4 Attributes of the Most Successful Companies, According to McKinsey

McKinsey has analyzed 2,400 of the largest companies over the past fifteen years and calculated the relative impact of forty variables on outsized growth in economic profit. Economic profit is a function of ROIC and revenue growth, the twin strategic and financial goals for any company, as discussed in the prior article.

1) Strong R&D investment
If you’re in the top 50th percentile of all companies in your industry in the ratio of R&D to sales, you have a 21% chance of moving from the middle of the pack to the top quartile of performers. In terms of raw ability to move companies, this variable is the most powerful. In other words, invest in innovation.

2) Constant active re-allocation of resources to growth areas
If you’re in the top 40th percentile of all companies in your industry in terms of re-allocating resources to new growth spaces, you have a 15% chance of moving up to the top quartile of performers. And, according to McKinsey’s research, CEOs who actively do so in their first few years keep their jobs longer.

Companies that move an entire half of their capital expenditures across business units create fifty percent more value than those that don’t. McKinsey has written a book about this, The Granularity of Growth. Examples include Philips, who divested legacy TV and audio businesses. They then identified the most promising 340 geography and product combinations, such as electric toothbrushes in China that they then doubled down on.

Re-allocating requires pulling resources from some areas. One way to make it easier is to extract the resources first, then increase funding and resources in promising areas afterwards. If you do them both together, the promising areas may receive less than is desired due to constraints and conflicts.

There are two levels of strategy; this level is the one on the right side of the image below.

3) Active M&A/divestitures
If you’re in the top 40th percentile of all companies in your industry in M&A, you have a 13% chance of moving from the middle of the pack to the top quartile of performers. To get there typically requires doing several deals that lead to over 30% of your market cap over ten years—but without any that are alone larger than 30%.

Major mergers (e.g., Time Warner and AOL) have attracted the most attention. According to McKinsey, it is from analysis of mergers like them and a short-term view of how share prices react to mergers that have led to the inaccurate view that M&As often don’t create value.

4) Positive industry trends
If you’re in the top 20th percentile of all companies in terms of positive industry trends, you have a 24% chance of moving up to the top quartile of performers.

This points back to #3 of the “4 Steps to Develop a Strategy” around identifying areas where there is a positive trend that you can ride. Finding and leveraging trends that others aren’t reacting to is one of the core jobs of the strategist.

Supermarkets and airlines create loyalty programs that give them access to data about their customers which then gives them a chance of seeing trends that others might miss. Netflix is a well-shared example of a company seeing a trend early (i.e., the move away from physical DVDs towards online viewing). Even though Netflix’s value has increased significantly since then (as of 2020 anyway), in 2011, when it announced it was shifting its strategy in anticipation of this trend, its share price dropped 80%.

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Revenue Growth and ROIC Are All That Matter

And they both matter about equally

In discussions I’ve had, there has been disagreement about the right goals to set for companies; therefore, there’s been disagreement about the role that strategy should play.

Two of the most common mentalities I’ve come across are “let’s skip any real innovation investments—we need to improve the bottom line this quarter” or, “let’s grow revenue at all costs.” Both are wrong and both represent a loss of focus on the right long-term goal.

The goal of companies = long-term value creation driven by solid strategy.

Long-term value creation is a function of two pillars working together: revenue growth and return on invested capital (ROIC). ROIC = annual net profits / total invested capital.

If you don’t like those two terms, P&G has a corporate measure that they call operating TRS (total return to shareholders). It is a mix of revenue growth, profit margin improvement, and an increase in capital efficiency. It appears to include the same core components.

Revenue growth
Only revenue growth that preserves ROIC leads to long-term value creation. The authors of the McKinsey classic finance book, Value, rank the unique types of revenue growth in terms of their ability to generate long-term value creation.

The most valuable forms of revenue growth come from creating new products and new markets (e.g., Blue Ocean Strategy) and attracting new customers to a market. In the middle are bolt-on acquisitions. The least valuable forms of revenue growth come from large acquisitions and market share battles based on marketing, pricing, and incremental product updates.

Building wholly new products and developing new markets are the fundamental building blocks of long-term value creation. Business development, marketing, and product management are important, but they support—and not overtake (as often happens in large companies)—the company’s strategy, innovation, and R&D engines.

ROIC
What is ROIC? Annual profits divided by the capital (e.g., all shareholder’s equity that is not sitting in a bank) invested in the business. ROIC increases through lasting improvements in profit margin and/or reducing the capital locked up, such as through a reduction in servers or physical plant footprint.

What drives ROIC? Your competitive advantage—i.e., the things you do uniquely well.

If you’re an established company, knowing where and why you are profitable will tell you where your sources of competitive advantage are—and thus be a significant starting point for building a future strategy.

For startups, your initial competitive advantage often comprises your unique customer insights, your own development skills, and your ability to build something others can’t copy. Once you build an integrated set of systems serving your customers, such as through learning loops, that complete set of unique processes becomes harder to mimic.

Improving ROIC matters a bit more than growing revenue… but the magic happens when you can do both
In 2018, McKinsey’s strategy practice determined the relative impact of these two levers on economic profit.

In short, the general odds are 8% for a company to move from being in the middle to being a top performer. But the odds of doing so are 19% if you outperform in both ROIC and revenue growth.

Outperforming on ROIC alone (e.g., becoming more cost efficient without growing) keeps you at 8%. Outperforming on growth but underperforming on ROIC (e.g., scaling your business when you are not ready to do so efficiently), has just a 4% chance of upward mobility—and it comes with a 25% chance of slipping into being a bottom performer.

Venture Capitalists say the same thing in a different way
When we were raising money for, and then selling, our last company, we talked with many investors about what creates higher valuations. The summary of those discussions was that there are four primary factors and two additional ones. In order of importance:

  1. High revenue growth. If you are growing at 40% or more annually, you’re in a “hypergrowth” category which will command a premium. This is aligned with the “Revenue Growth” category above.
  2. Quality of revenue. High renewal rates are important. If you are B2B and are able to sign two-to-three-year term contracts, that is highly valued. SaaS platform revenue as a concept is highly valued as sustainable revenue (as opposed to, say, consulting, where every year all of the revenue has to be created anew). This is aligned with the “Revenue Growth” category by adding the additional detail that companies that are well situated to prove future revenue growth is inevitable will be valued higher.
  3. Is there a clear moat around the business? Barriers to others disrupting or replicating your business are investigated. This is aligned with both “Revenue Growth” and “ROIC” stability: what are the chances that a competitor or supplier can force the company to lower prices, lose customers, or accept higher costs and therefore lower margins?
  4. Is there a continued path to scalable growth? Low per-unit cost implies the company will become more profitable as volume grows. This is directly aligned with the “ROIC” category. In other words, investors give revenue growth precedence over ROIC, but both comprise all the major areas that they care about.
  5. Next in line, but much lower on the list of importance, is the strength of EBITDA and cash flow. In other words, was a major fixed cost investment made that the company is now paying off with annual cash flow? High invested capital of course lowers ROIC and so this one is aligned with that category.
  6. And finally, is there a larger market this company can go after as part of a future growth story? In other words, is revenue growth limited or could it realistically keep growing and growing?

 
Focus on the long-term profitable growth, not one or the other in the short-term
Make smart decisions and fight hard for the most profitable (but perhaps lower revenue) pockets of the market. Over time, you will become stronger and more able to serve your customers; the pure revenue-chasing competitors will fall. The goal of strategy is not to squeeze out a few more dollars or a few points of market share this year. It is about finding the large new profitable growth opportunities over the coming years.

Returning to the perennial favorite strategy case study, Southwest Airlines. Their founder and CEO Herb Kelleher pointed out that other airlines would allow their costs to increase by 25% to gain an incremental 5% of market share. Why do that? Focus on the customers you’ve chosen to serve and focus on profitability; don’t torque your business away from your core value proposition, he argued.

Michael Porter addresses this issue head-on as well: “The desire to grow has perhaps the most perverse effect on strategy… inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers. Attempts to compete in several ways at once create confusion and undermine organizational motivation and focus. Profits fall, but more revenue is seen as the answer… the growth imperative is hazardous to strategy.”

And this: “Gaining ten percent share in another segment where you have no advantage will often damage your profitability.”

You can set financial targets if you like. But a target cannot define a strategy. Strategy is about how you are going to fulfill a customer’s need in a unique way. You can then determine if executing the strategy will get you to your target or not.

Don’t allow yourself to chase revenue growth at the expense of lowering ROIC.

Chet Richards, a disciple of military strategist Col. John Boyd agrees: “The simplest business strategy is to grow: A competitor makes an acquisition, so we make a larger one… The idea is that once a company achieves sufficient market share, it can dictate the terms of the competition… Players using this strategy included such famous names as SwissAir, Enron, WorldCom, and AOL.”

Why is this important to emphasize? Because the early goal of startups is to get revenue. Until you have paying customers, you really have nothing at all. Startups need time to get to that point and, later, to profitability.

The moral is: go after the revenue when you have to. But whenever there’s a choice between mindlessly growing revenue versus protecting or growing profitable revenue, the latter must be your north star.

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There are 18 Sources of Competitive Advantage. Which Ones Do You Have? Are You Maximizing Your Use of Them?

The money was there, all that latent power… something waiting to be born, something sleeping. He cradled the unformed dream in his hands and wondered who to give it to.

— Ben Fountain, Brief Encounters with Che Guevara

Sources of advantage are a major component of Step #3 of the “4 Steps to Develop a Strategy”. As I wrote there, “true sources of advantage are ones you can invest in and they become stronger over time. As you increase their value, you can then leverage them for more products, which further strengthens them.” In other words (with apologies to bank robbers), having bags of money is not by itself a source of advantage. Nor is having anything that is equivalent to bags of money, such as a gold mine, a competitive advantage. If you purchase a gold mine, it has the net present value of all likely future mining profits built into its price.

However, if you use money to invest in a gold mine you are uniquely qualified to run, then you have a source of advantage. It’s only a source of advantage if you are a natural owner of the asset.

Sources of advantage also must be something you are uniquely good at relative to competitors. And they must help you win customers.

What are the unique technologies, skills, or resources you have that allow you to help your customers accomplish something 2x, 3x, 5x, or 10x faster, cheaper, or better than they otherwise could? They are the reasons that your customers are buying from you and that’s where your advantage lies. If you can’t think of what your competitive advantage is, start with the fundamentals: why is anyone buying your product? Why are they paying you at all? Are they paying you more than an alternative solution? If so, why?

Note that, for a startup, you may have some of these already or you may simple have a plan to acquire them quickly and then build on them. The main source of advantage for a startup is the ability to see the world in a new way and innovate quickly, unencumbered with the responsibilities of running a corporate machine.
Established companies, for all the other sources of advantage they may have (e.g., a large number of customers), often also have an unhealthy arrogance. They can only see their own machine. They rarely listen to upstarts… Microsoft underestimated Google, Blockbuster underestimated Netflix, and Western Union underestimated the telephone, for example.

^^ = Common for startups

Tangible assets (can be traded or bought, potentially)

  1. Product or service model
    • ^^ Unique data from your customers – and analytics built on it. He who owns the data owns the industry … Uber and Airbnb’s business model are simply to own the data about their markets and do not to own any physical assets (e.g., cars or hotels).
    • ^^ A dedicated focus on a specific user segment / specific industry. If accounting customers in all industries are being served one accounting software powerhouse, starting a new company that focuses specifically on accountants in one industry—such as healthcare—is an advantage. Especially if the needs of that industry’s users differ from the average needs and are thus being over—or under-served by the entrenched powerhouse. And especially if unique knowledge is needed to build a product for and serve that segment of users—knowledge that the founding team have.
    • ^^ Unique production and distribution model when entrenched competitors are locked into their old models, such as Dell’s approach of built-to-order and ship-direct-to-customer model when Lenovo and others were locked into building generic models and distributing through stores.
    • Difficult-to-copy or patented product components, especially when they integrate complementary products / multiple parts of a user experience, such as Apple’s iPod look-and-feel and integration with iTunes. A unique technical achievement that powers a new product.
    • Uniquely low costs to onboard and serve a new customer, such as TurboTax’s low cost to prepare tax returns for a new customer versus a local accountant who needs to spend an intro one-hour consultation to set up a customer.
    • High switching costs, such as Facebook’s ability to lock users into a network of their friends or medical device manufacturers’ ability to lock in surgeons who need to be re-trained to use a new device.
    • Being known and trusted for high quality on attributes that customers care about, such as Toyota’s long record of the low cost of maintenance.

     

  2. Customers
    • Access to your users. One difference between a two-year old company that has 500 users and a brand-new company with none is that the former has 500 people to guide them. Your users and buyers rarely have all the answers, but the ability to listen to their needs, challenges, and latent opportunities is an enormous advantage.

     

  3. Physical asset
    • Access to unique physical resources (for which you are the natural owner), such as a physical asset like an exclusive long-term lease on a gold mine or a long-term lease on a great restaurant location.

     

  4. Scale
    • Size and scale, but only if you can get lower marketing costs or higher purchasing power, such as a local company buying billboard space to drive sales to ten stores versus one store (lower marketing costs) or Amazon offering much larger book inventory than a local bookstore (thus earning higher purchasing power).

 
Intangible assets (cannot be traded)

  1. Product or service model
    • ^^ A unique insight into what creates value for a buyer or user that the company makes so central to their product and culture such that every new product / new product feature decision is viewed in terms of whether it adheres to this insight. For example, in a software company where number of clicks to achieve a task in their product is the central rallying point, every new feature will be judged against this metric; this ultimately leads to a product so optimized against this feature that the company may come to represent the best-in-class ideal of this.

     

  2. Team
    • ^^ A tightly-knit team with a culture of continuous innovation and hustle. In other words, a lean / agile / fast-product-feedback-loop mindset. Startups often have this; larger companies usually cannot. A strong and positive corporate culture, esprit de corps, and a pride in a company and its accomplishments are qualities that are so rare and powerful they deserve a spot at the top of this list.
    • ^^ Access to the unique knowledge of your team, especially as it develops unique insights over time. Knowledge and experience of the buyers and users you are selling to is especially important. Also valuable are experience with similar products and business models (e.g., B2B SaaS).
    • ^^ Ability to attract and retain top talent, such as top consulting firms can do. Part of this is a corporate competency in training and continual learning, which is increasingly valuable as employees move into new roles over time.

     

  3. Supplies / distributor relationships
    • Distribution or sales network / customer access, including partnerships, such as GE’s sales force that can take a new product idea into just about any company in the world quickly. One reason Amazon paid $1B for PillPack in 2018 was to get access to its pharmacy distribution rights it had established in all fifty states.
    • Supplier partnerships, especially exclusive ones.

     

  4. Scale
    • Network effects at-scale, including products that have fast-product-feedback-loops built into the product. Like Facebook and Waze, when your product strategy makes every incremental user add new value to the product for all other users, you have a powerful source of advantage.

     

  5. Market
    • Being a part of a disciplined market where the leaders don’t resort to price wars, such as real estate agents consistently charging 5% of house sale price. For most of my discussions on strategy, I propose building a new market, not joining existing ones. But even new markets will be ancillary to existing players. How well behaved are they? Well behaved markets are an amazing boon to their players. Peter Thiel, founder of PayPal, and an all-round powerhouse thought leader on startups has said, “corporate profits … are eliminated by competition.” Well, not necessarily. There are thousands of fund managers and investment advisors and most of them are very profitable. As important as the existence of competitors is how well-behaved those competitors are.

 
The strategist is always considering how to best leverage their sources of advantage
Steve Blank (who could be considered to be the godfather of the Lean Startup methodology) wrote about a process for finding strategic partners in his book, The Startup Owner’s Manual. While I like a lot of what he shares in the book, there is a sentence that should make a red flag go up in the mind of any strategist.

Explaining a way to organize a list of potential partners, he recommends creating a three-column table and to list each partner in a row. Each column would have a heading, he explains: “The headings are: ‘partner name’ …, ‘what they provide’, and ‘what we provide’. Don’t feel bad when the word money appears repeatedly in the third column. It’s fairly typical for startups, at least in their early days.” Now I think that’s a dangerous proposition.

When he says, “what we provide”, he is referring to what we (as a startup) can give to a larger potential partner, that they don’t already have. That’s another way of saying, “What are our unique sources of advantage?”

As mentioned earlier, money is not a source of competitive advantage, but even if it were, money cannot be your only differentiator.

Startups typically have a few sources of advantage, relative to larger companies: speed and agility of product design and launch, deep and focused skills in a particular technology, the sheen of a company fully invested in a new innovation that will catch the attention of potential customers, and a laser-focused team, for example.

Your sources of advantage are the strengths that you can offer to any potential strategic partner even in the earliest days of your development.

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Should You Sign Your First Customers for Free?

It’s been my experience that you learn much more when serving your first couple of clients that any other point in your product’s or company’s trajectory.

Before we signed our first customer in a recent company of mine, for example, we had a data request with clean columns in a well-thought out layout. But when the first data came in from our pilot sites, our grand visions immediately deflated in exasperation. Whatever product connectors we had built had to be rebuilt. And further, over time, we learned that even the idea of sending a data request wasn’t the right approach for our customers; by our fifth customer we learned enough to just send them specific scripts that they just run on their databases to generate what we need.

Should you serve your first customer for free?
Because your first few customers will be so valuable in helping you shape your product, for the right early customer, a free pilot can be a win-win. The investment the customer makes is with their time, feedback, and patience. The value of their time cannot be under-estimated; it is a form of payment. People value their time most of all and they prove they value your product by spending time implementing and using it, even if they aren’t also paying.

Who comprise the right first set of customers? I wrote in a prior article, “Market leaders who are also Innovators are the most powerful first customers: be willing to invest as deeply as you need to sign them up—their reference-ability is what will allow you to sign Pragmatists up later on.” Also, because seeing how they use the product, getting their feedback on it, and filling in gaps with customer care is so critical early on, having your first customers local may be important.

Should you offer consulting as an early “product” while you are building your real product?
It seems like a good idea but hasn’t worked well in my experience. In my current company, we needed a few months to get our MVP out the door and wanted to start interacting with customers before then. We show those early potential customers paper versions of our product and built ad hoc analyses for them that were focused directionally aligned with the product we were building. Here are the pros and cons of that experience:

Pros

  • Offering consulting services before the product was ready allowed us to start talking to potential customers early in the process, before we had begun building any product
  • This may work generally if you can offer analytical consulting that matches the basic types of analytics your product will do; you can get early feedback before productizing it.
  • This allows you to get access to data early—which can help build benchmarks.

 

Cons

  • It’s as hard for people to sign up for and use consulting as it is for them to use your product
  • Their feedback on your paper analytics reports probably has marginal correlation to their feedback on your real product since they’d use it in a different workflow and mindset
  • People respond better to products than to consulting: they can look at a product demo and imagine it and how they’d use it; consulting requires them to figure out what to do with the output.
  • The largest “con”, though, is that doing this puts your potential customers (whether or not they sign up for your consulting project) in the frame of mind that you are a consulting company. It’s even harder to get another meeting later and re-frame that you have a product.

 

 
Converting a free pilot into a paying one
This has seemed harder than signing a new client. The challenge is a stakeholder who brings you in for a free pilot early on is an “Innovator” (discussed a few articles ago on building a sales engine), from Geoffrey Moore’s book “Crossing the Chasm”. They want to be the first to try out an apply new technologies but they may not have the ability or confidence to convert that type of pilot into a business case to win over others in their organization who are “Visionaries” (who need a clear business case for funding) or worse, “Pragmatists” (who need case studies and lots of proof points; who are never going to do a deal with a startup).

The solution is to work through your original stakeholder to create other senior relationships in their organization and, with them, adjust your messaging to better align with their priorities and their need for a strong business case.

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All books and other resources referenced in this article

PayPal’s Strategy and How It Evolved Over Time

This example is from Jessica Livingston’s interviews with startup founders, Founders at Work. What her interviews reveal overall is that buyers, value pools, and approaches can change in startups’ early days as founders validate market needs and better assess their abilities to serve those needs.

It’s clear that most founders think deeply about the buyer, the value pool, their unique approach to addressing it, and make conscious decisions to evolve the elements as needed. In contrast, the technological insight and/or the source of differentiation / competitive advantage they leverage tends to remain constant throughout the evolutions.

Here’s PayPal’s strategy circa 1999, at the time they were funded by Peter Thiel. I’ve put it into the structure that I introduced in the “4 Steps to Develop a Strategy”.

PayPal’s Strategy (1999)

  1. Buyer + $ value pool. What’s the high $ pain point or unmet need?
    • Companies looking to add security to applications running on PalmPilot but who can’t build all of the crypto algorithms themselves. For example, to replace the credit-card-shaped one-time password generators or communications applications.
  2. How to unlock the $ value pool. What’s keeping the value pool from being unlocked? How unique is our chosen method?
    • Ability to create crypto algorithms is complicated, only academics know how to do it (and they have no interest in commercializing it)
  3. Why us? What are our sources of advantage? What trends will we ride?
    • Founders’ expertise in building complex algorithms, e.g., crypto libraries.
  4. User + how we will delight them. What are the two to five unique and pivotal decisions that will define our solution?
    • Making these complex crypto algorithms plug-and-play for the developer and invisible and seamlessly integrated into the developer’s product for the end user.

And here’s PayPal’s strategy circa 2000, after converting the above crypto libraries into a product that allowed PalmPilot users to beam money to each other … and then getting a lot of excitement from eBay users who started testing out a website-based version that PayPal put up as a demo:

PayPal’s Strategy (2000+)

  1. Buyer + $ value pool. What’s the high $ pain point or unmet need?
    • Individuals who want to transfer money to each other, e.g., eBay buyers and sellers
  2. How to unlock the $ value pool. What’s keeping the value pool from being unlocked? How unique is our chosen method?
    • Taking credit card / bank account payments online results in significant loss due to fraud. Other competitors were folding because they could not sustain the losses. PayPal invented a way to automate the prioritization of potential fraud and inform a human-based team that could then attempt to recover losses or turn it over to the Feds.
  3. Why us? What are our sources of advantage? What trends will we ride?
    • PayPal’s ultimate core expertise is in developing and building an algorithm that would predict the fraud risk of a transaction, determine whether to accept the risk. Also, the post-transaction fraud recovery tool.
  4. User + how we will delight them. What are the two to five unique and pivotal decisions that will define our solution?
    • Making the complex fraud prediction algorithms seamless for the end user.
    • Making the complex fraud recovery tools seamless for the inhouse fraud recovery teams. (Note these tools were apparently so useful that the Feds commissioned to use them on their own datasets).

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Do Your Marketing, Sales, and Product Materials Tell the Same Continuous Story?

From a users’ perspective, the value in having the messages they experience from your website and other places in the marketing and sales process aligned to what they experience when they use your product is self-evidently valuable. It’s one of the most powerful ways to encourage usage and adoption.

But as a business builder, thinking through the long arc of the story and making sure you are using the best ideas from each step throughout will help you organize your team’s thinking around a consistent direction.

In my current company, we built our marketing and sales materials early on. We iterated through them many times and got a version that worked well. Our marketing materials got us a first meeting and our sales materials typically won over the room and got us a follow-up meeting.

But sometimes when we presented to a room full of potential users, people were skeptical.
Users sometimes said, “this sounds too much like a problem to solve the administration’s needs. Isn’t it just one more thing I need to do?”

We debated for a long time internally whether we should tell our story from the buyers’ or users’ point of view. It was an unanswerable question until we thought about how the marketing and sales messages transitioned the customer into our client services team and their onboarding process.

And then the answer became obvious: keep the user as the constant focus.

It’s natural to want to tell two different stories

You have a buyer and users. When talking to the buyer, you may want to talk about their high $ pain point, how your product solves it, and the ROI you generate. When talking to users, you may want to talk to them about what they’re trying to accomplish now and how you help them do that faster, better, and more holistically.

In our early sales pitches, we told both stories but started with the buyer. Why not? We were often in front of the buyer and wanted to get to how we solved their problem.

A few months later, as we brought clients on to the product, we built out an onboarding function inside the product itself (such as popup boxes that greet new users to our website showing how to use it) and the client services messages we would use when reaching out. We invested in those materials because we knew adoption and utilization of our product was the most important metric that we would judge our own success by. As discussed in earlier articles, those materials were built based on the latest thinking we could find from companies like Zillow and LinkedIn and others.

Those materials were all about the user. We started reminding them of their buyer’s goal and giving them a couple of options to choose from for their personal goal as a user.

Our product could do a lot and we knew trying to teach them how to do everything right away wouldn’t work; users can’t take a complete career journey in a 45-minute training session. We wanted them to tell us how we could help them best and work with them to adopt our product to do that task.

Those options we gave users to choose from were the major use cases we solved for them. That was how we picked up from the sales process and led our users through product onboarding. For us it was an “Aha! moment” when we realized that was the story we should have been anchoring on all along through the buying process. Why would they want to see any different message when they visited our marketing website, for example? Everything should be reinforcing and consistent.

That doesn’t mean we decided not to address the value proposition to the buyer and the ROI. Just that we always led with the user and the use cases we support them on. The buyer would then have immediate confidence that users would be engaged and we could then share how usage drives the outcomes and ROI they needed to see.

Customer Success’s main role is threading the needle

…Between executives’ goals…
Every three to six months, our Customer Success team meets with the Executive team and checks in on their objectives. Not necessarily their objectives with respect to our product, but their goals overall: what keeps them awake at night? Are the outcomes that they bought us for still the most important for them? If not, what are the new ones? If they have changed, we change our coordinated goals to reflect. Usually the outcomes are stable, but the messaging and situations change.

For example, improving employee engagement in hospitals is always a top priority for HR leaders. But every few months, the specific forces and challenges change. In one year, the hospital may be extremely busy or navigating a pandemic, in which case, their focus is on alleviating burnout of their team members. That ultimately rolls up under the category of employee engagement, but it is a specific theme, a specific message, and a specific focus. In other years, it may be an increase in new hire turnover that is causing them to re-imagine their new employee onboarding program and the focus may then be more on a specific demographic of employee.

…And individual users’ goals
Our Customer Success team also spends a lot of time talking to our users. What are they trying to accomplish? What are their goals? What does our product help them with? What are the top use cases that they would recommend to their colleagues that they use our product for? Listening to them explain those things, in their own words, allows us to sharpen the way our teams talk to other users.

The connection between the users’ and executives’ goals may appear different on the surface, but they are often just different levels of abstraction. Users may be focused on finding an “easy button” solution to completing the new hire check-in processes given to them by the executive team. Or they may see the symptoms of burnout (e.g. employees increasing their sick leave) and talking to them about how we can solve that may get their attention much faster than talking about how to solve the issue using more abstract terminology.

Focus on the user, their concrete needs, and the story that works with them. Then take that story and abstract it up to as examples to executives about how you’re supporting in specific ways, their more abstract objectives.

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How to Prove that Your Product is Creating Impact

This is Part 18/18 in the series “How to Build an Innovative New Product or Company” on the topic of how to measure the value and ROI that your product is having for your buyers and users

Consider a product that helps prevent patient falls in a hospital. It is bed alarm that alerts the nurse when a patient is shifting their weight so the nurse can assist the patient who may be trying to stand up, thus reducing the risk that a fall will occur.

Further, imagine that, before implementing ‘Fall Safe’, a particular hospital had 5% of patients fall during their hospital stays. Then that hospital implemented ‘Fall Safe’ in 2015 and falls went down in many of the departments. Over time, falls across the hospitals went down to 2.5% and held steady.

How do you take credit for holding the fall rate at 2.5%? If your product wasn’t in use, wouldn’t the rate go back up to 5%? What if the hospital claims they’ve done other things since 2015 that contribute to the 2.5% level? What if the hospital is set to renew their subscription with you and wants to know what improvement you’ll make beyond the current 2.5%? In other words, their expectation might be that 2.5% is now the baseline and your product will need to move beyond that to be considered a good investment.

What if the severity of patients increased during the past year and their fall rate went up to 7.5%, but you believe it would have gone much higher had it not been for your product?

If you want to impact an outcome metric, you need to communicate that outcome metric to the buyers and users of your product. Ideally, you’d compare it to a target. In this example, how many falls has the hospital avoided this year? What’s the cost avoided from doing so? For each department, how are they doing? Are they meeting their target? Can the product itself communicate this or is it better to have a monthly email or meeting where this is shared and explained?

Create an index that your customers will need to rely on you to provide, that they will refer to often, and that the use of your product is the primary mechanism they will use to improve it

You may have to create your own metric that your buyers believe is a leading indicator of the actual outcome metric; this is especially useful if the real outcome metric is rarely measured or conflated with noisy events.

Customer acquisition via marketing is a good example. Companies spend a lot of money on marketing efforts (e.g., visiting tradeshows or running magazine ads) but struggle to know whether current efforts are putting them on a path towards the future sales they aspire to. So marketing firms have created proxy metrics, such as the open rate of email advertisements that they send. It works great as marketing team members can focus on increasing it every day. They know that if they do that will, it will improve total sales, which is the ultimate outcome, but may not respond on a daily basis to their efforts.

Proxy metrics should (a) be easy to measure, (b) be concrete and stable, (c) correlate to / predictive of the main metric, (d) show you how to hone your actions and efforts in the near-term, (e) adjust as you take those actions, (f) be a clear measurement, not a “black box”, and (g) ideally be on a scale of 0-100 where 100 is best. Net Promoter Score (NPS) is a good example; it has been shown to predict lifetime customer value and renewal rates. Can you create a proxy metric that becomes the de facto standard for your industry?

Can you aspire to continuous improvement? Should you?

Continuous improvement, such as the Toyota Production System or airline safety reporting system enjoy, is a noble goal for a product. If you’re ambitious, you don’t just want your users to try your product; you want them to use it, see an improvement in their goals, then use it more, and over time see it revolutionize a major part of their lives or careers for the better. This can’t happen from a point solution; rather, only from a cultural change.

If you aspire to continuously improve a metric, I think you then need to consider how your product fits into the larger ecosystem. You may also need a larger client care team to make sure that culture and behaviors are being built and reinforced around the product.

What if your product improves outcomes … but other forces at work muddy up the outcome metric so it’s hard to tell for sure?

One thing we do at my current company is to split our user base into two or three categories at each client, based on usage: superstars vs. on-track vs. lower users. We then look at the changes in the outcomes metrics for each of the three cohorts every few months. If the overall outcome metric is improving for the highest users, is stagnant for the middle users, and is deteriorating for the lowest users, you can easily see the impact that your product is having, assuming all other forces are affecting the three groups equally.

What if your product improves outcomes … but your users revert that improvement by using the improvement as an excuse to relax other efforts?

Malcolm Gladwell shares the insight that more pedestrians are killed crossing the street at crosswalks than they are at other locations. Overlooking the mathematics of it (e.g., part of the answer is that many more people try to cross at crosswalks), part of the reason is that the crosswalks provide a false sense of security. The crosswalks reduce risk, but that risk reduction is then lost due to more careless actions by the pedestrians.

The crosswalk is a “product” and it is only half of a pedestrian safety solution. It needs public awareness and other supporting systems. For example, statistics on a signs posted at each crosswalk warning of the number of pedestrians killed at crosswalks might help reinforce the need for continued vigilance.

In conclusion…

You have a great product, you have happy users, and you’re making an impact on the world. The final major step is to document that impact and prove it to the world. Focus on the outcome metric that you want to improve. Make sure that your product and customer success team collectively can own as much of the influences on that metric as possible. Work back from that larger outcome metric to create proxy metrics that provide proof of real-time progress. Find ways to show that your highest users are making the most progress. Most of all, keep it simple: you may spend all of your life thinking about the details of these outcomes, but the impact has to be clear and unequivocal to any skeptical stakeholder taking a cursory glance.

 

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All books and other resources referenced in this article

 

Can You Scale Your Company Without Losing Your Identity?

This is Part 17/18 in the series “How to Build an Innovative New Product or Company” on the topic of how to scale up a product and company that is working for its early customers

Scaling has many challenges, but they are ones you might call “champagne challenges”. Not dissimilar from diamond earrings scratching your new iPhone, scale challenges are the function of some success.

Humans do a particularly terrible job scaling things that work in small quantities. We took strawberries, tomatoes, and wheat, for example, and created harsher versions of them because we prioritized the ability of crops to withstand transport to the grocery store and create a profit above all else.

So how do you take something that works well and grow it so it will work well for many more customers, with much less human intervention, without diluting your product and service?

Scaling is the process of taking what you do today—both what (1) humans and (2) machines do—and simplifying, modularizing, documenting, and replicating so that it can be done for more customers with less effort.

On the machine front, I’ve spent a lot of my career building analytics prototypes that power the first couple of customers. Then we bring on engineers to figure out how to rebuild it for real. Platforms like Airbnb’s open source AirFlow exist to help scale and automate data flow processes.

The people front is harder. How do you figure out the exact steps, business logic, decisions, and judgment that employees make on a daily basis which result in iconic customer care—and grow it when those employees are no longer able to do the role at scale? Done poorly, bureaucracy and red tape creep in, slowing down activities and extinguishing any remaining lifeforce from your company.

The values that incur costs are the ones that will outlast you

I’ll spend an upcoming article on this thought, but the message is simple: if the founding team has values, they represent and stand up for those values, then others who join will become disciples. One test to see the values that the founding team promoted is to look at what the average employee values when you have fifty or hundred people in the company. The values that emerge can just as easily be destructive as constructive if they are not thoughtfully put in place. The values that demonstrate costs are the ones that define you. When a company is willing to part ways with a superstar but culturally offensive sales leader, every employee notices.

A checklist for spotting bureaucracy

An early Amazon employee, John Rossman, wrote a checklist in his book The Amazon Way about the keen eye Amazon users in spotting and avoiding bureaucracy—as it has scaled:

You know that bureaucracy has crept into your business processes when …

  • The rules can’t be explained;
  • They don’t favor the customer;
  • You can’t get redress from a higher authority [or said another way: if the rules set up an unfair or sub-optimal situation and there isn’t a simple process to correct and set it right from an authority with a global perspective];
  • You can’t get an answer to a reasonable question;
  • There is no service level agreement or guaranteed response time built into the process;
  • When the rules simply don’t make sense

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All books and other resources referenced in this article

Take a Lesson from Google, Intel, and Others … Use OKRs Instead of Product Roadmaps

This is Part 16/18 in the series “How to Build an Innovative New Product or Company” on the topic of using quarterly, bottoms-up, transparent Objectives and Key Results as an organizing principle

OKRs are a simple data-driven organization platform created by Andy Grove of Intel and championed by Google, among many other well-organized companies in recent years. John Doerr was the glue between Andy and the rest of us and John has been OKR’s greatest evangelist. I collected many of the ideas here from his book, “Measure What Matters”. Doerr credits the existence of OKRs as the system that allowed Intel to quickly rally around a competitive crisis against Motorola in 1980, leading to Intel’s dominance of the CPU industry for the following twenty to thirty years.

OKRs are not about adding administrative work. You can create yours in only a few hours per quarter if there is already a clear corporate direction in place. Nor are they about signing up team members for superhuman accomplishments. They are simply about making sure that everyone gets the greatest leverage from their efforts.

Progress on objectives and key results should be tracked and shared weekly as green (“complete” or “on track”), yellow (“updating or needs attention”), or red (“is this still valid? Should we drop it?”).

At the end of each quarter, progress and notes about each objective and key result are documented. Google measures progress against each item on a percentage basis at the end of each quarter: 70%-100% is green and 0%-30% is red. Notes allow teams to adjust progress beyond the numbers. If the goal was a hundred sales calls, but you had eighty calls with great follow up, shouldn’t that count as a complete success?

John Doerr has a saying, “We need teams of missionaries, not teams of mercenaries.” By giving teams a business objective (e.g., “decrease customer onboarding time by 50%”) instead of a product roadmap outcome (e.g., “deploy onboarding tutorial”), you are motivating and empowering everyone in your company to be an imaginative contributor in the pursuit of customer value, instead of deploying them as a blunt object in building what the leadership team dictates.

The connection of OKRs to strategy

In the “4 Steps to Develop a Strategy”, I outlined a process for developing a corporate strategy and gave the following example for Southwest, of which I’ll re-create Step 4 here:

Southwest Airlines’ Strategy (circa 1970s)

  1. User + how we will delight them. What are the two to five unique and pivotal decisions that will define our solution?
    • Limited passenger services
      • Such as no first class; no frequent flier miles; open seating/first-come-first-on; passengers cleaning up after themselves to speed up gate turnarounds; no meals
    • Be lowest cost
      • Such as flying one aircraft type, the 737; thus, also not needing to train and certify pilots on other aircraft; No travel agents or 3rd party travel websites—you can only book with the airline thus avoiding royalty fees.
    • Highly agile and invested grounds and air crew
      • Such as personality-infused pre-flight safety presentations; employee stock ownership; ground and flight crews well compensated; crews allowed to join unions; crews empowered on any safety issue. Let employees be our “eyes and ears” for new ways to continually improve our service to customers.

Step 4 of a strategy has several business objectives for the company. These can become company objectives in annual or quarterly OKRs. Or, more likely, the company’s OKR objectives would be the next level of operational detail behind these, evolving them over time while the strategy remains more consistent.

For example, “Let employees be our ‘eyes and ears’ for new ways to continually improve our service to customers” could be a corporate OKR objective that hangs around for a long time with evolving key results: hiring the right people, training them, providing the tools for them to perform this role.

In my experience, startups (perhaps all companies) have four objectives and so OKRs should roll up to them, even if they don’t explicitly claim to do so:

  1. Serve more customers
  2. Provide the best service we can to those customers, thus driving more usage and value; this also increases the likelihood of renewals / repeat purchases
  3. Conduct prudent cash management
  4. Be a preferred place to work, grow, and develop a career / craft

 
How to create OKRs
OKRs…

  • Should be created by each employee for themselves every quarter. At the same time, prior quarter’s OKRs should be evaluated. In some cases, quarterly and annual OKRs may exist in parallel. Annual OKRs are released a couple of weeks before the year. In the first couple of weeks of a quarter, teams develop and communicate their quarterly OKRs.
  • Should be big ideas that move the business forward and that customers will care about.
  • Exist for the company overall, every department, and every employee. Team leaders should have OKRs similar to, but not identical to, their department’s objectives.
  • Are public among other employees in the company. Post them on an employee’s office door or make them searchable online. Because your objectives are public, it can help you say no to others’ requests for your time that are outside their scope; your priorities are clear for everyone to see. (That is not to say that employees shouldn’t help each other achieve their OKRs.)
  • Are a mix of top-down (e.g., from your manager) and bottoms-up (e.g., from you or your team members)
  • Are divorced from compensation. They should be used to motivate big goals and structure a path to success, not for creating criticism and sandbagging.
  • Objectives and Key Results should all start with a verb: Establish, Deliver, Test, Get, Develop, Publish, Prove, Prepare, Recruit, Hire, …

 


 
OKRs have two components

Objective: What you are trying to achieve

  • For example: “Release the first version of our email product,”
  • Three to five objectives per quarter. What you say “no” to is as important as what you say you will focus on.
  • Most are “committed objectives” that you’re expected to achieve. Some can be marked as “aspirational objectives”. The latter are pure stretch goals that are there to push the boundaries of what may be possible. Committed objectives should consume all the team’s resources. Aspirational ones go above and beyond expected abilities and may not get completed and thus would carry over to the next quarter.
  • Only list what needs to be given emphasis. Do not include all ongoing aspects of someone’s job. For example, don’t list “conducting weekly 1-1 review sessions” or “managing daily standup meetings”.

 
Key Results: The measurable steps you will take to achieve the objective

  • For example: “Deliver the three new features to staging by March 1″
  • Three to five key results per objective.
  • Measurable = has a number in it. There must be evidence of completion, such as a link to a product or document created or the results of a test report.
  • Timebound = when applicable, has a target date in the quarter for delivery, or end of quarter is implied.
  • Flexible = key results can be edited/added/deleted over the quarter as new information comes in
  • Managers’ key results often become some of their direct reports’ objectives.
  • Accomplishing all the key results should trigger success for this quarter on the objective, though objectives may hang around for multiple quarters if needed.
  • Quantity goals should be paired with quality goals. For example, if having a hundred sales calls is one key result, having them lead to twenty in-person meetings could be another.
  • Identify dependencies early on: does one team’s key result require another team to contribute? If so, is completing this in the other team’s OKR?

 

OKRs can help keep multiple layers of a larger organization aligned to a shared strategy

I have been asked if a corporate strategy and product strategy are the same. If a company has multiple products, do they all have individual strategies? How do strategies roll up or down?

As my experience is with companies under 500 employees (and mostly thirty to sixty), I have to defer to others on what it takes to set a strategy within larger companies. P&G, for example, have a corporate-level strategy, a category-level strategy (e.g., skin care), and a product-level strategy. The individual strategies of which customer to target and the specifics of how to win will vary, but the core “2 to five unique and pivotal decisions of our solution” (which P&G refer to as “reinforcing rods”) remain consistent. P&G doesn’t use OKRs, though they use a similar process. Either way, those “reinforcing rods” can help OKRs remain consistently anchored in the corporate strategy even at lower levels of the organization.

OKRs help keep companies from falling into the waterfall product development process—and thus keep the focus on fast-product-feedback-loops

Be thoughtful and strategic about setting objectives. They can (and should) persist for many quarters, if needed, to fully realize them. Jeff Bezos, Amazon founder, says, “We are stubborn on vision. We are flexible on details.” He could have also said, “We are stubborn on objectives. We are flexible on key results.”

In other words, choose carefully what is most critical to your success and anchor your objectives on them. Then iterate your key results every quarter as you make progress and learn. No one can predict how many iterations a new innovation will require before it will work.
Marty Cagan, Founder of Silicon Valley Product Group and author of “INSPIRED: How to Create Tech Products Customers Love” gives an example that objectives should be business results, not tactics; the former are only mechanism by which a company can measure progress. For example, “implement a PayPal mechanism in our product” should not be an objective. It is a potential way to reach an objective that may or may not work. “Reach more customers outside of France” is a business result of which a PayPal integration may be a component.

At the end of the video of Marty’s talk, linked below, he discusses how using OKRs is the more effective antithesis of a standard product roadmap that most (non-startup) companies use today. A product roadmap is where the executive team provides ideas, put ideas through a business model prioritization process, create requirements for each item, build and test, and finally, months later (and thus far with no user input or feedback), deploy, market, and release the features. That process is all about features and is slow. OKRs re-orient teams to be about business outcomes.

For startups, consider setting up OKRs in terms of learning a set of lessons
Tom Chi, a product management rapid prototype evangelist (formerly from Google X), advocates for a culture of learning. Part of that is to test out ideas as quickly as possible and create Key Learnings from the experiment, instead of debating and choosing from within closed-door meetings. Key Learnings are actual test results of the types of decisions that otherwise would be argued about by non-users prior to building something. Why not just build it and find out the answer? In the video linked below, Tom calls these closed-door arguments a fallacy—looking for “the truth of the invention that hasn’t been invented yet.”

Setting up a key result in terms of Key Learnings can be especially powerful. A key result of “Test twenty new prototypes and generate ten new Key Learnings by Oct 1” is great, for example.

. . .

All books and other resources referenced in this article

How the Patriots Won Superbowl 51

The one chart that shows how they pulled off the greatest comeback win in sports history

A recap

The New England Patriots played the Atlanta Falcons in Superbowl LI on February 5, 2017, the final game of the 2016 NFL season. The Patriots were down 21-0 with 5 seconds left in the first half when they finally scored 3 points. The score was still lopsided at 10 minutes left in regulation time when the Patriots kicked a field goal, taking the score to 28-12.

At this point, it was reported by statisticians that the Patriots’ chances of winning were about 0.3% (though anyone who has seen Tom Brady and the Patriots play a fourth quarter should have been skeptical about those odds). I had a Boston-based colleague who was talked into flying down and buying a ticket to the game by a friend of his; a Patriot fan, he was sitting in his seat at the stadium cursing the friend and searching for earlier flights home at this point.

The Patriots, down by 16, then pulled off an incredible succession of plays: a sack on Falcons’ quarterback Matt Ryan that led to a fumble, which Brady and the Patriots then took down the field for a touchdown. They made a two-point conversion (in itself a rare event), then held the Falcons, got the ball back, drove 91 yards down the field, scored another touchdown, and capped it off with a second two-point conversion to tie the game with less than a minute left. The Patriots then won the coin toss in overtime and Brady completed one pass after another leading to a game-winning touchdown a few minutes later.

The final ten minutes was flawless execution, pass completions, and scoring… which makes the question of why they weren’t able to do anything in the first thirty minutes such a compelling one.

What struck me, as I was a Boston resident at the time and had seen many similar great comebacks engineered by the Patriots, was how typical this was for the team. It seems as natural to watch the Patriots struggle early as it is to watch them easily assemble a series of long and flawless scoring drives later in a game.

The one chart that explains it

The Falcons played man-to-man defensive coverage against the Patriots. This worked well early in the game when they were able to cover them and stop Brady’s ability to complete passes. But in a game that lasted almost four hours start-to-finish, they became exhausted chasing around fast receivers. As one commentator wrote after the game, “keep a defense on the field long enough and eventually it’ll break.”

The top chart below shows the average number of yards the six most-mobile Patriots offensive players ran during the game, the same for the six most-mobile Falcons defensive players, and below both of those, the total actual yards gained by the Patriots offense. The x-axis is in terms of actual time: from start to end, the game ran about 230 minutes, though it included interruptions, such as about 30 minutes for halftime.

What you can see is that the average Patriot offensive player ran about 1,000 yards compared to about 850 for the average Falcon defender. The Patriots picked up 543 yards as a team.

In other words, the Patriots made the average Falcons secondary defender run 56% more yards than they picked up.

In bottom chart shows the same thing for when the Falcons were on the field. They picked up 351 yards total in the game which was almost exactly how much the average Patriot secondary defender ran.

In short, the Falcons defense was tired out by the end of the game. The Patriots employed plays that made them move far more than the Falcons’ play calling made the Patriots’ defenders move.

Chart showing how much the Falcons defenders ran during the game
(original analysis by watching the game film)

At first glance, you might consider that this shows a lot of inefficiency on the Patriots’ side if you consider how much the Patriots had to move to get the yards they gained. But since the Patriots’ individual movements has a direct relationship to how much the Falcons’ defense moved, the Patriots knew they had to move a lot as well. They were likely better conditioned and prepared for it over a long game.

The Patriots systematically invested in wearing the defense down from the beginning of the game and it didn’t fluster them that the return of that strategy didn’t start kicking in until they were down by many points with only a few minutes left to go: they knew that once they had the defense worn out, the rest of the game would be close to toss-and-catch for them.

One example that shows how the Patriots got the Falcons to move

The first play in overtime is a good example of how the Patriots caused the Falcons to run. The Patriots (the ‘O’s) lined up with a running back and three wide receivers. The Falcons had two defenders in the backfield (about 20 yards behind the line) and other defenders covering the three receivers man-to-man. If Brady had thrown a 20-yard pass, these deep defenders would have run very little: they would have been ready and waiting for the ball while the Patriot receivers ran the 20 yards to get to them. But Brady threw a short pass to the left to the running back (shown in blue) who then ran a short few yards along the left sideline. This drew five of the defenders over—with the two deep defenders running at least 30 yards to get to the ball. The play ended in a five-yard gain for the Patriots and 20-30 yards run by each of five defenders on the Falcons.

What does this mean for strategists?

In football, the objective is to defeat your opponent. In business, the goal is decidedly different: to better serve your chosen customers and continue to delight and create value for them.

But the Patriots’ strategy still has relevance. I think there are two lessons.

First, play the long game. Invest today in small events and decisions that add to give you advantages months and years in the future. If you can create a platform where you are creating value for your customers 18 months from now as easily as the Patriots were picking apart the Falcons’ defense in the final few minutes, wouldn’t you? Even if that means taking actions today that may seem wasted in the near term when things don’t easily go in your direction.

Second, mobility is an offensive asset. If you consistently move fast enough, competitors will be unable to keep chasing you. Mobility is one of the greatest sources of competitive advantage. It’s perhaps a bit of a stretch to compare the Patriots’ physical mobility with a company’s ability to constantly iterate and improve its products, but both are the anti-thesis of sitting still. Spend your time finding new sources of value for your customers not building walls (e.g., patents) around immobile product features that haven’t and won’t ever evolve.

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All books and other resources referenced in this article