product strategy
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matthunter.com© 2012 Matt Hunter
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Product
management
strategy
15TH APRIL 2013
matthunter.com© 2012 Matt Hunter
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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
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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
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This basic pattern is viewable across many industries
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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
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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
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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
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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.
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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.
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Over time, a successful technology strategy should blend together multiple S-curves…
Time (years)
TechProgress
S-curve 1
S-curve 2
S-curve 3
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And sustain a steady growth in profits
Time (years)
TechProgress
ORProfits
S-curves
Profits
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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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Horizon 1Tweaks, derivatives & product support
<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
Horizon 1Tweaks, derivatives & product support
Horizon 2New product platforms
(“V2.0”)
Horizon 3Break-throughs
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.
Organisationalfocus:
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
Horizon 1Tweaks, derivatives & product support
Horizon 2New product platforms
(“V2.0”)
Horizon 3Break-throughs
Time (years)
ProfitBusinesses typically have many projects in this horizon, which require limited resource investment and deliver quickly.
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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.
Organisationalfocus:
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)
ProfitBusinesses typically have many projects in this horizon, which require limited resource investment and deliver quickly.
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)
ProfitBusinesses typically have many projects in this horizon, which require limited resource investment and deliver quickly.
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
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Critically, management of projects in each horizon differs
Horizon 1Tweaks, derivatives & product support
Horizon 2New product platforms
(“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:
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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
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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
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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
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Plotting existing and proposed projects against these dimensions we can determine which horizon they fall in
Project list
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Typically, businesses will find the majority of their projects fall in H1, a few in H2 and few (or none) in H3
Project list
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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
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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
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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.
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