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Will Big Companies Follow Microsoft's Lead and Make It Harder for Startups to Win?

Will Big Companies Follow Microsoft's Lead and Make It Harder for Startups to Win?
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Conventional wisdom is that big companies have enormous advantages over startups. I think the opposite is true. But now big companies are starting to become smarter. And that could mean startups have to change.

Big companies often have thousands if not hundreds of thousands of employees, billions in cash, access to more through borrowing and selling stock, a big sales force and a plethora of patents.

How can a startup -- with its rapidly dwindling cash pile and overworked staff -- expect to win? The simple answer is that all those resources make big companies much slower learners than the duck-like entrepreneurs -- who appear calm above water while they're rapidly paddling beneath the surface.

It all comes down to the difference between how big companies and startups formulate strategy. As someone who has been teaching strategy for decades and worked with its global guru, Harvard Business School professor Michael Porter, I learned that strategy for big companies involves an executive steering committee and a team of consultants.

The consultants spend six to 12 months analyzing the attractiveness of a potential market, evaluating the capabilities needed to win in that market, assembling the resources needed to master them, detailing the action steps to implement the strategy and building a robust financial model that estimates the investment required and the expected return.

But as I found after interviewing more than 160 entrepreneurs for my 2012 book Hungry Start-up Strategy, entrepreneurs don’t have the luxury of time for this type of strategy because they could easily burn through their remaining cash in the months it would take to get this process started.

Instead, startups take their two best guesses about the right strategy. They build quick, cheap versions of the products that represent those guesses, put them in front of customers and measure the response. Startups learn from the reactions and try again.

Related: Innovation: Small Businesses Live It, Big Businesses Buy It 

In the time it takes a big company to go through its six- to 12-month strategy process, a startup may have tried six or seven different strategies, each possibly better than the one before. The result is that their lower resource levels give startups faster clock speeds than big companies.

In theory, nothing is stopping big companies from taking the same strategy approach as startups do, as I teach in my seminar "Three Ways to Get Back Your Company’s Start-upnessat Babson College's Executive Education Center.

I was pleasantly surprised to find that Microsoft, whose employees have not participated in my seminar, seems to be heeding some of its lessons, at least judging from a recent The New York Times article. 

“You learn to harness feedback," David Campbell, the head of engineering for Microsoft's Azure (or cloud computing product), told the Times. "Early on, this means lots of ‘A/B testing,’ or putting up two versions of a website to quickly see which the customers prefer.”

Microsoft employees adapt Azure based on customer preferences. Campbell said the Azure team “makes engineering changes by moving parts of its customers’ traffic into the new stuff, seeing if that works as predicted and then building up. Checking expectations and hypotheses in real time takes hours, instead of months and years in the legacy world.”

Through this new approach Microsoft's Azure group is introducing more new products faster. Over the previous quarter, Azure delivered a new feature or service every “every two days,” according to Campbell’s Times interview.

The result  is a radical change in the practice of strategy at this big company, letting market response to cheap experiments prevail over a battle of managerial egos. As Campbell explained, “Instead of having a debate informed by decades of experience around whether a customer would want A or B, we define a testable hypothesis, which we quickly try to validate.”

While Microsoft is not the only big company to adopt this more agile approach to strategy -- Google and Amazon have always done it -- what makes Microsoft interesting to me is that it's changing from the more traditional approach to strategy. 

If Microsoft could boost its revenue growth substantially through this new approach to strategy, it could enjoy an enormous increase in its stock price, which would give it access to much more capital.

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There are plenty of reasons why Microsoft might not be able to succeed with this new approach, such as, for example, if the CEO decided the new products were cutting into its most valuable profit pool.

But if companies like Microsoft are able to combine their enormous pools of capital, people and technology with the agility of a startup, they could force fledgling companies to rethink how to maintain their competitive advantage.

Maybe that could be the subject of my next book.

Related: Keep Innovation Flowing as Your Startup Grows