The Piton Network: Decisions that Simultaneously Support and Limit the Future Decision Space

Business Philosophy Series

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“To know where you are going, just follow the path you are on”.

Piton: A mountain climbing tool, a metal spike that is driven into the side of a mountain to act as an anchor. A climber will place a Piton into the mountain in order to continue to climb up; however, placing a Piton also restricts potential upward movement.

Intro

When playing chess, you have to always think several moves ahead. With each chess piece you move, you are constantly changing your future potential moves. All scenarios you face are a downstream consequence of earlier moves. A good chess player is constantly thinking through how different moves impact their potential future moves: they are thinking how does my future decision space change. When an opponent is in checkmate, that outcome is decided many moves prior.

A Piton is a decision that simultaneously supports and limits our future decision space. When a business starts making decisions, they are placing Pitons down which both support and limit their next move.

If an entrepreneur decides to open a restaurant and leases out a space that has very little customer seating, they have just placed a Piton down. That Piton will constrain them from making many decisions: their lack of seating means they are unlikely to be a “full service” restaurant with waiters taking orders, since they would not be able to accommodate more than a couple guests at once. However, the restaurant’s smaller footprint also means they are paying less in rent, which together with no waiters could enable them to charge less for food. In that one decision, the entrepreneur has limited what sort of restaurant he can build, as well as what sort of restaurant he would have an advantage with.

When you are following a path up a mountain, you are placing Pitons into the mountain side which enable you to progress on your path, while simultaneously restricting your future movement. A Piton may literally be supporting you, but it also limits your motions which is why putting it in the correct place is important. Everyday entrepreneurs and business managers are placing Pitons down.

Decision Clusters

We noted that in chess, each decision you make will impact your future decision space. Similarly, the decision to place a Piton in the side of the mountain limits where you can navigate to place succeeding Pitons. The reality is that most decisions are not single decisions, but clusters of decisions. That is because when we make one decision, subsequent decisions are linked.

For example, let’s say you have a low-price strategy for your business. Getting the cheapest products typically means outsourcing internationally, which in turn means longer lead times. This is usually offset by larger orders to not only get better pricing, but to also build up storage of inventory to compensate for the longer lead times. However, the higher inventory a company holds also puts it at risk of inventory obsolescence and potentially will lead to discounting of unsold inventory.

In this example a company might have thought they were just making one decision (buy products cheaply) but were really making no fewer than 4 decisions: 1) how responsive they can be to changing inventory needs, 2) how much working capital is tied up in inventory, 3) how long reorders take, and 4) what is their risk of inventory obsolescence and needing to discount. This is how making one decision closed the decision space on at least 4 other elements in the company. And these are just the more obvious factors.¹ We call the decision to have a low-priced strategy a Piton—the Piton is the strategic decision on which all these other elements follow.

Laying down that one Piton (low-price strategy), meant the company was simultaneously deciding on several other factors. If they want a low-price strategy, they may have to lay that Piton down nevertheless, but they should be conscious of its downstream impacts. Putting a Piton down isn’t just a single decision, but effectively multiple at once. When one decision is really forcing several decisions, we will call it a “Decision Cluster”.

A Company’s Value Prop is Guided by Their Load-bearing Pitons

Floor & Decor is a hard surface flooring retailer. Most other flooring stores carry samples of product and have distant warehouses that can ship the customers’ orders to the store for pick up or to their job site. In contrast, Floor & Decor’s “stores” are the warehouse. This means that they can have all their SKUs in stock for the customer to leave with that day. Home Depot also utilizes a warehouse like store model, however since they have multiple categories of home improvement product, they have much less flooring selection than Floor & Decor.

These two decisions to (1) specialize only in hard surface flooring and (2) utilize a warehouse store model, are critical variables to creating a unique value prop for pros and consumers. Professionals highly value in-stock inventory because they want to be able to complete projects quickly, so they can book more of them. Consumers want a lot of selection and cheap prices. These preferences are fulfilled best by the two decisions we mentioned above. Anything else is likely sub-optimizing for consumer’s and professional’s preferences.  

These are Load-bearing Pitons, that support Floor & Decor’s entire value prop. The whole Clay Christensen disruptive innovator point is that sometimes competition can come from another “value network”, or in other words they are not using the same Load-bearing Pitons. The incumbent is stuck because to pull those Pitons out of the ground would mean a total degradation of their current value prop. (Clarifying note: A Value Network typically refers to elements outside the business that support the organization or departments within the organization. A Piton refers to a strategic decision which then has elements built around it).

Think of Wal-Mart trying to fight Amazon’s one day delivery from a store footprint instead of a distribution center network. Their delivery position is clearly sub-optimal as their warehouses are oriented to delivering large full truckloads to individual store bays and not pick & pack single items into individual boxes. This leaves them to service delivery from the store level, with little of the automation or order density Amazon benefits from at each distribution center. They simply cannot address fast delivery on millions of items from a value network optimized for physical retail: their delivery network will always be sub-optimal relative to Amazon.²

If you were a baker, it is the difference between making the best cake and making the best cake using the ingredients you happen to have laying around on your shelf. You are optimizing for the variables you have versus the optimal variables to optimize for. In mathematics, a “Meta-Optimization” is when you optimize for an outcome with the optimal variables, instead of the given variables.³ The Piton Network is what an organization is currently optimized for based off their existing Pitons. Too often organizations are optimizing for their current Pitons, rather than moving the Pitons into the optimal position to best serve their value prop.

If You Have to Copy, Copy Completely.

The airline industry is an incredibly competitive industry that is characterized by high fixed costs, high input cost variability, low customer loyalty, and requiring near full asset utilization to achieve just mediocre profitability. The nonessential nature of certain travel means a mild economic slump can lead to consumers deferring or substituting flying, which pushes the airlines into loss.  However, Herb Kelleher of Southwest was able to run an airline profitably for over 30 consecutive years.

In order to achieve that, every element in the Southwest airline model had to be optimized perfectly. He used the same aircrafts, which allowed him to place bulk orders to get a slight discount, but also meant that the staff knew exactly how to prep the plane and didn’t have to waste time with unfamiliar aspects. Pilots could be slotted on different flights with more ease since they were licensed to fly all planes. Focusing on regional airports meant less competition and thus lower prices. Not assigning seats, but only boarding order sped up onboarding. They would land, offboard, clean, onboard, and takeoff in record times, which increased asset utilization. This further supported lower prices. Lower prices spurred more demand. More flights increased network density and lower overhead.

Jet Blue tried to copy their low cost and efficient approach and would mimic elements like using one type of aircraft, but their failure to copy everything meant that they were sub-optimizing. They still used assigned seats for example, which increases the time it takes to board and thus increases the time planes are not in the air. Home Improvement warehouse chain Lowe’s similarly tried to copy Floor & Decor by increasing in-stock inventory and selection, but they couldn’t match Floor & Decor’s level of selection or price without changing their core business. So long as Lowe’s was only willing to devote a fraction of their square footage to flooring, they would always be competing from an inferior position since they couldn’t house the same level of selection or in-stock inventory. Lowes may have lifted sales a bit, but moving from, say, 10% to 20% of a Floor & Decor’s level of in-stock selection is not a good enough value prop to harm Floor & Decor.  

Lowe’s had Load-bearing Pitons they were unwilling to pull out in order to optimize just for their hard flooring business. Most businesses cannot fully copy a competitor because they would have to pull a Load-bearing Piton out and rebuild part of their business. As in this case it would require Lowe’s to exit other home improvement categories in order to free up the square footage in their stores. Look for companies whose value prop is served by Load-bearing Pitons, and that will help guide an understanding of the credibility of the competitive threat.

In such cases, the company is trying to serve a job from a sub-optimal position. These companies are competing on the competitors’ terms, instead of their own. Lowes and Walmart see a competitor having success and wants in on that not realizing that going after what that competitor was successful in necessitates a tradeoff that would weaken their positioning in their current business.

As Jeff Bezos notes, there are two-way door decisions and one-way door decisions. A two-way door decision can always be reversed. A one-way door decision is irreversible (at least without significant costs). Businesses who chase competitors from a sub-optimal Piton Network usually fail to fully copy the competitor’s offerings because there is a Piton in their network that needs to be moved, but it is a “Load-bearing Piton” and moving it is a “one-way door” decision. Not all Pitons can be restaked once pulled, and pulling them may permanently push a company in a different direction.

To reiterate, a Piton is a strategic decision that simultaneously supports and constrains an element of a business. The Piton Network is what the Pitons in the company are optimized for. Just like with mountain climbing, it is possible for a Pitons to be sub-optimally placed for your intended path.

RH Restaking the Piton Network

Sometimes though there are bold managers that realize they need to change many things in their business. Gary Friedman of Restoration Hardware was one. In The early 2000’s Restoration Hardware was nearing bankruptcy. The first Restoration Hardware sold antique hardware for homes (think light fixtures, doorknobs, and other home durables). They would add more home good items, but since they were an unknown brand with no money to advertise, founder Stephen Gordon started adding more “gimmicky” items to the stores. These items were cheap and helped draw customers in out of curiosity. Overtime, he started to lean into novelty more and more, moving items around the store so the experience was always different and narrating the items with quirky descriptions.⁴ These items attracted curious shoppers, increased word of mouth, and since they were relatively cheap and sure to be gone next time they visited, spurred impulsive purchases. For a while they became a bit of a profit center for them.

However, ultimately the novelty faded and while people may have known about the stores, they weren’t interested in their core hardware offerings, like an Oak Mule Chest for $1,990, since it was adorned with an Atomic-Man robot toys and dog biscuit mix. This is the King Midas problem: Restoration Hardware increased traffic at the cost of decreased conversion. Restoration Hardware was a broken, unprofitable business with falling sales and nearing bankruptcy.

Gary Friedman reinvented the business by pulling out the Load-bearing Pitons. He removed most of the novelty and discovery items, but not all of them all at once. He realized that they were still an important revenue driver for the company and so wasn’t able to eliminate the practice in one swift stroke. This is where the climbing analogy is apt. When you are climbing a mountain, you cannot remove the Pitons that are holding you because then you will fall. The climber can only remove a Piton after the next one is staked into the mountain. Gary Friedman never removed all of the gimmicky items until the business was on a more solid footing, which he initially did by expanding their textiles offerings and directly sourcing products in order to cut prices. As he improved their core home offerings, they were less dependent on the gift items revenues and only then could they totally remove them.  

He had the aspiration of making Restoration Hardware a luxury brand, but he couldn’t just jack up his prices all at once. He had to ditch their legacy mall store footprint which could not support a high-end image. As he kept moving up the mountain, he realized there were many other Pitons that were holding the new luxury offering back. Delivery had to be re-envisioned since it was leading to many complaints, their warehouse network wasn’t optimized for the number of SKUs they carried, they had to brush off 3^rd party interior designers since they couldn’t cater to them with discounts as the discounts would hurt their brand and direct-to-consumer efforts.

A lot of these decisions fell from prior decisions. RH could have tried to optimize for their existing Piton Network by making some of the changes Gary Friedman did, but still keeping most of the Stephen Gordon whimsical and gimmicky products, but then it could never fulfill their luxury ambitions.  Gary Friedman wasn’t going to just optimize from the existing Piton Network, but from the optimal Piton Network, discarding existing elements that didn’t serve the new business vision.

Conclusion.

The Piton is a strategic decision that other elements of a business are built off of and constrained by. But at the heart of a Piton is a trade-off. Every time you build towards something, you build away from something else. Stack a few of these decisions together and you have a Piton Network— a group of decisions that optimize a business for a specific outcome, but critically do not allow it easily to be optimized for something else. A company’s destiny is their Piton Network.  

With each Piton a mountain climber stakes into the mountain side, they are making a decision on how to proceed. The Piton both supports them and constrains them.

You can read our second piece on the Piton Network Concept here.  

If anything was unclear, please leave a comment or DM us @Speedwell_LLC!

1. Other factors could include navigating tariffs, higher reliance on international shipping, higher exposure to fuel from transit costs, and bringing in the need to interface with different cultures and languages as other elements that can impact the company and all stemmed from this one decision to have a low-price strategy.

2. This is precisely why Clay Christensen insisted that in order to create disruptive innovation from an incumbent company they should set up a small, remote organization: he knew the temptations to try to configure based of the existing value network would be too strong, but always sub-optimal.

3. Meta: Meta is best explained by example. When you play poker, you are just playing a game. However, if you pretend that club soda you are drinking is a vodka tonic that is impairing your judgement in order to throw your opponents’ off, you are playing the “meta-game”. 

4. The description of Restoration Hardware’s “My Own Quirky Summer Memories Sandwich Spreader” is as follows: “I remember a particular sandwich spreader from my summer sandwich-making noon times on a lake-front house on Indian Bay in upstate New York. Being the weird and wonderful or whatever guy I am I always thought this spreader was such a classy way to put mayo on that absurdly squishy white bread”.