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Strategic Shield

Whenever a young company enters the marketplace, it faces numerous dangers. Some of them are as follows:

  • Established competitors will try to undercut it.

  • Suppliers will not give favorable terms.

  • Partners will try to negotiate contracts in their favor.

  • Finance companies may not lend due to lack of credit history.

  • Venture capitalists will demand more equity or lower valuations.

  • Customers will negotiate lower prices due to lack of track record.

  • New hires will demand higher compensations.

To protect itself from these, companies need to develop strategic shields for themselves early on in the game, thereby enhancing the real and perceived value of the company. A great example of a company creating such a shield for itself at a very early stage is Microsoft. This company managed to get IBM to license its DOS operating system for the personal computers it was selling. Due to this relationship, Microsoft developed numerous advantages in the marketplace that helped it to thrive for the next 20 years. Examples of strategic shields that a company could develop are:

  • One or more strategic partners

  • Development of key technologies that are not easily replicable

  • Claiming and acquiring patent rights for technologies

  • Hiring key employees who can help in various functions (technologists, marketers, managers)

  • Negotiating exclusive agreements with established companies

  • Getting some notable companies to participate in beta programs

  • Gaining a critical mass of customer adoption (such as the case of Hotmail.com)

Keep in mind that these strategic shields do not come cheap. For example, exclusive agreements may require the company to give up a large portion of its revenue in the short term or even in the medium term. Key employees may demand high compensations. But these shields will help the company survive in the long run and provide significant negotiating leverage in fund-raising and merger discussions.

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