The Biggest Startup Strategy Myth (And How To Deal With It)
How The Way I Thought About Strategy Created Millions In Value
“We have a strategic plan. It’s called doing things.” — Herb Kelleher (Co-Founder of Southwest Airlines)
In my early years that quote hung in our office. I even remember an employee telling me that he wanted to work “more strategically”. I didn’t even understand what he meant. In my mind our company’s strategy was clear and only execution could make all the difference. My company nearly failed because of that lack of insight. But more in that later…
Nowadays I couldn’t disagree more with the quote, and I think it’s misleading for startup founders. It’s naive to think that strategy is a discipline only used by big companies and devised by overpaid consultants.
The strategy is the limit
Today I think about it this way:
Strategy determines the magnitude of any endeavour and execution determines the degree of achievement.
Success = Strategy (1–∞) x Execution (0–1).
Strategy is a number between 1 and infinity and Execution is a number between 0 and 1. That means no matter how well you operate, your execution will never outgrow your strategy potential.
Let’s say your neighbour opens a bakery shop to sell German bread in the Bay area. We give him a 5 on the strategy variable. He executes well (0.8) and gets an overall score of 4.
Since you like bread and have read Blitzscaling by Reid Hoffman you feel inspired and decide to start a nationwide German bakery franchise. I give you a strategy score of 500 because the venture has much more potential (let’s say 100x). But this also makes the execution much harder and you end up getting an execution score of 0.6. So, you end up with an overall score of 300.
What’s clear from this example is that the strategy determines the limit of what you can get. No matter how good your execution is, your venture won’t grow bigger than the initial strategy behind it.
How to use this insight?
Why, What, How?
As a startup founder you essentially have three types of questions to answer each day: Why? What? How?
- · The ‘Why’ is your personal reason for starting a business (your personal mission, goals, values etc.).
- · The ‘What’ is your strategy. For instance, do you want to open a single bakery store or a chain?
- · The ‘How’ deals with your daily struggles to execute that strategy. You’ll spend most of your time on the ‘How’ questions.
In my experience, the problem is that most founders tend to spend much more time on the ‘How’ and not enough time on the ‘What’, because the ‘How’ is more tangible and more pressing (employees wanting something, code that needs to be written, customer inquiries etc.).
So, what generally happens is that you start out with a strategic hypothesis but get tied up in the daily operations of running your business almost instantly. A lot of founders get stuck here and never return to the ‘What’ questions.
I was guilty of that behaviour and spent 100% of my time during the founding years of my first startup focused on the ‘How’ instead of reflecting on the ‘What’ because “our strategic plan was ‘doing things’”. I missed out on a lot of opportunities because of that.
Strategy as a process (opposed to “set & forget”)
I recently sat on a panel together with three highly successful internet entrepreneurs to discuss startup strategy in front of 70 young founders participating in the EO Accelerator program. All of us had built companies with several hundred employees and sold businesses for tens of millions of dollars.
What struck me was that although we had used completely different strategies to scale our respective companies, all of us had figured out a way to see strategy work as an ongoing process rather than a one-off activity. All of us held regular meetings with our co-founders and/or management team, dedicated to answering the ‘What’ question.
Good strategy, bad strategy
Regularly reflecting on strategy makes a lot of sense in the context of the following strategy definition I borrowed from the book “Good Strategy, Bad Strategy”:
Despite the roar of voices wanting to equate strategy with ambition, leadership, “vision,” planning, or the economic logic of competition, strategy is none of these. The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.
- Richard Rumelt, “Good Strategy/Bad Strategy”
According to Richard, a ‘Good Strategy’ consists of the following three components:
- A diagnosis of the status quo
- A guiding policy to reach a certain goal
- Concrete action steps to support the guiding policy
At this point, it’s clear why the reflection on the ‘What’ and ongoing strategy work are important. All of the three components can and probably will change over time as you gather more data. Especially in the early stages of a startup, strategy should be seen as a set of hypotheses that are improved through constant feedback rather than an unchangeable constant.
My own strategy shift
When I first started my company, RegioHelden, our plan was to sell Google AdWords campaigns to small businesses in Germany and manage them in an automated way. I’d give myself a rather low strategy score for this plan. On the one hand, we were addressing a big market, but on the other hand, we were only offering a niche product for very specific use cases.
I spent the first 4 years in the trenches of the ‘How’ working on executing the plan (acquiring customers, recruiting employees, raising VC etc.) and not thinking much about the ‘What’. That means, I basically never revised the plan until I realised that it wasn’t as good as I had thought. The main downsides of the strategy were dependence on one product, low margins, high customer churn and systematically increasing prices for supply. No matter how good our execution was, we couldn’t influence those factors much. And all of those things made the execution much harder compared to what we did later.
Taking a step back
Only when things had got pretty bad (millions of euros in VC burned, no profits, frustration because of all sorts of operational problems) did we take a step back and reflect on the ‘What’.
How we implemented a strategy process
We began to hold quarterly management meetings offsite where my COO and I would use a full day to reflect on the last quarter’s progress and try to focus on the ‘What’. We asked ourselves questions like:
- What did we learn from our customers?
- What has changed in the market?
- What did we learn from our competitors?
- What did we learn from our past initiatives/goals? What went well, what went wrong?
- How did our view on the strategic diagnosis and guiding policy change?
- Which action steps (OKRs) do we choose based on what we learned?
I wish I could say that we only talked about the ‘What’ questions. Unfortunately, we frequently found ourselves being drawn into the ‘How’ (both questions lie very close to each other). It takes a lot of discipline and practice to be able to distinguish between the two questions and stick to the former. But in the end, the sessions were still productive. Even if we only talked about the ‘What’ 30% of the time, that’s much better than not talking about it at all like in the first few years.
After spending the first day with the managing directors, we spent the next 2 or even 3 days with our managerial team (10–15 people) to discuss the ‘What’ questions and enter the operational ‘How’ world to define new quarterly OKRs.
Results of our strategy shift
These efforts led to a shift from a one-product company to a solution provider for various internet marketing products for SMBs in Germany. Today, RegioHelden is focusing less than 20% of its new business on the initial product (Google AdWords), has much higher margins and significantly lower customer churn. Based on that new strategy, we were able to sell the business to one of Germanys biggest media companies in an eight-figure deal. That would never have been possible with the first strategy, because we were too specialised to be an attractive acquisition target.
I hope my experiences help you to reflect on your startup’s strategy process! If you liked the article, feel free to share it with your network so that other entrepreneurs can enjoy the content, too. 🙏😊