If you live in the country and see someone out walking a smaller dog, once in a while it will be dressed like this:
Does your startup need a coyote vest?
That’s called a coyote vest and it’s pet body armor designed to prevent Bruiser from being taken by a coyote and/or hawk. I think about coyote vests whenever I think about larger vendors running envelopment strategies against smaller vendors.
A Review of Envelopment Strategies
Envelopment strategies are common, and often winning, strategies in enterprise software. Two classic examples from the days of yore:
- Microsoft wiping out Wordperfect and Lotus by suite-izing word processing and spreadsheets, along with presentations, into a single office suite category with Microsoft Office.
- Siebel transforming sales force automation (SFA), the category it originally created, into customer relationship management (CRM) by building its own marketing automation and acquiring customer service via Scopus [1] [2].
I’ve written before about envelopment strategies, then using SuccessFactors and Marketo as examples. I’ve executed envelopment strategies, too. At BusinessObjects, we pioneered the category for query & reporting (Q&R) tools, and then ran an envelopment strategy that broadened and transformed our category into business intelligence suites. We did that by building OLAP into our Q&R tool, and then spending $1B to acquire Crystal Decisions in enterprise reporting.
More recent examples include:
- Qualtrics, who evolved from a product-centric survey software positioning to a solutions-centric experience management (XM) positioning, and defined a new category the Play Bigger way in the process [3].
- Alation, who pioneered the data catalog as an application for data search & discovery and then transformed it into an overall data intelligence platform for data search & discovery, data governance, cloud data migration, and data privacy.
Alation transformed the data catalog from its original search & discovery use-case to a broader, data intelligence platform.
In short, envelopment strategies work — to the point where they’re basically the standard play in enterprise software: pioneer a category, win it [4], up-level it by defining a broader problem, define what’s in and what’s out when it comes to solving that broader problem [5], and then deliver against that definition.
“You either die a point solution, or you live long enough to become a platform.”
This has never been more true than today.
— OnlyCFO (@OnlyCFO) December 26, 2022
But that’s just our warm-up for today, where our question is not whether envelopment strategies are effective (answer, yes) but instead: what should I do when a competitor is trying to envelop me?
Combatting Envelopment Strategies
Deciding your response to an envelopment strategy requires you to determine where your category fits into the larger vendor’s broader vision.
The key question: is your space one of the top three (or so) strategic components in the larger vendor’s broader vision? If it is, you face a very different situation from when it is not.
For example, back in the early days of CRM, sales, marketing, and customer service were all defined as in the space. But professional services was out.
The original definition of CRM left room beyond sales, marketing, and service (as well as plenty of room within each)
When your company is not within one of those strategic components, life is fairly easy. You will likely be able to partner with the larger vendor because while vision overlap may exist, reality overlap does not — and the sales force knows that. For example, early CRM vendors did not offer a professional services automation (PSA) tool and their sellers were typically happy to connect customers to a good PSA offered by a friendly partner.
While such partnerships sow the seeds of downstream conflict because the larger vendor usually expands its scope over time, that is a high-class problem. You can build a substantial company in the period between the larger vendor’s first entry and when they eventually get their act together. That often takes multiple, failed, organic attempts — executed across years — followed by a change in course and a major acquistion. Oracle failed repeatedly at in-house-developed applications for about 15 years before eventually changing course to acquire PeopleSoft, Siebel, and others. Salesforce eyed Yammer around 2010, then built Chatter to an only modest reception, and about 10 years later acquired Slack to provide best-of-breed collaboration.
But it’s not usually as simple as in or out. Because these boxes tend to be quite broad, there is usually room for specialization. For example, for many years customer service largely meant case management to Salesforce — omitting B2C customer service (e.g., high-volume case deflection portals) or field service (e.g., rolling trucks). ServiceMax, RightNow, and Click all partnered succesfully with Salesforce in these areas before Oracle acquired RightNow (early in the game) and Salesforce later acquired Click after nearly a decade of partnership.
Consider some popular specialty areas with sales today, including revenue management (e.g., Clari, BoostUp), conversation intelligence (e.g., Gong, Chorus) and sales enablement (e.g., Highspot, Seismic). And there are many more.
Sometimes, the situation is more subtle, where the issue is not room due to specialization, but room due to lack of commitment. In these cases, the larger vendor “cares, but not that much” about a box. The vendor may want to cover a large number of boxes, each with a different commitment level that is usually known with the organization [7], but never expressly communicated:
- High. We must succeed in this space.
- Medium. We care, but not that much.
- Low. We really don’t care and just want to “check the box.”
If you skim the larger vendor’s marketing, it will be difficult to discern the level of commitment associated with any given space. But, if you spend more time, looking for rich content, deep white papers, and numerous customer reference stories, you will likely develop a sense for whether the marketing is simply veneer covering a low-commitment box as opposed to the hardwood of a core one. Either way, the sales force will know. Partners will know. Most employees will know [7].
For example, Oracle had its own BI tool, Discoverer, the entire time BusinessObjects grew from zero to IPO, serving largely Oracle customers, in many cases partnering with the Oracle field [8]. In strategy circles, Oracle was executing a “weak substitutes” strategy, treating the space opportunistically, hoping to get extra revenues from indifferent customers, but understanding their offering was not fit to win in a best-of-breed evaluation.
Summary of Strategic Responses to Envelopment Strategies
With that backdrop, let’s summarize the options for how you can respond when someone tries to envelop you.
- Sell. The key here is timing. If a bigger vendor approaches you early in your lifetime, you might think “too early for me.” But, for them, it’s a clear sign that they are tracking the space and doing a make / buy / partner assessment. If you rebuff the offer, you might get a second chance, but it will likely be years later, after they try building it themselves or acquiring another company and failing. Remember, when selling to a strategic, it’s about them, not you [9]. Examples: Aptrinsic selling to Gainsight, Chorus selling to Zoominfo, though later in its lifecycle.
- Specialize. Get so strong in your space that buying another vendor wouldn’t really solve the larger vendor’s problem, thus they decide to build or partner in the space. If you execute well and you’re really focused, you can beat their in-house development efforts and stay a leader despite the larger vendor’s efforts. If you also have great access to capital so you can grow fast, you can also build a substantial company while the larger vendor fumbles around. Your strength and anticipated response can shape their “in/out” definition of the category. Examples: Gong, Clari, Amplitude [10].
- Segment. Pick a size-based, functional, or vertical segment of the market and go deep. Think: we’re the best CRM vendor for SMB/MM (Hubspot), we’re the best application for the customer service function (Zendesk), or we’re the best marketing personalization vendor for retailers (Bluecore). This strategy can work very well to provide differentiation from the would-be enveloper and build a moat to protect your from their attack. Think: “the megavendor may be in bigger in the overall market, but nobody knows and cares about you like we do.” [10]
- Counter. Envelop back. If someone tries to envelop you, well, two can play that game — and you can envelop right back. This works best when you’re similar in size to the would-be enveloper. Examples: Back in the day, BusinessObjects and Cognos each tried to envelop each other. After BusinessObjects bested Cognos in the BI suites evolution, Cognos countered by trying to unite BI suites with planning software to create enterprise performance management [11]. Today, in a similar clash, Alation and Collibra are trying to envelop each other in data intelligence platforms, the former starting from its leadership position in data catalogs and latter from its strong position in data governance. I believe Alation has the better strategic position in that battle and that seems to be proving out in the market [12] — though I am by no means a disinterested observer [13].
- Suffer. Finally, you can pretend that envelopment isn’t happening around you — an all too popular strategy, that rarely results in a good outcome. As Mark Twain said, “denial ain’t just a river in Egypt.” Ignoring category envelopment is a fast path to becoming a question in Trivial Pursuit Enterprise Software Edition. Example: name the enterprise reporting vendor who, in the early 2000s, had a superior product, but nevetheless lost to Crystal? Answer: Actuate. While it’s fashionable to say, perhaps over a nice glass of Michter’s 20 year in Davos, that building a company is about ignoring the competition and following your true North Star, that has nothing to do with the real world of strategy which is all about rising to strategic challenges, which often arise from competition.
A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them. — Richard Rummelt
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Notes
[1] Hence the original, and fairly long-lasting, definition of CRM as sales, marketing, and service.
[2] That Siebel would shortly thereafter miss the cloud transformation and be displaced by Salesforce is a story for another day. Per an old friend who used to work there: “I decided to leave Siebel the day I heard the quite powerful VP of Product say we were going to beat Salesforce by being more Siebel than we’ve ever been.”
[3] Effectively doing two transformations: (a) from survey software to customer experiencement management, (b) from customer experience management (application) to overall experience management platform — for customer, employee, product, and brand experience management.
[4] Don’t forget this important step! You can be too busy thinking about the next thing to remember to win the category you pioneered.
[5] The hardest part of the exercise in my opinion. Where do you need to make, buy, or partner? What really needs to be integrated in versus what should be connected externally and/or built upon. This is an exercise that intersects customer centricity with core competencies.
[7] Sadly, know usually means tacit knowledge within the company and its close ecosystem. Companies seem to feel a need to communicate as if they are all-in in every space in which they play. This damages corporate credibility, but there is no obvious alternative. Think: “we sell a great thing 1, 2, and 3 and a just-OK thing 4 and 5. People figure it out anyway, but it’s hard to say in a marketing collateral or sales training. Plus, sometimes, senior management think it’s also a great thing 4 and 5, and few are willing to tell the Emperor that they’re wearing no clothes.
[8] Knowing that a $3M data warehouse Oracle database deal might ride on the success of a demo built in a $50K BI tool, and knowing that Oracle had only a weak commitment and a meh BI product, a seller might willingly trade away the $50K of BI tool revenue to increase the odds of winning the $3M database deal.
[9] Making a product acquisition, especially a strategic one, at a larger vendor requires much more than it being a good idea. It’s more like stars aligning. Larger vendors often track spaces and key vendors within them for years before making an acquisition. Triggers for actually making an acquisition could be a competitor acquisition (e.g., Oracle buying Endeca in response to HP acquiring Autonomy), the loss of a major customer, acknowledgement of failure in a new product initiative, a change in board sentiment, or a drop in a company’s stock price such that it become acquireable. Example: we had discussions with Acta several times, over a period of years, before eventually acquiring them at BusinessObjects.
[10] Specialize and segment are both the coyote vest strategy — get so strong in a space that it’s unenvelope-able (or at least, not worth enveloping) from the larger vendor’s POV.
[11] Via the acquistion of Adaytum. And yes, the original definition of EPM was the unification of BI and planning. This was an analyst-led shotgun wedding that Cognos embraced and one that never really made sense to customers. While BusinessObjects later countered by acquiring SRC, BI and planning never really came together. You could put them under one proverbial roof, but they never became one category. The two categories later diverged and EPM was redefined as the unification of financial planning and consolidation software (another analyst-led shotgun wedding that also later largely fell apart).
[12] If you want to provide a general-purpose data access platform designed to help a wide range of users find, understand, and trust data, are you better off starting from a data access point of view (POV) or a data governance one? Methinks access, as it’s fundamentally a “play offense with data” POV whereas data governance is fundamentally a “play defense with data” POV. I think customers want to buy the former (offense, subject to proper defense as a constraint) and it’s easier to adapt an access POV to governance than the converse. Growing up around dusty glossaries and policies isn’t a great way to get spiritually in tune with end-user needs, collaboration, access, and a data democratization POV. IMHO.
[13] I have a long history with Alation as an angel investor, advisor, former board member, interim gig employee, and consultant.
