Blue Mine Group

The business model as root cause of short-term challenges

What are your biggest short-term challenges? How can you address them effectively to ensure the survival and growth of your venture?

Critical short-term challenges

In today’s precarious economic conditions, most ventures are facing major short-term challenges in addition to their perennial long-term value creation issues. For many, the most critical challenges fall into at least one of three groups:

Market challenges

One set of top priorities is on the sales and marketing side of the business. The fundamental concern here is that the venture is not securing customers, revenue and market traction quickly enough. The venture is struggling with the following types of issues:

• Pursuing a range of potential markets, but not getting any real traction in any of them.
  
  
• Having difficulties communicating what it offers in a way that prospective customers understand and find compelling.
  
  
• Receiving few inbound enquiries, and finding it very difficult to gain prospective customers’ attention for even an initial conversation.
  
  
• Experiencing long sales cycles with many opportunities stuck in a “black hole” after presenting a proposal.

The net impact of these market challenges is that sales goals are not being met, and the venture is in danger of either never getting to, or falling below, sustainably profitable revenue levels. 

Product challenges

A second set of critical issues for many ventures is on the engineering / operations side of the business. Here the core concern is that the venture is taking too long and spending too much to get to the point where it is delivering on its promise to customers. Critical issues include:

• A current product offering and operational delivery system that is first generation and clearly inadequate relative to future customer needs or competitive offerings.
  

• Frequent internal arguments and lack of clarity on which new products and features to develop, with continual changes in direction and priorities.

• Constant product development delays and “scope creep”, with frequent missed deadlines amidst complaints of inadequate internal staffing and equipment.

• Significant product quality issues and high rates of customer dissatisfaction with both products and customer experience, leading to high product return and “customer churn” rates.

The impact of these product challenges is excessive levels of investment and costs, missed market windows of opportunity, and an inability to retain customers, putting huge strain on the business in terms of short-term cash flow.

Venture challenges

The third set of challenges relate to the primary stakeholders and resources in the business. The key issue is that the venture does not have, and cannot attract, the right stakeholders or the right resources to achieve its goals. These issues include:

• Running low on current funding, and finding it difficult to attract new funding.

• Constant pressure and high anxiety on the board and amongst investors.

• Having in place an incomplete management team, and struggling to attract the right management team.

• Either a lack of strategic partnerships, or partnerships that consume resource and deliver no value to the venture. 

• Lack of true, valuable intellectual property (IP).

The impact of these venture challenges is that the business is severely hampered in executing its plan and pursuing its goals, and may be missing one or more ingredients that are vital for its success and growth.

Product Marketing

Product marketing focuses on attracting and winning customers as effectively as possible. The primary responsibilities of the product marketing role comprise:

• Clearly defining the target markets, customers, needs and buying cycles, and working with both the marketing and sales disciplines to ensure there is complete consistency and focus on the target market.
• Developing the product’s core messaging – value proposition, elevator pitch, detailed product descriptions, product presentations and demonstrations, white papers and case studies.
• Working with marketing to provide subject matter expertise, content and input for marketing communications programs such as web site and collateral design, media and analyst relations, direct marketing, trade shows and conferences.
• Working with sales on customer presentations, developing proposals and tailoring deals to win business.

The product marketing role is critical to managing a number of common challenges:

• Ensuring close coordination between sales and marketing in terms of target market and key messages.
• Enabling high response rates to marketing programs based on optimal targeting, positioning and messaging – offering real value to target customers, media contacts, analysts and conference organizers that is of high interest and meets their needs. 
• Ensuring the groundwork is laid by marketing before beginning to incur high selling costs.
• Keeping sales cycle short by offering compelling solutions to urgent needs in well defined markets.
• Facilitating high sales win rates through tailoring product positioning, pricing and benefits to individual customer needs.    

How product management maximizes the value of the innovation

The value of a product or service innovation can be illustrated using the following diagram:

This diagram shows the familiar innovation or product lifecycle cumulative cash curve, together with an associated valuation curve. The diagram shows that there are three core drivers of the value of an innovation: the amount and timing of investment, the rate of market traction, and the valuation multiple. The three product management roles described above focus on these three value drivers, and in so doing, the product management discipline becomes the central driver of innovation and venture value.  

Product development: minimize investment

The primary investment associated with product and service innovations is typically in engineering and operations. Product development plays a key role in ensuring that products are designed and developed as efficiently as possible based on a clear, well-defined upfront specification. It also plays a key role in ensuring operational processes are designed and developed efficiently based on a clear set of requirements both for the product and the customer experience. In this way, the product management discipline plays a pivotal role in limiting funding requirements, increasing capital efficiency and reducing time-to-market. 

Product marketing: accelerate market traction

The rate and timing of market traction – attracting and winning customers – is a direct result of the depth of market need, the ability of the product to meet that need better than all other options, and the ability of the sales and marketing team to get that message out to the right market participants (customers, channel partners, media, analysts, industry associations). Product marketing plays a key role in focusing the sales and marketing teams on the right target markets with the right messaging. It also plays a critical role in educating and winning individual customers. As such, the product management discipline is instrumental in accelerating market traction.  

Product strategy: increase valuation multiple

The valuation investors assign to a venture is typically a function of both its underlying cash curve and a multiple that investors assign to that particular venture in comparison with other ventures in the same industry. Two ventures with similar cash curves may get assigned significantly different valuations primarily based on two key factors: the core business model (market opportunity, IP, business system) and the caliber of the key stakeholders - the management team, investors and strategic partners. Product strategy is responsible for the product business model, and it is also pivotal to general management’s ability to attract the right caliber of stakeholders to the venture. In this way, the product management discipline is a primary driver of the venture’s cash curve and valuation multiple.

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Through true, strategic product management, ventures can transform their success and ability to create value from innovation. As the owner and strategic product management of the venture’s product vision and business model, the product management discipline should play a central role in guiding and enabling the venture’s other key disciplines in maximizing the three core drivers of venture value.

Product development

Product development focuses on building and delivering products as efficiently as possible. The primary responsibilities of the product development role comprise:

• Developing clear and detailed “whole” product definitions – the total set of product features and benefits, together with target product economics (selling prices, costs and margins).
• Working with the engineering discipline (including research, design, development and testing) to ensure products are designed and developed to meet requirements.
• Defining the customer experience desired for customers to purchase, receive, install and maintain the product.
• Working with the operations discipline (sourcing, production, delivery, support, billing) to design and implement processes that deliver the desired customer experience.

The product development role is critical to managing a number of common challenges:

• Reducing product complexity and production, delivery and support costs.
• Minimizing re-work due to unclear or incorrect product features.
• Eliminating time and money spent on unnecessary features and functionality.
• Ensuring rapid market acceptance through continual customer input during development.
• Ensuring operational needs are considered in parallel with product design and development.
• Ensuring the totality of the product and customer experience fully realizes the product vision and strategy.

Product strategy

Product strategy focuses on planning and managing the product business model over its lifecycle.  The main components of the product business model are:

• Product market definition – defining the target markets and customers, the urgent customer needs to address, and the total solution needed to meet those needs better than competing solutions. This includes defining both market and product roadmaps laying out how the innovation will be commercialized over time. 
• Business system definition – how the product or service will be developed, marketed, sold and delivered. This includes both defining the key internal functional disciplines and models needed, as well as identifying external partners in one or more parts of the business system.  
• Economic model – how the innovation will make money, including funding, investment, revenue, costs and cash flow.   

Getting the product market definition right is probably the single biggest driver of value in the whole venture. The difference between focusing on a large, unmet need with a compelling, superior solution, and offering an unexciting product to a small market with no compelling needs, cannot be over-stated. The former will create good returns even with mediocre execution, while the latter will soak up huge amounts of investment for a long period of time without ever really succeeding. The large majority of problems with innovation and new ventures – excessive funding needs, lengthy time-to-market, lengthy sales cycles, slow rate of market traction, poor valuation – are a result of poor product market definition.   

The business system definition is also very important. Many ventures try to commercialize innovation using an inappropriate business system, because it reflects their prior experience, not the needs of this venture. So for example, they follow a “not invented here” mentality and try to build everything in-house, when technology or IP is available externally at much lower cost and time-to-market; or they try to build a direct sales force when a web-based and licensing model would be far more value creating.

Naturally, the economic model is also of central importance, to ensure all opportunities and risks are considered from the beginning, and to ensure that product market strategy and business system put in place to execute on that strategy deliver optimal financial results.

The primary responsibilities within product strategy include:

• In-depth market analysis, including customer research, competitive analysis and market eco-system analysis.
• Internal collaboration to lead the cross-functional team in defining the right solutions to meet the identified market needs.
• Internal and external collaboration, communication and management to ensure the implementation and execution of the product business model across its lifecycle. 

The main “client” discipline for product strategy is general management. By creating a powerful and value-creating product business model, product management enables general management to attract the right caliber of executives, secure the right amounts of funding, and build the optimal network of alliances and strategic partnerships for the venture.

Formulating and implementing product market strategy

Given its central impact, formulating and implementing an optimal product market strategy is a top priority for innovation-driven companies. But as noted above, this is a difficult challenge for many. So how should you go about it?

Through extensive experience with dozens of companies over the past six years, we have evolved the following simple but powerful approach:

1. Define the urgency of reviewing your product market strategy, and the specific issues to address.

• Determine the urgency to review either your overall product market strategy, or selected product markets.
• Begin by working with your management team to identify the set of key issues your business is facing, and which of them can be traced back to questionable product or market strategy decisions. 
• Using this as input, define the specific product market issues to be addressed. Use the generic portfolio and product market lists above as a starting point.

2. Form a cross-functional product market strategy team.

• Form a team with representatives from engineering, product management, operations, marketing and sales.
• Conduct a kick-off workshop to work through the issues. Identify “low hanging fruit” - immediate decisions you can make. Identify areas where additional input is required.
• Schedule regular sessions, perhaps every two weeks, for the product market strategy team to meet. Drive all product market strategy discussions to this working group.

3. Conduct internal and external analysis to enable fact-based discussion and decision making. Examples might include the following:

• Understand your product market economics: develop a product market matrix, showing past, current and future market size, market share, revenue and margin for each product market combination.
• Evaluate your market options. Assess key elements of market attractiveness (depth of felt need, size, growth, competitive intensity, etc.) versus your core capabilities. Use the analysis to prioritize your target markets.
• Conduct customer research, to truly understand both core and buying customer needs. Learn what is really important to your customers – what actually leads to a purchase decision.   
• Understand your competitors in detail, specifically your competitors’ offerings, and how well they meet customer needs versus your own.
• Summarize your current product and service offerings in terms of key benefits and positioning. Compare your offerings with customer needs and competitive offerings. Identify areas to address.
• Explore a range of pricing options. Consider the impact of upfront payment versus an annuity model. Look at some of the recently identified “free pricing” models. Evaluate impact in terms of customer acceptance and your company’s economics.

4. Based on the above analyses, identify and evaluate product market options, and select the new strategies:

• Summarize and synthesize your analyses into a limited set of robust, internally consistent options for both individual product markets, as well as for your total portfolio of products and markets.
• Define your evaluation criteria, such as short term impact, long term potential, fit with core capabilities, and evaluate each option against these criteria.   
• Look for ways to harmonize and reduce the number of options, for example through timing (we’ll do this now and that later), or through fitting the options into an overarching framework (these three product options could all be modules of one solution running on a common platform).
• Make final selections of market focus and product direction.

5. Develop an implementation plan, and track and regularly review progress:

• Translate the new strategies into functional action plans: what are the implications for engineering, operations, marketing, sales and service? Define specific tasks, responsibilities and timelines.
• Establish metrics to add to your normal operational metrics so you can track implementation of the new strategies.
• Review progress frequently, and discuss implementation issues in the cross-functional product market strategy team.

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Surprisingly, despite its central importance, many companies struggle with the question of “which products should we offer to which markets?” Don’t let this deter you. Time and again, we have seen those companies who recognize and have the courage to resolve their core product or market problems experience a tangible unleashing of energy, productivity and success. The result? A transformation in your company’s ability to achieve its growth and valuation goals. 

Portfolio product market strategy

Product market strategy at the portfolio level seeks to address questions such as the following:

• What should be our total portfolio of products and markets? How should this evolve in the short, medium and long term?

• Which markets should we focus on? Which are most attractive in terms of their demand and competitive characteristics, and fit with our core capabilities?

• Which product and service categories make best sense for us? Which fit well with both our most attractive market opportunities and our core capabilities?

• Which product markets are our priorities for investment and growth? Are there products and markets we should exit? Are there opportunities to expand into new markets? What new products and services should we introduce, and when?

• How can we optimize value across our product market portfolio? Are there opportunities to create and leverage a common product platform? Are there opportunities to offer similar products to multiple markets?

Product market issues

For many innovation-driven companies however, product market strategy is value-limiting, not value-enabling. These companies evolve their product market strategies by default, rather than through proactive, systematic analysis and thought. Target markets are selected based on the background of the company founders or through historical accident, not through careful evaluation of which markets offer greatest potential. Similarly, product and service offerings are a result of early engineering and positioning decisions, some of which were made without sufficient understanding of customer needs and competitive offerings, or long term strategic considerations.

A common reason for a lack of an effective, well thought out product market strategy is that it has to be a truly cross-functional process. Most key functions in the business are directly affected by, and have strong views on, which products the company should offer to which markets. Many companies do not have the right structures and processes in place to achieve the level of cross-functional work required. Add in the egos that get involved, and past investments that loom large and must somehow be justified, and it becomes clear why so many companies struggle in this area. 

The net result is that a great many of the issues that such companies confront can be traced back to problems in their product market strategies. Consider the following example issues, which can be traced to poor market strategy:

• Revenues are slow to ramp, due to a lack of urgent customer needs.

• Sales cycles are too long, due to lack of customer urgency and competitive intensity.

• With few customers in each of many markets, the company does not have a credible reputation in any one market.

Or think about the following issues stemming from inadequate product strategy:

• Customers fail to understand what the company does.

• Customers do not appreciate or want to pay for the difference between your products and your competitors.

• Engineers are struggling to build the product as defined.

• Operations is not able to deliver the customer experience required.

• Margins are poor, due to poor pricing strategy and high engineering costs.

Are you experiencing any of these issues? If you are, chances are that you are trying to address them through business system responses - throw more resource into engineering, hire more salespeople, run more marketing programs. Such efforts end up draining funding and resources, and provide “band aids”, without solving the real underlying issues. Perhaps you need to look deeper, to identify the root cause of the problem – a need to overhaul your underlying product market strategy.