Business Strategy for Product Managers

BUSINESS STRATEGY FOR PRODUCT MANAGERS

Mike Chowla Twitter: @mchowla

Silicon Valley Product Camp

March 22, 2014

Copyright © Mike Chowla 2014


My Background• Education

• BS, Electrical Engineering and Computer Science, UC Berkeley• MBA, Wharton

• Experience• 10 years as software engineer and architect building high

performance infrastructure• Previously Principal Product Manager for AOL Mail• Currently Director of Product Management at StrongView


Definition of Strategy

Webster's: a careful plan or method for achieving a particular goal usually over a long period of time

In a business context, our goal is sustainable competitive advantage

So:

a careful plan or method for achieving sustainable competitive advantage


Why care about strategy?• Figure out if you can be successful entering a market

• It’s a crystal ball that allows you to peer into the future and predict the industry structure even for nascent products

• Strategy effects are much more pronounced in Internet businesses because the effects of geography are weak

• Competitive advantages last less long due to faster innovation cycles

FRAMEWORKS


Porter’s Five Forces

Bargaining Power of Suppliers

Bargaining Power of

Customers

Threat of New Entrants

Threat of Substitute Products

Competitive Rivalry

in the Industry


Porter’s Generic Strategies

Segmentation Strategy

Differentiation Strategy

Cost Leadership

Low Cost competency

Uniquenesscompetency

Narrow Market Scope

BroadMarket Scope


KEY CONCEPTS



Threat of Imitation• To be effective, a strategy must consist of unique activities

• “The essence of strategy is in the activities – choosing to perform activities differently or to perform different activities than rivals do.”

Michael Porter

For activities to be unique, your competitors must either be unable to replicate them or replicating them must have impacts the competitor is unwilling to accept due impacts on their existing or other lines of business.


How Much Value Can You Capture?• Value Created = Willingness to Pay – Cost

• Willingness to Pay is the most the customer would pay• Cost includes minimum return to be in the business

• Added Value = The amount of aggregate value in the industry that would disappear if the player wasn’t there

• You can’t capture more value than you create


Added Value Example• I paid $750 for my iPhone• Max I would pay is $800• Cost is $250• Value Created = $550

• If no iPhones, I would buy a Nexus 5• Max I would pay $500• Cost is $250• Value Created = $250

• Apple’s added value is $300

SOURCES OF COMPETITIVE ADVANTAGELower Costs

Network Effect

Product Differentiation


COST ADVANTAGELower Costs



Recent Example: Google Drive

Those prices seem pretty low…


Compared to

Google’s Price is 80% Lower!


How Much Does Storage Cost?

Two ways to estimate it:

1) Guess at Dropbox’s gross margin. Say 80%. We have to figure utilization and the freemium model:

(1 – 0.8) * $10------------------------------- (100 * .5 + (1 / .04) * (2 * 0.5)) = $0.02 GB/month

100GB @ $10 month, 4% paying subscribers (Forbes), 70-80% gross margins is typical for SaaS business, estimate 50% utilization


How Much Does Storage Cost?

Two ways to estimate it:

2) Look at Amazon S3:

Cheapest Price = $0.043 cents / GBEstimated Gross Margin: 50%

$0.043 * (1 - .05) - $0.0215 GBAWS Gross Margin 50% - UBS Estimate


What does that mean?

$0.02 * (100 * 0.5) = $1 COGSAnd we haven’t yet accounted for non-paying free customers

Either Google has a cost advantage or their new pricing is a huge loss leader….


What’s your response if you are Dropbox?

Options are either:

1. Product differentiation to show higher value and justify higher price

2. Figure out how to lower costs so they are no longer at a disadvantage


Moral of the Story

It’s really hard to compete against a cost advantage


Other Examples

• Walmart – Supplier bargaining power, best distribution network, relentless at cutting costs

• Dell (pre-laptops) – Direct sales model reduced inventory costs

NETWORK EFFECTWhy doesn’t Facebook have (successful) competition?



Definition

The value of a product or service is increased by others using it


ExamplesSocial Networks

Market Places

SoftwareBuyers can’t leave because the sellers are there and vice versa

You can’t leave because everyone else is there

Applications and need for interoperability have kept people on these platforms


• There’s a lot of ways to improve Craigslist.• Site has hardly changed in 10 years• But no serious competition because

• The network effect• And many postings are free

Craigslist


Industry Structure Result

Creates a winner take all (or at least the majority of the value)

Explains why exits for consumer Internet companies have non-linear outcomes. Leading company (ie: WhatsApp, Instagram) has a huge exit with high per user value while smaller competitors get much smaller per user values.

DIFFERENTIATIONCan your product (or other part of your offering) create competitive advantage?



Differentiation

In the short run, yes!

Sustainable competitive advantage? MaybeThe question is can your competitor copy what you’ve done?

EXAMPLES OF WINNING ON PRODUCT



(Web Search)• Lots of competition in the early days of the commercial

Internet• Google was a late entrant• No switching costs• No Network Effect• Microsoft spent a ton to compete

• Google has maintained the best results


(Streaming)• Lots of Competition

• Amazon• All the pay TV vendors (Cable, Satellite)• Hulu

• Pay TV vendors experiences are terrible from a UX perspective

• Amazon is a formidable competitor• Competitive Advantages

• Great UX• Distribution, in the most devices and maintains experience• Radically higher value than Pay TV, $8 for all you can eat

• But Amazon bundles with Prime


(2008-2013)

• Tons of competition when the company was founded• http://techcrunch.com/2006/01/31/the-online-storage-gang/

• Low Barriers To Entry

http://techcrunch.com/2006/01/31/the-online-storage-gang/

http://techcrunch.com/2006/01/31/the-online-storage-gang/


(2008-2013)

• Dropbox had far superior UX• Well integrated into OS• Just Works

• Viral growth through referral storage bonuses• But nothing to stop competitors from copying

• Drew Houston’s Slide Deck on Lesson Learned is fantastichttp://www.slideshare.net/gueste94e4c/dropbox-startup-lessons-learned-3836587• “Building a bulletproof, scalable, cross-platform storage

architecture is hard”

http://www.slideshare.net/gueste94e4c/dropbox-startup-lessons-learned-3836587





Can you win on product?

Clearly yes, but seems to be the exception rather the rule

Why is it rare?

My best answer is that it’s hard to build a culture that creates a superior product

Culture Eats Strategy For Breakfast

Peter DruckerMark Fields, Ford Motor Company

DISRUPTION



What Breaks Down Competitive Advantage?

• Disruptive Innovation• creates a new market by applying a different set of values, which

ultimately (and unexpectedly) overtakes an existing market. (source: Wikipedia)

• ‘Disruptive’ has unfortunately turned into a buzzword• Key concept is the performance of the disruptive

innovation is always worse on at least one axis• Existing customers will not want it which causes the incumbents to

ignore it• Usually much cheaper than the technology being disrupted


Disruption Examples• Hard disk drives

• Clayton Christensen’s Favorite Example• Smaller form factors had less storage and were slower

• Blackberry• Keyboard made email experience better

• Still the best mobile email experience I’ve ever used

• Touch interfaces were disruptive• Worse for email

• Responds too slow• Network effect (from applications) switches from Blackberry to iPhone

and Android


The Bible On Disruption• One of the best books I’ve

read on strategy

• If you haven’t read it, you should


Summary• Create added value, because this is what you can capture

to create above average returns

• Sources of Competitive Advantage• Lower Costs• Network Effect• Differentiation

• Disruptive innovation destroys deep seated strategic advantages

[email protected]

Twitter: @mchowla

www.linkedin.com/in/mchowla


Business Strategy for Product Managers

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