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Startups and large firms: When both David and Goliath win

Complementing his explanations during the recent SKEMA Strategy Summit, Dr. Philippe Chereau, SKEMA Ventures director, delves into how an asymmetric partnership can be established between a startup and a large firm.

We all know about the David against Goliath story and the result of their battle. When applied to startups and large firms, the asymmetry of the situation of the stakeholders usually ends up the other way round. In fact, concerning business relationships, neither scenario should prevail, as there is no lasting business partnership that is not perceived as beneficial for both parties. The key question is, for the sake of each party’s interest, how can an asymmetric partnership between a startup and a large firm be made to work?

Raising the issue of asymmetry is the first step towards obtaining the answer. How asymmetric is the situation between a small, fast-growing young firm and a large, incumbent, well-established company? From the resources perspective, startups lack the organizational slack of financial and human assets that large firms usually possess. This cushion of actual or potential resources allows large firms to adapt to internal or external pressures for adjustment, whereas startups are constrained by the need to carefully allocating the right resources to the right project. This may generate power imbalance in the negotiation as the startup may become locked in the partnership, and consequently, prevented from having discussions with competitors of the large firm.

Dr. Philippe Chereau at the SKEMA Strategy Summit in Paris
Dr. Philippe Chereau at the SKEMA Strategy Summit in Paris

Strategic planning

Startups also use their inherent agility to capture market or product opportunities and their planning horizon usually does not exceed a few months. They may also underestimate the gap between a prototype and a fully supported solution, be it a product or a service. This may lead to a poor appreciation of the time and cost required to move between the two. From a strategic posture perspective, startups generally practice “strategy along the way”, and forget that strategic planning does not mean rigidity but aligning the use of resources with business objectives in the appropriate business model. From an organizational standpoint, startups favor staff versatility and ad hoc processes. Wearing several hats at the same time may make it difficult for startups’ decision-makers to find the right counterparts in the large firm where there is a clear separation between line and staff roles.

Conversely, large firms follow explicit strategies, have well-established market positions, and benefit from efficient operational routines. However, this may lead to market myopia and reduce innovation effectiveness – the well-known innovator’s dilemma. Moreover, the separation between line and staff role hampers the creation of new knowledge via cross-fertilization and makes it difficult to see the “big picture” of the innovation scope when working with a startup, thus underestimating the real value of the partnership. This inability or unwillingness to open the scope of their product-market domain may also lead large firms towards an ex-ante reluctance to even consider the innovation brought by the startup. By doing so, they add the “not invented here” syndrome to the innovator’s dilemma.

Strategic intent

Having said this, and considering the embeddedness of these asymmetries in each partner, how can asymmetric partnerships result in shared success? The answer may lie in a shared cascading process stemming from strategic intent to business modeling and partnership implementation.

First, both parties should reconsider their strategy of competitive positioning characterized by unilateral supplier-client relationships towards a strategy of an ecosystem where multilateral relationships between all stakeholders prevail. In other words, startups should consider their partners – clients, suppliers, and facilitators – according to their own individual potential interest in the startup’s success. From this standpoint, a large firm can be a valuable supplier if it sees the startup as a Trojan Horse to explore new market opportunities.

With this opportunity-cost perspective, it is in its own interest to contribute to the success of the startup by lowering its negotiation power. Conversely, a startup can develop a win-win partnership with a large client when the latter lacks a “component” in its value proposition that can be supplied by the startup or when the startup’s value proposition leverages one of the large firms. The key aspect here is that each party makes its own strategy explicit to the other before entering into a negotiation.

Asymmetric partnership between a startup and a large firm

Shifting from this strategic intent, startups should develop a business model that reflects their ecosystem strategy, thus, intrinsically mirroring one of their chosen partners. Indeed, by designing an offer dedicated to the large firms that could use it to foster their own value proposition and sell it with a revenue model that would leverage this value, while cooperating with suppliers or facilitators willing to be part of this value network, startups may generate a virtuous cycle that makes asymmetries and power imbalance obsolete.

Importance of ‘advocates’

In this context, the likelihood of developing a win-win partnership increases significantly if it is supported by “committed champions” within the large firm that will facilitate decision-making and working processes with the startup. These commonly respected individuals play a central role in building trust and developing effective channels of communication between the partners. They create a bridge between both of the firms by fostering complementarities and reducing the perception of asymmetries. As “advocate” of the startup within the large firm, they facilitate the sharing of information between parties with regard to strategic objectives, organizational routines, and processes, and stimulate tradeoffs about the operational plan of the project.

In this approach, startups and large companies should think of their strategy as an action plan to align with the players of the competitive ecosystem in which they wish to develop and secure their position. In practice, like the competitive strategy, the ecosystem strategy is built on a double external-internal analysis. On one hand, is the external analysis of the inter-ecosystem competitiveness according to the collective capacity of the actors of an ecosystem to create more value for the end customer than another ecosystem. On the other hand, is the analysis of intra-ecosystem competitiveness that is the assessment of complementarities between the players of the ecosystem through the intrinsic competitiveness of their activities and the overall consistency of their positioning.

Philippe Chereau

Philippe Chereau holds a Doctorate in Management Science from Aix-Marseille Université, a PhD in Management Science from SKEMA Business School, and a Master in Management from EDHEC Business School. He is an entrepreneur and associate professor of strategy and entrepreneurship at SKEMA Business School where he was also the scientific director of the MSc Entrepreneurship and Innovation until August 2017. As a researcher, his work focuses on the strategic management of innovation and business models in innovative SMEs and startups. In the past, he has held directorial and managerial positions at different corporate companies and organizations.

This Post Has One Comment

  1. Thanks for sharing. It’s helpful for a entrepreneur like me to read and chew on.

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