Business Strategy for Product Managers


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Presented at Silicon Valley Product Camp 2014

Discussion of 2 classic strategy frameworks, the threat of imitation by your competitors and how to calculate added value.

Examines sources three sources of competitive advantage:
Cost Advantage
Network Effect
Product Differentiation

And finally looks at how disruptive innovations erode competitive advantage

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Business Strategy for Product Managers

  1. 1. BUSINESS STRATEGY FOR PRODUCT MANAGERS Mike Chowla Twitter: @mchowla Silicon Valley Product Camp March 22, 2014 Copyright © Mike Chowla 2014
  2. 2. 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 Copyright © Mike Chowla 2014
  3. 3. 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 Copyright © Mike Chowla 2014
  4. 4. 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 Copyright © Mike Chowla 2014
  5. 5. FRAMEWORKS Copyright © Mike Chowla 2014
  6. 6. 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 Copyright © Mike Chowla 2014
  7. 7. Porter’s Generic Strategies Segmentation Strategy Differentiation Strategy Cost Leadership Low Cost competency Uniqueness competency Narrow Market Scope Broad Market Scope Copyright © Mike Chowla 2014
  8. 8. KEY CONCEPTS Copyright © Mike Chowla 2014
  9. 9. 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. Copyright © Mike Chowla 2014
  10. 10. 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 Copyright © Mike Chowla 2014
  11. 11. 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 Copyright © Mike Chowla 2014
  12. 12. SOURCES OF COMPETITIVE ADVANTAGE Lower Costs Network Effect Product Differentiation Copyright © Mike Chowla 2014
  13. 13. COST ADVANTAGE Lower Costs Copyright © Mike Chowla 2014
  14. 14. Recent Example: Google Drive Those prices seem pretty low… Copyright © Mike Chowla 2014
  15. 15. Compared to Google’s Price is 80% Lower! Copyright © Mike Chowla 2014
  16. 16. 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 Copyright © Mike Chowla 2014
  17. 17. How Much Does Storage Cost? Two ways to estimate it: 2) Look at Amazon S3: Cheapest Price = $0.043 cents / GB Estimated Gross Margin: 50% $0.043 * (1 - .05) - $0.0215 GB AWS Gross Margin 50% - UBS Estimate Copyright © Mike Chowla 2014
  18. 18. What does that mean? $0.02 * (100 * 0.5) = $1 COGS And 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…. Copyright © Mike Chowla 2014
  19. 19. 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 Copyright © Mike Chowla 2014
  20. 20. Moral of the Story It’s really hard to compete against a cost advantage Copyright © Mike Chowla 2014
  21. 21. Other Examples • Walmart – Supplier bargaining power, best distribution network, relentless at cutting costs • Dell (pre-laptops) – Direct sales model reduced inventory costs Copyright © Mike Chowla 2014
  22. 22. NETWORK EFFECT Why doesn’t Facebook have (successful) competition? Copyright © Mike Chowla 2014
  23. 23. Definition The value of a product or service is increased by others using it Copyright © Mike Chowla 2014
  24. 24. Examples Social Networks Market Places Software Buyers 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 Copyright © Mike Chowla 2014
  25. 25. • 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 Copyright © Mike Chowla 2014
  26. 26. 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. Copyright © Mike Chowla 2014
  27. 27. DIFFERENTIATION Can your product (or other part of your offering) create competitive advantage? Copyright © Mike Chowla 2014
  28. 28. Differentiation In the short run, yes! Sustainable competitive advantage? Maybe The question is can your competitor copy what you’ve done? Copyright © Mike Chowla 2014
  29. 29. EXAMPLES OF WINNING ON PRODUCT Copyright © Mike Chowla 2014
  30. 30. (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 Copyright © Mike Chowla 2014
  31. 31. (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 Copyright © Mike Chowla 2014
  32. 32. (2008-2013) • Tons of competition when the company was founded • • Low Barriers To Entry Copyright © Mike Chowla 2014
  33. 33. (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 fantastic startup-lessons-learned-3836587 • “Building a bulletproof, scalable, cross-platform storage architecture is hard” Copyright © Mike Chowla 2014
  34. 34. 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 Drucker Mark Fields, Ford Motor Company Copyright © Mike Chowla 2014
  35. 35. DISRUPTION Copyright © Mike Chowla 2014
  36. 36. 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 Copyright © Mike Chowla 2014
  37. 37. 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 Copyright © Mike Chowla 2014
  38. 38. The Bible On Disruption • One of the best books I’ve read on strategy • If you haven’t read it, you should Copyright © Mike Chowla 2014
  39. 39. 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 Copyright © Mike Chowla 2014
  40. 40. QUESTIONS? Twitter: @mchowla Copyright © Mike Chowla 2014
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