Business Sustainability as a Strategy
This is a follow up to my article on Efficiency vs Effectiveness. For the sake of this article, I am assuming that you are one way or another involved in the development of products based on software.
At the core of every business strategy lies business sustainability. Continuously recurring is the question whether the current strategy is supporting the sustainability of the company, or not.
A sustainable business is traditionally considered to be a business which finds its market share continuously increasing. We see this with startups, scale-ups and grown-ups alike. It is not an uncommon path for companies to follow and most of the time I worked with startups and scale-ups, there was not a lot more than growing market share to determine success.
Market share is often considered a key metric to determine whether or not a business is successful. Consequently market share is often considered a key indicator of how a business is performing. Growing market share means sustainable business. In this model the successful entry into a market is a key indicator of whether or not the business is sustainable. More so when you consider that new products are going through two decisive cycles: Problem-Solution fit and Product-Market fit.
A problem worth solving and a solution worth buying.
Problem-Solution fit is likely the most frustrating cycle for any company. It is the cycle where it is established that a brilliant idea for a new product solves a problem which is worth solving. Once this is established, the next cycle determines whether customers with that problem would want to buy the product. This is called the product-market fit.
It is crucial for every new product to get traction in the market. which captures the number of users of the product and how fast that number grows. I always like to challenge leaders to relate this to the entire market. The conclusion is that absolute numbers may define success, relative numbers define potential. And this introduces a real concern when it comes to market share.
Market share is limited to 100%, it doesn’t go any further, however hard you try.
This limitation means that there is a limit to growth. Regulatory constraints will limit growth to well below the 100% mark in order to prevent monopolies. Resulting in a situation where a business can be too successful and therefore sees its sustainability be at risk.
When the objective is to grow market share, we are limiting the potential of our business strategy. Limiting business potential is in turn putting the sustainability of the business at risk. Unless you are operating in a niche market, another aspect that needs to be considered when growing market share is the objective; Commoditization.
Commoditization: Almost total lack of meaningful differentiation in the manufactured goods. Commoditized products have thin margins and are sold on the basis of price and not brand. This situation is characterized by standardized, ever cheaper, and common technology that invites more suppliers who lower the prices even further.
Source: http://www.businessdictionary.com/definition/commoditization.html
The fact that a product becomes a commodity, implies that it reaches market saturation. What we see in such a market is that competition is mainly margin driven. Since commoditization reduces margins, it also reduces profitability. Consequently, organizations operating in such an environment will mainly focus on cost efficiency to increase margins and stay profitable. As explained in my previous article Efficiency vs Effectiveness, this is only viable for production processes and not for engineering processes.
Whether a product is a commodity is to a large extent a matter of perception of the customer. Commoditization of a product is determined by its consumer, not its producer. Something that is especially true for software products.
In today’s digital world, many of the products and services on the market are software based. Specialist hardware, for example mainframes and supercomputers, is replaced by generic platforms in the Cloud. Software as a Service (SaaS) has made hardware platforms even less relevant from a customer perspective. The common understanding that ‘there is an app for that’ only emphasizes the notion that software products are perceived as commodities.
We are facing an interesting and unique situation. As explained in Efficiency vs Effectiveness software is engineered, not produced. Just to reiterate:
The production process in regard to software based products relates to the production of media containing the software, disks.
The delivery of products based on software is all digital these days. Instantaneous and frictionless. Customers come to expect an app for everything.
Engineering processes can only be improved upon by being more effective instead of being more efficient. When our product is a commodity our profit margins are at risk, and therefore, the sustainability of our business is threatened. Importantly, becoming more efficient at producing software will not improve this situation. Our business can only become more sustainable when we become more effective at engineering our products.
Effectiveness for Survival
With the commoditization of software products and the digitization of the delivery of these products, we must realize that market saturation is a far more common reality than it used to be. “Grow until you get bought” is a viable exit strategy pursued by many startups. Those that want to sustain beyond critical mass and want to become the next behemoth will have to resolve to a strategy where growth is not defined in terms of market share, but by markets instead. It is a matter of focusing on potential. Being able to find the sweet spot between potential for growth and risk of saturation is key. When the potential for growth decreases and the risk of market saturation increases, having the ability to pivot determines whether there is a future for your company or not.
The digitization of software delivery has resulted in a situation where we have no longer a physical product to get attached to. When we download an app, there is nothing to keep in our hands, to hold on to. There is literally nothing to lose, hence there is nothing to care for. This lack of attachment is one of the reasons consumers treat software products and online services as commodities. The expectation is not only that there is an app for it, but that there are several apps for it to choose from.
We find ourselves for the first time in the position where even unique products are not considered as such. A unique selling point is no longer a reason for the customer to buy the product.
Unique Selling Points will have to become Unique Buying Reasons.
It is tempting to think that there is no difference between a USP (Unique Selling Point) and a UBR (Unique Buying Reason).
When UBRs replace USPs, knowing what customers need is irrelevant, delivering what customers want determines business success.
Furthermore, what the customers want are more features, better performance and less bugs. In general, it can be said that customers want improvements, daily. With software being the product, there is no competitive edge to be gained in streamlining a production process. There is no production process. In today’s software market, competitive edges are based on being the most effective at software engineering; definitely not production efficiency. Whether or not a business is sustainable, depends on how effectively it is able to recognize and address the UBRs.
Time to market
Customers do not switch between physical products on a whim, so when a customer switches to that of a competitor, something must be seriously wrong. In this case, time to market is especially important when you aim to be the first in the market, since customers will not likely go for number two that hits the market. And with the practical limitations of a production and physical distribution process, being the first also means a head start in the race to capture the entire market. In other words, engineering must be focused on delivering the best first impression possible.
With no production process to give you a head start, to be the first is less relevant in the digital world. Customers will choose the app or service that addresses their UBRs first. They will switch to an alternative offering just as easily when that addresses their UBRs better.
Then, through the process of using our product and trying competing products, customers determine which UBRs will make the top of the must-have-requirements lists. Being able to respond to the ever-changing list of UBRs in the market in a timely manner, determines how well an organization can compete in that market.
Hence, in order to maintain a sustainable business, we need to be able to adapt to the requirements of our customers. Continuously, timely and adequately. Effectively, it means that in order to be a sustainable business, its product delivery must be agile. Not at a software engineering level, but at a business level. Agility at a business level entails all the activities from identifying which UBRs will make the product more valuable, to getting new releases delivered to customers in a timely manner, continuously.
In this context ‘timely’ implies that the only cost of any relevance is time. With the currency being weeks, days, hours and sometimes even minutes or just seconds, the time it costs to deliver a version of the product determines whether a business survives its competition or not. Shorter timelines result in getting results faster. Getting results faster not only means making money faster, but it also means getting the relevant feedback quicker to determine the next UBR, be it a new feature, a quality enhancement or a performance improvement. Being able to recognize and deliver the next unique reason why a customer would buy a product or continue to use the same services, is what drives a sustainable business. With software being the product, only the engineering process will be of any consequence in this regard. Since there is no production time, all costs quantified in units of time are related to the engineering process.
Wants over Needs
Organizations that are lean, nimble and agile are organizations that will excel at engineering their products to effectively address the wishes of their customers. They will put less focus on what are thought of as the customer needs and instead deliver what the customer wants. In other words, they think in terms of UBR instead of USP. These businesses will prove to be sustainable because they continuously ensure that their customers are willing to buy their products or continue to use their services and not the products of competitors. These organizations realize that their products are perceived as commodities and therefore customer loyalty is at best associated with their brand and not their products. They grow by extending their markets and not their market share per se. They will excel through their ability to adapt to a changing market and beat the competition again and again to market.
These are organizations that have effectively become agile businesses.
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@Arc-E-Tect
Disclaimer
The text very explicitly communicates my own personal views, experiences and practices. Any similarities with the views, experiences and practices of any of my previous or current clients, customers or employers are strictly coincidental. This post is therefore my own, and I am the sole author of it and am the sole copyright holder of it.
Credits
Special thanks to my lovely wife Olcay, as well as my friend Sytse who took the time and made the effort to review my article. I am confident that the article’s quality was significantly improved by their feedback.