Square Strategic Analysis: Strategic Planning and Execution
Analysis conducted for the Business Strategy Specialization: Strategic Planning and Execution course offered by UVA Darden School of Business on Coursera
Introduction
Square Inc. is a technology company that primarily provides financial services to businesses and consumers in the forms of hardware and software. Their mission is introduced on the Square corporate site:
“We believe everyone should be able to participate and thrive in the economy. We make commerce easy. We believe the economy is better when everyone has access…We believe in fair and square.” (Square Corporate Site)
As an enabler of participation and access to the economy, Square is building two significant ecosystems; one for sellers (i.e. merchants, Square’s “core” products and services), and one of buyers (individual consumers, via Square’s Cash App). These ecosystems offer their respective target market a unique portfolio of products and services, and the diversity of services brings with it no shortage of big-name competitors.
Given the concentration of players in Square’s area of focus, one might naturally wonder how they were able to break into markets with such well-fortified players. The answer is twofold, relating to Square’s business model / value proposition and their target market.
At the forefront of Square’s valuable competitive position, across both the seller and buyer ecosystems, is their ability to provide integrated solutions to their customers across hardware, software, and payment services. The above graphics suggest that the majority of incumbent firms are strong in one, but not all, of the services listed. These companies rely on third-party partnerships to offer complete services, whereas Square can offer an integrated solution that encompasses multiple service lines, greatly increasing the convenience for users and saving valuable time and costs.
“We primarily compete based on our brand and the simplicity and quality of our customer experience. We invest in brand, design, and technology to keep our products fast and simple, while also improving and expanding our feature set.” (Square 2019 10-K)
This strategy greatly increases the stickiness of Square users and locks them into the product, enabling Square to extract value over time. The bundling of services and creation of a new business model has proven to be a disruptive innovation to existing markets, resetting the competitive life cycle and consumer expectations while providing Square with a clear runway to grow.
The second reason Square has found success is that the seller ecosystem has followed a classic path forged by many previous disruptors: the original core products addressed a target market that was otherwise seen as unattractive. In this case, that market consists of “micro-firms” whose Gross Market Volume (GMV) is less than $125k per year. These merchants are seen as too small in size to provide meaningful contribution to revenue growth for other companies, so they are often neglected by larger, reputable financial services companies. Indeed, the early adopters of Square technology were food trucks, hyper-local restaurants, and other small businesses.
Having established their early competitive position with micro-firms, Square is making efforts to expand upmarket and provide their services to larger companies. This strategy has shown promise, and over 50% of current payment volumes come from merchants with GMW greater than $150k / year. In general, micro-firms will sign up just for Square POS and credit-card reader technology, while larger businesses are more complex and have higher demand for the benefits of a whole service ecosystem thus making them more attractive long-term customers.
Square clearly sees the future of their business in the acquisition of larger sellers as evidenced by the following graphic pulled from their 2020 Q1 Unit Economics presentation for investors:
So, we asked ourselves, how might Square improve their value proposition to SMB to Mid-Market sellers?
Strategy Hypothesis and Formulation: “Merchant Rewards” Business Model Canvas
Having brainstormed several novel ideas, we decided to test the following strategic hypothesis:
“What if Square created a Merchant Rewards / Gift Card feature inside of the Cash APP as a way to propel individual spending and drive merchant acquisition efforts?”
Our hypothetical strategy is best visualized using the business model canvas tool:
*Note: Square already offers a product called “Boost Rewards” as part of their cash card which is similar to cash back products offered by Bank of America, Chase, etc.
Instead, Merchant Rewards is a re-chargeable gift card that exists within Cash APP similar to the Starbucks Reward Card feature available in the Starbucks App. It can either be used to store cash for spending at your favorite local merchant which earns you loyalty rewards, or it can be utilized as a P2P gifting social commerce product.
Strategy Analysis:
In testing our strategic hypothesis, we want to first identify and challenge key assumptions made across four dimensions:
Value Test: Merchants will value the digital gift card service provided by Square; and individual consumers will value the rewards from their loyal shopping habits and introduce their favorite merchants to friends.
We know that:
· Cash that sits in the Square Cash App has no value, but cash deposited onto a gift card can be accounted as a liability by the merchant, meaning a portion of the cash can be used by the merchant in consideration of future sales (many gift cards are treated like cash and non-refundable)
· An estimated 10% of Starbucks Rewards are never used by customers and expire, allowing Starbucks to realize this money on their books with no service delivered
· Gift cards are mostly used by existing customers and using gift cards to attract new customers is less common
But we might want to know more about:
· Would small merchants increase consumer benefits by including spending rewards or would gift cards be treated simply as cash on a card?
· Will this actually create long-term, added value? Or would this be seen as an incremental change?
Execution Test: Square has a strong team of software developers capable of rolling out products with great UX and iteratively improving them over time.
We know that:
· Square was established as a digital-first company and has software development and innovation in their DNA
But we might want to know more about:
· What are the key features and usability requirements of a Merchant Rewards service?
Scale Test: Square has the existing network of merchants and consumers to develop this initiative into a revenue-generating product.
We know that:
· Square already has 2,000,000 sellers as customers and are adding about 100,000 new sellers each quarter
· The Square business model is founded on cross-selling of ecosystem services
But we might want to know more about:
· What type of merchants would be first adopters?
· What would merchants think of Square using a recommendation algorithm to promote other merchants to consumers?
Defensibility Test: Our competitors, such as PayPal or AmEx, will not copy this product or Square will enjoy significant benefits of a first-mover advantage.
We know that:
· American Express has strong brand recognition in regard to the Rewards / Benefits program space (adjacent to gift cards but not 100% the same)
But we might want to know more about:
· Who are the existing companies that already offer this service?
· What are the current strategic initiatives of our core competitors in regard to merchant gift cards?
· If this is an unoccupied space, why is that?
The identification and challenging of our key assumptions uncovered several questions which require examination and testing via a continuing research plan:
· Project Team: Assign an exploratory project team with diverse representation and allocate X hours per week to attend to this project
· KPIs: Determine a set of key information and checkpoints that provide management with the option to move forwards or bail on the project
· Desktop Research: Complete research of the landscape of gift card products; successes and failures, past research studies, the history / status quo / trends of these products
· Exploratory Research: Engage different user groups, sellers and individuals, to learn more about their perceptions and begin to understand attitudes towards
· Prototyping and Testing: Engage users with simple prototypes to receive feedback; a service blueprint, example business canvas, or wireframes
· Quantitative Analysis: Create a model to estimate the range of value to be created for different users across best and worst case scenarios
Strategy Implementation:
Finally, we continue analysis of Square’s ability to execute this initiative by applying the 4A framework to analyze organizational-level capabilities:
Alignment
Square demonstrates the ability for consistent and coordinated action. Both co-founders, Jack Dorsey and Jim McKelvey, are still engaged in management as CEO and a Board Member respectively, and their continued involvement ensures that the Square team stays aligned around their North Star vision. The Merchants Rewards initiative aligns with Square corporate values by supporting the “..thrive in the economy” portion of the mission statement shared in our introduction.
With a large-but-not-too-large team of software engineers and head office in Silicon Valley (global headcount is 3,800), the company follows a culture of “fail fast, fail smart” ensuring that their organizational structure does not become too complex and they discard non-value creating initiatives that may encourage misalignment.
Ability
Square’s talent and ability to efficiently execute this initiative is less clear. The Merchant Rewards initiative would require the involvement of a cross-functional team with responsibilities falling on two primary groups: software engineers (product) and business development (sales and marketing).
Square software engineers are part of a unique, strategic talent pool that is vital to the success of the company, and their offices are based in arguably the greatest source of software engineering talent in the world; Silicon Valley. This suggests that product development wouldn’t be a large issue.
However, Square strategic partnerships team is not as robust, and the company is just now starting to add depth to their roster of sales professionals as they look to sign up larger merchants and encourage cross-selling within the ecosystem. Jack Dorsey himself has proclaimed that the team “sucks at selling” their own product, and this indicates that a new strategic initiative could strain already thin resources or be unsuccessful if promoted incorrectly to potential users.
Architecture
Square is a growing company and does not demonstrate negative behaviors created by inflexibility or bureaucracy. Square is a young company that was borne as a digital-first organization, and thus collects large amounts of data. We expect that Square has decentralized operations, implemented flexible processes, and features distributed information systems. The author was unable to find any materials that suggest otherwise.
Agility
Square demonstrates a keen agility in its operations. While banking and financial services is an industry with a long history, the software space is hyper-dynamic, and this dynamism is part of Square’s DNA and competitive position as they attempt to be a disruptor in the financial services space. Keep in mind that within just 11 years of operation, the company has developed multiple service ecosystems used by over 2,000,000 merchants and with many respected, incumbent firms. Organizational growth has been enabled by an unrelenting focus on the user/customer which results in leadership unity, resource fluidity, and improves overall alignment. Furthermore, as a growing company, the firm routinely re-evaluates what it is now, where it is going, and how to balance the present and future.
Conclusion
In conclusion, it seems evident that Square has the capability to plan and execute on our hypothesized Merchant Rewards initiative. The team has the internal ability to build the product, appropriate attitude and culture to assess the opportunity and utilize feedback, and the organizational fortitude to make bold, strategic moves. However, our analysis of the value created is still incomplete and presents the most significant question mark remaining. In a hyper-growth company, allocation of resources and attention is critical, so this question needs to be explored further. Before moving forwards, Square would be best served to employ an internal team to research and assess the opportunity for meaningful value creation. To effectively manage internal resources, Square could choose to determine several key data points for testing and create thresholds which, if surpassed, trigger further investment.
Sources Used:
http://jpkoning.blogspot.com/2019/08/starbucks-monetary-superpower.html
https://www.fastcompany.com/3034271/the-secret-success-of-the-square-starbucks-alliance
https://en.wikipedia.org/wiki/Square,_Inc.#Cash_App
https://www.pymnts.com/digital-payments/2019/square-loses-customer-wall-street-concerns/
https://squareup.com/us/en/about/investors
https://www.retaildive.com/ex/mobilecommercedaily/whole-foods-makes-risky-bet-on-square-scaling
https://www.pymnts.com//?s=square
Morningstar Equity Analyst Report: Square Inc.
