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This article analyzes the dilemma faced by entrepreneurs regarding development strategies. After identifying their initial market segment, entrepreneurs must seek avenues for growth through various options such as geographical, technological, and commercial diversification, upstream or downstream integration, and conglomerate diversification. The article emphasizes the importance of the board of directors in strategic decision-making and proposes several objective criteria for collectively describing and evaluating innovation and growth opportunities
E. Krieger
New ventures share the same challenge as the ancestors of the princely family of Monaco: to conquer a territory, however small it may be, in order to thrive sustainably… and that’s where strategic dilemmas begin.
For the Principality of Monaco, alliances represented a major challenge to preserve the autonomy of the ruling house. The land value of the « Rock, » a territory of 2 km2, shows that it is not necessary to be large to be sustainably prosperous. Young companies rarely start under the same auspices but can virtually expand to all corners of the world, either directly or through strategic alliances.
The challenge for founders and business leaders is to make development choices while maintaining strong coherence, ensuring clarity and efficiency. At the start, many teams proceed through trial and error before identifying the offering and segment that will allow them to grow without exhausting themselves in endless technical developments and expensive commercial actions.
Focus on 80% on a given segment
The challenge for entrepreneurs is, however, simple: focus on 80% on a given segment and engage in business development the rest of the time. If you do the opposite, you will undoubtedly become an energy-dissipating machine generating an inexorable cash consumption coupled with moral exhaustion.
Once you have found your starting segment, with a clear value proposition and business model, the question of the growth rate and development axes will arise again… unless you decide not to grow for perfectly justifiable reasons, as the personal equation of each entrepreneur varies.
However, your company will sooner or later be condemned to leave its niche and find avenues for growth. In terms of strategy, several modes of development are distinguished:
- Geographical diversification, which involves expanding to other territories, provided it makes sense, especially in terms of regulatory constraints.
- Technology-related diversification, which involves leveraging your expertise with other clients and requires adapting your business processes to these new markets.
- Commercial-based diversification: you retain your customer base but sell them other products and/or services complementary to your initial offering.
- Upstream integration, which involves producing what your company previously purchased from its suppliers. The idea is to reduce your dependence on sourcing and optimize your margins… but this also means taking on a new set of competences.
- Downstream integration, which involves wanting to control the distribution of your products to be in direct contact with end customers.
- Conglomerate diversification, which takes place without prior connection to your customer base or expertise but with a financial or risk distribution logic.
Each of these development modalities can be achieved through internal growth, external growth, or alliances, making 18 possibilities. These development options all have advantages and disadvantages, but, again, it is essential to excel in your core business before embarking on any form of diversification. This cannot be done in all directions, or your company risks taking on undue risks and saturating the management’s « bandwidth. »
Who decides on these development axes?
These diversification choices are obviously not the prerogative of the leader in their ivory tower: it is a careful blend of « on-the-ground » analysis, close to current or future clients, and discussions within the executive committee and the board of directors of your company.
Indeed, it is at the board level that strategic decisions are made, with the subsequent responsibility for the CEO to implement them with their teams. Inspiring the strategy and implementing it: the grandeur and servitude of the CEO job. 5% strategy and 95% execution: such is the formula for managerial success for both startups and SMEs.
How to assess development opportunities?
A few recommendations will help you formalize and evaluate new development axes:
- Define your own criteria and their respective weights, drawing inspiration from the items listed below.
- If a project does not meet any qualification criteria, do not pursue it. It is better to evaluate several projects to be able to select « the best » and dedicate significant resources to it.
- The discussion with your teams will be decisive in creating consensus on both the analysis and the eventual decision to diversify.
Four sets of criteria can help you formulate and collectively evaluate the relevance of each development opportunity:
- Market and new offering: What is the « business » opportunity in a single sentence? What are the new products and/or services you plan to launch? How many potential customers are there? What is their need, and to what extent are the needs of these potential customers insufficiently satisfied by current offerings? How is the market segmented? What is its size, in volume and value? What is the predicted growth of this market?
- Activity and competitive advantages: What are the main offerings that directly compete with this product and/or service? What will be your competitive advantages? Will you be competitive on the selling price, or will you differentiate yourself on quality, performance, style, delivery times, or other criteria that contribute to making your offering unique? Are there entry barriers to the sector? What is the degree of dependence on suppliers and distributors?
- Economic and financial data: What is the potential for revenue and margin? How are margins likely to evolve? What are the main risk factors that could impact results? What is the break-even point, in volume and value? What is the financial profitability, and what is the required time to recover this investment? What is the long-term financial value of such an activity?
- Management and human resources: Who will be in charge of developing this project? Are the technical, commercial, and administrative profiles required compatible with current skills? What is the capacity (and availability) of management to lead this project? What is the development schedule for this project, and what are the key stages? Is this project compatible with our corporate culture?
Analyzing potential development axes will allow you to revisit the fundamentals of your business and competitive advantage… which brings us back to the Monegasque lands with our metaphor of the rock of which you would be the sovereign.
« You want to be king of the hill… but which one?« : this expression invites you to be the undisputed leader in a field of activity.
And you, over which rock or hill will you be the sovereign? It’s up to you to then set out to conquer the vast world, with necessarily limited resources that will require you to make choices.
Good luck with formulating, evaluating, and implementing your strategic development axes!
