve it. (Eric Wiebes, 2007)
But if we look onto the visions of successful entrepreneurs we can quickly recognize that they have both elements in their mind: they know exactly where they want their organization to go and they have a clear plan, at least in their mind, how they will achieve this. The vision of an entrepreneur is not comparable to the vision statement of an established business. The vision of an entrepreneur is more a “mental representation of strategy” which “serves as both an inspiration and a sense of what needs to be done” (Henry Mintzberg, 1998). Joseph Schumpeter introduced in 1912 his concept of creative destruction. He described entrepreneurs as the “engine that keeps capitalism moving forward” (Schumpeter, 1911). It seems that entrepreneurs have a different way of projecting, formulating and crafting strategies which in the end is crucial for the progress of the whole nation. For Schumpeter, an entrepreneur is not an inventor neither an investor who brings the initial capital but more importantly the person with the business idea. Business ideas are abundant but in the hands of the right entrepreneur they become powerful or as Mintzberg expressed it in an article in 1991: “Strategic Thinking as ‘Seeing’”.
Successful entrepreneurs seem to see something which is hidden for most other people. Traditional companies and business scholars will agree that strategic thinking is seeing ahead. But entrepreneurs don’t just see something ahead, they rather thee the “big picture”.
From a Joke in Silicon Valley to $25.5 Billion
Let’s take the example of Brian Chesky, Joe Gebbia, and Nathan Blecharczyk — the three founders of Airbnb. Airbnb is a website and marketplace where people can list, find, and rent private apartments, couches, houses, and even a luxury villa. Brian Chesky and Joe Gebbia experienced that during big business conferences in the United States oftentimes attendees were unable to get a hotel room for a night because all hotel rooms were either booked out or extremely overpriced. Besides of that they were not able to pay the rent of their loft in San Francisco and they decided to rent their living room into an airbed and breakfast accommodation for up to three short term renters. (Airbnb, 2016)
They both realized the problem: overbooked and overpriced hotel rooms and extremely expensive living costs in the San Francisco Bay Area. Besides of that they thought that Craigslist — the biggest platform for classifieds in the US — is not the right platform for their plans. They not only recognized the problem but at the same time they saw a solution for that: an online platform where travelers can easily book a private airbed including breakfast from trusted hosts. When they started their company an unbelievable big number of people criticized their idea and most people and even investors said: “Airbeds in strange flats? That’s stupid! Nobody wants to sleep in a strangers bed!”. But the founder trio continued to work on their plans, even without an investor. In late 2015 Airbnb was the third highest valued privately owned company with a valuation of $25.5 Billion.
They saw something most people didn’t see. They went from being a joke in Silicon Valley to one of the highest valued private companies ever. Airbnb is now valued higher than Marriott, starwood, Expedia, and Wyndham with a growth rate of more than 90% and a revenue growth rate of 113% (CB INSIGHTS, 2015).
By taking our Airbnb example and then applying it to the following quotation of Jospeh Schumpter from the year 1911 we can validate it as a timeless statement because it is today in the year 2016 as true as it was more than 100 years ago in 1911:
“What have (the entrepreneurs) done? They have not accumulated any kind of goods, they have created no original means of production, but have employed existing means of production differently, more appropriately, more advantageously. They have carried out new combinations. (…) and their profit, the surplus, to which no liability corresponds, is an entrepreneurial profit.” (Schumpeter, 1911)
And indeed Airbnb used existing infrastructure differently. They are now higher valued than most hotel chains in the world but without having any room, bed, or buildings in their inventories. It is clear that doing new things or things in a new way was a key element for Schumpter, and Airbnb is one of countless examples.
So what do successful entrepreneurs do differently than established business schools teach?
Do they craft strategies differently or do they craft strategies at all?
Can an organization be successful without having a well written strategy?
Richard Branson the founder of Virgin Group, which compromises more than 500 companies (Feloni, 2015) said the following:
“I have not depended on others to do surveys or market research, or to develop grand strategies. I have taken the view that the risk to the company is best reduced by my own involvement in the nitty-gritty of the new business.”
Testing as a Strategy
It seems that a clear entrepreneurial vision is a key point for disrupting entrepreneurial success and that no clear strategy is needed. But Eric Ries has a clear opinion on this statement.
In his opinion entrepreneurs who avoid all forms of management, process, and discipline are more likely to fail than those who follow some principles rules. These principle rules are nonetheless not the traditional management principles which are taught in class. Eric Ries teaches in his book “The Lean Startup” his own startup strategy which he based on the lean manufacturing principles of Taiichi Ohno and Shigeo Shingo from Toyota.
Eric Ries proposes that “entrepreneurs judge their progress differently from the way other kinds of ventures do” (Ries, 2011). Eric Ries proposes to use a process of validated learning instead of an empty entrepreneurial vision on an eighty-page business plan. According to Ries startups are building to often products that in reality no customers want. And because startups build products that nobody wants it does not matter if they are on a strict budget and on time and it does also not matter if they are moving forward to a vision. When applying the Lean Startup Principles, the first strategic goal of a startup is not to work towards a vision or milestones written in a business plan but to figure out the right product for which real customers will pay for as quickly as possible. Or as Ries describes it: “The Lean Startup is a new way of looking at the development of innovative new products that emphasizes fast iteration and customer insight, a huge vision, and great ambition, all at the same time.” (Ries, 2011)
Eric Ries strategy for startups is a “Build-Measure-Learn feedback loop” which is the opposite of complex business plan, normally based on assumptions anyway.
Build-Measure-Learn Feedback Loop
Startups are entrepreneurial ventures and they need to be differentiated from traditional businesses. Managers usually find certain assumptions in their business strategies and they are often tested or can be tested in the future. The challenge of startups is however to build an organization that can test these assumptions systematically. (Ries, 2011)
According to Eric Ries a successful startup strategy is crafted by carrying out the “build-measure-learn” feedback loop until a product is found which real customers really want.
Strategy Formation as a Visionary Process
When looking onto entrepreneurship and on startups we confirm that entrepreneurs and newly established startups which are looking forward to disrupt a current industry work with different strategic frameworks than traditional companies. Startups and their founder have the big advantage that their vision is not a printed vision from an employed manager. The vision startups are working with is purely based on the founder’s vision — this vision comes from his heart and the founder has oftentimes the possibility to pursue his own vision the best. However traditional companies have it more difficult because oftentimes the vision in their company is not their own but one which is only written down on a vision statement paper.
Most of the world’s most successful entrepreneurs have the opinion that complicated business plans are often a waste of time. They argue that business plans are purely based on assumptions which will never come true. Eric Ries, author and creator of the Lean Startup, confirms that business plan are not very useful for the success of a new venture but he is certain that a startup without any strategy is much more likely to fail. He proposes a Build-Measure-Learn feedback loop which combines the founder’s visions (or the industry they intended to enter) with the testing and building of actual products until the final product is found.
Entrepreneurs should use the insights of the most successful entrepreneurs of the world and try to avoid writing complicated business plans which are based on fictive assumptions. Rather they should have their entrepreneurial vision in mind while testing their product continuously at the market. When the right product is build the founders can use their product and their vision to create a real roadmap for the future of their startup. Crafting a strategy in new startups should therefore be clearly differentiated from strategy crafting in already established businesses where progress and assumptions can already be tested.
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Marius Schober is a 22 years old passionated entrepreneur based in Düsseldorf currently building a startup in the area of digital signage & entertainment. Part-time he is consulting companies to improve their social media presence to gain ready to buy customers. For more information visit mariusschober.com.
And because this is a result of a small research paper here are my references:
Airbnb. (2016, 04 26). Airbnb. Retrieved from Our Co-Founders: https://www.airbnb.com/about/founders
CB INSIGHTS. (2015, 06 22). Why That Crazy-High AirBnB Valuation Is Fair. Retrieved 04 26, 2016, from CB Insights: https://www.cbinsights.com/blog/airbnb-hospitality-industry-valuation-breakdown/
Eric Wiebes, M. B. (2007). The Craft of Stratgy Formation — Translating Business Issues Into Actionable Strategies. Chichester, West Sussex, England: John Wiley & Sons, Ltd.
Feloni, R. (2015, 02 11). Why Richard Branson is so successful . Retrieved 04 26, 2016, from Business Insider: http://www.businessinsider.com/how-richard-branson-maintains-the-virgin-group-2015-2
Henry Mintzberg, B. A. (1998). Strategy Safari — A guided tourthrough the wilds of strategic management. New-York, New York, United States of America: The Free Press.
Ries, E. (2011). The Lean Startup. New York, United States of America: Crown Business.
Schumpeter, J. (1911). Theorie der wirtschaftlichen Entwicklung. Berlin: Duncker & Humblot.