Understanding Product Development

Projects do not exist in a world of their own. Instead, they arise within environments that exert substantial influence over the kinds of projects that are approved and how projects should be planned and executed. These environments, in turn, are influenced by strategic factors that have been the subjects of extensive research. This article attempts to correlate these strategic factors directly to project selection, planning, and execution choices that project managers must make.

To begin, I must define the word product. A product is a bundle of services that provide value to a customer or customers. Often, to provide value, it is necessary to deliver an object. The object is not the product. It is only a part of the product, a means of delivering a part of the value. To illustrate this point, I will tell a story about two newly rich Russians.

Both of the Russians had recently purchased brand new Mercedes-Benz automobiles. One said, “Mine has the largest engine available.” The other replied, “So does mine but mine also has a turbo charger.” The two continued to compare their new cars for some time until one finally said, “I suppose our two cars are, in fact, identical, but,” with a broad smile, “I paid more for mine.” Value is in the mind of the customer.

My understanding of product development hinges on my understanding of two concepts from the recent past; Strategic Intent and the Boston Matrix.

In May, 1989, the Harvard Business Review published an article written by Gary Hamel and C. K. Prahalad[1] entitled Strategic Intent. The authors argue that companies and the products they sell are defined by their strategic intent and that there are only three possible strategic intents:

In the technological excellence environment, customers do business with a company that provides features and functions that are not available elsewhere. These companies invest substantially in research and development and design new products using advanced technologies that provide them with competitive advantage. Their customers pay a price that is dictated by their perception of the value of the features and functions rather than on any price comparison since none is available. Quality is defined by novelty and utility. Often, customers must be taught to value capabilities previously unavailable. The early video cassette recorder became valuable to customers only after they were taught to value the convenience of watching television shows on their own schedule rather than on the schedule of the television station and the value of watching television shows more than once. Initial buyers of these devices paid very high prices to be among the first to enjoy these conveniences.

In the operational excellence environment, the value of features and functions has already been established. Customers buy products because they reliably deliver value at competitive prices. The operational excellence company invests heavily in quality assurance and promotion in order to drive volumes of sales higher while driving costs lower. New features and functions will be added only if they can be cheaply and reliably layered atop existing ones. McDonald’s has proliferated across the planet by producing a predictable meal quickly and at reasonable cost. The McDonald’s menu grows very slowly and only after thorough test marketing. Each new offering is accompanied by an elaborately documented production process that ensures the new product will be identical in every McDonald’s store.

In the customer intimacy environment, customers buy because they get exactly what they want within the constraint of the price they are prepared to pay. The customer who is willing to pay a small price will be fitted with off the rack clothing that approximates the size of their body. The customer who is willing to pay more will acquire clothing made of the material of their choice, precisely tailored, and delivered at the time and place of their choosing. Customer intimacy companies invest in processes to learn about customer needs and wishes. Wal-Mart continuously analyzes sales data to identify customer buying trends and to ensure that customers never have a reason to shop with a competitor. The waiter in a fine French restaurant hovers near his customer in order to anticipate every need.

The exciting development, begun just five years before the Hammel-Prahalad article was published, is the ability to satisfy two strategic intents concurrently. Michael Dell has driven his major competitors from the field by providing both operational excellence and a measure of customer intimacy. In doing so, he has also sewn the seeds of the destruction of mass production as the primary means of wealth creation on our planet. Mass customization is defined by the combination of operational excellence, customer intimacy, elimination of inventories, and economies of speed rather than scale.

This concept originated with the founders of the Boston Consulting Group who published it in 1968 as an extension of their “experience curve” model to accommodate product portfolio analysis. The matrix is a two dimensional view of the world of products, also referred to as the growth-share matrix.

The matrix has a vertical axis that represents the growth rate of a market, varying from low to high and a horizontal axis that represents the market share of individual competitors, also varying from low to high. Each axis can be bisected, yielding four quadrants.

As technologies mature to the point they can be considered for product development, they attract developers in very large numbers. Their market will enjoy an extremely high rate of growth but none of these original competitors enjoy more than a trivial market share. These companies are called wildcats and competitors in this arena are likely to be controlled by inventors who are more infatuated with the new technology and with their own efforts to make use of the technology than they are with the constraints of doing business, satisfying customers, or making a profit. Many of these companies will ultimately exhaust whatever resources they can beg, borrow, or steal without developing a marketable product. The inventors who lead these companies simply move on to other opportunities without regret since they believe that what they have learned about the technology is of greater value than any product that might have resulted from their efforts.

A few of the wildcats may, however, come under the control of a different personality, the marketer. This new leader will first sell a new invention to venture capitalists who fund the acquisition of a sales force, a means of production, a promotional program, perhaps the accumulation of an inventory, and most certainly an accounts receivable file. The marketers also wrest control of the invention from the inventor and insist that the product must be stable because there are other fish to fry.

In Apple Computer, for example, Steve Wosniak was the inventor who produced a toy primarily for his own amusement. Jobs, on the other hand, felt the toy was a product and managed to convince the world that his view was appropriate.

The marketer is primarily concerned with global domination. The new product will be a star. Success, in the United States, will be defined by the Justice Department filing suit for abuse of monopoly power. The sales force will never be big enough. The promotion program will never be sufficiently funded. The means of production will never be adequate and the accounts receivable file will never be thick enough. All of these ambitions require cash and the marketer’s first concern is finding enough of that stuff to fund the next level of investment.

America On Line (AOL) was a shining example of the star. By 2003, AOL served 35 million households in the United States. Unfortunately, AOL also had 70 million former customers in the US and there are only about 105 million households in the country. AOL was so busy attracting new customers that it never got around to developing and implementing a strategy for keeping customers. Since 2003, AOL has continued to lose customers at about the same rate as in the past but it has ceased to win new customers. Their market simply reached saturation and, like all stars, their growth could no longer sustain them.

Later, or sooner, as markets become saturated and market growth slows, somebody will become concerned about a trivial objective called profit. When this happens, the marketer is likely to lose control of the product and the new business will fall into the hands of the accountant, a creature educated, experienced, and finding delight in squeezing costs out of every aspect of the process of delivering product to the market. Those who are successful find themselves in possession of a large, rather unsightly, but most productive animal called a cash cow.

Producing cash requires an on-going effort to reduce costs since efforts to increase volume drive the costs of selling product to an unsustainable level. Production, promotion, distribution and support costs become the battleground. Of course, if this process is allowed to continue indefinitely, the accountant will be successful in eliminating all costs, and all revenue.

The Boston Matrix, to this point, has existed in the domain of technological excellence. Now a new force intrudes in the evolution. The operational excellence competitor, recognizing the opportunity associated with the cash cow, reverse engineers the product and commences more reliable production at still lower costs. Unburdened by the costs of developing new technologies and educating new markets, the operational excellence company enjoys significant competitive advantages in established markets. They begin to take market share away from the cash cows. Faced with declining prices, declining market share, and a slow growth market, the fate of the cash cow seems sealed.

Two options exist for the cash cow that acts quickly enough. The first is to use generated cash to invest in new wildcats. Microsoft exploits this strategy very well, first investing in and then acquiring start up companies in related businesses. Nearly all of Microsoft’s profits, however, are still derived from its core operating system and office suite of products. Its other adventures have yet to fulfill their promise. Earlier, Xerox Palo Alto Research Center and Phillips Eindhoven have been notorious for their production of new products and equally notorious for their failures to produce either stars or cash cows for their parent companies. Perhaps this is true because of the cultural conflict between an environment dominated by an inventor and an environment dominated by an accountant.

Very recently, the government of Tatarstan has created TechnoPark Idea in a very interesting attempt to nurture wildcats into stardom under the auspices of a quasi-governmental institution. We must all watch this experiment with great interest since it does represent a novel approach to initiating new product development. In the United States, the pharmaceutical industry has been most successful in implementing the strategy of employing cash cow surpluses in wildcat innovation. Governmental protection from early intrusions by operational excellence companies may account for this unusual exception.

The other strategy open to the declining cash cow, the option we see being implemented on a daily basis, is merger and acquisition. By combining the market shares of competitors, companies can extend the period during which they enjoy larger market shares and the associated economies of scale. Of course, these are only delaying tactics. They may produce sufficient profits to earn the CEO and other executives their bonus payments but they are not long-range solutions to the inevitable journey into the kennel. All cash cows ultimately become dogs.

At this point, enlightened boards of directors replace the accountant executive with an attorney who will be charged with breaking the company up into marketable pieces and negotiating a series of divestitures while closing out those pieces that cannot be sold. The attorney, likely, has been waiting in the wings and has played an important role in the merger and acquisition phase.

For many years I played a game I call "bring me a rock." It has millions of variations but they all follow about the same general format. The game begins when the boss calls me into his office and says, "Ed, I have a project for you. Bring me a rock." I'd then design and build the rock the boss should want. When I presented the boss with the rock I'd get a mystified look and the question, "What is THAT." I'd remind the boss that he'd asked me to bring him a rock to which he would respond, "That's not the rock I want." Then I'd ask if he could tell me a bit about the rock he wants and he'd respond, "Absolutely, I will know it when I see it."

The fault, of course, was my own. I failed to demand sufficient information from the boss to get a clear understanding of what was expected. The truth, however, is that the boss didn't have a clear understanding either. My position is that the FIRST responsibility of the project manager is to help the sponsor clarify precisely what the deliverables of the project are to be. Without some understanding of the strategic frame of reference in which the project is undertaken, the project manager cannot discharge this responsibility.

To properly understand the roles of the product development project manager, we must understand the position of the company in which projects are undertaken. The possible positions are depicted as follows:

	TE	OE	CI
W	W-TE	W-OE	W-CI
S	S-TE	S-OE	S-CI
CC	CC-TE	CC-OE	CC-CI
D	D-TE	D-OE	D-CI

W-TE products are produced for fast growing markets usually associated with emerging technologies and with little attention to customer requirements.

S-TE products focus on employing emerging technologies and processes to add features and functions in order to increase market share.

CC-TE products focus on employing emerging technologies and processes to reduce costs.

D-TE products use emerging technologies to assimilate the products, services, or business processes of merged or acquired competitors.

W-OE products imitate existing products while integrating more reliable or cost-effective production processes.

S-OE products imitate existing products while adding features and functions to build market share.

CC-OE products imitate existing products while modifying elements that drive costs.

D-OE products merge the features and functions of competing products to produce a single new product.

W-CI products employ emerging technologies to achieve specific requirements of a single customer.

D-CI products facilitate integration of customer merged or acquired products, services, or business processes.

The role of the project manager will vary depending on the category of the project as defined by Strategic Intent in combination with the Boston Matrix. A payroll system development project, for example, might fall into any one of these categories. An understanding of which category it fell into would facilitate appropriate decision making in each phase of a payroll project. More complex projects, such as the development of a commercial airliner or an advanced weapons system, might include subprojects from many of the categories. Here too, an accurate understanding of the purpose of the subproject would facilitate appropriate decision making.

In general, wildcat projects have the most to gain from systematic project management but are least likely to enjoy those benefits because they are under the control of an inventor who is likely to have little or no interest in anything beyond the technology and learning what might be done with it. Establishing a “project” mentality that specifies a completion date will be the great challenge in this environment. The pharmaceutical is generally most successful in this area by laying our stringent financial controls and demanding detailed planning documentation.

While the marketer is running the company, project managers are concerned with building tools, facilities, promotions, and accounting systems. Costs are of concern only in that projects must compete with each other for resources. Scope is likely to be flexible because each step is an improvement over what has existed. Time is of the essence in every project. Here, project managers must collaborate with one another in order to optimize the impact of the entire project portfolio on enterprise success.

The accountant thrives on stability and predictability. Projects, and their associated costs and disruptions, will be deferred until they are inevitable. Then they must be completed quickly in order to return to a new state of stability as quickly as possible. In this environment, project failure is likely to be associated with management failure. Risk management is restricted to a very limited set of threats while the obvious possibilities of cost and schedule overruns are ignored. Here, the project manager will be well served to carry out risk planning outside the view of the sponsor who will see threat awareness as antithetical to a “can do” attitude.

As our company moves toward the kennel, we are asked to further reduce costs, to integrate diverse capabilities in support of mergers and acquisitions, and to eliminate what has become obsolete or dysfunctional. The temptation to automate bad processes must be overcome. Simplifying processes should be the first priority in project planning. Ultimately, of course, it will be a project manager who is charged with turning off the lights and locking the door as he leaves behind what has ceased to be a viable company.

The hierarchical organization associated with mass production is obsolete. Today's projects are so complex that no one person has sufficient understanding to define scope clearly. The executive is now relegated to ratifying the recommendations of teams of subject matter experts because he cannot comprehend all the ramifications involved.

I believe most failed projects fail because of a failure to define exactly what must be accomplished and that is why I believe project managers must come to an understanding of the strategic framework surrounding their projects. The PM must be able to communicate with the sponsor at this level since this is the only level at which the sponsor is likely to be a subject matter expert.