A fundamental building block for strategy and organizational design
Every company can be boiled down to a simple equation and the companies that win strategize for and organize around the components of their equation. The equations are obvious but they are the fundamental building blocks for an effective strategy and for aligning a team.
A social media platform with an ads model (sells ads as its primary source of revenue generation) has an equation with three primary components. To determine what these components are, we must work back from the product of the equation, which is usually revenue. In an ads model, how much Revenue a company can generate is dependent on the number of ads it can serve to users. The number of ads it can serve to users is dependent on how many users it has, otherwise known as Growth, and how much time they spend on the platform, otherwise known as Engagement. Therefore the equation for a company with an ads model is [Growth x Engagement = Revenue].
A media company with a consumer subscription model (sells subscriptions as its primary source of revenue generation) also has an equation with three components. The product of the equation is, again, revenue. In a subscription model, the amount of Revenue a company can generate is dependent on the number of subscribers it has, otherwise known as Growth, and the lifetime value of each subscriber, otherwise known as LTV. Therefore the equation for a company with a subscription model is [Growth x LTV = Revenue].
To apply our equation and use it to create our strategy, we need to break it down further. The components of the equation are all outputs, and outputs are by definition things we can’t work on directly. As a next step we must identify the inputs for each of these outputs. These inputs should add up to their output. For Growth at the company with an ads model, the inputs are New Users + Retained Users + Resurrected Users - Churned Users. These four inputs together equal Growth, and each of them has an equation. We continue to cascade the equation tree, creating a hierarchy of equations until we get to ownable metrics.
Once we create our hierarchy of equations, we can create our strategy and organize around it. The word “strategy“ is thrown around a lot but, ultimately, it’s just the collection of inputs we choose to work on and how we’ll work on them. A strategy framework can help us determine which inputs to prioritize and how to approach them. More on that in my next post! But the first step to developing a winning strategy is understanding all the inputs we could possibly work on.
The next step in applying our equation is organizing around the outputs. There are infinite ways to organize a company, but the most effective way is to organize around our equation, creating teams around each of the inputs we choose to work on as part of our strategy. These teams should be grouped together under their output, so teams with the same output are working together in service of a shared output goal. This allows us to create a shared strategy that can be evaluated and executed on through the lens of driving our outputs. And if we drive our outputs, our company is working!
Lastly, our equation informs our strategy and how we organize but it’s also fundamental for alignment. Patrick Lencioni starts The Five Dysfunctions of a Team by writing, “if you could get all the people in an organization rowing in the same direction, you could dominate any industry, any market, against any competition, at any time.” The equation is our first tool for getting people rowing in the same direction. We do this by using it constantly. It’s the first thing we talk about during strategic planning. It’s how we frame debates about tradeoffs. It starts every board meeting and ends every All Hands.
I know what you’re thinking. Equations aren’t sexy. It’s hard to get people waving their hands in the air about equations. That’s fair. The key is getting people to internalize the equation to the extent that we just talk about the components, which are inspiring, and people know what they add up to. That starts by hammering on the equation a lot in the beginning so it becomes central to the culture we’re building and how we operate.
Next up: Strategy Frameworks and Developing An Operating Model! Hope you’re having as much fun as I am.