By Brian Nejmeh & Jon Sappey
This is the second post in a series on Strategy Debt, which companies incur when they fail to clarify their strategic intent with stakeholders, and which is compounded when employees are empowered over time to act outside of the company’s strategic interests.
In our experience the best way to avoid incurring Strategy Debt is through the development and ongoing maintenance of a Strategic Narrative that becomes the foundation for organizational planning and prioritization, resource allocation, and performance management from the enterprise level down to individual goals and deliverables.
We have described our framework for creating a Strategic Narrative in an earlier post, but it seems worthwhile to revisit each of the elements in terms of how it can create Strategy Debt, whether through its absence (sin of omission) or through sub-optimal strategy (sin of commission).
You may recall our viewpoint that Category is the most under-utilized source of market momentum. Many companies are entirely passive when it comes to Category, forfeiting any benefit they could derive and ceding the power of Category to competitors and disruptors. That competitive disadvantage is classic Strategy Debt.
Positioning yourself as the natural leader in a growth category is the nirvana of Category strategy. Sometimes, credibly claiming this space requires some thin-slicing, but it is critical to success. If the Category is experiencing low or negative growth, and if you are not well positioned to capture leadership share of the market, then you are incurring some degree of Strategy Debt.
Finally, not anticipating how the Category will evolve over time, and planning for sustainable success, will add to Strategy Debt. For example, think about the relationship between the CRM and CSM Categories. Which companies have succeeded as CSM has emerged? Which have fallen behind, and which have managed the evolution effectively?
2. Differentiating Assets and Capabilities
Being clear about what your company’s “crown jewels” are; how they create value; how you can avoid their commoditization; and how they will need to evolve over time – all of these must be spelled out in the Strategic Narrative. Further, this clarity must drive behavior and change in the organization: we have all heard the phrase what made you successful to this point will not make you successful in the future. The tension between past and future must be managed proactively in order to avoid Strategy Debt. Subject matter expertise, well-integrated and privileged ecosystem and channel partnerships, deep proprietary data, insights and algorithms are all examples of differentiating assets and capabilities.
Precious few assets and capabilities offer sustainable competitive advantage, especially in the SaaS/API world. Many firms rely on the expertise and relationships of key team members, but particularly in the post-pandemic work environment, this is a dangerous assumption to make. Anticipating what will differentiate in the future (with a view of the emerging Category), and actively working to ensure the availability of those assets and capabilities is imperative. Without a shared understanding of what sets you apart today and in the future, you are incurring Strategy Debt.
3. Target Market and Segments
Defining, sizing, and prioritizing target markets and segments is crucial for avoiding Strategy Debt. This must be done with an understanding of the state of technology adoption and your particular product-market fit.
Customer discovery programs provide understanding of pain points, underserved outcomes, and the movement from minimum viable product to mainstream whole product. In many cases this involves the emergence of a broader ecosystem of partnerships which may be visible or invisible to customers.
Pursuing opportunities outside of targeted and prioritized segments can create Strategy Debt in many forms: increased customer acquisition and value delivery costs; brand reputation damage due to poor product-market fit, low value realization, and churn; diluted understanding of whole product requirements; partner relationship and channel management challenges; and more.
4. Whole product vision and roadmap
The SaaS world has brought some changes to the notion of whole product, but product line leaders still need to understand what whole product means and to design the journey along the technology adoption life cycle. Strategy Debt is incurred when
- Whole product vision is incomplete or inaccurate, perhaps from insufficient understanding of desired customer outcomes or the competitive landscape;
- MVP offerings are not pivoted based on rapid lessons learned, leading to frustrated early adopters and lots of re-work.
- Whole product requirements are left to service providers during significant periods of customer growth rather than being “baked into” the product, creating issues of scale during periods of rapid customer adoption.
- Prioritized items on the product roadmap are displaced by tactical feature/functions in order to secure short-term revenue from non-strategic customers.
Creating awareness of the larger context – i.e. the ecosystem – in which solutions are deployed is an essential component of the strategic narrative for a variety of reasons. First, technical integration with upstream, downstream, and “horizontal” technologies and data sources must be accounted for, inclusive of the relational and power dynamics of various providers. Second, third-party service provider relationships can also be critical to success. Being a preferred partner can be a powerful complement to – and often lead to – being a preferred provider. The dynamics of “coopetition” must also be understood, where an equilibrium needs to be established with providers who offer both complementary and competitive solutions.
Strategy debt accumulates as these external relationships are under-developed, and as competitors assume privileged positions in the ecosystem. Also, as technical integration components are not productized in similar fashion to the firm’s core offerings.
6. Competitive analysis
Understanding your competitors’ approaches to the market – how they think about Category; how they differentiate from you; where they believe they can win; where they invest in partnerships – is as important as defining all the elements of the strategic narrative for yourself. Incomplete and/or obsolete viewpoints of the competitive environment create strategy debt that can compound quickly in today’s agile environment, where changes can be deployed so quickly. Debt manifests itself in a slower growth rate than competitors’, resulting in lower market share.
In addition to the “traditional” competitive set, established companies must now also attend to the possibility of industry disruption – brand new providers who take a totally different approach to defining and solving a problem. Sometimes M&A activity can have the same disruptive impact with new capabilities and perspectives coming together. If you don’t have a view on how you could be disrupted, or of how you can disrupt yourself, then you have strategy debt to pay down.
Many companies in the enterprise software space are still attending to the relationship between direct and channel sales programs, working to minimize channel conflict and co-facilitate positive customer experiences with channel partners. Channel programs that have unnecessary and unresolved channel conflict incur strategy debt, as do those where customer “ownership” and responsibility for customer success are unclear.
Apart from traditional channel sales challenges, the Product Led Growth model introduces a new set of GTM challenges since customer acquisition, trial, purchase, renewal and expansion may all be automated. This requires an intimate understanding of the customer journey including jobs to be done, desired outcomes, and value realization. Knowledge deficits here and the resulting strategy debt can lead to low post-trial conversion, high levels of churn, and lower ARR growth rates.
8. Financial model
Business models need to be designed in a way that balances customer success with shareholder success over the entirety of the technology adoption life cycle. In particular, scaling efficiently during periods of rapid market adoption and then removing costs from mature offerings will ensure the ongoing capability to fund new initiatives and provide attractive returns to investors.
In this case, strategy debt can easily create financial debt and inability to invest in the future if too many resources are required to deliver value in a growth market; and if opportunities to remove cost are not acted upon in the late stages of adoption.
9. Human Capital and Operational Strategies
Keeping talent and value chains in alignment with evolving commercial opportunities is extremely challenging, especially in the still-evolving post-pandemic environment. Strategy drives organizational change, and this in turn challenges you to define what will be retained in addition to what must be added or modified. Ability to execute strategy derives from human capital and operating strategies that are in synch with the company’s business opportunity. Having the right people, at the right time, in the right chairs is all part of the human capital balance sheet of a strategic narrative.
Of course, all the elements of the strategic narrative are in a state of flux that is only becoming more dynamic in the digital age. Attuning the organization to changes already in motion as well as those yet to emerge, and pivoting as necessary in a timely way, minimizes the addition of strategy debt.
As you can see the negative impacts of strategy debt can be substantial, inter-connected, and challenging to unwind. Everything that can be done to avoid it in the first place, and to pay it off quickly when it is incurred through effective mitigation, is effort well spent. For many of our clients, expressing the strategic narrative as a formal, integrated initiative is an important first step.