The road to successful commercialization is a steep and difficult one — a fact which entrepreneurs know all too well. But like hikers who use a zig-zag trail to ease their ascent up a mountain, entrepreneurs may be able to more effectively reach their goals by taking an indirect route. Wharton management professor David Hsu studies what he has dubbed the “strategic switchback”: a two-part plan for getting to one ultimate entrepreneurial goal.
Hsu spoke with the Mack Institute about when a nascent venture might want to adopt a switchback approach, especially given the unknowns that still surround this strategy. He also addressed how established firms should react when faced with a start-up that is trying to execute this strategy. An edited transcript of the interview is below.
The project that I’m going to describe is a project in which we study how entrepreneurial ventures commercialize their innovations. And this is a question that has dramatic implications for both the start-up entrepreneur and the established firm or incumbents in a particular industry because it affects the competitive dynamics between start-ups and incumbents.
What we find is that in the typical case of the start-up entrepreneur, there’s a lot of difficulty. Imagine yourself trying to climb up a very steep mountain: the most efficient way of doing that would be to go straight to the top. But a lot of times, especially for start-up entrepreneurs, that’s very difficult to do because they don’t have the resources, financial backing, or organizational assets to do that. And so what we find is that sometimes it’s much more efficient for start-up entrepreneurs to take a switchback. That is, take one strategy as a byway to try to get to the top of the mountain. The first stage of that strategy is a little bit inefficient, but it allows the start-up entrepreneur to ultimately get to the preferred ultimate strategy.
When we talk about the entrepreneurial switchback strategy, what we have in mind is a two-part strategy in which the ultimate strategy is to take a certain action, be it entering directly into the marketplace or ultimately partnering with an incumbent. But for start-up companies that action may be initially very difficult, either because they lack the credibility with the partners or because they don’t have the organizational expertise to directly enter the marketplace. And so what we’re arguing is that maybe a temporary cooperation strategy or a temporary competition strategy may be important in undertaking these switchback strategies.
There are really two reasons why you would want to undertake a switchback strategy. The first reason is because you want to demonstrate to the marketplace and to the partner and to the would-be partners that you actually have accomplished something technically and commercially. And the only way to really do that is enter in the marketplace. But your ultimate goal is to do that partnership with the incumbent firm.
The other way in which you might want to use a switchback is if you don’t have the specialized organizational assets right away. And here the example is maybe what you want to do rather than directly entering into the marketplace. You might want to do a partnering deal, even though that’s not your final preferred strategy, do a partnering deal in which you’re learning some of those organizational capabilities alongside the partner. But after you’ve acquired some of those skills, divest that partnership and enter the marketplace yourself.
“This is going to be a challenging one for incumbent firm managers because the last thing they want to do is to breed their own competitor down the road.”
You can think about two implications. For the start-up entrepreneur it’s very important to think about under what circumstances you need to undertake these two part strategies, because after all it’s much more complex and expensive to undertake one strategy and then switch to another. And so definitely what we’re saying is think carefully about the type of obstacles that you face and whether it’s really necessary to undertake both of these strategies that are involved in the switchback. A lot of times what we argue is that there’s really very little alternative. In the analogy to going straight up the mountain, that would be a one-part strategy that would be the most efficient, but in the case of a resource-constrained start-up, that strategy may be simply infeasible. And so we often make this analogy to a switchback in order to get up that mountain.
One implication for the incumbent is to try to discern when the start-up is actually just trying to use the incumbent in the temporary cooperation strategy to enable a long term product entry strategy. This is going to be a challenging one for incumbent firm managers because the last thing they want to do is to breed their own competitor down the road. And so one clear implication for established firm managers is to try to understand the [start-up’s] true intentions. It may be important on a contractual level to have a very broad agreement or long-lived agreement with the entrepreneur so that those threats of subsequent entry by the start-up may be curtailed. Or to try to discern the true aspirations of the start-up entrepreneur so that the incumbent isn’t faced with a very strong competitor down the road.
One of the areas that we’re trying to follow up on is the extent to which the costs associated with a switchback strategy may exceed some of the benefits associated with using the strategy at all. Because after all, doing a two part strategy is naturally going to be quite costly, both at the levels of organizational strategy, personnel, organizational processes. And what we’re trying to figure out is whether those costs are justified. Do they really exceed the benefits of using this type of strategy?