Whenever there is a discussion on strategy, there is always confusion; are we discussing organization strategy or competitive advantages? Invariably there is a lack of clarity. Organizations are perpetual entities; they will remain in existence for generations to come. While products have a limited life cycle, there is inception, growth, and eventual death. Such misunderstandings lead to discussions on strategy, delving into too much implementation or tactical details. I feel a qualitative outline is always well understood and appreciated over a detailed analysis paralysis for an organization. A larger organization will have full-time corporate strategy groups or strategic consultants addressing detail analytic needs. In such cases, a product manager may have to defend her product-related decisions or provide alternate viewpoints to the strategic decision-makers. Understanding some of the strategic management tools and their qualitative nuances is helpful for product managers. You may not need detailed quantitative assessments as a strategic consultant may use.
We will talk about four tools here. They have been around for several decades; they are part of all management programs hence can be followed by most.
- Five Forces by Michael Porter
- BCG Matrix
- The Key Success Factor (KSF) by Kenichi Ohmae
- Du Pont Analysis
I will not discuss the details of these concepts; rather I will show a qualitative application of each of these tools.
Five Forces by Michael Porter
Although considered as one theory, they are a collection of ideas Michael Porter provided on industry analysis. Some notable being the differentiation of strategy from competitive advantage, five forces, value chain, etc. At an organization level, strategy is all about the diversification of a portfolio. And for a product or a division, it is ensuring a competitive advantage. Organizations do not compete; their divisions or product groups compete for survival. Organizations survive on holding the right portfolio of products and services. At least that is with larger organizations. In the case of smaller organizations, both get blurred. I will be inclined to consider them more in the divisional entity class. What are the five forces? Porter said an industry gets governed by the following five interacting forces.
- Bargaining power of the supplier
- Bargaining power of the buyer
- The threat from new entrant
- The threat from substitutes
- Competition among rivals
I consider Adobe and Microsoft migration to the cloud as one of the most significant achievements. The cloud vendors like Amazon, Google, etc. became new entrants; knowing they have a captive group of enterprise customers, both the companies effectively built substitutes themselves to cater to their existing customer needs. It is a significant product management success. This tool helps to change the whole product while protecting the customer base. Another thing the tool helps in identifying market shift. If the participants in the five constituents above change, then there is a definite shakeup. The introduction of Reliance Jio into the telecom market had a ripple effect in many adjacent markets.
BCG matrix is simple comparative product placement in a 2x2 matrix of high market growth vs. product share. If you work for a large organization as a product manager, the BCG matrix bites you badly every year during the portfolio planning of the corporation. The matrix classifies your product into four groups.
- Star — High market growth and High market share
- Dog — Low market growth and Low market share
- ? — High market growth and Low market share
- Cow — Low market growth and High market share
The Dog group gets divested; the Cow group experiences reduction in their investment. And the question mark is given time to show results for a few years or quarters. As a product manager, you have to be clear on where your product lies on the matrix.
Key Success Factor
A KSF can be outside of a product feature you are building or conceiving. If you were to order a beer, you most likely ask for your favorite brand. But if the bartender says your brand is not available chilled, you will switch loyalty and pick up whatever is available chilled. In short, the KSF of beer selling is nothing to do with the product feature but how it is stored and delivered. Kenichi Ohmae suggested such factors should be identified and given utmost importance. What is the KSF of your product? Is it a product feature or something outside of the product?
The Du-Pont analysis is a financial tool to tell you where to focus for your division or product’s success.
Profit/Equity = (Profit/Sales) X (Sales/Assets) X (Assets/Equity)
The last one Assets/Equity is a financial reconstruction factor. Whether your organization is debt or equity funded. However, the other two can be significant to your organization. The asset turnover ratio (Sales/Assets) determines how sales are generated for the assets you have invested. Renting a warehouse may work out cheaper than buying real estate for a retail chain. Does that make a business case for cloud adoption in IT? In the software industry, the physical assets like plants and machinery are generally low, but one significant contributor of asset equivalent is the number of employees or rather R & D employees. Secondly, salaries may not be capitalized as per GAAP of many countries as part of R & D expenses. Since engineering salaries are a significant part of your actual investment, per engineer revenues can be a good proxy for asset turnover. High per-engineer revenue tells how reusable is the work of your engineers. Good software product companies have per-employee revenues of over a million USD. What is your number? Profit over sales is generally a great tool to quantify discounts and promotions and determining marketing budgets etc.
Product managers sometimes get ratholed into designing the right product for a market and lose out on the larger picture. Strategic management tools ensure the overall goals of the products and organization are understood effectively. While we discussed the tools, I knowingly kept the details outside the purview as most of you may have been exposed to them or have some form of understanding of them. Just Google around; there are excellent explanation articles and videos available on them already.