Systematic Genesis and Obsolescence-A Product Management Mantra

Product Managers can't sit on their tails even when they believe they're winning the goodwill of the market. In this respect, Product Management might be the second most thankless job in industry after that of an operations manager, where even if you make the production numbers for the month, upper management and executives shift their focus to the next period and cast doubt on the manager's ability to hit the numbers for that period. Both these jobs are a treadmill where accomplishments are made and forgotten.

In the "Building Product Value-Guidance for Product Managers" blog-post I listed several truths of product management and offered a framework of enabling capabilities for building product value. In this post I want to focus on the most basic truth of Product Management:

Truth #1

Product Managers must be willing to cannibalize old products with new products. If managers aren't willing to give up on old products, competitors will make the products obsolete for the manager.

Sustaining and Disruptive Innovations
In product management (products are bundles of goods and services), there are two ways to characterize innovations made to products: sustaining and disruptive [1]. The sustaining innovations utilize a single genetic code for their products to which incremental changes are made to yield performance improvements. Alternatively, disruptive technologies utilize a completely different genetic code that produces a slightly different value proposition to the customers' fundamental needs. Ironically, disruptive technologies often yield products that perform worse, at least in the near-term, to the incumbent products, but over time may actually dethrone those products due to performance/cost advantanges.

Businesses can fail for many reasons, such as poor execution of plans, poor plans, poor leadership, poor processes, and even bad luck. But Christensen [1] showed that businesses can fail even when they do the right things from a traditional management theory standpoint. Many businesses invested aggressively in new technologies, listen to their customers, and did market research only to lose their leadership position to another business that was shrugged off as a niche player. One of the most recent examples of a disruptive business that was shrugged off might be NetFlix, who swiftly dethroned Blockbuster with a new way to deliver home entertainment.

Systematic Genesis and Obsolescence

Businesses that were able succeed in the face of disruptive innovations did several things right [1]:

1. They funded disruptive technology projects when they could align customers with the innovations.
2. They scaled disruptive innovation projects so that staff could get excited and demonstrate small wins.
3. They planned to fail early and inexpensively and made it organizationally acceptable to do so.
4. They developed new markets for their technology rather than go head to head with sustaining technologies.

One of the best examples of success through cannibalization is how Hewlett-Packard developed and introduced ink-jet technology. In the mid-1980's the laser jet technology dethroned the dot-matrix printers and HP developed the leading market position. Even though ink-jet printers were slower, resolution poorer, and the cost per page was higher; evidence was there that the printers themselves were cheaper to manufacture. To investigate the opportunity, HP created a separate organization to take responsibility for making ink-jet printers a successful business opportunity. Now HP is the major player in the ink-jet printer market.

Avoiding the Innovator's Dilemma

The Innovator's Dilemma, as put by Christensen [1], is that "logical, competent decisions of management that are critical to the success of their companies are also the reasons why they lose their positions of leadership."So should product managers throw their hands up in the air and regress to a shoot-from-the-hip management style? My position is that the innovator's dilemma doesn't have to be a dilemma at all because those "logical and competent decisions" would have been dismissed with the proper use of Value Driven Product Management tools.

Value Driven Product Management (VDPM) is the organization, coordination, and execution of activities focused on growing the net-value of products. One of the core enabling capabilities of VDPM is the ability to quantify the critical value metrics as depicted in the chart below as they are the key to managing the fundamental metrics of product value, product cost, and pace of innovation.

VDPM advocates the planned obsolescence of products by including disruptive technological innovation in the product plan. As shown in the figure below, net-value improvements begins with innovations that lead to product performance improvements that yield product value gains. Although searching for process innovations should always be sought to reduce costs, they generally lag the product performance curves. Nevertheless, when net-product value improvements are coming primarily from process innovations, businesses should begin investing in projects to identify new product architectures that have the potential to produce either more net-value (as shown in the figure) or to add a product to the portfolio that addresses an underdeveloped market.

VDPM tools are used to measure the fundamental metrics of product value, product cost, and pace of innovation. All three metrics can be shown in the S-curve figure above and can be used for predicting product obsolesce and the need for a new technological architecture (sometimes referred to as a platform). The VDPM not only measure the current state, but can be used to detect product value opportunities and forecast market performance (predictive analytics) to make sure incremental profit is not left on the table.



[1] Christensen, C.M. (1997). The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press. Boston, MA.

Building Product Value-Guidance for Product Managers

In life we talk about building personal wealth. In business we talk about building shareholder value. It's time for product managers to start talking about how to build product value. Value Driven Product Management (VDPM) is the organization, coordination, and execution of activities focused on growing the net value of products and just like there are principles for growing wealth and shareholder value, there are principles for growing product value. In this post I offer a framework for understanding the essence of VDPM.

The Value Driven Product Management Pyramid

I recently reread "Building Wealth" where L. Thurow lists what he believes to be the truisms that provide the foundation for societies, companies, and individuals to build wealth. I couldn't help but see the parallels between building individual/social wealth and building product value. I looked at Thurow's  truisms through the Value Driven Product Management lens and found that much of the framework and principles apply to improving the value of products.

There is an unfinished pyramid on the pack of the dollar bill with a glowing eye at the top. The symbol was placed there by President Roosevelt in 1935 to represent economic strength and durability during a time when America's wealth was anything but that. The unfinished pyramid symbolizes the possibilities of the future and the glimmering eye represents the ability to see what must be done next.

Here are the layers of the Product/Service Value Pyramid

The Eye: Value Driven Product Management

Social and Environmental Consciousness

Value Driven Decision Approach

Product Value Advocates

Innovation and Knowledge Management Systems

Value Driven Culture

Base of Pyramid: Value Delivery Systems

Before we get into the layers themselves, there are a few truths that we posit from the beginning:

Truth #1

Product Managers must be willing to cannibalize old products with new products. If managers aren't willing to give up on old products, competitors will make the products obsolete for the manager.

Truth #2

Product Managers can attain high profit margins and large rates-of-return by exploiting product value disequilibriums that result from technological innovations, under-serviced markets, and evolving social trends. All other prospective product management actions yield marginal results with a low rate-of-return.

With these fundamental truths in place let's look at each of the pyramid layers to see what other truths we can find that can help product managers attain the top of the pyramid.

The Base: Value Delivery Systems

Every organization has a way of doing things. The small business will likely have the efficiency and style of the business owner. The larger organization is build upon legacy processes, methods, and culture. If we think about these characteristics as "business genes", we might say that businesses are predisposed to have certain strengths and weaknesses that are very dependent upon their market. If the business moves to a new market, some strengths might become weaknesses, and visa-versa.

Truth #3

Every organization has a genetic code for delivering their products and services. The secret to success is finding markets where the products' strengths make them exotic and where weaknesses are irrelevant.

Value Driven Culture

There is no shortage of literature that talks about continuous improvement. Lot's of business say that it is part of their culture and in the drinking water. The major distinction of a value driven culture is that continuous improvement activities are not pursued based on perception, but because there is strong evidence that the actions will have a direct impact on the customer's willingness-to-pay (product value) and/or reducing costs to yield a positive change in the net-value of a product offering.

If an action reduces cost, but also reduces the customer's perception of value by more than the cost savings the result is a negative net-value change, which results in less profitability because prices must drop to yield the same demand and results in customers seeking out other alternatives for the same price.

Truth #4

There is no institutional substitute for individuals who know how to grow customer value (see figure below), which is done by improving willingness-to-pay metrics (product value) and/or reducing costs to yield a positive net-value change.

Innovation and Knowledge Management Systems

An innovation in the truest sense is an artifact or concept that is new to the world and improves upon a legacy artifact or concept by either improving performance (think product value) or reducing cost (think product cost). Innovations can come about by accident or systematic discovery, but in nearly all cases they come about through the use and/or the application of knowledge. Businesses need systems to keep track of lessons learned and accumulated knowledge whose immediate implications may not always be clear to ensure the wheel doesn't need to be continuously reinvented.

Truth #5

Innovative ideas come from both knowledge and creativity. Any organization that values structure, policies, and rules above all else will not be creative, but without the right degree of order, innovative ideas and knowledge vanish. 

Product Value Advocates

"There are more cowboys in Detroit than all of Texas!" This is what one automotive industry expert had to say about the cavalier style of auto executive decision making throughout the last several decades. The data were there to suggest that reliability and fuel economy were becoming ever increasingly important in the decision calculus of auto consumers, but because auto companies lacked the proper analytical tools to sense and assign the proper level of sensitivity for these automotive attributes the opportunity was lost.

There are many studies that suggest that people often fall into decision traps because of our limited working memory, limited abilities in cognitive reflectiveness, and limited abilities related to comprehending the true probabilities of uncertain events. When decisions get complicated and we don't have a decision framework we use over-simplistic decision heuristics. Sometimes the result of these poor decisions yield a good result, but what we really want is a good decision based on a framework that gives clarity of action.

Although analytical tools have their place in decision making, the use of intuition is critical to check assumptions. If the analytical tools are to be trusted (and used) by decision makers, models must be transparent so they can be checked with intuition. Balancing analytics with intuition is the job of a skilled analyst who has the proper analytical tools and a solid understanding of decision analysis. I like to call these individuals Value Advocates because they can use their specialized knowledge to detect and communicate value improvement opportunities in a credible way.

Truth #6

Use intuition AND analytical tools to make good value driven decisions because either used alone can be very risky. Product Management teams need both experienced managers to provide intuition and value advocates who know the analytical value tools to reduce risk and provide clarity of action.

Value Driven Decision Approach

A decision is an irrevocable allocation of resources. You don't actually decide to buy a pair of shoes until you pass money to the shoe store. You don't actually decide to go on vacation until you're on the airplane and past the point of no return even though you've purchased the ticket-you could change your ticket to make a trip for reasons other than vacation.

We make decisions every day ranging from what to wear to work to what home to purchase. Whatever the decision, it is clear that the level of consideration that a decision warrants is based upon the level of risk associated with that irrevocable allocation of resources. Will your taste in fashion change after you purchase the shoes? Would you rather spend your money on a new pair of skis rather than go on vacation to the Caribbean? In our personal lives there is no escaping the results of our decisions and therefore we are very careful when making big decisions-those that require a significant amount of our resources.

When it comes to product management, the level of decision analysis should also be directly related to the level of resources to be allocated. While working for a manufacturer of specialized aircraft I often heard complaints from managers that information gathering for decision analysis was "too much work", but if you asked the executives whose careers depended on flawless strategic decision making, their response would be, "That's the way its must be!"

Truth #7

Managers who are interested in building value into their products and services will use Value Driven Decision Analysis. Managers who are on rotation, have plans to move on after decisions are made, or who don't have a true stake are more comfortable making decisions with a limited level of consideration.


Social and Environmental Consciousness
Now more than ever, companies are being held accountable. This accountability is directly related to the ability of stakeholders to organize and get messages out when companies take actions that negatively impact society and the environment-even if these results were unintended or unknown.

In the past it took investigative reporting to get the word out, but with the advent of social networks and media, the message gets out and the implications to the business can be swift and unforgiving.

Truth #8
Negative social and environmental externalities must be understood and quantified when possible so they can be included in the product planning decision calculus. Failure to do so leaves the business open to legal liabilities, political controversy, and societal backlash.

The Glowing Eye: Value Driven Product Management

It should be clear that Value Driven Product Management (VDPM) is more than just a few neat ideas, its more than neat analytical tools, and it applies to all types of products and services. Indeed, to be a value driven product management requires that several modern day management principles be interwoven into the culture and organization. Specifically, VDPM is the organization, coordination, and execution of activities focused on growing the net value of products. 

One of the core enabling capabilities of VDPM is the ability to quantify the critical value metrics as depicted in the chart below as they are the key to managing the fundamental metrics of product value, product cost, and pace of innovation.

What I've offered in this post is not meant to be all inclusive of what VDPM is supposed to be, but simply a framework for understanding the essence of VDPM.

Book Review: "Mastering Customer Value Management" by R. Kordupleski

1 Star (Out of 5)

The following is a book review of "Mastering Customer Value Management" by Ray Kordupleski. The book was first published in 2003 by Pinnaflex Educational Resources, Inc.

The methodologies advocated in this book are for managers who don't mind shooting from the hip and living dangerously. This can be the only fair assessment as the author does not cite a single reference (although there are many authors in this field and the domain is not new), the methodologies are developed based on what I call "farmer math", and the supporting logic for the methodologies is fraught with logical errors, fallacies and oversimplifying assumptions. This book was written for clients as a marketing tool, was not peer reviewed by people knowledgeable in the field, and was printed by an unreputable publisher (visit their website at www.pinnaflex.com and you'll find a website selling storage sheds!).


If you're thinking about purchasing this book, don't! There are many out there that are clearly written and have methodologies that won't get you into trouble.

Book Review: "Designing and Delivering Superior Customer Value" by Weinstein and Johnson

5 Stars (Out of 5)

The following is a book review of "Designing and Delivering Superior Customer Value: Concepts, Cases, and Applications" by Art Weinstein and William Johnson. The book was first published in 1999 by CRC Press.

"Designing and Delivering Superior Customer Value" was written to serve as a text for MBA students on the concepts and theories of customer value, but would serve as an excellent read for general managers who are striving to make step changes in products and services. The book goes a step further than many other books on customer value as it not only proposes a framework and supporting logic (where most books on the subject stop), but backs up the propositions with real world data and several case studies (half the book is applications and case studies). The book is clearly written, has an excellent bibliography, and uses real-world examples to illustrate main points.

One of the major contributions of this book is that it suggests a relationship between customer value and Total Quality Management (TQM), which was a continuous improvement initiative the proceeded Six Sigma. Indeed, one of the major criticisms of traditional Six Sigma is that it focuses largely on cost savings and forgets to consider improvements in customer value. The authors state it clearly: The losers in the quality battle will be those who attempt to do things right, while the winners will be the organizations that learn to do the right things.

The book serves well as a foundational piece as the methods and tools are largely qualitative, but those interested in the latest analytical techniques that include quantifying and forecasting value metrics may want to seek another book on the subject. Another consideration is that even though the words "Designing and Delivering" show up in the title, the book is largely focused on delivering, i.e. the processes that make up the "service" side of the business and how they contribute to customer value.

In summary, "Designing and Delivering Superior Customer Value" is an excellent contribution to the area of Value Driven Management and is highly recommended for marketing and general managers. This book would also be a good addition to the library of quality managers because of the attention given to the link between customer value and quality.

Book Review: "Value Merchants" by Anderson, Kumar and Narus

4 Stars (Out of 5)

The following is a book review of "Value Merchants: Demonstrating and Documenting Superior Value in Business Markets" by James C. Anderson, Nirmalya Kumar and James A. Narus. The book was published in 2007 by Harvard Business School Press.

This book serves as a "how-to" for value based pricing in a B2B context. "Value Merchants" is written for the business leader or sales manager that sells products to businesses (B2B) who wants to get a better return on their products by quantifying (in terms of dollars) the benefits and savings for their customers to eliminate the need to provide price concessions in order to make a sale. The book could be read over a short flight as it is clearly written and has good flow.

The book makes the case for the use of and demonstrates how to create "value calculators" to document cost savings and incremental profit gains delivered to customers by purchasing the suppliers products and services, which they call "Customer Value Management Process". The authors show going through the process can help make stronger value propositions, quantify value claims, construct business cases for change, tailor market offerings, and transform the sales force into "value merchants" as opposed to "value spendthrifts".

There are only two criticisms that I have of this book. First, the "Customer Value Management Process" should actually be called the "Value Merchant Process" or the "Customer Value Based Marketing & Sales Process", as Customer Value Management is a much broader domain of thought comprising many tools that include the "Value Merchant Process". The second criticism is that the bibliography and references to scholarly works is very limited, where nearly half of the references point to author's own journal publications.

In summary, this book provides an introduction and a "how-to" for value based pricing in a B2B context and how are interested in learning about one of the many tools that make up Value Based Management.

Book Review: "Know Your Customer" by Woodruff and Gardial

5 Stars (Out of 5)

The following is a book review of "Know Your Customer: New Approaches to Understanding Customer Value and Satisfaction" by Robert B. Woodruff and Sarah F. Gardial. The book was published in 1996 by Blackwell Publishers Ltd.

"Know Your Customer" is for the intellectually curious marketing manager who wants to gain a foundational understanding of the differences between customer satisfaction and customer value (how customers value products). Although this book might be a bit much for the general manager who is interested in the results of satisfaction and value studies only, the general manager will benefit from an enriched view of how customer value insights can lead to innovation and the limitations of customer satisfaction metrics.

The authors lay down a framework for satisfaction and value and explain why analyzing both is key to business intelligence. The book is clearly written, uses a formal voice, has a good bibliography for the time that it was published, uses examples from industry to help illustrate important concepts and accomplishes what it sets out to do--explain the relationship and differences between customer satisfaction and value.

The book serves well as a foundational piece, but may fall short for those interested in the latest analytical techniques that include quantifying and forecasting value in terms of a willingness-to-pay metric in dollars (called product value). Product value is particularly helpful when making tradeoff decisions that influence product cost and when it is necessary to dedicate precious resources to a list of possible product innovations.

In summary, this book is perfect for managers interested in a foundational understanding of customer satisfaction and value. This book is not for those interested in the latest analytical concepts and tools.

Customer Satisfaction Versus Product Value

Many companies have systems in place to measure product satisfaction (the more popular term is customer satisfaction) and use the information to aid decision making. Alternatively, very few companies have systems in place to measure product. I share the belief with others that satisfaction and value metrics are different, they tell different kinds of stories and that together they provide the complete story. In this post I'd like to explain the following:

• The difference between satisfaction and value metrics.
• Show that both satisfaction and value metrics are necessary for decision making.

Customer Satisfaction and Value Defined

Customer Satisfaction is a customer's perception of how well a product (good or service) performs in specific situations or in general relative to their expectations. 

Product Value is a metric that is a property of a product (good or service), similar to product cost in that it is measured in $, but measures the worth of a product (customer's willingness-to-pay) for a specific market and is independent of use situations.

Below is a table that compares satisfaction and value in more detail.

Customer Satisfaction and Value in Decision Making

Both measures are needed to get a complete picture of how the business is doing and neither alone is a substitute for the other. Below is a table that shows how the metrics aid different types of decisions.

Five Disciplines for Creating What Customers Want

“Risk comes from not knowing what you’re doing.” – Warren Buffett


Carlson & Wilmot say that businesses must address at least the following types of value:

• Customer Value
• Company Value
• Shareholder Value
• Employee Value
• Public Value

Many folks use the words "customer value" to mean "value to the customer". I like to use the words "product value" because for me it represents a property of the product just like "product cost" (a product can be a good, service, or combination of the two). Whatever you call "value to the customer", everyone can agree that it is the center around which all other types of value are based. Everyone can also agree that product value fluctuates over time as the tastes of customers change.


Using product value as a metric to manage the business is about creating what customers want. Carlson & Wilmot list five disciplines for doing this:

1. Focus on important needs
2. Have a system for creating value
3. Make sure your organization has innovation champions
4. Use innovation teams
5. Align the organization around creating value

It should be clear that being able to measure product value is key to all five disciplines, but let's role up our sleeves and take a look.


Prioritizing Important Needs


Products satisfy the needs of people who purchase them. My car not only takes me from point A to point B, but it carries me safely, it moves my groceries, my friends, it provides excitement by accelerating swiftly, and so on. The car possesses several critical-to-value (CTV) attributes for which I'll pay. Quantifying how my willingness-to-pay changes as the level of CTV attribute changes is one of the best way to prioritize important needs.


Value Creating Systems


To be successful in the long term, businesses must have a system for making improvements. The best systems are based on the principles of value driven innovation, which focuses on building the net-value of a product over time. Net-value is the difference between product value and product cost and its growth has been linked directly to growth in market share in several studies.


Innovation Champions 


Innovation champions are individuals in the business that encourage and support product and process improvements in the organization. In The Tipping Point, Gladwell listed three important roles of innovation champions:

1. They share knowledge
2. They influence others to take action
3. They connect the right people to enable action

Of the five disciplines, this is the one where quantifying product value may be nice, but not that important. The innovation champion may just need to have an intuitive sense that an opportunity exists and have the innovation team quantify the innovative power of an idea when it comes to obtain funding from upper-management.


Innovation Teams


Kaizen teams are a well known approach for gathering a cross-functional team to attack innovation opportunities. These teams are often formed to focus on process improvements, which can result in cost savings and improved service. Although improving service is one way to increase product value, it is often a secondary objective of Kaizen teams and there exist opportunities to improve the "economic good" part of product value. This is a view held by some of the Six Sigma thought leaders. Indeed, it is my view that Kaizen event charters should quantify the expected change in both product value and cost as a way to understand the projects true innovative power.


Product Value and the Organization


A consistent theme throughout my blogs is that improving the net-value of products and services is everyone's job. Nevertheless, unless businesses learn how to quantify product value, net-value will remain a fuzzy metric and the it will be difficult to set targets and monitor progress. One of the key benefits of measuring product value for the organization is that it is an outward looking metric, which tells you how you are doing with respect to your direct and indirect competition. Ultimately, quantifying the fundamental metrics is what helps the entire organization play the same sheet of music, to set targets, and innovate.