Like humans, companies go through phases. There’s the early seed and development phase. Founders are so preoccupied with a problem they go crazy. They consider solutions and the feasibility of a business. There’s the startup phase, when a business is actually born, and it stumbles towards product/market fit. There’s the growth and scaling phase, as we try to close more and more deals while, at the same time, hiring the right people. If we’re lucky, we reach the later stages. There’s the expansion phase, as we attempt to land and expand or attack new verticals or geographies. This is when things get really interesting—and hard. Who are the right people to hire? What are the right products to build? The formula that got us here almost certainly won’t get us there. Lastly, there’s maturity, which is when the business has really hit its stride. Maybe there’s an exit, and very likely there’s new leadership involved.
Consistent in all of this are two things: culture and capabilities. Culture is the invisible hand inside your organization. It’s your company’s autopilot. Specifically, culture is the unique combination of processes and values within an organization. These processes and values are what enable us to replicate our success. They allow people to make decisions which are in alignment with the goals of the company without having to constantly coordinate with one another.
This also means your culture is derived from your capabilities, what your organization can and cannot do. Clayton Christensen groups these factors into three buckets: resources, processes, and values. Resources are the (mostly) tangible things a company has—people, capital, brands, intellectual property, relationships with customers, manufacturers, distributors, and so forth. Processes are what we do with resources to accomplish the organization’s goals, such as developing products, developing employees, hiring, firing, doing market research, and allocating resources. They take in resources and produce value. Processes help us protect and scale our values by providing a means of documenting and codifying them. These are predominantly intangible things. Finally, values define how a company makes decisions. What goes to the top of the list, and what gets ignored. What gets investment, and what doesn’t. These are our priorities that guide us.
There are a few problems with how leadership tends to view capabilities. There is typically an overemphasis on resources. This happens because in the startup phase, success is largely governed by resources. Notably, people. This is especially true of software startups. I quote this section from The Innovator’s Dilemma frequently:
In the start-up stages of an organization, much of what gets done is attributable to resources—people, in particular. The addition or departure of a few key people can profoundly influence its success. Over time, however, the locus of the organization’s capabilities shifts toward its processes and values. As people address recurrent tasks, processes become defined. And as the business model takes shape and it becomes clear which types of business need to be accorded highest priority, values coalesce. In fact, one reason that many soaring young companies flame out after an IPO based on a single hot product is that their initial success is grounded in resources—often the founding engineers—and they fail to develop processes that can create a sequence of hot products.
In the beginning stages, people drive success. Early engineers and founders (the two are not mutually exclusive) have an itch to scratch that they are so passionate about, they evangelize this crazy grand vision and people get excited. The company is small, focused, passionate, and everyone is working closely together to solve a customer problem they are obsessed with. And, sometimes, it pays off.
Next, leadership starts asking itself, “OK, we shipped this crazy successful product, now how do we grow?” This is where the wheels start to come off. There are three problems that occur.
First, the focus shifts away from solving a problem you’re obsessed with to finding the next big product. These companies fail to find a new product because they are searching for one without passion. They are seeking top-line revenue growth, not pursuing a vision. They are looking at markets through the lens of “here’s where we can make money” and not “here’s where we can solve problems,” and in doing so, they lose sight of the customer. At this stage, they basically have forgotten what got them here.
Second, their processes get in their own way. This seems contradictory given that processes, by their very nature, are meant to facilitate repeatability. If we have good processes in place, we should be able to apply them time and time again, even with different people, and end up with consistent results. But things break down when we apply the same processes to different problems. In essence, they try to find success using what brought them success to begin with, but with a warped perspective. You can look at every startup and they will all have wildly different stories about how they found success, but the one thing they will all have in common is that relentless itch. When we attack a new market, we need to do a reset on the processes and values, not a recycle. Christensen suggests if your company is so deeply entrenched in its processes that this isn’t viable, as is often the case with large enterprises, spin it out into a new venture. Processes are as dynamic as the company itself. They are not a one-size-fits-all deal. Christensen calls this the migration of capabilities.
The factors that define an organization’s capabilities and disabilities evolve over time—they start in resources; then move to visible, articulated processes and values; and migrate finally to culture. As long as the organization continues to face the same sorts of problems that its processes and values were designed to address, managing the organization can be straightforward. But because those factors also define what an organization cannot do, they constitute disabilities when the problems facing the company change fundamentally.
Third, they don’t fully appreciate the nature of dynamic priorities. Software startups in particular often mistakenly attribute their initial success to technology when, in reality, it’s because of people and timing. Aside from the passion, you need people early on who can ship and ship often. These might not be the most technically capable engineers, but they get things done when it matters. Later, you need people who can still ship but while cleaning things up. Lastly, you need maintainers—people who can refine without breaking anything. That’s not to say you have these archetypes exclusively at each stage—you want a balance of people—but it’s similar to how companies commonly need a different type of CTO at different phases or an Interim CTO.
While resources are an essential part of early success, it’s processes and values that will sustain you. However, we tend to overfit on resources because we become biased from that success—investing heavily in technology and innovation and grounding the company’s success in a few key individuals. We also overfit because resources are more visible and measurable. Being deliberate about establishing processes and values—which are derived from vision—helps to overcome this bias, but it needs to happen early and be continually reinforced. We also need to ensure our processes adapt to new problems. The larger and more complex an organization becomes, the harder this gets.
Moreover, we need to be conscientious about which processes matter to us the most. Often the most important capabilities aren’t reflected by the most visible processes—product development or customer service, for example—but in the less visible, background processes that support decisions about where to invest resources. These might include determining how market research is done, how financial and sales projections are drawn from this analysis, how products are conceived, how planning and budgets are negotiated, and so on. These processes are where many companies get their inability to cope with change.
And this is where the breakdown happens: a company has highly capable people—people who have helped shape its success as a startup—but arms them with the wrong processes and values. The result is often a boom followed by a bunch of fizzles as they try to catch lightning in a bottle once more. A compelling vision plants a seed. Strong processes and clear values help that seed to grow. But the shade produced by that seed—our capabilities—is stationary, so when we approach a new challenge, we need to recognize when to start tilling.
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