Entrepreneurial Strategy

7 Choosing Your Competition

1
 One suspects that in only a few years’ time, our children will listen in
disbelief when we regale them about how people used to get taxi rides by standing
in the street and waving their arms. While in most places, Uber and Lyft have
received the attention, credit and, also, animosity, for the technological disruption
that has obviated the requirement for a ‘line of sight’ taxi hail, in 2010, there were
many entrepreneurs who had the same core idea: to use mobile technology to
match taxi drivers with customers. And while Uber, as of the time of writing this
book, appears to have the largest business world-wide, there is considerable
heterogeneity in different cities that illustrate distinct entrepreneurial choices of
competition.

Uber has built its business largely outside the existing regulatory system;
essentially, obtaining drivers and customers without gaining regulatory approval
first and then using considerable resources to fight it out in the judicial and
political arenas. But others have chosen a different path, perhaps none more so
than Hailo.

Hailo was founded in 2010 by three internet entrepreneurs, Jay Bregman,

Ron Zeghibe and Caspar Wolley but, significantly, also Russell Hall, Gary Jackson
and Terry Runham, three London taxi drivers. They had observed a waste: taxis
spent between 40 to 60 percent of their time not transporting passengers but
looking for them. In the meantime, passengers had trouble finding taxis. Given
that both drivers and customers now had mobile phones on them, surely
technology could intermediate this informational problem.

In contrast to Uber, Hailo chose to think about how this technology could
be applied within the existing system. They did not seek to work outside of
regulatory rules that governed taxi operations around the world but to insert
themselves within the system to improve those operations. Consequently, they

2
sought to recruit taxis first – essentially providing tools to help drivers understand
what was going on in their city.1 It was a type of social network that allowed
drivers to identify problems, traffic and pockets of customer demand. It was only
once they had enough taxis using this system that they allowed customers using
their mobile devices to hail cabs. The app then matches the customer with a taxi.

What is critical about Hailo’s approach is that they chose not to compete
with existing taxi companies. Whereas Uber and Lyft recruit drivers who may not
be taxi drivers, Hailo operates only to serve registered taxis. They do not attempt
to change the prices taxis charge. Finally, Hailo, in its public statements, aligns
itself with existing regulations.

Ultimately, the business model for taxi hailing apps is still fluid. The point
here is that different companies offering essentially the same idea have made very
distinct choices regarding the competition. Hailo will prosper relatively more if
existing regulations stay largely in place. Others rely on those regulations giving
way. What is also possible is the systems could co-exist. Regardless, each venture’s
choice of competition shaped other elements of their entrepreneurial strategy.

In this chapter, we argue that competition is a meaningful choice for many

startups. As with all choices, there are broad trade-offs that need to be considered.
However, this chapter is an important gateway towards our framework that will
allow us to characterize different constellations of the four strategic choices
entrepreneurs face – in particular, we will argue that it is around answers to who
and how to compete that different constellations that some have advocated for in
the past can be seen as distinct choices; something that helps us define an
entrepreneurial strategy compass.

Choosing Whom to Compete Against: Cooperation vs Competition

Though the potential for competition is always present, a fundamental

strategic choice to be adjudicated by any founding team is whether or not their
ideal route to commercialization is in cooperation with established players, or

1 http://www.entrepreneur.com/article/226684#

3
whether their ideal route to the market involves constructing an independent
value chain, which in most cases will then compete with established players.
Importantly, there are a subtle set of benefits and costs associated with this choice,
and there is certainly not a “one size fits all” approach. On the one hand, the
control over costly-to-build complementary assets is a key wedge between the
capabilities of startups and more established firms in an industry, and the inability
to acquire these resources cost-effectively has an important impact on the ability
of the startup to both create and capture value. When specialized complementary
assets are required, the sunk costs of product market entry are likely to be
substantial. Simply put, a more “cooperative” approach with established players
could reduce the costs of market entry borne by the startup, may enhance the
speed and scope of diffusion of the idea, and lessens the threat of competition from
the “800 pound gorilla” in a particular market.

At the same time, constructing an independent value chain offers the startup
a higher degree of operational freedom, and also enhances the ability to capture
value once that value chain is in place. By constructing one’s own value chain, a
startup avoids granting control rights over the ways in which their idea is
commercialized to incumbent players (whom might have incentives to thwart or
slow down the entry of a startup’s innovation if it threatens current offerings).
Additionally, there may be situations where the existing value chain structure may
be designed ineffectively for the segment of consumers a startup intends to serve.
In those cases, despite the costs of constructing an independent value chain, it
could be even more costly to commercialize through traditional channels.

This choice is a crucial but difficult one at the time of founding: the hassles
(and potential for expropriation) of working with established firms is difficult to
forecast in advance and it is equally difficult to forecast accurately the costs and
resources that will be required to establish a value chain from scratch on an
independent basis. Moreover, the degree of cooperation from the established firm
and their ability (and interest) in competing in the product market with you on a
head-to-head basis will be difficult to predict beforehand.

4
 However, there are important consequences of this choice that are both
predictable and allows an entrepreneur to proactive in managing the challenges
that are likely to arise. For example, if one undertakes a more cooperative
approach, it will be important to rapidly focus on aspects of your idea that
reinforce the value you provide to the customers of the established firms (e.g.,
these are more likely to be more mainstream customers, and so you may need to
standardize the product more quickly), and you will need to orient your
technology choices in a way that allows for integration with the systems and
offerings of the established player (e.g., emphasizing compatibility and your role
as a value-added service). The company you build will also be much different.
Whereas a company that seeks to compete with established firms must build out
(quickly) the full value chain (but might benefit from a more open and fluid design
as the founding team and early employee each become a “jack-of-all-trades,”), a
more cooperative approach is likely to be premised on a team that can work in an
effective way with larger organizations (more suits, less jeans) and invests in
developing comparative advantage in those capabilities and problem areas that
are the focus of the firm’s effort.

Ultimately, the choice between competition and cooperation is fundamental

and drastically shapes the direction of the venture: though entrepreneurs do not
have the luxury of choosing not to compete, the decision to collaborate with
established firms means they faced a more limited and significantly different
competitive landscape than if they were to choose to compete with those very
firms.

Choosing How to Compete: Execution vs Control

A second fundamental choice that an innovation-driven startup faces is the

decision between prioritizing execution versus control. On the one hand, many
startup companies, excited by their idea and eager to learn how to make their idea
“better,” prioritize the ability to experiment and iterate on their ideas directly in
the marketplace. In other words, the founding team invests in executing rapidly
and working with customers, suppliers, and investors who can contribute to the

5
venture’s success - with issues of intellectual property or ultimate control over the
“idea” put off for future discussion. For example, Mark Benioff, the founder of
Salesforce.com and long-time evangelist of “The End of Software,” was relatively
transparent about how he planned to deliver on the underlying value proposition
of Software as a Service (SaaS). Salesforce.com scaled quickly and aimed to
improve on their idea over time through experimentation, learning, and feedback
from their core customers.2 Indeed, for Salesforce.com, prioritizing “control” over
their idea (either through an emphasis on trade secrecy or even through aggressive
acquisition of intellectual property) would have significantly hampered their
ability to engage a wide variety of early customers, and draw on that experience
in refining their service offering and technology platform over time. This case
illustrates the advantage of investing in execution: the venture is simultaneously
free to become its own best advocate3 and the founders are able to engage various
stakeholders in the type of fluid and open communication that can help identify
key customer priorities or help overcome supply chain bottlenecks.

On the other hand, founding teams can instead invest their scarce resources
in securing a certain amount of “control” over their idea. For a technology-driven
startup, investments in formal intellectual property protection, though expensive,
can allow a startup to exclude others from direct competition or enter negotiations
with a supply chain partner with a significantly enhanced degree of bargaining
power. Almost by construction, prioritizing control over the “idea” raises the
transaction costs and challenges of bringing the technology to market or working
with customers or partners, but it does enhance the ability of the startup to capture
the share of value that is being created. Formal intellectual property protection
such as patents is not the only way that the founders can maintain control over
their idea. Trade secrecy, proprietary methods or algorithms, and even
employment practices such as non-competes can all contribute to allowing the
founders to enhance their ability to control who has access to the technology or

2
Which, importantly, were not in the earliest days the same customers as those of more traditional CRM
software vendors.
In other words, it is difficult to evangelize your technology if the key details and specifications are
3

maintained as a secret.

6
not, even as they share the basic “idea,” early prototypes, or even commercial
products with others.

To make this tradeoff concrete, consider the challenges facing academic

entrepreneurs considering how to commercialize their ideas. While academics
often disclose the most version of their discoveries first through an academic
paper, they face latitude in how to move that idea to commercial and real-world
impact. In a recent study, we evaluated the difference between professors and
students in their approach to this process.4 On the one hand, faculty members (at
least in the United States) are often encouraged to commercialize innovation
through their technology licensing office (indeed, they owe their universities a
duty of disclosure that can be enforced given their ongoing employment), and also
may have experience that allow them to manage some of the complexities of
managing tight control over intellectual property while also having limited time
to really invest in the type of learning that would be associated with execution. In
contrast, student inventors are exactly the opposite: they have limited institutional
support to obtain formal intellectual property, are free to simply walk off campus
and “get stuff done” (e.g., Mark Zuckerberg was able to simply drop out of
Harvard to pursue the development of the The Face Book), and often embrace the
iterative interaction with customers that is essential to learning and
experimentation. To investigate this more carefully, we examined a systematic
sample of “paper-startup pairs” – ventures whose origin is in an academic paper
(think Google and the Google algorithm developed while Sergey Brin and Larry
Page were students at Stanford), focusing in on whether the founding team
included a student, professor (or both). After accounting for differences across
different “ideas’ (e.g., some ideas are simply more “patentable” than others, or
may be associated with a more rapid process of market introduction), we
evaluated how the choices of professor founders differed from that of student
founders. The results are dramatic: professors are more than twice as likely to
commercialize their idea with a patent application within a year of the publication

4Ching, K., Gans, J. and S. Stern (2015). “Execution Versus Control: Endogenous Appropriability and
Entrepreneurial Strategy,” mimeo, MIT Sloan School.

7
of the paper, while students are able to reach early-stage milestones more quickly,
including incorporation, their first round of financing, and even the timing of their
initial product introduction. Not simply a function of the “idea,” founders face a
choice of how to manage that idea though execution (at the expense of control) or
vice versa.

Similar to the choice between competition and collaboration, the choice

between execution versus control is crucial. Of course, not all ideas can be patented
(or receive effective intellectual property protection), and innovations vary with
how “leaky” they are likely to be in terms of the ability of competitors to imitate
or potential partners to be able to exploit your idea without your approval. For
any given idea however, founders need to consider how their venture is likely to
evolve if they focus on execution – competing on the basis of speed and agility,
versus control – competing on the basis of strong bargaining power and a
reputation for enforcing control over their idea. From a customer choice
perspective, founders focusing on execution are more likely to start by choosing a
narrower customer segment, prioritizing learning from early adopters versus a
control-oriented startup which, though slower, may be able to position themselves
to broader markets when they do enter. At the same time, execution-oriented
startups are more likely to iterate on their technology (ride the “S curve”) rather
than focus on transferable and generalizable technologies that are subject to
standardization. Finally, the choice between execution and control is likely to have
significant impact on the company you build. For example, where execution-
oriented startups are more likely to encourage iterative experimentation and
learning, control-oriented startups will still undertake experimentation but in a
more deliberate and decisive fashion.