Product Strategy

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Product

management

strategy

15TH APRIL 2013



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Maturing businesses often experience declining growth. A core reason for this is their failure to invest in developing a product pipeline. Focused on the short term needs of customers, product managers and the C-level invest heavily in the development of tweaks and refinements to existing products, but fail to pursue longer term developments that have the potential to create entirely new products or competencies.

Originally developed by McKinsey in the 1980s, the Three Horizons framework provides practical conceptual tools which help managers avoid these pitfalls.

This presentation condenses and merges highlights from the three horizons model and more recent successors. It provides a framework for product managers and C-level executives to discussand prioritise their product investments.



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First edition: 15th April 2013

Second edition: 20th July 2013

matthunter.comDIGITAL ◊ PRODUCT DEVELOPMENT ◊ STRATEGY

matthunter.com© 2012 Matt Hunter matthunter.com

Many technologies demonstrate an “S-curve” relationship between investment and progress

CumulativeR&D Effort

Progress

Early investments make limited progress

A breakthrough point is reached and progress accelerates dramatically

Eventually, the technology starts to plateau and new investments have a limited effect


This basic pattern is viewable across many industries


Eventually, a technology is pushed to its absolute limit and further investment yields no further gains

CumulativeR&D Effort

Progress

Limit of technology

Initially increasing then declining R&D productivity within a given physical architecture

Performance is ultimately constrained by physical limits


Eventually, every technology has its limits

Sailing shipsUltimately constrained by the power of the wind

Copper wireUltimately constrained by transmission

capability

Semi-conductorsUltimately constrained by the speed of the

electron



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Technology s-curve

Associated with this technology S-curve, we can see a profit curve for investing firms

Time (years)

TechnologicalProgress

Profit

CumulativeEffort

0

Loss

Technology profit curve

Early investments appear loss making

After break-through, profits rocket

As technology plateaus, further investment is value destroying

For firms, it makes sense to stop investing as the technology becomes more matureand yields fall below the cost of R&D investment


As one technology plateaus, it may be possible to move to a new technology and drive further progress

Time (years)

“Old” technology curve

“New” technology curve

At this point, moving to the “new” technology looks like an expensive step backwards

Progress

But after working through early problems (hopefully!), a break through occurs and progress starts to surge ahead once again

Whilst the new technology is in early stages of development, it offers a poor alternative to the established, old technology

Performancegap

Businesses rarely invest through the dip


IBM and DEC lost market share to Microsoft and Intel

Modis, T. Predictions - 10 Years Later. (Growth Dynamics, Geneva,Switzerland, 2002), 335. ISBN 2-9700216-1-7.


Failure to plan for and manage shifts in technology is the main reason successful incumbents lose market share

Mainframe Computing

1960s

MiniComputing

1970s

PersonalComputing

1980s

Desktop Internet1990s

Mobile/SocialComputing

2000s

New winnersIBMNCRControl DataSperryHoneywellBurroughs

New winnersDECData GeneralHPPrimeComputer-Vision

Wangs Labs

New winnersMicrosoftCiscoIntelAppleOracleEMCDellCompaq

New winnersGoogleAOLeBayYahoo!Yahoo!JapanAmazonTencentAlibabaBaiduRakuten

New winnersAppleFacebookSamsung…

Note: Winners from 1950s to 1980s based on Fortune 500 rankings, winners in 1990s based on peak market capitalisation. Source: Adapted from Morgan Stanley’s Mobile Internet Report 2009 Setup, with additional 2000s section.


Over time, a successful technology strategy should blend together multiple S-curves…

Time (years)

TechProgress

S-curve 1

S-curve 2

S-curve 3


And sustain a steady growth in profits

Time (years)

TechProgress

ORProfits

S-curves

Profits


Horizon 1

Horizon 2

Horizon 3

This is the basis of the “three horizon” model

Time (years)

Profit



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The three horizon model

Keeping the three horizons in mind, we should plan to manage projects in each horizon differently

Horizon 1Tweaks,

derivatives & product support

Horizon 2New product

platforms (“V2.0”)

Horizon 3Break-throughs& new platforms

Time (years)

Profit

The first horizon involves implementing innovations that improve your current operations

Horizon two innovations are those that extend your current competencies into new, related markets

Horizon three innovations are the ones that will change the nature of your industry and generate new compentencies



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The Three Horizons model is a simple framework to help managers consider whether they are planning for the future properly

Managers are often lured into focusing too much on short term projects:

Horizon 1 projects tend to exploit an established technology. Small R&D investments can produce significant gains. Focusing on generating obvious value, managers exert all their effort here.

Horizon 2 projects are usually under-funded and have their support removed too early

H2 projects are things like launching a product extension or V2.0 of a horizon 1 product. Because the project usually involves moving on to a subtly difference S-curve, H2 projects require a strong initial investment before they start to deliver progress. But management often compares the short-term ROI of these investments with projects in Horizon 1 and simply decides not to invest.

Horizon 3 projects are often completely ignoredMost businesses don’t have any long term plan to develop a breakthrough technology. If / when another firm develops this breakthrough, managers will scramble to catch up. This is when technology firms most often fail.



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The three horizon model

Keeping the three horizons in mind, we should plan to manage projects in each horizon differently

Horizon 1Tweaks, derivatives & product support

Horizon 2New product platforms

(“V2.0”)

Horizon 3Break-throughs

Time (years)

Profit

The first horizon involves implementing innovations that improve your current operations

Horizon two innovations are those that extend your current competencies into new, related markets

Horizon three innovations are the ones that will change the nature of your industry and generate new compentencies



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<6 months

Innovations that improve your current operations.

“profit from the core”, exploit core competences ,capitalising on existing strengths

Description:

Related concepts:

Common mistakes:

Expanding into new markets too soon, ORExcessive incrementalism

Organisationalfocus:

Organisations are usually geared towards delivering these projects.

Source of value:

Superior execution, and a culture of hustle, or leveraging an existing customer base / monopoly position

Number of projects:

Businesses typically have many small projects in this horizon, which require limited resource investment and deliver quickly.

Management is focused on ROIMetrics:

Businesses are typically focused on horizon 1 by default

H1 Example Product



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Illustration of number of projects typically seen in horizon 1,2 and 3

Typically, businesses have most of their activity in horizon 1



(“V2.0”)


Time (years)

ProfitBusinesses typically have many projects in this horizon, which require limited resource investment and deliver quickly.



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Horizon 2New product platforms(6 months to 1 year)

Extend your current competencies into new, related markets.

Description:

Related concepts:

Common mistakes:

H2 is incredibly difficult to manage. Seem similar to your current productsTemptation is to use the same metrics to assess their success. You are likely to abandon them too quickly because it will seem like they’re not performing well.


Projects require senior management (“champions”) involvement to ensure they get appropriate priority.

Source of value:

Positional advantages (leveraging other assets).

Number of projects:

A smaller number of H2 projects should be undertaken.

Metrics:

Horizon 2 projects need to managed with a sense of entrepreneurialism and focus on growth

Entrepreneurialism, Balanced score cards

Growth rates, progress against technology mile-stones, revenue, NPV

H1 Example Product

H2 Example Products



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Illustration of number of projects typically seen in horizon 1,2 and 3

Typically, businesses have a little activity in horizon 2



(“V2.0”)


Time (years)




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Horizon 3Break-through products or services

(>3 Years)

Horizon three innovations are the ones that will change the nature of your industry. Generally, these are radical innovations.

Description:

Related concepts:

Common mistakes:

H3 projects can seem like expensive distractions from daily business. But if management neglect to prepare for the future, they run the risk that the core business will become redundant and collapse. Most businesses have no plan for horizon 3.


CEO leadership is needed to select these projects and to ensure the business takes investment in them seriously

Source of value:

Value is typically delivered by being a first mover, establishing a quasi-monopoly.

Number of projects:

Businesses should pick a small number of main themes to invest around and then experiment with multiple projects around the themes, expecting some experiments to fail and others succeed. This is to not be mistaken for managing a portfolio of unrelated investments in the hope that some succeed.

Metrics:

Horizon 3 projects need CEO-level leadership and a focus on achieving technical milestones

Vision Statements

Metrics are predominantly stage gate based, demonstrating that certain technical hurdles can be met within a investment limit



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It is rarely obvious what an H3 product looks like for a business



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Illustration of number of projects ideally seen in horizon 1,2 and 3

Most businesses have no active investments in horizon 3

Horizon 1 Horizon 2 Horizon 3

Time (years)


Businesses support fewer H2 projects, measuring progress against stage-gates and killing-off under-performers.

?Seen as an expensive distraction or pipe-dream, H3 is usually neglected



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Illustration of number of projects ideally seen in horizon 1,2 and 3

A more optimal spread of projects balances the needs of the three horizons

Horizon 1 Horizon 2 Horizon 3

Time (years)


Businesses support fewer H2 projects, measuring progress against stage-gates and killing-off under-performers.

Businesses choose a small number of themes to invest in for H3, then “spread their bets” (Venture capital style) with several small bets within those themes


Critically, management of projects in each horizon differs



(“V2.0”)

Horizon 3Break-through

products or services

Short-term profitability

Cash-flow

ROI

NPV

Market projections

Technical demos

NPV calculations nested in decision trees

Real Options

Advanced market estimates

Management science

LeadershipArt

Key Metrics& Tools:

MainPlayers:

Product Managers

Functional & Technical Heads

CEO & CTO

OverallVibe:


How do you select which horizon a project fits into?

• Re-balancing the project portfolio over the three horizons normally means killing off some existing projects

• Can be controversial in the business…• If we start culling projects in “Horizon 1”, product managers will try to

get re-classified as “Horizon 2” to keep their projects alive

• There are also other political motivations that effect how people want their projects to be viewed• Being classed as a “breakthrough” means higher profile support and

less scrutiny on profitability in the short term, so some will try to push for H3

• Helps if we have a system to focus the discussion

• The following method uses two simple questions to try to answer whether a project is likely to be in horizon 1, 2 or 3



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Change in customer focus

First question: “To what extent does this project serve a different group of customers?”

LOW CHANGE Existing customers and previously identified needs

MEDIUM CHANGE Helps us win someone else’s customer by serving their previously identified needs ORTakes us into an existing market segment that we weren’t competing in before

HIGH CHANGE Serves a new group of customers meeting a need that was previously unidentifed



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Level of innovation required

Second question: “To what extent does this project require an innovation in our technology or processes?”

LOWINNOVATION

Tweaks an existing product or provides support to it

MEDIUM INNOVATION

Expands our product range with a new but similar productORReleases another generation (“V2.0”) of an existing product

HIGHINNOVATION

Requires new organisational capabilities OR results in an entirely new product or service that we sell


We can define a project’s horizon based on the extent to which it demands more innovation & accesses new customers

Horizon 3:BreakthroughProjects

Horizon 2: New product platforms

Horizon 1:Tweaks, derivatives & product support

Customers

Less Change More Change

Innovation

More

Less

Adapted from Wheelwright & Clarke 1992, Pierre Azoulay 2012; with Horizon features overlaid


Horizon 3:BreakthroughProjects

Horizon 2: New product platforms

Horizon 1:Tweaks, derivatives & product support

Customers

ExistingCustomers

New Customers OR Enters a different existing segment

NewCustomers

Less Change More Change

NewCore

Product or Service

NextGeneration of

Product orService

Product or Service

Extensions

Derivatives &Tweaks

Innovation

MoreInnovative

LessInnovative

Adapted from Wheelwright & Clarke 1992, Pierre Azoulay 2012; with Horizon features overlaid

We can define a project’s horizon based on the extent to which it demands more innovation & accesses new customers


Plotting existing and proposed projects against these dimensions we can determine which horizon they fall in

Project list


Typically, businesses will find the majority of their projects fall in H1, a few in H2 and few (or none) in H3

Project list


Balancing the project portfolio over the horizons then requires a mix of culling, reviving and generating projects

CULLINGSome of the horizon 1 projects should be

considered for cancellation (or if

possible outsourcing) to create capacity for

H2 and H3

GENERATINGManagement should think deeply and

canvas opinion throughout the business to generate more prospective projects in H3

REVIVINGIt’s usually easy to

find more H2 projects – typically, they are sitting in engineers’ desk drawers because

they were previously

attempted but cancelled too soon


How many projects in each horizon? No hard rules. Google aims for 70/20/10

“We spend 70 percent of our time on core search and ads. We spend 20 percent on adjacent businesses, ones related to the core businesses in some interesting way. Examples of that would be Google News, Google Earth, and Google Local. And then 10 percent of our time should be on things that are truly new…

How do you enforce that 70/20/10 rule? For a while we put the projects in different rooms. That way, if we were in one room too long, we knew we were not spending our time correctly. It was sort of a stupid device, but it worked quite well. Now we have people who actually manage this, so I know how I spend my time, and I do spend it 70/20/10”.

Eric Schmidt, then Google CEO, speaking to Business 2.0 magazine, December 1st 2005


So let’s start with a 70/20/10 split of projects across the horizons



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Product Management Strategy Summary

• 1) Balancing short term profit and long term value

• Most businesses are overloaded with short term feature development that is called for by existing customers.

• Being too reactive to existing customers, businesses under-invest in longer term product extensions and big-win initiatives

• Planning for horizon 2 and horizon 3 helps avoid “death by incrementalism”

• 2) Recognising when to manage projects differently

• H1: ROI & efficiency

• H2: NPV & market share

• H3: Options

• 3) Projects can classified as H1, H2 or H3 with a degree of science

• Classify projects based on the degree of innovation required and the extent to which projects appeal to existing or new customer groups

• 4) Explicitly target a 70/20/10 spit of projects over the 3 horizons

• Choose a project split which reflects your need to maintain present projects versus deliver long run growth



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Matt Hunter is a senior product manager with

experience in consumer web, mobile apps and digital

marketing.

Matt is presently Director of Product Management at

App Annie in Beijing. Previously, he headed Product

Development and Digital Marketing at Confused.com, a

British insurance comparison engine. Matt also worked

as a consultant with Bain & Company in Europe, South

Africa and Australia.

He is the holder of an MA in Economics & Management

from the University of Oxford, an MSc in Strategic

Information Systems from Cardiff University and the

MIT-Tsinghua International MBA.

Product Strategy

Business

Transcript of Product Strategy