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.

Four Steps to Deliver Product Value

Businesses must be responsive to how customer's tastes change. For example, in the early days of cell phones customer's wanted small and light-weight phones. Today's phones must possess a balance between functionality, usability, size, and durability. What makes the task increasingly difficult is that there are several different markets of consumers with different expectations and willingness-to-pay for each of these attributes. The many cell-phone manufacturers have come up with their solutions over time and the consumers show their preferences with their purchase decisions. Some of the manufacturers have found ways to satisfy certain target markets, but these guys fight hard for every point of market share.

Product planners can make deliver big gains in market share and profitability by taking four major steps:

1. Identify sources of product value
2. Make changes to goods and services that increase net value (product value minus product cost)
3. Promote the changes
4. Assess the product value delivered

Identify Sources of Product Value

The first step in identifying sources of product value is to measure the current product's value to the customer. Measuring product value is how the business measures how its solution measures up against the competition and serves as a source of ideas for integrated communications to the customer to remind them of the solution's benefits. The key to Step #1 is exploring the voice of the customer for adding or changing attribute levels for which consumers are willing to pay. Although many product planners and executives use their gut to identify the sources of product value, it doesn't have to be this way. The competitive landscape is just too tough to rely on gut feels alone.

Increase Net Value

Competing on both product value and product cost is the key to creating value for the customer and value for the business. Studies have shown that successful businesses (in terms of profitability and market share) are the ones that focus on creating valuable products AND keeping costs down simultaneously. Generally, when making these tradeoff decisions, analysts will come up with cost forecasts and leave it to the product planner to use "the gut" to figure out if the change will be a net value winner (net value losers are the ideas where the change in willingness-to-pay does not cover the change in product cost). Again, making the net value decisions doesn't have to be this way. There are ways to make these calculations rapidly to support better decisions.

Promote the Changes
If changes are made that give the consumers more for the money--TELL THEM. The metric of product value is based largely on perception, so its important the product changes are communicated so that the consumer know how your product is better than the competition (and how to explain it to their friends).

Assess the Value Changes
The last step is measuring the value changes using actual purchase data. Actual sales data is the only way to obtain a metric of product value that truly measures how consumers vote with their dollars. Using survey data to forecast value changes is a necessary step in determining what product changes will help net value, but using real sales data to measure changes in product value is the only way to assess the innovative power of product changes.

Clarity Please-Product Value for an Individual

Every marketing textbook I look at defines product value as the relationship between the consumer's perceived benefits in relation to the perceived costs of obtaining those benefits. The relationship is generally expressed as the following ratio:

Value = Benefits / Costs

I know we can measure costs, which might be transportation costs, storage costs, maintenance costs, delivery costs, etc. But someone, anyone, please give me an example of when a marketer has actually taken the time to list out and quantify the tangible AND intangible benefits..... I fear I'll be waiting a long time. Now let's say someone actually went through the trouble of quantifying these metrics, I would like to meet an executive who used the resulting ratio to make a decision. If the ratio was less than 1 (indicating costs were larger than benefits), who's to say the analyst didn't forget a benefit or two that might tip the scale???

Can we please dispose of this nonsense and move onto a metric that allows us to make decisions? Let me propose an alternative definition of product value, which has been tested in major automotive and heavy equipment companies and has shown to be rigorous and worthy to be included in the decision calculus. Rather than give a mathematical derivation (you can find this in a book), I'd like to get there using our intuition (let me know if I can make some improvements).

Let's start with the illustration below. Here we have a buyer with a sack of money and a seller holding a TV (both men and smiling) with a lady in the background who is clearly disappointed about something. If the seller's price was equal to the buyer's Individual's Customer Value (let's call this VI, where I stands for individual), then there wouldn't be a deal as this would meet the buyer's willingness-to-pay threshold. Conversely, the seller wouldn't sell the TV for a price that was equal to his cost (let's call this CS). Therefore we know that price needs to be somewhere between VI and CS. The closer that the price is to CS, the happier the buyer will be; and the closer the price is to VI, the happier the seller will be. Let's say the buyer and seller were honest and fair in their dealings, for them to share equally in the deal they would set price as follows:

Price = (VI + CS) / 2

Let's define "Net Value" as  (VI - CS), so the buyer and seller are both happy because they split net value 50/50.

The challenge with real markets is that every potential customer has a different VI so it's impossible to charge a single price to split the net value in each transaciton. It's also rare that the seller divulges his costs and/or the seller divulges his/her willingness-to-pay. In the next post I'll tell a story about a customer value metric for a market of individuals. Don't worry, I'll also talk about the angry lady in the background in a future post.