It has been a week of arguing which sequence is right. Is it
Product > Strategy > Business Model
Strategy > Business Model > Product
For most people in the valley – running startups, working for them or mentoring them to become insanely successful – the sequence is clear. There is no argument. Anyone who says otherwise simply doesn’t get it.
Wouldn’t it help if we all understand and speak the same thing when we say Strategy, Product or Business Model?
Here is a very simple definition for these terms. Not made up, not changed to fit present day mania. These are well established definitions for running any business. And those disrupting status quo to create frictionless something or the other are not exempt from these definitions.
Strategy – Here is a simpler and relatable definition – Strategy is about making choices under constraints (and most times under uncertainty). Choosing the only option available to you (say going for 4th and 24 with 7 points down and 20 seconds on the clock) is not strategy. Choosing all options available because you are not resource constrained is not strategy. Strategy is making hard choice, under limited resources (there are only situations with limited resources) and the outcome is far from known.
For a VC firm their strategy could be the type of ventures they even want to consider, be it the pedigree or market it plans to play in. For accelerators it would appear they could fund anything and everything from enterprise to social media startups but their choice is to limit investment choices based on the stage of the startup.
For a startup (or more generally, a business) the choices start with which customer segment and need they want to target first – a segment with compelling unaddressed need, that is not only big enough but also had big growth opportunity. You can serve all customers and all needs. The old adage about being all things to all people goes well here.
For example, Salesforce.com choosing to serve enterprise customers with significant pain-points (and IT budget to spend) and reach them through highly effective direct sales team vs. building out Chatter as competition for Facebook is their strategy. Another example is Netflix choosing streaming over DVD by mail as the future.
Strategy does not end with the first choice. If you have to make a hard choice among available options (and most times under uncertainty) then it is strategy. First it is the segment to target, then there are choices on routes to market, product, product features and when to deliver, pricing and communication.
That is strategy.
Business Model - You can do a Google search on all kinds of theoretical works on business model. In practical terms, business model is answering two questions
- How are you creating value to your customers? (see value equation)
- How are you capturing your fair share of that value created? (see Value Step function)
Together these two constitute your business model. You could be like some of the group buying sites and take a share of value you did not help create. Or you could be miss out getting your fair share. In either case your business will sooner or later will fail because it runs out of value to take or in latter case run out of cash.
You could introduce a third party (or fourth, or fifth) in the value flow – say advertisers, content producers – and decide to capture value indirectly. If your product adds compelling net new value to customers you chose to serve, charging for it remains the simplest of all business models.
And as an astute reader you noticed there are choices to make in defining the business model. It could be in how best to deliver value or how to capture value, whether to capture value upfront or align with value deliver (subscription). That is strategy does not go away when you move to business model.
Product - What is a product? Are your customers buying products? Ted Levitt said,
“Customers are not buying quarter inch drills but quarter inch holes”
Clayton Christensen said,
“customers have jobs to be done and they hire products for those jobs”
So we could say product is the value delivery medium. This is not to trivialize it. Product offers the greatest opportunity to innovate – to deliver something that does the ‘job’ better than any other alternatives available to customers, to deliver most natural way to use it, to do so in the most cost effective way for the venture that is building the product, to make it sticky, etc.
Again there are choices to make – what to build, when, how etc. More strategy in building the right product.
Given these, you decide whether one is greater than the other. For startups, Fred Wilson argues finding the product-market fit first, deciding on strategy then business model.
For startups that begin as a personal problem the founder is trying to solve with the assumption that there are many others with the same problem it would appear
- start with the initial iteration
- keep refining it through user discovery
- build a large enough user base, getting early adopters to spread the word
- worry about monetization later
… is not only the only recipe but one that is guaranteed to deliver success (can you say Facebook, Twitter, Instagram, Pinterest?)
The argument for product first approach should not be because of what we know to be successful startups or because of one’s inability to start with strategy first.
Did you consider the possibility that when you do thousands of experiments – thousands of founders with the same personal problem, trying to address it in thousands of different ways – some experiments are going to succeed?