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Monetisation Matters Foundations: Getting fit, staying fit

Subscribe to Monetisation Matters here for in depth articles and actionable insights on Strategy and Monetisation.

Hey! It’s Andreas from Monetisation Matters, the home of in-depth articles and actionable insights on Strategy and Monetisation. Built for Founders, Product, and Product Marketing leaders as they navigate their $1m to $100m growth journeys.

This month’s article in my foundations series digs into fit. Why it’s much more than just product-market fit, how it relates to information, and why it’s easy to go down the wrong route and get stuck.

Why this is important

We obsess over product-market fit. But fit applies to the whole business, reflecting its likelihood to survive and thrive. Only a few combinations of resources, capabilities and focus will produce any growth, with even fewer producing exceptional outcomes. Unfortunately it’s not always clear which decisions will lead to an increase in fit; the environment can also change and destroy it.

Give me the highlights

  • Fit for purpose: Fit depends on the relationship between a business and it’s environment; not only on the product.
  • Information drives fit: The more you know about your environment, the better predictions you can make, and the better your fit.
  • Designing for the unknown: The more you explore, the better decisions you can make, but this has to be balanced with exploiting what you know.
  • Climbing the wrong hill: Most combinations of capabilities and focus are false summits, requiring a step back, or a creative jump to drive better outcomes.
  • Dealing with earthquakes: Environmental changes destroys fit - the path out requires a return to exploration and experimentation.

Fit for purpose

Survival of the fittest has nothing to do with fitness and everything to do with fit. Try driving an F1 car in a desert and you won’t get very far; take it to Silverstone, and it will show you what it can do. Performance depends on the relationship between driver, car, and track. The same goes for any business. Its performance is a function of how well it has been designed for its local, immediate environment.

Product-market fit has existed in the venture capital lexicon for decades, go-to-market fit, and scale-to-market fit entered more recently. The industry keeps having to add more variations of ‘fit’ because fit is an emergent property of the whole; something different from the sum of the parts. As with any design, improving one part is likely to force trade-offs elsewhere. Increase the functionality of your product and you may need to also increase the level of support.

Each location on the landscape above corresponds to a different configuration of the business in a given environment. For example, different technologies, focus, human capital etc. Height represents reward. The ups and downs of the landscape are a function of complexity and interdependencies within the organisation, and with its environment. Moving through the landscape, fit might initially decrease, but new invisible assets accumulate which helps it to climb higher peaks. Build a business on the edges and fit is elusive. Move towards the centre and things improve. The green path up is smooth; take the red path up and you’ll make it to the top with some bumps along the way.

Growth is a step function because small changes can lead to a significant improvement in fit. In the landscape above, a peak is created by a unique combination of customer and product focus. You may operate very close to that peak, where it is rather flat, but a small change in customer and product focus unlocks a sudden jump in fit. I see these jumps happen often. Small changes in the ICP, or small additions to the feature set can lead to significant improvements in fit.

“The value (“fitness”) of a given combination of building blocks often cannot be predicted by a summing up the component blocks.” - David Krakaeur

Information drives fit

Maxwell’s demon can bring order to chaos. The demon appears in a thought experiment where he controls a trap door between two chambers of gas. He survey’s the environment, measuring the speed of the molecules, and then uses that information to separate slow moving molecules from fast. His ability to build up information about the environment is what gives him the power to create order. The demon isn’t just a thought experiment; we can find him in the natural world. He encodes information about the environment into DNA through random variation and natural selection. The demon chooses what to keep and what to discard, improving genetic fit over time.

Information, which I wrote about here, and fit are analogous. Information about the market is encoded into the business; lots of small refinements in its processes and product drives fit. It’s not about market reports and strategy docs, but how the business interacts with its external environment. Businesses that know a lot about their environment can also make predictions better than chance. They know how likely they are to close a deal, how to make their customers successful, what features to build, and so on.

“Information and fitness are exchangeable. You have high information about how to do something, how to survive in the environment means having high fitness.” - Christoph Adami

Designing for the unknown

Designing a start-up to fit its environment is a bit like an F1 team building a car when it doesn’t know the driver, the surface of the track, how long it is, or the number of laps. Considerable effort needs to be spent on understanding the environment before making consequential design decisions.

Founders and their executive teams face a dilemma. Exploring the environment allows them to learn more and make higher quality decisions. But explore for too long, and they won't show the traction needed to secure additional capital. Exploit too early, and they could end up in a dead-end or burn through runway with nothing to show for it. Jeff Bezos framework of one vs. two-way door decisions focuses exploration effort where it matters. Some decisions are so consequential and costly to reverse that they deserve to be over-analysed. But most decisions are two-way door decisions, allowing more freedom to navigate the landscape and find the best fit experimentally on the understanding the decisions are reversible. Progressively building up a map of the territory is another way of limiting how much you need to explore whilst still making high quality decisions.

You don’t need to know much about the London underground to navigate it. Just a tube map. A simplified abstraction of the territory. Just as a tube map is helpful to decide what route to take, market segmentation guides decision making and strategy. It saves you needing to explore every potential customer in the market, instead capturing the differences that really matter. Focusing on one segment of the market (your ICP), provides the additional advantage of reducing the size of the landscape. With less to explore, you’re able to focus your efforts, and learn faster. The typical sequencing therefore proceeds as follows: broad exploration —> build a map of the territory —> focus in on a narrow ICP —> progressively increase exploitation —> explore the next opportunity and so on.

“Some decisions are so consequential, and so hard to reverse, they are one-way door decisions. You go through that door, you’re not coming back.” - Jeff Bezos

Climbing the wrong hill

A group of Navy SEALS were discovered by local Taliban sympathisers in the Korangal Valley. Instead of killing them, they let them go, knowing that this would jeopardise their mission. Unable to update their superiors, they hoped that by climbing a peak they would be able to call for help. Their hearts sank on reaching what had looked like a peak, only to discover a false summit where their communication equipment failed to work. Unable to escape or call for help they were overwhelmed by Taliban forces. Of the four SEALs, only one survived. The difference between climbing a local vs. global peak was the difference between living and dying. This is the true story of Marcus Luttrell, as depicted in the book and film adaptation ‘Lone Survivor’.

The hill a start-up chooses to climb might not have life or death consequences, but it is the difference between a great and a mediocre outcome. Given that you don’t know what the landscape looks like, progress can be misleading. You keep climbing higher, only to get stuck at the top of a small hill where inertia is at a maximum. Whichever way you step is a step down. There are few options available at the top: i) stay where you are and accept a mediocre outcome; ii) take the pain of going down and find your way to a higher peak; iii) if you’re lucky, take a creative leap across the landscape onto a higher peak.

A creative leap is likely to be driven by a change in ICP and application of your invention. Sildenafil i.e. Viagra was originally intended to treat hypertension. After noticing side effects I don’t need to elaborate, Pfizer targeted a new condition where fit was unexpectedly excellent, creating a multi-billion dollar per year product - a creative leap across a landscape.

"Bad! Bad! What? Is he not going - back? - Yes! But you understand him badly if you complain about it. He's going back, as every man does who wants to make a huge jump.” - Friedrich Nietzsche

Dealing with earthquakes

‘Only the Paranoid Survive’ is a book about earthquakes. The kind of earthquakes that upend entire industries. Significant environmental change destroys hard won fit. It’s as if you climbed Mount Everest, only for the mountain to collapse, and then a larger mountain to emerge in the distance. When the environment changes there is no choice but to return to exploration, to loosen control. New invisible assets need to accumulate to return the business to a position of fit.

Loosening control provides colleagues deeper in the organisation space to experiment and learn - building up the information needed to chart a new path forward. Andy Grove successfully led Intel through multiple earthquakes by ‘letting chaos reign’ at the right time. This is why retaining a  culture of experimentation is so important. As the environment changes experimentation needs to be dialled up, but that’s hard to do if it isn’t already a feature of the business.

An underlying culture of experimentation provides the seeds for future adaptation. AWS grew out of a desire to increase the internal efficiency of Amazon. Intel already had a small microprocessor business before doubling down. In both cases early exploration and accumulation of visible and invisible assets set the business up for success as their environments shifted. Hard questions also need to be asked about how the business is configured. The most sensitive will concern people. Does the team have the right knowhow to thrive in the new reality? Can they acquire the required knowledge and skills, or do people with the right knowhow need to be brought in?

“It is not the strongest of the species that survives, not the most intelligent that survives. It is the one that is the most adaptable to change.” - Charles Darwin
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