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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
Mike Chowla Twitter: @mchowla
Silicon Valley Product Camp
March 22, 2014
Copyright © Mike Chowla 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
Copyright © Mike Chowla 2014
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
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
Copyright © Mike Chowla 2014
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
Porter’s Generic Strategies
Segmentation Strategy
Differentiation Strategy
Cost Leadership
Low Cost competency
Uniquenesscompetency
Narrow Market Scope
BroadMarket Scope
Copyright © Mike Chowla 2014
KEY CONCEPTS
Copyright © Mike Chowla 2014
Copyright © Mike Chowla 2014
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
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
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 ADVANTAGELower Costs
Network Effect
Product Differentiation
Copyright © Mike Chowla 2014
COST ADVANTAGELower Costs
Copyright © Mike Chowla 2014
Copyright © Mike Chowla 2014
Recent Example: Google Drive
Those prices seem pretty low…
Copyright © Mike Chowla 2014
Compared to
Google’s Price is 80% Lower!
Copyright © Mike Chowla 2014
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
How Much Does Storage Cost?
Two ways to estimate it:
2) Look at Amazon S3:
Cheapest Price = $0.043 cents / GBEstimated Gross Margin: 50%
$0.043 * (1 - .05) - $0.0215 GBAWS Gross Margin 50% - UBS Estimate
Copyright © Mike Chowla 2014
What does that mean?
$0.02 * (100 * 0.5) = $1 COGSAnd 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
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
Moral of the Story
It’s really hard to compete against a cost advantage
Copyright © Mike Chowla 2014
Other Examples
• Walmart – Supplier bargaining power, best distribution network, relentless at cutting costs
• Dell (pre-laptops) – Direct sales model reduced inventory costs
NETWORK EFFECTWhy doesn’t Facebook have (successful) competition?
Copyright © Mike Chowla 2014
Copyright © Mike Chowla 2014
Definition
The value of a product or service is increased by others using it
Copyright © Mike Chowla 2014
ExamplesSocial Networks
Market Places
SoftwareBuyers 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
• 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
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.
DIFFERENTIATIONCan your product (or other part of your offering) create competitive advantage?
Copyright © Mike Chowla 2014
Copyright © Mike Chowla 2014
Differentiation
In the short run, yes!
Sustainable competitive advantage? MaybeThe question is can your competitor copy what you’ve done?
EXAMPLES OF WINNING ON PRODUCT
Copyright © Mike Chowla 2014
Copyright © Mike Chowla 2014
(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
(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
(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 2014
(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 2014
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
DISRUPTION
Copyright © Mike Chowla 2014
Copyright © Mike Chowla 2014
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
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
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
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