Developing a successful business strategy is about finding the proper niche, where to launch an initial version of your product to create a feedback loop and improve fast while making sure not to run out of money. And from there create options to scale to adjacent niches.
- Business strategies make sense only in hindsight
- Balancing short term survival with long-term (at times) grandiose vision
- Action plan: can you hold it in your head? If not, throw it away
- The niche is the reality check
- Complex systems are fractals
- Create options to scale
- Transform the business at each stage (Transitional Business Modeling)
- Inside the Strategy Lever Framework
Business strategies make sense only in hindsight
I have a business mantra that goes along these lines:
Business strategies take years to roll out. Yet when they do, they are obvious only in hindsight.
For the entrepreneurs who roll them out, that is all but a linear process. Rolling out these business strategies is a painful process, which requires a lot of faith in your own gut instinct, and it’s all about sweat, persistence, execution, and stubbornness.
And it all starts by balancing out the short and long term.
Balancing short term survival with long-term (at times) grandiose vision
As Jeff Bezos explained many times over, many decisions seemingly do not make sense in the short term. They do with a long-term perspective. Therefore, as an entrepreneur, it’s critical to balance short and long term.
From here let me give you some examples of how short term and long term are two different creatures, and yet they feed each other:
- Profit is different from liquidity: when you run a business, that might seem obvious. But as you see it making the first profits, you might still struggle with profitability. As perhaps your clients’ payment cycles are long or your suppliers’ payment cycles are short. Or both. In other words, getting to profitability is great, but if you don’t have liquidity to invest back into the business, to create options to scale, not much useful for the long run.
- Being right in the long-term does not guarantee survival: while we all love to be right. If you don’t manage to survive the short-term, that won’t be much needed. Regrets will hunt you down, as you see others successfully executing on your same idea, but with more ability to balance the short term survival to the long-term vision, which leads to the next point.
- You might have a grandiose vision, but you need reality checks: we all like to think of ourselves as changing the world. For how noble this thought might seem, this also can easily lead to failure. When building up a business, execution takes up most of the effort. Thus, without built-in reality checks (is the product feasable? do people want it? is it adding value to the right people?), it’s easy to fall into the business cimitery.
So how to minimize the risk of a bad execution? Let’s build some premises before we can lay down the whole framework.
Action plan: can you hold it in your head? If not, throw it away
Back in 2006, as Tesla was trying to pull off its first model, the Roadster, one thing was clear. The grandiose business plan who had been drafted a few years earlier by Tesla’s co-founders (Elon Musk would become CEO only in 2008) proved quite wrong.
That’s not because the people who drafted it were not smart. On the opposite, they were so smart to be able to put together a complex scenario analysis and have it drafted as a business plan. Yet when execution came, the costs and timing to produce the electric sport’s car were, by far, quite off. This also led to a final internal fight, where the initial co-founders (Martin Eberhard and Marc Tarpenning) were ousted.
In the meantime, in 2006, Musk had drafted a master plan that looked like the following:
This action plan, which was written down but could have been held in mind represented the key steps, took Tesla over fifteen years to roll out! And I’m sure Elon Musk might have rehearsed it over and over, through the years.
The niche is the reality check
From a market launch perspective, how do you balance short and long term?
The answer is the niche. Or a subsegment of the market that will enable you to kick off a feedback loop to improve the business quickly. In fact, a “market” is too big to even understand whether your product is making a difference.
I know this might sound trivial. Yet, there is a critical reason why the market niche you pick is so important:
- This serves as the center stage to present your product.
- It helps narrow down the scope of the business, thus make it much much simpler to execute.
- But most importantly, when you start something new, the most valuable thing to have – to progress fast – is to kick off a feedback loop. When you target too wide market, there is no feedback loop in place. Why? Because the environment you target is so complex, that to understand wheter you’re doing something right or wrong is impossible. That is why a much smaller market segment, is way more simple to tackle. A niche, the smaller it is, the easier to target, to track the progress of your business and trigger “learning feedback loops”.
This last point is extremely important to stress. In fact, we can argue that the most valuable asset for our business over time, is a continued “learning feedback loop” where the market is able to tell us what we’re doing wrong, and how we can improve. In a niche market, the audience is small enough to give us this feedback. When the audience is too large and spared, it’s very hard to make any conclusion at all.
Complex systems are fractals
Benoit Mandelbrot who coined the term “fractal” made fractal geometry an incredible tool to describe the real world. A fractal is a sort of pattern that repeats itself at various scales. A great example of that is the cauliflower, a cruciferous vegetable with a very interesting shape. In fact, if you zoom in, you find the same pattern and shape repeated over and over.
I took this picture for you at the local supermarket. This, in particular, is a Roman cauliflower, and as you can see, if you zoom over and over again, you will find a self-repeating pattern. The same shape over and over at various scales. As a sort of Russian Matryoshka doll.
In short, complex systems in the real world are very very irregular. They do look similar at various scales (a neighborhood is made of blocks, a city is made of neighborhoods, a country is made of cities). Yet when things scale up and down, the dynamics change. This is what a complex system means. It’s not about the shape itself, but the size and scale which determine the dynamics of the system.
Why is this important to us, here? A few implications:
- Smaller scale is easier to handle, as complex dynamics kick in exponentially at wider scale (you don’t control large, complex systems)
- Complex systems are mostly perturbated. Therefore, the more you take on a larger market the more you expose yourseful to unknown risks, volatility and therefore chances to fail.
- A bigger opportunity, but not a reversible one. It’s true there is a much bigger opportunity in a larger market, but there is a point in which you cannot reverse your position. As you get exposed to the largest chunk of the market, you can’t go back. Why? you have structured your whole company to survive in that market, and if that market suddenly changes, srhinks or it’s taken over by another market, the company might collapse.
These are all things you need to be aware of when creating options to scale.
Create options to scale
As you take over a niche, at that point you have options to scale. It’s worth highlighting that scaling to a certain extent can be a great way to grow your business. Yet, as you scale, once a critical mass is reached, everything will change. The wider the market, the less control you will have on it, and the more fragile your business might become.
From here it makes sense to adopt a transitional business model framework.
Transform the business at each stage (Transitional Business Modeling)
As we’ll see later on, a transitional business model is a “temporary business model” that is executed to tackle various stages of growth. The premise that matters here is that as you move from a transition to the next, your whole business model changes, and this, in turn, might require a completely different business mindset.
Inside the Strategy Lever Framework
The strategy lever framework is a five-step tool to go from niche, to option to scale. This exercise can be done as a thought experiment, so that you can pretty much hold it in your mind, without having to write down dozens of pages of a business plan.
The whole logic behind the framework is that of unlocking options to grow further, by conquering adjacent niches.
Start with a Blue Sea Strategy
In a Blue Sea Strategy, we start from the opposite premise. Even if you’re launching an innovative product. You want to start from a very small niche of the market and charge a premium.
Why? First, as you’re building the initial version of the product, that might turn out to cost way more than you imagined. Second, by targeting a very small segment of the market you are adding value where existing (large) players can’t. Third, the niche will give you feedback and will work as the foundation to move to adjacent niches.
As you move to these niches, the new uncontested market will build bottom-up, and organically.
Read: Blue Sea Strategy.
Niche down (From Niches to Microniches)
Thus the first question is about identifying a niche where your product might be successful.
If you target a microniche, things get even better.
Identify a Minimum Viable Audience
From there you got to identify a Minimum Viable Audience.
Read: Minimum Viable Audience.
Move to adjacent niches
When Jeff Bezos started Amazon, started Amazon, as he did market research, he found various categories that worked well to prove the business concept. As Jeff Bezos pointed out back in 1997, “there are more items in the book category than any other category by far,” with over three million different books worldwide at the time. Only Music was number two.
Thus, as Amazon became the most successful online bookstore, it then moved to music.
Amazon of the early years, therefore, used this rollout where it moved to adjacent niches, where the know-how developed, made sense, and can be used to scale them faster.
This connects to the business scaling process, highlighted next.
Read: Business Scaling.
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