Week of 2022-07-18
Where I venture forth in developing my little strategy framework based on customer-vendor loops. This week, it’s about the loop setting: what it’s made of and how to find it. The continued use of the ice cream shop as my example is giving me a brain freeze.
Also, welcome back to the wild world of muddling prose and puzzling diagrams! I missed writing these and I feel lucky you’re still adventuring with me.
Customer-vendor loops and their setting
The notion of a setting for a customer-vendor loop is fairly intuitive. A loop doesn’t exist in its own, insulated bubble. Taking that ice cream shop I use as my go-to example, where do its customers come from? They don’t just magically appear in the air. Instead, they walk up to the shop, traveling down a crowded street or perhaps a shopping center. This street is part of the store’s setting. Similarly, where does the milk to make ice cream come from? More than likely, the owner of the store buys it regularly from a vendor. That vendor is also part of the setting. For an ice cream store, the setting may also include chocolate and other flavor vendors, and of course all of the equipment that is necessary to make and serve delicious ice cream. Put simply, the setting of a customer-vendor loop is everything that’s necessary to make the loop go.
I would go a step further and claim that the process of constructing a customer-vendor loop is first and foremost a process of finding a setting that results in that special kind of feedback loop I’ve been going on about. The key shift for me here is away from the mental image of drawing a feedback loop from scratch, dot by dot, and toward the mental model of spotting a few unconnected dots that are really close together, and linking them together. It seems obvious that if I choose my ice cream shop’s setting as the middle of the Arctic tundra, I will first need to invest into first erecting a city that attracts people to live in it. I can’t remember any city being built for the purpose of setting up an ice cream shop.
It is probably not surprising that this kind of setting-spotting is largely about discerning existing customer-vendor loops that already exist. To drive this point more precisely, a setting of a customer-vendor loop is composed of other customer-vendor loops. As I write this, I imagine a densely connected network of loops, each reinforcing and weakening each other in various ways. The capacity to establish my own customer-vendor loops stems from my ability to understand the strengths, weaknesses, opportunities, and strengths within stocks and flows of customer-vendor loops of others that are adjacent to me.
The discipline of business strategy dwells in this area and I’ve benefited greatly from the wisdom of its purveyors. As one pointer, Hamilton Helmer’s 7 Powers is a rather beautiful capture of various setting configurations. There’s also a pretty comprehensive framework called “Business Model Canvas” that is described in the Business Model Generation book (thank you for introducing me to it, Ujval). If I tilt my head a little bit and squint, at the core is the process of defining a setting for a customer-vendor loop. Finally, a thorough five-force analysis of a setting can do wonders for opening that strategic third eye. For instance, the setting defines how unique and differentiated our product can be. Borrowing Michael Porter’s example, to start an airline, you and I can just rent a plane and lease a gate at the airport – but so can everyone else.
More generally, when I hear the words “product market fit”, I hear “choosing a setting for our customer-vendor loop”. In software engineering, we usually use the word “dependencies” to talk about our team’s setting – though limiting our understanding of a setting to project dependencies can be fraught with peril. In my experience, one of the key challenges that software teams run into is not being deliberate about understanding their setting. I’ve been there myself, swept off the ground by a fascination with some cool bit of technology. When we say “solution in search of a problem”, we usually talk about a customer-vendor loop that doesn’t actually close onto itself – and more often than not, it’s a result of plowing forth with developing a product without considering a setting to which it is born.
To emphasize the necessity of being intentional about the setting, I’ll close with this anecdote. I once had an enlightening conversation with a pastor of a small-town church in Central California. Their attendance was down year over year, and with the onset of the pandemic and ensuing isolation (remember 2020?), there was quite a bit of worry about whether the congregation is still, in fact, a functioning church. I immediately launched into the fixing mode and suggested reexamining the setting: embracing the momentum of moving the services online could possibly mean the expansion of the audience, opening up all kinds of new opportunities. Kindly, the pastor noted that the story of that particular church is deeply intertwined with and is inseparable from the story of its town. No matter how appealing the growth potential might be, the “small-town” bit was an immutable, foundational part of the setting.
So yes, beliefs and principles are also part of the setting and they play a large role in defining what’s possible. It seems like a good idea for a leader to understand what those beliefs and principles are — both theirs and of their team, and how they influence the configuration of the setting.
🔗 https://glazkov.com/2022/07/21/customer-vendor-loops-and-their-setting/
Finding the setting
In the previous story, I talked at length about finding the setting, and I thought it might be useful to try and write down a pattern I’ve seen when looking to complete that puzzle of a functional setting for a customer-vendor loop.
The approach that seems effective is by studying the stocks of adjacent loops. As you may remember, there are four of them: Customers, Interactions, Vendors, Products. Each stock has value. There’s something here about abundance and lacking that I haven’t quite figured out yet. For the sake of this narrative, let’s assume that we can tell if the stock is abundant or lacking. When the stock is abundant, there’s excess value that presents us with an opportunity to create our own stock. When the stock is lacking, our opportunities in relation to this stock are rare and unimpressive. It’s not always so clearcut. Sometimes lacking stocks present opportunities that were previously unavailable, and stocks gaining in abundance seep energy away from the opportunities that were there before. But to keep things simple, let’s go with the simple rule of thumb: adjacent abundance leads to more opportunities, and adjacent lack to fewer.
I’ll start with the Customers. As their numbers grow, we start recognizing that the customers themselves create value. Think of a lively market, a bazaar. People flock to a bazaar because there’s something they may need to purchase, but also because they might be surprised to find new things they haven’t seen before. Half the fun of going to a farmer's market is in discovering a new kind of honey that I didn’t realize I definitely needed to buy. Customer growth spurs the engagement flow, and is often a common phenomenon that strategists spot. If I am near a bazaar, I will have opportunities for engagement, and many business venture ideas start here.
Moving clockwise, let’s look at the Interactions. Sometimes, there might not be a clearly distinguishable collection of Customers. Instead we notice a certain behavior that is hard to ignore as random. Cowpaths are a common buzzword, but they nicely describe the value in the Interaction stock. Being carefully observant of common behaviors alongside well-traveled paths and detecting unmet needs is another trick that strategists employ. Often, the cowpaths are opportunities that lie just outside established roads, and their value does not reside in having an audience. People can come and go as they please. The entrepreneurs are attracted to some emergent common need that these people start having as they do.
Looking at the Vendor stock, its value is in the breadth and depth of capabilities. Whether they are the knowhow and expertise, funding, or just plain raw brawn – capabilities accumulate in this stock. Many teams get their start by putting a group of passionate, experienced, and skilled individuals. By doing so, they amass capabilities – or put differently, value in the Vendor stock – to create new opportunities by building things. Areas like Silicon Valley are traditionally brimming with the Vendor stock, though I am very excited about new spaces that normalizing remote work is opening up.
The final component in the customer-vendor loop is Products. This one is very familiar to the engineering teams. Every time we examine dependencies, which framework we will use or which platform we will pick, we are evaluating the abundance of the adjacent Products stock. I won’t spend much time here, since it’s fairly straightforward. However, there’s another set of opportunities hiding in the abundant Products stock. Sometimes we find new uses for things we already have. There’s a fancy term in biology: exaptation, or a shift in function of a trait during evolution. Products stock may hold value not only because they serve their intended purpose, but also because they may be repurposed to do something entirely different. Especially for well-established Products, there’s always some exaptation going on.
I am sure there are other ways to uncover a setting, but this seems like a decent starter kit. It probably won’t help you find the next big business idea, but it might produce an insight or two when considering your organization’s strategy.