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
Uniqueness
competency
Narrow
Market
Scope
Broad
Market
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
ADVANTAGE
Lower Costs
Network Effect
Product Differentiation

COST ADVANTAGE
Lower 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 / GB
Estimated Gross Margin: 50%
$0.043 * (1 - .05) - $0.0215 GB
AWS Gross Margin 50% - UBS Estimate

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….

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 EFFECT
Why doesn’t Facebook have (successful)
competition?

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

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

• 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.

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

Differentiation
In the short run, yes!
Sustainable competitive advantage? Maybe
The 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

(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”

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

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

QUESTIONS?
mchowla@gmail.com
Twitter: @mchowla
www.linkedin.com/in/mchowla

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