Preface: This postis the first in a new chapter of my thinking about product. While I’m passionate about the diagram presented below, my explanation of it is a bit too brain dumpy for my taste, and I’m not convinced I’m framing it optimally. After many failed attempts to refactor how I walk through it, I’ve decided that it’s better to get this out there in the world while I continue to dwell on some of the problems. I’m looking forward to your thoughts.
In crafting products, there’s a tension between two dispositions.
On the one hand, methodologies like lean startup and agile push us toregularly fit our product to the real world. By regularly running tests, validating demand, and shipping in small iterations, we can keep an up-to-date map of our product’s environment. Using marketsignals as a steering mechanism seems to be the surest way to create value.
On the other hand, the most impactful products, don’t just react to their environment, theychange it. Ignitingreal change, it seems, requires aleader’s unwavering commitment to avision of how the world shouldbe.
How can“unwaveringcommitment to avision” coexist with “using marketsignals as a steering mechanism”? The options are to(a) bendyour vision to fit the discovered realities of the real world or (b) chargestraight through obstructions until you break through or blow up.
While it’salluring to commit to one disposition over the other,the great companies simultaneously change the world and operate within it. There’s no formula for how they do it. But I’ve created a diagram that can at least help describe howthemost impactful companies reach for theirvision while adapting to the world as it is.
Now that I’ve bombardedyou with the full diagram, I’llunpack itthrough describing three typesof loops:
- Reality-Orientation Loops. How companies create feedback loopsto win customers and markets.
- TranscendentLoops. Howcompanies use markets as stepping stonesfor “world changing”impact.
- VisionLoops. How companies create new behaviors, markets, and industries.
Reality-Orientation Loops
Companies have a vision for where they want to go, but the evolving landscape around a product is filled with surprises, both good and bad. A company faced with a setback can overreact like a government in the wake of a terrorist attack. And newpathways to success can go unobserved.Thereality-orientation loopsrepresent how companies, guided by market signal, stay oriented as they move forward.If youcan maintain the healthy functioning of these loops, you can retain mastery of yourcontext and act accordingly.
Let’s start with the loop thatframes the reality-orientation loops.
Tech, Users, & Capital
The loop encircling Tech, Users, and Capital representshow companies try to win markets. The objective is to applyresources to build a technologyand attractusers with a stellaruser experience. Hopefully, people will love or need theproduct so muchthat they’ll pay forit (or be valuable to advertisers). If all goes well, the company willreinvest revenue or other funds back into enhancing the technology.The loop, givensuccess, repeats.
Companiescan’t conquer marketsguided by onlygut feeling. To stay oriented, they needthree intersecting feedback loops.
Users &Tech
No matter how powerful a company’svision, even if you’reApple, youcan’t blindly sustaina great user experience. Companies requireinsight into the people who use or might use theirproduct. This type of insight exists in qualitative forms, like user testing and surveys; and quantitative forms, like web analytics and A/B testing.When this feedback loop breaks, the organizationcan’t adjust when theproductdoesn’t stick.When theloop is healthy,product usage provides astrongsignal forproduct direction.
Users &Capital
The terms of the loop connecting Users and Capital is how we traditionally describe the health of a business. No matter how viral aproduct is,to grow revenue, companies must invest specifically in acquiring users, whether it’s through traditional or untraditional methods. Even Facebook advertises itself. Industry thinkingabout how to balanceuser acquisition and revenue is ever-evolving. The feedback loop is problematicwhen the product is not achieving the intended balancebetween customer acquisition cost and revenue. If you’re trying to be profitable, the loop is broken when acquired usersare not converting to paying customers. If you’re trying togrow, the loop is broken when yourpricing strategy introduces too much friction. For an example of a thriving users-capital loop, see how Uber used “Capital as a Performance Enhancing Drug.”
Capital &Tech
Engineers shouldn’tbuild, build, build all day. To ship the right product at minimal cost, teamsneed to examine their process regularly. Process improvements can be in the form of tweakingproject management structure, communication methods, ortools. When the Capital-Tech loop breaks, teams failto deliver within business parameters; i.e., they ship a flawed productor run out of time. When the loop is functioning, the team continuously improves its velocity and the soundness of each release.
TranscendentLoops
All companies must create reality-orientation loops tonavigate their local environment. No matter how grand a company’s vision, to realize it, they must win real markets. Customer-driven companies,as defined by Venkatesh Rao, operate only in these inner loops.These companies play azero-sum game,remixing established technologies and business modelsto engagecustomers already made legible by a market. They win by takingcustomers from others. The winners ultimately fade awaywhen larger forces erode the market.In contrast, product-driven companies (again, in the Rao sense) altertheir environment, feed off the flux, and create new markets, industries, and behaviors.
The “transcendent loops” in the diagram represent how companies can use their local environment as a stepping stone toset inmotion a more fundamentalimpact, transcending current markets. We can use this framework toseparate the paths of the most impactful companies.
Capital &The Economy
A company’s business model can do more than capture wealth; it can transform the economy around it. Google’s search advertising business model, for example, disrupted findability for businesses, creatinganew class of Internet-based companies. Google’s platform is now foundational for anyone striving to make money online.
For this to happen, Google had to start by taking users from competitors like Yahoo in the inner loops of the search engine market.
Users &Society
Product-driven companies, through their user base, impact society at large. While Facebook startedby scratching the social itchof college students,the power of the platformhas reached global proportions, even playing a role in political movementslike the Arab Spring.
For Facebook to reach for itsvision of “making the world more open and connected,” they’ve had to monetize through the inner loops brand advertisingmarket.
Tech &What’s Possible
While customer-drivencompanies meet customerand business objectives through remixing established technologies, somecompanies create new building blocks, openingnew possibilitiesfor all developers. Amazon, for example, created AWSas a side effect of their eCommerce business, making iteasier and cheaper for anyoneto launch an internet company.
Amazonstarted by taking on incumbents in the inner loops of the booksellers market.
VisionLoops
While some people work at startups to make money, others dream tomake a dent in the universe (and, conveniently, make money). The most ambitious companies, if successful,introducenovelty into the world, causingunpredictable change. Thecompany who creates a dent is positioned to bethe primary benefactor of the change they create. They are the firston thescene to understand it and build on top of it.
Society & What’s Possible
Winning a market requires tappinginto established patterns of behavior, often solving problems for their users. Deeper product impact, however,unearths latent behaviors. To grasp the phenomenon of Twitter, one might ask“What problem doesTwitter solve?” You can force an answer, but to pose the question misappliescustomer-driven dynamics on a product-driven phenomenon.Rao suggests that product-driven companies tap into an “anomie.” He writes:
… there exist untapped regimes in their universe of behavior that are marked by undefined restless energy and undirected curiosity… This creates a certain level of anxiety, and a regime of under-developed behaviors (often bucketed under “play” or “hobby” behaviors, characterized by amateurishness, which is another way of saying pre-economic).
When a product unleashes new behavioral forms, a slew of new companies follow to build technologies around the behavior, e.g., all the companies striving to re-channel the desire totweet.
Product directionscan fail by prematurely banking on their ability to createnew behaviors. Blippy and Swipely failed to entice users to broadcast their purchases socially. Now, Venmo has successfully created this new behavior. Why Venmo succeeded and the others failed could be a combination of execution andtiming — the precise factors areimpossible to know.
Society & The Economy
It is has been argued byPeter Thiel and others that the most significant innovations don’t play in existing markets, they create new ones. Apple, for example, wasn’t the first company to produce a tablet. However, they created the tablet market with the iPad and captured the majority of the market’s value.When amarket is legible, customer-drivencompetitorscan attack the space from a variety of angles to win share. While erosion will happen with time,market creators are so valuable due to theirhigh probabilityofextended business success.
Marc Andreessen says that if you’re looking for the next great startup idea, you candig through the graveyard of failed companies from the late 90s.The grocery delivery market, for example, is growingnow, fueled byInstacart and other players.Companies like Webvan and Kozmo failed to reach the same vision previously, perhapsdue to lackof the smartphone and the entrenched online shopping behaviors we have now. Onemight argue that the iPhoneand Amazon.com products created the grocery delivery market, not because they are competingin the space (although Amazon is), but because they created thenecessary conditions for themarket to form. Visionarycompanies, to massively succeed, don’t need to capture all, or even the majority, of the new valuethey create.
The Economy & What’s Possible
When new behaviors and markets enter the picture, new industries form to support the changingworld order. You can walk down the value chain to anticipate the rippling effects of market changes. To bolster the iPhone, Apple expedited theformation of the mobile app industry by creating the App Store marketplace. Slack is applying a similar strategy with their developer fund and app directory.
While some companies intentionally create supporting industries as a strategy, the most impactful products canengendersupporting industries as an unwanted side effect. For example, the rise of search enginescreated the SEO industry. While SEO can be a good lens through which to improve the relevancy of web pages,Google continuously has to battle SEO specialists who try to game their algorithms.
Conclusion
That’s it for walking through the diagram. I hope you found it useful. Itbegs the question: what do we do with it?Unfortunately, I’m not sure yet, and I feel like I still have a long way to go wrestling with the subject matter of this post. If youthink of any applications of the diagram or ways to improve it, let me know. Otherwise, stay tuned!
Update: My new post, A Visual Framework for Product Vision, uses the concepts described here to create a practical format that companies can put to use.
