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.
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.
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.
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.