“Lord knows we don’t need anymore software that no one uses.” Des Traynor
Strategy is a word that is rarely used in Product Management. And, when it is, it’s usually invoked (wrongly) to describe a process, an approach or an objective. Innovation is not a strategy or a source of competitive advantage. Neither are bots, design thinking, launching on Product Hunt or ‘crushing it’. Virtual reality is not a competitive advantage either, unless you own Oculus Rift. These are tactics available to all.
In place of strategy is a belief in the intellectual power of smart people and the unbounded potential of software engineers to solve problems and reimagine entire industries. Strategy sounds over-engineered and time-consuming. But, in my opinion, investment in product strategy will be the key differentiator for Product Management success in the future. Not pivoting, growth hacking or running lean.
In 2014, Janet Pierson, the Head of SXSW’s film festival, warned that “the impulse to make a film had far outrun the impulse to go out and watch one.”
The same is now true for digital products. Thanks to the enormous influence of Lean Startup, AWS and open source software, it’s never been easier to build a product. And, consequently, everyone has.
The mania for ‘innovation’ and new product development, not just in startups but also enterprises and SMBs, has taken hold in so many sectors that oversupply is rampant.
There are already far too many apps but 80% of people’s time is spent on just 3. Competition for user attention is insanely high and influencing switching behaviour commensurately hard.
The explosion of new products indicates that most people are solving the wrong problem. The challenge isn’t product ideation. It’s monetisation and your target customer’s Willingness to Pay.
Far more money is being made helping people ideate and create new products than is being made from the products themselves. It’s boom times for the builders, the ‘innovation experts’ and the venture development shops selling Lean Canvases and MVPs. Product success is a marathon not a sprint but most folks are selling (design) sprints. The picks and shovels metaphor has never been more accurate.
Oversupply creates a race to the bottom. Whilst it’s easier than ever to build and launch a new product, it’s harder than ever to monetise one and build a sustainable digital business.
These days, before you build and launch a new product, you really need a strategy. And, in many cases, Product Managers may conclude that the best thing they can do is NOT build that new app, website or bot as there is no prospect whatsoever of actually making money.
And making money is the new, new thing in product. Not hits, shares or registered users.
What strategy is not
This is part 1 of a short series on product strategy for Product Managers. We’ll traverse Blue Oceans, Low End Disruption and Value Chains, ending up at Aggregation Theory and the legend that is Ben Thompson; someone all Product Managers should get to know.
In the beginning, however, was the word. And that word was written by Michael Porter, Harvard legend and author of several landmark books on strategy; notably Competitive Advantage in 1985.
What’s remarkable about Michael Porter is how much of his long and illustrious academic career he spent repeating just a handful of simple ideas. What’s also remarkable is how few actually seemed to follow his advice, despite him being cited and read by virtually everyone in business or economics in the past 30 years.
Porter believed that strategy was very simple to grasp but counter-intuitive (and therefore hard) to realise in practice.
He loved dispelling common preconceptions. Foremost amongst them is his firm belief that strategy is not about being the best. (“What’s the best furniture store? Ikea?!?” he liked to ask during his lectures.) The best does not exist. What does exist is the best solution for the specific needs of a specific segment.
Strategy is about making hard choices. These choices are what distinguish your product from others. Porter would have agreed wholeheartedly with Steve Jobs’ analysis of innovation. Strategy is, most definitely, about saying ‘no’ to 1000 things.
Above all, strategy is about being unique. It’s about defining the specific needs of a specific customer segment and then solving for them uniquely. To do this, you need an advantage that no one else has. Product Managers need to think very carefully about what that advantage is as, in many cases, it doesn’t exist.
“If you don’t have a competitive advantage, don’t compete.” (Jack Welsh)
Ask yourself, “What does my product have that no one else can easily copy?” This is why the best products don’t compete on features: anyone can copy them. It’s also why so much software will remain free. Your unique advantage is what people will pay for, and most products don’t have one.
Porter is best known for identifying 5 forces that determine the profitability of any industry within which different companies compete. In doing this, he challenged conventional thinking which tended to focus exclusively on ‘beating the competition.’
To truly understand your product’s likelihood of success, you need to consider the likelihood of new entrants (better known as ‘barriers to entry’), the relative power of the customer, the threat of substitution and the relative power of your suppliers.
Competitive pressures occur across all 5 vectors which impact your overall profit potential. No product exists in isolation. Anyone considering building a new product should understand the inherent profitability of their industry before they decide whether to move in.
In my experience, this analysis is almost always overlooked. In the rush to ‘disrupt’, founders and product developers focus exclusively on their perceived advantages and ignore the other forces that contribute to long term success. This is why the ‘Uber for X’ model works in theory but rarely in practice and why startups like Homejoy fail. The nature of the 5 forces within the carrier industry is very different from that of domestic cleaning.
The airline industry, despite a glamorous veneer, is notoriously unprofitable. New entrants get burnt so often that Warren Buffett likes to joke that he has a 24-hour helpline available for him to call anytime he thinks about buying an airline.
Porter was also responsible for one of the most over-used, clever-sounding terms in business (after ‘strategy’ itself): the Value Chain.
The Value Chain describes all the activities a firm engages in to produce goods and services. Understanding the key value add activities within your product’s supply chain helps you understand where your core capabilities reside and what is ‘non-core’ and can be outsourced. Much of the mania for outsourcing in the late 80s and 90s was a result of value chain analysis.
As Paul Graham observed, “It’s better to have 100 people love you then 1 million people like you.” The essence of strategy is knowing which customers you want to make really happy. It’s natural to try to be all things to all people but the best products ignore the needs of most.
The most common strategy mistakes are:
- Confusing strategy with goals (being #1 in the market is not a strategy)
- Confusing strategy with actions (expanding into China is not a strategy)
- Confusing strategy with being ‘good at something’ (known as ‘operational excellence’). This worked for Japanese manufacturers for a while but proved unsustainable over the long term.
Right now, by far the biggest mistake (according to Porter) is confusing strategy with growth. Growth alone says nothing about the power of customers or the availability of substitutes, both of which dampen profitability.
It’s wrong to assume that high-growth industries are inherently profitable (or inherently good.) As Porter points out, “A narrow focus on growth is one of the major causes of bad strategy decisions.”
Thanks to the macro-shifts in the cost of software development and hosting, many industries now look like this:
So, is the obvious conclusion to just give up and go home? No – but you need to think beyond just ‘solving a customer problem.’ That’s a fine place to start but don’t expect to make any money.
Here’s what Product Managers can learn about product strategy from Michael Porter:
- Think very carefully about the industry you are working within or plan to disrupt and consider its’ relative profitability before you build anything. Don’t assume digitising everything will yield a sustainable business model. As Des Traynor rightly observed, “Just because you don’t see any software there, doesn’t mean it’s enough to base something on.”
- Think very carefully about what gives you a unique advantage. If something is available to everyone (like Snapchat channels or machine learning) then assume everyone will be using it. That means it’s not a competitive advantage. If you don’t have something that no one else has then no one will ever pay for your product.
Coming next: D is for Disruption
Microsoft knew exactly who its target customer was and executed strongly to serve them for over a decade. Nokia did the same. But both companies fell down despite faithfully following Porter’s advice.
So what happened? What happened became known as ‘disruptive innovation’ and was famously identified by a young Harvard Business School professor called Clay Christensen in his even-more famous book, “The Innovator’s Dilemma.”
This is the subject of the next instalment in this series on product strategy.
[Note: in the world of physical products, it’s possible to have a strategy in which you compete on cost. But, as the marginal cost of adding a software user is $0, it isn’t really an option for digital products .]