(2022-12-08) Schmidt Strategy Systems Thinking And Being Wrong

Daniel Schmidt: Strategy, Systems Thinking, and Being Wrong. After a company achieves product/market-fit, things get complex.

Business complexity compounds with the expansion of the customer base, code base, and team. Developing a business strategy at this stage requires systems thinking. To make forward progress, you must find leverage points (bottleneck). Donella Meadows writes... (Places To Intervene In A System)

A difference between the top companies and the rest of the pack is that they think in terms of leverage points.

A classic example is how Netflix improved retention rates when they were a DVD business. Complex factors lead customers to stay or churn. But Netflix identified a key lever: the number of DVDs that customers add to their queue in their first session on Netflix (Aha Moment)

post-product/market-fit, intuitions can be dangerously misleading

for companies that are post-product/market-fit, there is an insanely exciting opportunity to make strategy more scientific.

inform strategy with scientific models of how a business operates; a set of hypotheses that you can test, invalidate and iterate on.

For post-product/market fit companies, strategy is based on a theory of relationships between work and metrics; a model that hypothesizes answers to these questions:
What are the lead measures (leverage points) of the critical business KPIs?
What projects can influence these lead measures?

we’ve had the privilege to watch a growing number of companies take a scientific disposition toward their strategy. Regan Davis, a product leader at SpotHero, is at the forefront.

Regan and I talked in-depth about what he learned from mapping their strategy in DoubleLoop.

1. Front-line contributors are happier when they have the business strategic context.

2. Building confidence in your North Star metric requires evidence.

Regan connected metrics on their map to their data warehouse, via the DoubleLoop.com Looker integration. The correlation scores generated by DoubleLoop confirmed that their North Star metric “Seamless Parks” was strongly correlated with their key business KPI, “Gross Order Value.” See the screenshot below.

Some folks had previously been skeptical that “Seamless Parks” was the right North Star metric for SpotHero. Seeing the positive correlation in DoubleLoop alleviated these concerns

3. Wins can be squandered without cross-functional alignment.

The product team at SpotHero released a feature that improved the results for parking facilities in their marketplace. When looking at their data-connected map in DoubleLoop, Regan was surprised to see that utilization per seller had not expanded as a result of this improvement.

utilization wasn't organically increasing -- instead, the opposite was happening Meaning other people/types did worse, because zero-sum?

4. Assumptions about leverage points can surprisingly prove false.

To make their North Star metric actionable, SpotHero identified input metrics that were intended to (1) be predictive of their North Star metric and (2) influenceable with projects

For example, the product team assumed that “First 3-Month Retention” was predictive of “Repeat Parks.” But it turned out that the metrics were inversely correlated, as shown below.

It’s important to note that changes in the market can change how your business functions. Since the impact of Covid has calmed down, SpotHero is now seeing a positive correlation between these metrics, if they account for a 90 lag, which DoubleLoop allows you to do.

5. System thinkers need to simplify how they communicate.

Regan made a simpler version of his strategy map to share with the executive team. It shows how every department contributes to the key levers that drive the business.