All strategy is a function of situation. Situation varies not only as a function of the individual company and market, but also of time. Remember that classic Silicon Valley strategy books were written in a different time and thus had some implicit assumptions built into them. For example,
- That you’re in a new category.
- That it’s a huge greenfield market, ripe for the taking.
- That once you took it, switching costs were high so you could keep it.
- That if you didn’t take it, somebody else would.
Be the gorilla of the space. Just ship in the tornado. Design the category to become king. Sound familiar?
Those assumptions were largely valid in the world in which I grew up: the dawn of relational databases, ERP, SFA, CRM, data warehousing, and business intelligence.
A subtle part of what drove those assumptions were some underlying facts about exits:
- If you finished win, place or show in the category, you could go public. You’d get a very different valuation multiple as a function of position, but you could make it out.
- If you finished in fourth or beyond, you’d end up a zombie. You couldn’t go public. But there were no PE firms to buy you (either standalone or as part of a roll-up). So, you’d limp along half alive, half dead with no real future.
- A zombie’s only hope was to be acquired by one of the few zombie-eaters like Computer Associates who’d put you out of your corporate misery — firing your exec team, your R&D team, several other teams, and then jacking up your annual maintenance fees faster than your captive customer base could flee.
That was it. So, you needed to play to win. The markets were new, huge, and greenfield — and there was nothing else to play for. Fight to win, hope that you do, and worst case end up in the top three. Otherwise, may God have mercy on your corporate soul.
But things have changed.
- Many software markets aren’t new or greenfield, but replacement.
- Markets aren’t always huge, but we have collectively realized you can build a nice business in what was formerly seen as a niche (e.g., account reconciliation).
- Switching costs aren’t that high. At least compared to their on-premises predecessors. Customers can change systems.
- There are more exit options available for both venture- and PE-backed, as well as bootstrapped, startups.
While there certainly remains a large winner-take-all world (e.g., AI) that dominates most Silicon Valley thinking, there is now also a parallel, more mundane world. The danger is when strategic thinking designed for one gets applied to the other.
That’s the distinction between “playing to win” and “playing to make plan.”
Because I grew up in the playing-to-win world, my inclination was to call the latter “playing to play,” but that’s too pejorative. It’s not playing for playing’s sake. But nor is it playing to win. It really is playing to make plan.
While I’m going to end up using the word “win” in two different contexts here, one of my favorite strategy authors defines strategy as the plan to win. That definition quickly begs the question: for us, in our situation, what is winning?
- For some, it’s changing the world by creating a new market and dominating it, delivering a 100x or more return to early investors. Here, winning means winning in the market.
- For others, it’s selling the company in 4-6 years for 3 times what the investors paid for it. Here, winning means making plan, because – trust me — you can be sure that any board-approved plan will put or keep you on track to deliver that 3x.
These are two different worlds populated with different companies, backed by different investors, and usually inhabited by different employees. Let’s contrast them by comparing the advice I give to CEOs in each.
The World of Playing to Win
When I meet a CEO in the playing-to-win world, I say things like:
- If you don’t win this market one of your competitors will. A first-place valuation can be 10x second which in turn can be 10x third. You must win. Second prize really is a set of steak knives.
- For the next several years, you need to get in touch with your inner barbarian. When the smoke clears at the conclusion of the hypergrowth phase, you must emerge the winner. After you’ve won, you can do TechCrunch interviews about the difficulty of maintaining your values during hypergrowth. But win first.
- Hire a VP of Sales who makes you uncomfortable. They should be so aggressive you get worried. You don’t want shipping bricks or channel-stuffing aggressive, but you do want a strong dose of, “you want me on that wall, you need me on that wall.” They should be respected more than liked, feared more than loved.
- You must build a hyper-competitive sales force who will win deals at nearly any cost. Turnover will be high. Consultative selling will be low. You’ll hear negative things about how aggressive your people are from time to time. That’s fine. You’re trying to win market share, not the vendor congeniality award.
- Even though you’re larger and growing faster than your competitors you need to plan to keep growing at extraordinary rates. You can’t let up and risk someone catching you. One day this will end in a phenomenal plan miss with internal chaos, but you won’t care. You’ll have won the market. Then you can clean up the mess.
- Make a loose discounting policy that provides sales with lots of discretion. Then throw that policy out the window when a deal heats up. You must win. You’ll be accused of slashing prices to sell a deficient product, but you don’t care.
- Market your leadership. Your top marketing message needs to be, “we’re #1” in any of its various forms. #1 is safe. #1 is the default choice. #1 has the biggest ecosystem with the most partners. Make competitors explain why a prospect should pick them despite the fact that the market has chosen otherwise. Crush any misguided claims that the company should be more humble or that some customers prefer to buy from underdogs.
- Track relative market share. At every QBR, put up charts that show relative ARR (triangulated in all likelihood), burn rate (ditto), and headcount so you can get a clear sense of who you’re gaining on and who is gaining on you. Yes, this is paranoid but you have to do it – to build the leader you must be realistic about where you stand, and to stay the leader you must detect and eliminate threats early.
- Blunt all competitive threats. You never want to let a smaller competitor – particularly a high-profile one — get a toehold in the market. So, when someone announces a new feature, you announce it too, ship an anemic version at once, and then round it out over time. Deny differentiation. “Grey” is your watchword. Any time a competitor tries to establish a black-and-white differentiator, you immediately grey it out. Eventually, they’ll stop trying to differentiate or their differentiation will become so esoteric as to be irrelevant.
The biggest risk here is losing, having missed the usually once-in-a-lifetime opportunity to define and dominate a category. For more on what to do in this situation – and how to blunt common tactics if you’re on receiving end — see my post entitled The Market Leader Play.
The World of Playing to Make Plan
When I meet a CEO in the playing-to-make-plan world, I say things like:
- Is the total available market (TAM) big enough to support your 20-25% growth targets over the next few years?
- If not, how can you expand into adjacent markets and/or offer new products that will help ensure you can grow?
- How can you get to a point of indifference between a 5x ARR and a 15x EBITDA valuation? (Hint: the answer is 33% EBITDA margins.)
- What is your plan to get EBITDA margins to 20% and then closer to 30%+ over the next few years?
- Is the operating plan achievable? Have you inspected all the key levers to ensure that we have a high chance of achieving it? To the extent we’re assuming changes to productivity metrics, what plans have you put in place to achieve them? Or are they simply wishes?
- Are you identifying and doubling down on success sufficiently in your go-to-market plans to increase GTM efficiency?
- Against whom are you competing, and do you have a playbook such that you know you can win your fair share of deals?
- Remember my definition of solution selling, that we can win the deal if we convince the customer of three things: (1) they understand my problem, (2) they can solve my problem, and (3) I want to work with them.
- Are you exit-ready? Have you done due diligence on yourself — and put plans in place to correct problems — so that you can be reasonably sure there will be no problems when one day an acquirer’s due diligence process occurs?
The biggest risk here is that your make-plan focus inadvertently becomes blinders to external changes in the market (e.g., a new, disruptive entrant) that can ultimately inhibit your ability to make plan going forward. Think: you know you need to grow at 20% and crank up EBITDA to 30%. But you forget to answer the question: why would anyone want to buy from us again?
The other risk is execution, which is why PE investors prefer working with proven leaders who they know and trust to take on these assignments. When you’re only shooting for singles and doubles you can’t afford many strike-outs.
When The Whole Category Just Wants to Make Plan
One interesting case is when an entire market goes into “make plan” mode. I’d argue that my old category, enterprise performance management (EPM), is largely there. All the major independent players are owned by PE firms and presumably more focused on making plan than on winning in the market. Thus, innovation has slowed. The level of competitiveness has diminished (also helped greatly by Workday’s acquisition of Adaptive Insights, a well-funded, aggressive, price-slashing competitor back in the day). It strikes me today as a sleepy category with a bunch of PE-owned firms all grinding out their “make plan” goals, hoping to get sold for 3x+ their invested capital in the coming years.
What happens then? Alas capitalism works. There is now a crop of VC-backed startups like Cube trying to fill the Adaptive void or Mosaic in financial analytics. France’s Pigment is the most aggressive grower and capital raiser in the space, but more focused on mid-market and the Anaplan void in enterprise. But there is a short answer to the question, what happens when the whole category ends up PE-owned and focused largely on “making plan?” A crop of new startups enter to seize on that opportunity. (And see my disclaimers as I’m working with several of them in different ways.)
Conclusions
Let’s wrap up this post with a summary:
- Back in the day, the only real play in enterprise software was playing to win.
- Much of enterprise software strategy was thus defined in books primarily focused on the problem of winning in large, greenfield markets.
- Over time, as new exit options emerged, companies could either plan to win or play to make plan. Both were good ways to make money.
- But those are two different worlds that require two different strategies and often attract two different types of employees.
- Your company will work best when you identify which mode you are in and then define strategy, hire employees, and run the company accordingly.
- Beware the big risk in each world: losing in the playing-to-win world, and blinders in the playing-to-make-plan world.