The 3-Layer Cake Strategy To Building A Company That Lasts

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Confession: I tried going to self-help, for CEOs.

When I started my first business, I met once a quarter with a dozen fellow chief executives to share our challenges and, quite often, disasters.?The floor was ours to bring whatever topic we wanted up with the bigger group.

At one gathering, we heard from a CEO who sounded like he could write a textbook on managing a business. But as he spent 45 minutes discussing the intricacies of a new HR hire,?it became clear that his business had much bigger issues with product and competition.?

I realized he’d over-indexed on one key element of leadership — namely, day-to-day operations. But he’d overlooked two other important elements: product and go-to-market (GTM) strategy.? Within a year, his business was dead in the water.?

Getting all three of these elements right — product, GTM and operations — is easier said than done. It’s one of the reasons why only about half of startups make it to the five-year mark. A mere 0.2% hit $100 million in annual revenue.

I like to think of it as a three-layer cake — the kind you might have at a traditional wedding, where one tier sits on top of the other. At the base is a great product. Without a solid base, the business is doomed to failure. No matter how good your sales team is or how operationally savvy your CEO may be, without solid product at the base, the company will tumble over.?

Layered on top of that base are two additional tiers: GTM strategy and operational excellence. Each of these is also important to sustaining growth and achieving scale. They build off of great product to take a startup to the next level. If either of these layers is weak, growth will be severely impacted.?

The fundamental job of the founder or CEO is to establish that solid product base, while also integrating the other two essential layers and ensuring they’re stable. As the founder of three software firms, here’s what I’ve learned about making that happen.

1. It all starts with product excellence

It goes without saying that without a great product, you don’t have a company.

McDonald’s understood that universal truth. For all his mastery of marketing and franchising, Ray Kroc knew the burger had to be good. So he bolted GTM and operational excellence on top of a product that people really wanted, enabling McDonald’s to grow.

That’s why from day one, founders must focus relentlessly on product-market fit. This means solving for problems that customers really have — not the ones you think they have. Constant customer contact, tight feedback cycles and aggressive iteration are the keys to getting this right.??

Without product-market fit, the business has a much lower chance of success. About 35% of startups fail because there’s no market need for their product.

I’ve seen so many companies get ahead of their skis here, leaping to marketing, distribution and scaling before having nailed product. Likewise, if your product stinks, bringing on a CEO who excels at operations won’t do much good either.

That said, founders and CEOs should remember that product alone can’t carry the business. As a self-described product guy, I learned that the hard way. After launching my first company, AppDynamics, I stayed true to my engineering roots by going all-in on product. But then I ran into a wall.

There’s an old joke that a good salesperson could sell a comb to a bald man. That’s funny, but it isn’t true. A company can’t live on sales alone. If you have a bloated sales infrastructure but a mediocre product, your cake will topple over.?

2. But that product won’t move itself. You need go-to-market excellence

Moving forward meant getting my head around GTM, which spans sales, marketing and distribution. You might make the best TV in the world, but if you can’t get it on shelves at Best Buy, what’s the point?

Among founders, there’s a tendency to downplay the importance of sales. At AppDynamics, it took me a while to accept that having a robust sales strategy is just as important as creating a superior product.?

To transform our scattershot sales process, I built a machine. That meant crunching the numbers to determine how many leads and salespeople we’d need to hit certain revenue targets, as well as revamping the sales ranks to ensure that everyone was a high performer.

These kinds of efforts pay off. On average, businesses with a formal sales process generate almost 30% more revenue than those without one. Marketing matters, too. Compared to their peers who don’t, CEOs who prioritize marketing as part of their growth strategy are twice as likely to see that growth top 5% annually.

However, balance is crucial. There’s an old joke that a good salesperson could sell a comb to a bald man. That’s funny, but it isn’t true. A company can’t live on sales alone. If you have a bloated sales infrastructure but a mediocre product, your cake will topple over.?

That problem is endemic to the SaaS B2B software world, where high-growth businesses often spend 50% or more of their revenue on sales and marketing as they seek to scale. The SaaS graveyard is littered with companies who splurged on sales at the expense of product … then ran out of runway.

3. Every great company’s secret weapon: operational excellence

Once a company reaches a certain size, a third kind of excellence becomes vital. Operations might sound like the boring part of business, but it’s air traffic control. Without operational excellence, the third tier of our cake, things can quickly go sideways.

Essentially, operations is management — the stuff people earn MBAs for. It covers building teams, holding people accountable, managing money and all the housekeeping duties involved in running the business. Just like the product folks must live in product, those who handle operations need to live in spreadsheets.?

Operational excellence makes a big difference to the bottom line. The best-managed companies enjoy 25% faster growth and 75% higher productivity than those at the bottom.

But again, operational excellence without a foundation of great product is meaningless. Probably the most famous example of leaning too heavily on operations is Apple before Steve Jobs took charge. The company hired former PepsiCo president John Sculley as CEO for his operational talent. But Sculley knew little about product, which languished until Jobs returned to save the day.?

Ultimately, startup founders and CEOs must remember that they can’t neglect any of these three layers of excellence.?

Many founders will be naturally strong in one area but lacking in the other two — a product-oriented founder who neglects GTM, an operations-obsessed CEO who overlooks product, a GTM-preaching founder who lets operations slide, etc. — so it’s equally important to bring in the right people to fill in the gaps. At the end of the day, investing in these three layers enables you to have your cake and eat it too, so to speak — you create a strong business you can scale around. Do it right and there’s no ceiling to growth. Neglect your product foundation, however, and your cake may come tumbling down.?

Thank you for reading! For more insights from my experience as a serial entrepreneur and how we can harness the power of software to change the world, subscribe to Entrepreneurship and Leadership.