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Phase Gate and Agile

You have built a $100M company from the ground up, taken if from an ad hoc wildcatter to disciplined product development machine. Your phase gate system weeds out bad concepts, lackluster products, and has generally been successful. However, more and more your products are finishing development only to discover the market has shifted and launch performance has underperformed predictions. No matter how much more upfront work you do, nothing improves. By the time you finish development and gain market feedback, 80% of the investment is sunk, and there is no recovery.

Your developers talk you into trying Agile Product Development, and you agree. The first few products come out well and sales are solid. As the team gains confidence and independence it starts to feel out of control. The team begins to fail when it chases markets that are too small and some projects never seem to finish. Your phase gate controls have all broken down and are not managing risk.

What do you do?

Jim Highsmith (Agile Project Management), has a chapter on governance that deals directly with this problem. Jim points out that in the old phase gate systems, governance and operation (product development) are tightly coupled. Solving your problem requires "separation of governance from operations and then loosely coupling them." Governance is a linear process for managing investments and risk, operating much like real options. Agile works on the principle of iteration, experience, and feedback.

The crux of the solution is in redefining the stages and gates to align with Agile. Traditional phase gate has 5 stages: Opportunity Identification, Concept Generation, Concept Validation, Development, Launch. This clashes with Agile which makes less assumptions and depends on exploration and feedback. Highsmith suggest using 4 phases and gates: Concept, Expansion, Extension, Deploy. Each phase mitigates risk. During Concept the core product ideas are worked out and a few critical iterations are completed. During Expansion high value features are built and as much risk as possible is is driven out. Extension completes the product with minimal risk and better foresight into costs and market acceptance. Deployment puts the product into the market.

The core difference is the Agile team is building a deployable product in every iteration all through all the phases. This reduces the time from requirements to feedback so that the process can respond to market dynamics, rather than the traditional phase gate that builds a deployable product at the end after most of the investment is made. At each gate, executives evaluate the project as an option on future investment. Do we make the investment and buy the next option? Do we cancel the project? Do we wait and see?

The alternative phase gate system allows the executive team or portfolio manager to make linear investment decisions while the team runs an iterative process. This combination will also speed up gate decisions. A classic phase gate requires all work to line up for a moment in time to product documents and presentations for a gate meeting. This interruption causes value flow to stop. Agile iterations are time boxed with deployable product at the end of each time box, so the team is already lined up in time. Evaluation is simplified because the team can demonstrate a product to customers and the executive team. So not only does Agile speed up delivery of value and responsiveness, it actually speeds up getting through the gates, as long as the executives get in alignment with the heartbeat of the project.

Much of the traditional phase gate system can be salvaged, so this is not a start over from scratch. Opportunity Identification and Concept Generation can be placed in the new Concept Phase. Much of the Concept Testing can be placed in the Expansion phase, however a deployable product is created each iteration, so Concept Evaluation, Prototyping, and Market Testing all become the same thing. The key is to redefine the phases and gates to complement Agile.


Now that I have proposed a Strategy Pattern for Agile, it is time to pick it apart a bit. After all, it is only a model, and a stereotypical one at that.

Jim Highsmith hits the balance issue on the head in Agile Project Development:

Agile Teams can place too much emphasis on adaptation or evolution and too little on anticipation (in planning, architecture, design, requirements definition). Failure to take advantage of knowable information leads to sloppy planning, reactive thinking, excessive rework and delay. Remember: Agility is the art of balancing.

This suggests that one cannot ignore the upper quadrants of the strategy diagram. From a company culture point of view, how do you pull that off? I suggest that what one does not want are tribes within an organization subscribing to one of the four strategies trying to balance each other, say executives operating from Planning and developers operating from Adaptive. This creates a us vs. them mentality. The idea would be for stakeholders to know how (behaviorally) to operate from all quadrants, but as a minimum, from one on the predicability side and one on the non-predictability side. This flexibility allows teams to draw from both.

I imagine balance as development loops taking paths through quadrants like a chaotic attractor that bifurcates as needed to include whatever quadrant is required given the reality the company faces. The role of executive leadership is to gently push the pattern into the shape required whenever it is stuck in a maladaptive pattern. It gets stuck whenever someone lacks flexibility or foresight to recognize that the current pattern is maladaptive.

How do you create such an organization? Leadership, proper selection employees, coaching, education, example, collaboration, etc. Lot of soft skill stuff. There is a natural tendency to use control, but I think this is one place where control is helpless. Creating balance is more like guiding emergence than putting rockets into space.

Agile Project Management

This post looks at Agile Project Management as a Strategy Pattern and the transition from predictive strategies.

Agile Project Management is like Lean Product development with its emphasis on feedback and learning. Traditional Waterfall project development works much like Phase Gate: Specify, Design, Implement, Test, Deliver. One of the problems with the traditional method is that feedback comes late in the process. This means that mistakes made early in the process are revealed late where they are more costly to fix. Agile slices the development into features, iterations, and releases. A set of features are taken all the way to a releasable product, and then feedback is obtained. Even if the product is not officially deployed, an iteration is deployment ready. Feedback allows prioritization of features, learning, and the ability to track a moving target.

The Agile life cycle is:

  • Envision
  • Speculate
  • Explore
  • Launch
  • Close

The names are chosen to suggest flexibility. Iterations can include Speculate, Explore, Launch, or Speculate, Explore, etc. Loops are created where they are needed on a project by project basis. Speculate, Explore, and Launch form the core of adaptability. A pure Agile culture might look like the following Strategy Pattern:

Strategy Modle Agile.png

At the highest level the pattern is about beginning with a Visionary Strategy and then moving to an Adaptive Strategy. The loop in Visionary accounts for what Jim Highsmith (Agile Project Management) calls Iteration 0. Iteration 0 is the minimal amount of work required to build a feature set capable of generating feedback. This is where initial platform and architecture development occur. The loop in Adaptive reflects iterating with the customer in the loop.

Much of the difficultly Agile teams face stems from executive management operating in the Planning quadrant. Managers want predictability of schedules, cost, value delivered, and all the things found in a typical business case. Agile teams tend to disconnect from the Planning quadrant. Highsmith makes a strong argument for balance: that structure and flexibility must coexist in a healthy way, much like bones and muscles.

Where does this pattern apply best? Malleable Technologies. The most obvious is software development, which has near infinite malleability. Where does it apply least? Perhaps building an oil tanker. One cannot implement a subset of an oil tanker and expect a customer to test it. However, what if you can take a rigid technology and make it malleable? Modeling and Simulation are tools that make a technology malleable, and so are prototyping tools. One can make a 3D model and construct a prototype with lasers and plastic powder that a end user can play with it. Tools can be an enabler of this Strategy Pattern.



Strategy Modle Agile 2.png


Whether tools enable this shift or not, the real challenge is the cultural shift which requires a flexible mindset and balancing it with a prediction based mindset. Perhaps the best advice I can give about making this transition is take baby steps, say product enhancements followed by simple products. Work your way up to larger projects learning at each step along the way. But if you can make the transition, you can gain an competitive edge over your competition that is hard to copy. It is much harder to copy cultural changes than technologies.

Strategy Patterns

In new product companies, strategy and product development process can be misaligned, resulting in low company performance. Imagine using a Phase Gate process for a fast paced Web 2.0 company, or using a highly iterative process to design a nuclear power plant. The Web 2.0 company would slow to a crawl and die a quick death and most consumers would rather not experimented upon by nuclear plant designers. In this post I will propose a strategy framework that will form a basis for future posts about alignment with product development process. The strategy framework will consider strategy a dynamic process and look at what I call Strategy Patterns. For those exposed to the GOF design patterns, the analogy is intentional.

The basic framework uses a two dimensional grid with emphasis on prediction along the vertical and emphasis on control along the horizontal. This is not my creation, you can read the original work if you want to see how the framework was created (Strategic Management Journal 27: What to do next: the case for non-predictive strategy). Each quadrant represents a strategy orientation or mindset.



Planning assumes that markets already exist out there in the world, and one can study them well enough that one can make predictions about its behavior. Analyze markets, pick one with the characteristics you are looking for, select products for development, test market them, predict your market share, and launch.

Visionary assumes one can construct a new market based on their imagination and ability to control through prediction. It is not about discovery of markets and products, it is about creating them, and not only that, but one can still write a business case and predict market share, profit, etc.

Adaptive assumes that the market already exists, but there is no way to predict what it wants, so one must constantly adapt. This is the land of feedback and incrementalism.

Transformative is where entrepreneurs live. If one can't predict, and one wants to construct a market, one is in this space. The effectual logic of Sarasvathy works here (see my previous blog on Effectuation). Start with who and what you know, build relationships, make a deal, and work with it.

Keep in mind that the model is not reality. There are few pure companies that fit into a quadrant, and companies move around in them. CEOs and senior VPs also have personal preferences. assumptions, and mindsets that cause them to act in ways consistent with one of these quadrants. In many cases executive management are not all acting from the same strategy orientation.

Successful companies move around this model in patterns. Let's look at a couple of example patterns:

Web 2.0 Startup

In this pattern a couple of recent college grads come up with what they think is the next generation of social networking. Perhaps with some help from Tech Stars they create a prototype and simple business model. They give a demo at the Denver Boulder Entrepreneur Meetup, get some feedback and launch. At this stage they are visionaries. With a little luck they get a 100 or so customers and then plateau.

After talking to some customers they realize the website is not satisfying their needs. They collect ideas from their customers and modify the website. This continues and eventually they gain customers. With more customers come more ideas, and more changes. The feedback loop with customers puts them in a tight develop, feedback, develop loop. They are now adaptive.

An angel investor becomes interested and makes an investment that allows them to increase marketing and the number of customers grow until a VC takes notice. The VC invests and the company grows even larger. Eventually the VC wants to scale up and go public or sell the company and cash out. The VC hires a professional CEO and boots out the founders. The new CEO accepts the new market as given and starts positioning add on service levels and products based on research and business cases. The company is being pushed into planning.

The company becomes the next Google before it can get stuck in the planning mindset and decides to create new markets with its enormous resources. Looks like we are back to visionary, but with other mindsets available. Perhaps the company can now balance adaptive with visionary or oscillate between them. Create new markets, then evolve them through adaptation, while leveraging some amount of planning.

  Strategy Web 2.0.png

Private Equity Driven Restaurant Startup

A PE firm decides to reinvent hamburgers. They do an analysis of their competitors, their operations, real estate choices, menus, profit margins, etc. They develop a combination of changes that result in higher efficiency by using strip malls, limiting the menus, using smaller movable tables, and using time motion studies to change cooking techniques. They develop a menu for upscale burgers that can maintain higher prices. A business model is created that contains a diffusion model of market penetration using adapter and copy cat rates, with accurate cost estimates and profit predictions. Demographics are studied. A few restaurants are built and test marketed in the Denver area. The model is improved and the company starts expanding, and improving the model so that they can predict profits more accurately. In addition to improving their ability to predict, lessons are learned along the way and improvements are made. Once the model is stable, a franchise system is put into place to accelerate growth. Models for franchise growth are made... rock solid planning with no desire to get out of the box. This company builds predictable business to satisfy its risk adverse investors.


Strategy Hamburger.png


Capital Equipment Startup

This company designs and sells low volume high priced manufacturing equipment. The founders are industry veterans who think they know a better way to build equipment. They set off with a vision knowing that no customer will talk to them without something to show. They design the first system. They are visionaries. As soon as they start selling, they discover many unmet needs and requirements that prevent customers from buying, so they start adapting until they finally have a product that results in sales. Meanwhile, an executive with an entrepreneurial mindset uses his industry contacts to build a web of relationships out of which he builds channels and partners. Engineering/Marketing is still in the adaptive mode, but the executive is in transformative mode constructing new channels. One customer says they will buy a system if it is modified, and the executive being an entrepreneur, takes a order before the system is modified. Engineering/Marketing is now thrown into a transformative mode. The system is delivered, and it generates new ideas, so engineering starts modifying the product. Back to adaptive mode...

The company grows until a major competitor takes notice. An acquisition occurs and eventually the founders exit. The parent company researches the market and determines it can add modules to the product, upgrade its look and feel, and enter new markets. Business cases are built for several new markets and NPV models are used to pick the market with the highest IRR. The startup is being drug into the planning mode.


Strategy Cap Ex.png
If strategy changes, can the development process remain constant? In many cases, no. For example, a Phase Gate process might work well for Planning, but would not survive a hard core effectual thinking operating in Transformative mode. A true Visionary may operate completely out of intuition, which would be deadly in a mature market where Planning is the better strategy. I'll discuss product development as it is related to strategy in future posts, but for now I'll stake my claim that strategy and product development process are interrelated, therefore development process must change with strategy.
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