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Business Strategy for Product Managers (2018)


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Overview of strategy frameworks and sources of competitive advantages. Sources of competitive advantages examined are cost advantage, network effect, differentiation. Also looks at Disruptive Innovation.

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Business Strategy for Product Managers (2018)

  1. 1. Copyright © Mike Chowla 2018 BUSINESS STRATEGY FOR PRODUCT MANAGERS Mike Chowla Twitter: @mchowla Product Camp Silicon Valley March 31, 2018 Slides available at
  2. 2. Copyright © Mike Chowla 2018 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 product roles at AOL, StrongView,, Rubicon Project • Currently Director of Product Management at PubMatic
  3. 3. Copyright © Mike Chowla 2018 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
  4. 4. Copyright © Mike Chowla 2018 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
  5. 5. Copyright © Mike Chowla 2018 FRAMEWORKS
  6. 6. Copyright © Mike Chowla 2018 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
  7. 7. Copyright © Mike Chowla 2018 High Industry Rivalry Example: Ad Tech
  8. 8. Copyright © Mike Chowla 2018 Porter’s Generic Strategies Segmentation Strategy Differentiation Strategy Cost Leadership Low Cost competency Uniqueness competency Narrow Market Scope Broad Market Scope
  9. 9. Copyright © Mike Chowla 2018 KEY CONCEPTS
  10. 10. Copyright © Mike Chowla 2018 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.
  11. 11. Copyright © Mike Chowla 2018 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
  12. 12. Copyright © Mike Chowla 2018 Added Value Example • I paid $850 for my iPhone • Max I would pay is $900 • Cost is $275 • Value Created = $625 • If no iPhones, I would buy a One Plus 5t • Max I would pay $560 • Cost is $230 • Value Created = $330 • Apple’s added value is $300
  13. 13. Copyright © Mike Chowla 2018 Added Value Example: iPhone iPhone earns 91% of all profits for cell phone manufactures Possible because of Apple’s high added value and ability to capture a large share of it
  14. 14. Copyright © Mike Chowla 2018 SOURCES OF COMPETITIVE ADVANTAGE Lower Costs Network Effect Product Differentiation
  15. 15. Copyright © Mike Chowla 2018 COST ADVANTAGE Lower Costs
  16. 16. Copyright © Mike Chowla 2018 Cost Advantage Example: Southwest Unique Activities: • All 737s • Fastest Turnarounds In the Industry • Fly to smaller airports • No seat assignments • No First Class • Point-to-Point Service (vs. Hub and Spoke) • No baggage or change fees
  17. 17. Copyright © Mike Chowla 2018 Cost Advantage: Airlines Revenue 20,425 6,632 36,556 40,180 39,639 Cost of Goods 16,665 5,320 32,218 34,896 32,687 Gross Profit 3,760 1,312 4,338 5,284 6,952 Gross Margin 18.4% 19.8% 11.9% 13.2% 17.5% Available Seat Miles 148,521 53,620 224,692 273,410 251,867 Load Factor 84.0% 85.1% 82.9% 81.7% 84.6% Revenue Per A Mile 0.138 0.124 0.163 0.147 0.157 Cost Per Per A Mile 0.112 0.099 0.143 0.128 0.130 Margin Per A Mile 0.025 0.024 0.019 0.019 0.028 2016 data
  18. 18. Copyright © Mike Chowla 2018 Takeaways • Unique operations needed to reduce costs over competitors • Imitation always happens. If incumbents can’t, new entrants (ie: JetBlue) will • Lower costs give you the option of better margins or taking share through lower prices
  19. 19. Copyright © Mike Chowla 2018 Other Examples Walmart – Supplier bargaining power, best distribution network, relentless at cutting costs Amazon Supplier bargaining power, best fulfillment network, culture of frugality Dell (pre-laptops) – Direct sales model reduced inventory costs
  20. 20. Copyright © Mike Chowla 2018 NETWORK EFFECT Why doesn’t Facebook have (successful) competition?
  21. 21. Copyright © Mike Chowla 2018 Definition The value of a product or service is increased by others using it
  22. 22. Copyright © Mike Chowla 2018 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
  23. 23. Copyright © Mike Chowla 2018 • 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
  24. 24. Copyright © Mike Chowla 2018 Uber Maybe less other marketplaces: • Set pricing limits seller advantages vs. other market place • Drivers often drive for Uber and Lyft • Low loyalty from drivers • Easy for riders to switch to competitors How strong a network effect does Uber have?
  25. 25. Copyright © Mike Chowla 2018 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.
  26. 26. Copyright © Mike Chowla 2018 DIFFERENTIATION Can your product (or other part of your offering) create competitive advantage?
  27. 27. Copyright © Mike Chowla 2018 Differentiation In the short run, yes! Sustainable competitive advantage? Maybe The question is can your competitor copy what you’ve done?
  28. 28. Copyright © Mike Chowla 2018 EXAMPLES OF WINNING ON PRODUCT
  29. 29. Copyright © Mike Chowla 2018 (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
  30. 30. Copyright © Mike Chowla 2018 (Streaming 2007-2013*) • 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, $10 for all you can eat • But Amazon bundles with Prime *starting in 2013, Netflix started competing with original content
  31. 31. Copyright © Mike Chowla 2018 (2008-2013) • Tons of competition when the company was founded • • Low Barriers To Entry
  32. 32. Copyright © Mike Chowla 2018 (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”
  33. 33. Copyright © Mike Chowla 2018 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
  34. 34. Copyright © Mike Chowla 2018 DISRUPTION
  35. 35. Copyright © Mike Chowla 2018 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
  36. 36. Copyright © Mike Chowla 2018 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
  37. 37. Copyright © Mike Chowla 2018 The Bible On Disruption • One of the best books I’ve read on strategy • If you haven’t read it, you should
  38. 38. Copyright © Mike Chowla 2018 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
  39. 39. Copyright © Mike Chowla 2018 QUESTIONS? Twitter: @mchowla