New Product Development

Context

Mike Jones — Thu, 17 Jun 2010 03:19:00 GMT

I was in Tokyo this week. It is always interesting to see how context affects products. For example, look at this parking lot:

The building is over ten stories tall, and lifts the car up into the building. When you back out, a round disk on the ground rotates the card so you are pointing towards the street. As a side benefit, you don't have to worry about theft, as long as you trust the operator.

The product is a perfect match to a city with very high land prices due to lack of space. This would never work in my home town in Colorado. Land is cheap; cars are big. Another example is this gas pump. The station is very small, and getting in and out of the street dangerous. The pull down nozzle can reach the tank from any direction the car parks. This prevents turning around to get the car in the right position. Gas is pumped for you by the attendant, so you don't have to worry about managing the hose.

More subtle tradeoffs like this exist. For example, a company I am on the board of directors of sells capital equipment. Some customers care about overall economic benefit. Because the equipment is connected to another machine that costs 4 times as much, it economically better to make our equipment faster, even if if the costs goes up, because it lowers the over all cost of the combination. However, some countries in Asia are very sensitive to initial capital outlay, and willing to accept a lower initial cost, even if it is not a economic maximum due to lower performance. Knowing the market allows us tune the product and business model to match.

The Perfect Product: Priceless

Mike Jones — Sat, 12 Jun 2010 08:19:00 GMT

I have been in Penang, Malaysia these days helping a company integrate a new product into their manufacturing line and getting feedback on user experience. A little luck came my way and I got invited to a Malaysian wedding reception.

A prayer was invoked in Malay with chanting of the Koran in Arabic. The couple dressed as King and Queen. Friends and Family visited them on their throne and sprinkled water and flower petals on their hands, then gave them their hand to congratulate them. The president of the local company and I were invited up to give them our blessing as honored guests.

The bride and bridegroom made a very happy couple; how can anyone improve on that? No man made product can match the value of a wedding: infinite value value zero cost.

Timeless

iPad

Joe Admin — Mon, 05 Apr 2010 01:56:00 GMT

I waited in line for an iPad yesterday so I could play with it and imagine some applications. Most of my friends said there was no room for a device between an iPhone and laptop. I imagine lots of applications, such as automating a doctors office or auto repair shop, but the argument fell on deaf ears. I asked people in line why they wanted one and most people gave answers like: I travel a lot and want to watch movies, read e-mail, and use maps, and this is small, but not too small. I let my daughter play with it and she thinks it is cool. For her it is a social networking and media platform, not a homework machine.

Only time will tell, but I still can imagine lots of ways to use it for business, so I guess I better sharpen my Object C skills and write my first app.

PCamp Austin 2010

Mike Jones — Sun, 28 Mar 2010 15:16:00 GMT

Just finished PCamp Austin 2010. What an experience!

I heard several people comment that it was as good as any traditional conference, but the price was right: free. However, it is not free, it just does not have a fee. The conference depends on sponsors and volunteers. The facility at the AT&T center is as good as you will get. While the facility at Yahoo was great, the AT&T conference center has a main hall that is a room separated from the building entrance and registration area. With less distractions from passers by, the quality of the presentation in the main area was better.

PCamp Austin started under Bar Camp, but they are now a 501(c) and will hold elections. As a non-profit they can now run donations through the organization's accounts instead of personal bank accounts. The committee behind the event is very well organized.

This PCamp was run a little differently that Silicon Valley PCamp. All the voting occurred on site, as opposed to pre-voting online. From an organizational point of view this means the team had to very quickly take the vote tally and then organize the schedule near real time. The final meeting where feedback was taken made clear that how the sessions are categorized and scheduled matters, because people had trouble deciding what sessions to attend and the possibility for disappointment if the "hot" sessions all occur at the same time.

PCamp now wants to grow. It is already over 200 attendees, so they have a large community to draw on for volunteers. They are planning a two in a box method of brining in new volunteers. PCamp also has PCamp Potlucks where they run a 3 hour evening event. When talking to one of the presenters about how to get PCamp started in Denver, they suggested starting with the smaller Potluck event with 6 sessions and two rooms. The reduced scale would provide an opportunity to learn at a smaller scale. I think it could even run at a smaller scale of three sessions in one room. The take away is that even though an un-conference is simple to understand, it still requires a fair amount of organization to pull it off, and to pull off a big event the first time carries a lot of risk, or a very dedicated team of 4-8 people.

There was less interest in Agile and more focus on strategy, pricing, and traditional PM issues, compared to Silicon Valley PCamp. There were also far less techies. This changed the dynamics, giving the conference a more business feeling, in a traditional sense. Like the Silicon Valley PCamp, there were plenty of consultants at hand, many giving presentations. However, the presentation that won best presenter was not a polished consultant, he worked for Dell.

The sessions I attended where:

Value in Use Analysis for Product Pricing and Marketing
Total Vision
How to Get Buy In for Strategic Product Decisions
Sizing, Segmenting, and Forecasting Markets
Product Management - Start With the Story
PM Becomes Strategic Asset, and What It Means For You

I posted my session notes HERE.

I took video of the morning kick off and the closing meeting. The kick off was about introducing how things would run, what the values of the conference where, logistics, etc. The last meeting was for voting on best presenter and best presentation and feedback. Following the event, everyone wandered to the bar across the street to socialize and network. The videos are a very useful learning tool. Anyone interested in viewing them should let me know. Perhaps I can post them to YouTube at some point.

SVPMA

Mike Jones — Sun, 14 Mar 2010 01:48:26 GMT

Yahoo! I am at Silicon Valley PCamp to learn how un-conferences work. About 900 people registered. The place is coming to life and votes are being made. The top 15 internet voted topics make up the morning sessions. The bottom 15 are pasted to the window and we are "dotting" them to see what wins for the afternoon sessions. We each get three votes. I'm cheer leading for the "how to overrule the engineers in a startup" topic :-) Since I am a product manager with an engineering background, I guess I'll learn how to tell myself what to do!

Everyone is playing with TweetDeck. I am not a Twitter fan, but it hooks into Facebook and Linked In, so I'll give it a try. If you are into social networking, you might want to give it a try.

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Companies that were hiring were allowed to get up and announce their openings. 25-30 people made announcements for product marketing, management, developers, sales, etc. They where asked to write "Hiring" on their badge so people could find them and they could bask in the sunshine of new friends :-)

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About 500 people showed up out of 900 registered. All the sessions I went to had more than 20 people. In the area with the screen presentation format was used, and I gathered that more well known people that could draw a crowd were assigned to it. Other sessions were run tutorial style, and in one session a problem was given for people to solve in small groups and then gather to share insights. People did not promote their wares, but it was not to hard to figure out who the consultants were and exchange information. The growth rate after several years seems to be something like: 150, 190. 250, 500.

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The quality of sessions was quite high, and were much more participatory than traditional conferences. This PCamp is now well enough known that people flew in from North Carolina, Chicago, and of course Colorado, where I am from. In the former case, the employer paid for the trip! The organizers seem to be well connected and share materials with the other PCamps. Key to success where Yahoo! (provided the place), sponsors, so that food could be provided, and a key core of volunteers. The place consisted of 8 or so classrooms and a main meeting area with a projection screen.

My main goal in attending was to learn how PCamps and un-conferences are run in the hope that rmPDMA can be a catalyst to running one in Denver. I have provided my notes here so you can get a flavor of some of the sessions. All in all it was quite impressive. Lots of networking. Lots of learning from peers. Very low price.

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Morning Sessions

Product Management in a Startup Environment

The leaders printed out an "Exercise Scenario" for a hypothetical startup. There are questions for discussion. The proposed company is a online retail called "The Guy Registry."

A few interesting ideas came out the session:

Develop personas of users and have a consultant/expert maintain blogs for them so the team can interact
The role of PM in a startup is to guide the conversation such that it leads to focus
Deal with the CEO who is off on a new idea before the initial one is complete
Clarifying vision of the CEO needs constant testing because he will change his mind a lot
Assumption testing is critical
Don't have single points of failure
Can fall apart when the PM and CEO have a basic disagreement over direction and must be delt with
Flexibility is more important that process
Use Google Wave to manage the conversation
Host website by customer to get hits

Anthropology for the Product Manager

PMs have to deal with different cultures within organizations: customer, engineering, finance, etc. The PM has unique ability to translate customer needs and knowledge to the internal cultures. More can be learned by observing because people don't always do what they say. Customer's idea of what a product represents can be very different than yours. Personas can fall short of actual experience. Observing customers can provide context and one can see how a product fits with the whole person.

Anthropology is a process of informing.

Cultures

Tribes

It is important to avoid ethnocentrism. Measuring against self is problematic.

Frameworks:

cognitive anthropology - how people categorize things

symbolic anthropology - what does my product represent

Who you select to visit is important. Would not make huge scale changes on small number of data points. Small samples are good to open thinking, giving new areas to explore.

In the B2B context, how products fit into the work flow is important.

Pay attention to language and how they categorize their world. What is important? What media do they read. Another definition of culture is the language through which people see the world. What is tangible in the culture, what is taboo? What do they all have.

PMs don't use enough testable hypotheses and adjust them over time. It is very difficult to know your assumptions and cultural frameworks. People may frame things differently.

Best practices of what to do with data:

Worst thing is to think one customer is every customer
Overlaying thoughts, beliefs, values on customer said or did is dangerous
A lot can be learned by watching someone fumble with your product
Take and show videos of customer using product

What resources are out there:

Very new discipline
Not much out there
AIPMM
Johnson
The Chief Culture Officer MIT Pres (great position for PM)
Look for proxies: movie stats, economy, etc
Watch Dilbert Cartoons (don't just look at the product)

What about underlying drivers. Deeper ethnography's dig into this. $50K+. Humans are driven by primal forces and sometimes they show up. For example, body care product being used as entertainment (in Guatemala). Messages can then be tailored.

The business development manager ends up playing the role more than the product manager, but the business development manager is more interested in sales, adn the product manager is more interested in the overall product, market, etc.

Participant observation is used so people let their guard down. For deep "hang out", it is mostly observation, not recommending how to use a product.

Afternoon Sessions

Marketing Yourself

Rules about positioning:

Not about you
Differentiate
Why vs. What (or what I can do for you)

Why should I hire you? Because you will get... A, B, C

Know what the need is and align with it. Know the benefits and use "I" to support it.

It is ok to say I don't know yet because I don't know if we are aligned.

Top three strengths... good at and enjoy doing? How does it benefit a potential employer.

Tell me about yourself... let me talk about your organization and how I can help you...

Hard vs. soft benefits: hardware is "let me tell you how I did this in 3 other companies.."

Always lead with the benefit. Have a purpose and be strong.

Resume: Does it sell or merely tell?

Typical Resume... Company, Position, Dates

Company, Position - Employment Dates

Position Goals & Objectives

Grow..
Launch...

Change your resume for every job you apply for if neccessary. Only emphasize what matters to hiring company.

T - Resume (cover letter)

Position Requirements (left) Relavant Experience (right)

Taken from job desc Accomplishments per above

Watch out for poorly written requirements. You may have to rewrite them.

Finding Unadvertised Opportunities. Small % success at getting jobs via internet job sites.

Resumes posted by requirement
Most jobs come from networks and knowing people
May be posed to intelligence gathering, image, etc
People are looking for perfection and can't make decisions

Prospecting

Identify target companies
Get names of hiring managers
Google hiring managers to get to know them
Get email formats of hiring managers
Initiate contact

Take interviews for practice and networking.

Questions:

Why are you hiring a product manager?
Why is that important now?

Leads to ideas on selling yourself.

Finding Unadvertised Opportunities

Get names of hiring managers: "title" + companyname

Get email address formats: *@domain name, for example initial+lastname@domain

Position search on LinkedIn.

Many hiring managers are looking for someone to replace someone.

The Interview - Selling Your Product

50% - Related to person selling it

33% - Product

17% - Other

Be engaging
- Appearance
- Body language / eye contact
- Energy Level
Play offense without being offensive
The questions you ask
- The suggestions you offer

How do you talk about your self without talking about yourself. Always talk about yourself second. Talk about issues and how you can solve them. It is about them first then about you.

The Interview - Do's & Don'ts

Project a positive attitude
Smile and be passionate
Roll with the punches
Learn something from every interview
Don't talk money in the interview

Thank You note: reiterate their needs and how you fulfill them.

How to be a Phenomenal Product Manager

Book: The Phenomenal Product Manager, Expert Product Management

Becoming Phenomenal

Clarity: Role, Responsibilities, Ownership
Evangelize: Groups, Team, Reinforced...
Influence: Subtle, Relationships, Debating, Negotiating, Arguing (3 reasons), Alliances
Tone: Authority, Certainty, Writing & Speaking
Leadership: Think/Act/Communicate, Career Advancement, Instill Hope, Challenge Team
Be Bold: Have guts, Strong opinions, Stand up for what is right...or don't be a PM!
Communicate: Terse, Appropriate, Clear - briefly summarize the situation - state a few selected facts - state what you need, want or demand
Logic & Emotion: Data, Anecdotes, Personal Motivators
Expertise: Market, PM Domain, Business
Whole product: Own It, Insist, Fight, Give Credit
Enthusiasm: Self Generated, Infectious, Fake It, Brand (do not become cynical or jaded)
Tenacity: He who sticks with it... Respect
Attitude: If it's not fun, why do it?

Storycraft

Requirements -> Build it -> Product (value)

The guys that built it are weird but really smart. Need to communication them precise requirements they can build.

Human nature is to fill in the parts. If you don't specify exactly what you mean, they will build it any way and fill in the blank.

Mobile phone asset tracker: 3G Asset Manager Product Requirements

List the assets (inventory)
List asset owners
Associate assets to owners
Add/Delete new assets
Add/Delete people
Trace assets between owners

Stories should be implementation free. Business owns story list, not developers.

Personas are key to stories:

Users
IT people/ops
HR

Story Format:

As a <user> I want <activity> so that I can <benefit>
Acceptance criteria, great if specific and with data (business, not technical) - defines done - specific is better

Epics:

The whole story
Need to be decomposed or broken down

Thin slice:

If you don't thin slice, you are doing iterative waterfall
Start with very basic function

An Agile team will not work without approval of a story.

Non functional requirements and cost. Performance. Other out of bad requirements. Need a close relationship with developers.

Need to know how the learn, especially in an international context. Diagrams are much easier to understand. GUI mockup, workflow, etc. Diagrams support a bucket of stories, usually a natural bucket.

Delay commitment until the last responsible moment

Conferences

Phase Gate and Agile

Mike Jones — Tue, 26 Jan 2010 18:22:00 GMT

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.

Balance

Mike Jones — Tue, 19 Jan 2010 16:11:00 GMT

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

Mike Jones — Tue, 19 Jan 2010 05:20:00 GMT

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:

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.

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

Mike Jones — Wed, 06 Jan 2010 06:11:00 GMT

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.

Economic Modeling

Mike Jones — Wed, 16 Dec 2009 22:52:00 GMT

I recently asked the CEO of a startup, one who is thoroughly an effectual thinker, what he thought of building an economic model similar to that found in "Developing Products in Half the Time." The answer was that he would not believe the model. I then asked a product manager of a company servicing a mature market the same question, and the answer was that not only do they build models, but they drive the model from data from past projects and industry analysis, and the CEO hammers every corner of the model until they believe it represents reality. Only then is a project approved. This CEO is a hard core causal thinker.

I was not at all surprised. The effectual thinker knows that data and assumptions are suspect and constant feedback is more reliable. The causal thinker knows that if the data is good, they can make better tradeoffs. Each has its place.

Regardless of ones thinking tendencies, a lot can be learned by experimenting with a model. By playing with assumptions and their effect on the economics, one can get a feel for which assumptions need better testing and how they relate to development tradeoffs.

I'll walk through and example and see what we can learn. Here is the story: we are a capital equipment supplier selling manufacturing equipment to electronics manufacturers in the US and Asia. The market size is $100M per year, our product is priced at $200K, and the market grows at 8% per year. The product is targeted at a newly developing market segment.

Let's get started on a model. The first thing we need to do is model revenue. Because we are targeting a new segment, we will model the market and sales separately. The market model has two components: the available market and the diffusion of the new product. The available market is:

Available = Market Size X Quality X Awareness X Buy.

The Quality factor is used to model the effect of entering the market and then improving quality. This is a simple way of accounting for learning through market experience. Awareness is one of the A's in the classic ATAR model. Buy models the fact that there are substitutable solutions and this is the portion of sales that can be expected.

The diffusion effect is the standard model that uses a Trial Rate and a Copy Rate.

Let's build out a spreadsheet for this and talk about its assumptions:

Market size is in units sold with an 8% growth rate. The market will only buy half as many systems in the first year and four years later quality does not matter. Awareness starts out at 25% and ends at 100% in year 7. The assumption is that there are many small customers all over the world that are hard to find. 60% of the market will buy this type of solution and 40% will by substitute solutions or adapt what they already use. The diffusion model uses a trial rate of 10% and a copy rate of 20% The adopter column displays the number of systems per year that the market will buy. The penetration column shows the total systems sold. At year ten 350 systems will be in use.

The important assumption is that there are multiple competitors entering the market at the same time, and this represents how the addressable market will play out as a whole. We now have to model how much of this market we can take:

This model says that we can make 80% of the addressable market aware of our product, but initially we can only support sales to 30% of the available market. By year 4 we can support 100% of the available market. Our sales conversion rate is 30%, which is a way of modeling market share. The model says we can take 30% of the market we can reach. The Quantity column represents repeat business on average for this type of product. Sales ramps up over the first few years as customers gain experience with the product in production and purchase risk decreases. The end result is a number of units sold.

Multiply these models together and with sales prices and we have a revenue model for the base case:

The goal is to model four sensitivities: COGS, Development Cost, Performance, and Delay to Market. We can model performance reduction and market delay in the revenue model. Performance is modeled by reducing the Buy column of the market model by 10%. If the performance is lowered, people will turn to substitutes. We could also model this in the sales conversion rate, but using Buy simplifies the model. Market delay is modeled by delaying availability one year and lowering the sales conversion rate to reflect a loss of market share. The assumption is that a one year delay will cause a 33% reduction in market share. If you play around with the spreadsheet, it becomes clear that it is loss of market share that causes the largest loss. If this is not the driving factor in a new product, you can model the delay in other ways. For example, if your competitor can lock up the input value chain you can model higher COGS. Here are all three models side by side:

The left graph is 10% performance reduction, the middle graph is the base case, and the right graph is the one year delay to market. Clearly in this case delay to market has the bigger effect.

Let's now model revenue and look at the other to sensitivities:

COGS is set to 55%, thus a 45% margin, which is a very conservative number. We model higher production costs by raising COGS 10%. Our SG&A is 25%. Development cost is $1M, and there is a $100K yearly development cost associated with product improvements. A cost overrun is modeled as a 10% increase in development cost. We use a 30% tax rate and make an approximate cash flow projection. We then calculate a IRR of 44%, a NPV, etc.

A note on the model: the base values are setup in a table so we can tweak the base assumptions.

The sensitivities are handled with switches:

Each sensitivity is tested using the switches and the result is graphed:

A one year delay to market has the greatest effect followed by manufacturing cost. Performance impact is much smaller and development cost is very much smaller! However, what gets a lot of attention in the heat of development? Development cost, especially if you are in a start up. Sometimes you just don't have the cash and you have no choice but to starve development. But, if your product development looks like this, your decisions should reflect it. This is the basis of product development in all Reinertsen's books on Lean Product Development.

How realistic is the model? Like most models the market model is the most difficult, and market share the hardest number to estimate. If you have developed similar products, you can use analogies. Performance requires some guess work, but development cost and manufacturing cost are usually fairly accurate, and when they are not, you can improve the numbers as the project develops. We can deal with the market delay estimation by testing, but guess what? You have to at least have a prototype product to do that? You can do better by concept testing before engineering development. There is no other choice than to do the best you can and refine the model as you go along.

Much of the value of economic modeling is in the thinking process. Are you a fast follower? Does the late entry effect market share? Does it effect development cost? Is this a winner take all market? How does performance affect sales? Even if the model is not perfect, you will probably gain a first order approximation of what is driving cost and what should be managed. The point is that your intuition may be inaccurate, so using models will test it. If you can build the model as a cross functional team, you will have a much better model. Modeling as a team forces you to justify assumptions and reach common agreement on how to manage the cost of product development so that everyone is aligned and not working at cross purposes and different assumptions on cost.

So, if this were your model, what would you do with it? What tradeoffs would you make? How would it affect your process and decision making?

Note: if you want a copy of the Numbers spreadsheet used in this post, send me an e-mail. See the contact page of the Website.