Business Strategy for Product Managers (2017)
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The document is a presentation about business strategy for product managers. It discusses frameworks for strategy like Porter's Five Forces and generic strategies. It covers key concepts like sources of competitive advantage through lower costs, network effects, and product differentiation. Examples are provided for each concept, like Southwest Airlines' cost leadership. The presentation also discusses disruption and how it can break down existing competitive advantages.
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Business Strategy for Product Managers (2017)
- 1. BUSINESS STRATEGY FOR PRODUCT MANAGERS Mike Chowla Twitter: @mchowla Silicon Valley Product Camp March 25, 2017 Copyright © Mike Chowla 2017 Slides available at https://www.slideshare.net/mchowla
- 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 product roles at AOL, StrongView, Aeris • Currently Sr. Director of Product Management at Rubicon Project Copyright © Mike Chowla 2017
- 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 2017
- 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 2017
- 5. FRAMEWORKS Copyright © Mike Chowla 2017
- 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 2017
- 7. High Industry Rivalry Example: Ad Tech Copyright © Mike Chowla 2017
- 8. Porter’s Generic Strategies Segmentation Strategy Differentiation Strategy Cost Leadership Low Cost competency Uniqueness competency Narrow Market Scope Broad Market Scope Copyright © Mike Chowla 2017
- 9. KEY CONCEPTS Copyright © Mike Chowla 2017
- 10. 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 2017
- 11. Barriers to Entry • Cost Advantages • Scale Economies • Scope Economies • Learning Curve • Capital Requirements • Switching Costs • Scarce Resources • Product Complexity • Brand / Customer Loyalty • Limited Distribution • Entry Deterring Regulations Copyright © Mike Chowla 2017
- 12. 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 2017
- 13. 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 3 • Max I would pay $500 • Cost is $200 • Value Created = $300 • Apple’s added value is $325 Copyright © Mike Chowla 2017
- 14. Added Value Example: iPhone iPhone earns 91% of all profits for cell phone manufactures Copyright © Mike Chowla 2017 Possible because of Apple’s high added value and ability to capture a large share of it
- 15. SOURCES OF COMPETITIVE ADVANTAGE Lower Costs Network Effect Product Differentiation Copyright © Mike Chowla 2017
- 16. COST ADVANTAGE Lower Costs Copyright © Mike Chowla 2017
- 17. 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) Copyright © Mike Chowla 2017
- 18. 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 Copyright © Mike Chowla 2017
- 19. 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 Copyright © Mike Chowla 2017
- 20. 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 Copyright © Mike Chowla 2017
- 21. Sources of Cost Advantages • Economies of Scale or Scope • Learning Curve – Getting more efficient with each unit of volume due to learning • Lower Supplier or Input Costs • Better Business Model • Proprietary Knowledge Copyright © Mike Chowla 2017
- 22. NETWORK EFFECT Why doesn’t Facebook have (successful) competition? Copyright © Mike Chowla 2017
- 23. Definition The value of a product or service is increased by others using it Copyright © Mike Chowla 2017
- 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 2017
- 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 2017
- 26. 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 Copyright © Mike Chowla 2017 How strong a network effect does Uber have?
- 27. 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 2017
- 28. DIFFERENTIATION Can your product (or other part of your offering) create competitive advantage? Copyright © Mike Chowla 2017
- 29. Differentiation In the short run, yes! Sustainable competitive advantage? Maybe The question is can your competitor copy what you’ve done? Copyright © Mike Chowla 2017
- 30. EXAMPLES OF WINNING ON PRODUCT Copyright © Mike Chowla 2017
- 31. (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 2017
- 32. (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, $10 for all you can eat • But Amazon bundles with Prime Copyright © Mike Chowla 2017
- 33. (2008-2013) • Tons of competition when the company was founded • http://techcrunch.com/2006/01/31/the-online-storage-gang/ • Low Barriers To Entry Copyright © Mike Chowla 2017
- 34. (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” Copyright © Mike Chowla 2017
- 35. 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 Copyright © Mike Chowla 2017
- 36. DISRUPTION Copyright © Mike Chowla 2017
- 37. 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 2017
- 38. 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 2017
- 39. 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 2017
- 40. 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 2017
Editor's Notes
- Things called strategy that aren’t: Cloud Personal Favorite: Big Data
- This is what you get in a business school strategy course More a check list if you don’t know an industry
- http://247wallst.com/investing/2016/11/23/apple-iphone-profits-represent-90-of-industry-total/
- Inktomi story: joke about living in an estate in Woodside if their view of a fragmented market was correct