Table of Contents
Good Product Strategy Defined
Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.—Sun Tzu
We hear it constantly: “But what’s our strategy?”
A marketing VP said, “We can’t do a plan until we know the product strategy!” And her team all groaned. “Oh no! We don’t have a strategy!” And for many teams, strategy is just a buzzword with no meaning. What exactly is a strategy and how do you get one?
Product strategy is: prioritizing problems to solve that leverage our capabilities and skills, in ways competitive products can't or won't.
Strategy drives product success on purpose. It’s a data-informed diagnosis of the current situation, both in your organization and your target market. It includes a guiding policy to address challenges and a commitment to a coherent set of initiatives.
Many strategies fail because of an incoherent set of actions, especially the variety created by expensive consultants. A great diagnosis with a clear, understandable guiding policy is worthless if you fail to act against the policy. To have a good product strategy, you must identify the product initiatives (coherent set of actions) you will execute to realize company and product success.
Do you have a diagnosis of your current situation in the market and with your product? Do you have a guiding policy that empowers decisions to be made downstream? Do you have a coherent set of actions or initiatives the organization is aligned to execute?
In short, what does winning look like?
Good product strategy informs portfolio and organizational strategy with market insights, helping sharpen and strengthen them. Good product strategy empowers the entire organization in its efforts. It improves every team's overall productivity and efficiency as they work on the opportunities with the best chance of success.
And because of all this, good product strategy delivers strategic alignment across the entire organization.
Current State Diagnosis
Good product strategy begins with a current state diagnosis: a diagnosis of the external situation (the market and competition) as well as a diagnosis of the internal situation (your product performance).
Two key activities provide the best current diagnosis of the market and competition. First, perform continual discovery to sense changes in the market. Second, leverage secondary research and “listening posts,” such as sales and support teams, to maintain your understanding of the ever-changing market and competitive landscape.
Engage directly with the market to discover under- and un-met problems to solve. This results in insights that drive new market opportunities. Ongoing market discovery helps you understand new problems to solve as well as new segments and personas to serve. Continually validate your assumptions to mitigate your risk and ensure you re-evaluate when your hypotheses are invalidated.
Continual market engagement and ongoing learning improve your market-sensing capabilities, sometimes turning them into market-anticipating capabilities. With these market insights, you can see changes before getting caught flat-footed.
Download the PowerPoint file of the templates referenced in this guide. These templates are from Principles of Product Strategy, an applied learning program where you learn the concepts and apply them to your specific situation.
Market and Competitive Landscape
The Market Canvas is a framework for profiling your market and competitive landscape.
The Market Canvas includes four critical areas for your diagnosis: Market and Competitive Dynamics, Market Opportunity, External Factors, and a fourth column to identify other aspects to include in your external diagnosis.
Market and Competitive Dynamics
The most critical parts of the current situation are market and competitive dynamics. The framework to use to understand market dynamics is the product lifecycle.
Across the stages of the lifecycle, different dynamics have a major impact on the market.
Understanding where your product is in its lifecycle will help you identify the dynamics you should consider that are outside your control. It can help you understand that your growth struggles in a growing market may be that you are a follower, not a leader. Or, slowing growth is due to maturity and market penetration, not poor marketing and sales capabilities.
Understanding the current situation in the market and competitive dynamics is key for your current diagnosis.
Market Opportunity
Often, companies discover a product opportunity based on an internal idea or a suggestion from one customer. Before proceeding, it is critical to understand the market opportunity. How big (or small) is this opportunity?
For this, we use the concept of TAM, SAM, and SOM, a market-leading approach to sizing a market.
TAM stands for Total Addressable Market. This is the fully penetrated market – if every potential customer purchases from you and your competitors. SAM stands for Serviceable Addressable Market. This is the portion of the total addressable market you can serve with your existing product. SOM stands for Serviceable Obtainable Market. SOM focuses on the portion of the SAM you can realistically obtain — your potential market share.
What’s the worst thing that can happen to a product? No sales? No, some sales! Now you have a bad idea and customers to support.
Does the product idea still have merit assuming you can obtain this market share?
External Dynamics
You’ve examined the market and competitive landscape and sized the market potential. Next, consider external dynamics. PESTLE analysis is a great tool to help with this. PESTLE describes a framework of macro-environmental factors used in the environmental scanning component of strategic management.
Political factors relate to how the government intervenes in the economy. Specifically, political factors include tax policy, labor law, environmental law, trade restrictions, tariffs, and political stability.
Economic factors include economic growth, exchange rates, inflation rate, and interest rates.
Social factors include cultural aspects and health consciousness, population growth rate, age distribution, career attitudes, and emphasis on safety. High trends in social factors affect the demand for a company's products and how that company operates.
Technological factors include automation, technology incentives, and the rate of technological change. These can determine barriers to entry, minimum efficient production level, and influence outsourcing decisions.
Legal factors include discrimination, consumer, antitrust, employment, and health and safety laws, which can affect how a company operates, its costs, and the demand for its products.
Environmental factors include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect tourism, farming, and insurance industries.
Review these factors and consider how each might impact your market and product.
Also, document other relevant insights on the market and competitive landscape. This could be value chain weaknesses or opportunities, market or product adjacencies you could pursue, or inorganic opportunities like partnerships and acquisitions.
Use the Market Canvas to document your analysis.
Product Performance
The second part of the current diagnosis is to evaluate your product’s performance. How is the product performing financially compared to your expectations? Is it meeting your revenue and profit goals? Are there any indicators that could be worrisome?
First, you need to ensure you are tracking two key financial metrics—Revenue and Variable Cost.
Revenue is the top line and most visible financial metric. Variable cost is the one most don’t think about but should. Product managers usually have little ability to impact fixed costs but can often impact variable costs. Any improvement in variable cost directly becomes an improvement in product profitability.
Revenue minus Variable Cost equals Contribution Margin. Understanding your Contribution Margin equips you to make better financial decisions for the product and, in the end, improve your product’s profitability. This is where product managers should be focused.
If you cannot access product-level revenue details, partner with someone in your finance office to get a good estimate.
When considering those financial results, what financial levers can you pull?
Pricing is a lever. If you were to decrease the price, what would the impact be? Could you generate enough incremental sales to cover the lower price? What about a sales incentive? Could the increase in sales cover the cost of the promotion? What about an increase in the average selling price? Or an increase in retention?
Cost is a lever. Could you solve some problems in your next release that will reduce the cost of implementing or supporting your product? What impact would that have on your profitability?
Just as levers impact the financial metrics, key financial indicators help you see what may impact your levers.
What metrics could be indicators of changes in financial levers and metrics? Could a dip in customer satisfaction or NPS indicate that renewal rates will fall? Or what about a decrease or increase in usage and time spent on your product? What would that indicate?
Finding your key financial indicators can help you keep the pulse on your product performance and enable you to adjust and iterate throughout the year, not just when financial numbers are reported.
Use the Product Performance Dashboard to track your financial metrics, levers, and indicators.
With a current diagnosis of the market and competitive landscape and an analysis of your current product performance, you have completed the first step to a good product strategy.
With an understanding of the current situation, you can now focus on updating (or creating) a guiding policy for your product strategy and determining what actions you should take to realize that policy.
Product Strategy Guiding Policy
The three parts of a good product strategy are a current diagnosis, a guiding policy, and a coherent set of actions. Of these three, the guiding policy is where companies tend to struggle the most.
With an understanding of the current situation and our current challenges, what approaches will overcome your current challenges and achieve your aspirations? The goal for our guiding policy is to pass the two tests of a strategy: Is it clearly understood? And does it inform decisions?
Use the Strategy Canvas to create a guiding policy focused on four key areas: Strategic Aspiration; Ideal Target Customer; Competitive Advantage; and How to Measure Success.
Define Strategic Aspiration
Your best chance of winning with a product is to find the intersection between problems in a market and your ability to solve that problem in a way that is better or different from competitive offers. Truly strategic opportunities weave together aspects of the ideal target customer and competitive advantage.
Your ideal target customer is a group or segment that shares similar needs and wants, reacts to the same value profile, and values your competitive advantage.
This is your strategic opportunity. And your strategic opportunity should be aspirational. It should be meaningful and powerful to both employees and customers.
Ideal Target Customer
Choose your ideal target customers. Those customer groups you will focus on.
Stew Bither of the Smeal College of Business at The Pennsylvania State University said, “[personas are] groups of customers who share similar needs and wants and react similarly to the same value proposition.”
To identify your ideal target customer, start with personas. Find groups of customers with similar problems to solve who also have similar motivations and value profiles. And explicitly declare which ones you should not target.
With these characteristics defined, you can define the market segments by more traditional demographics and firmographics of where you can find these personas.
Competitive Advantage
Your ideal target customer values your competitive advantage. Therefore, you must understand your differentiation to have a good guiding policy.
And you must have an actual differentiation, not just a feature or gimmick that can be easily copied.
The less differentiated you are, the more the market sets your price; the more differentiated you are, the more control you have over your pricing. Answer two questions to find your differentiation: What are your organizational capabilities? And which of these capabilities are valued by your buyers?
ASPIRE is a tool to help you understand your organizational capabilities and determine where you have a competitive advantage. This handy mnemonic can help identify your organization’s core competencies to ensure you focus on the most valuable priorities.
Authority. Clients look to us to solve these problems.
Systems. We have proven methods and business systems in place.
Purpose. We’re fanatical about the product category, the persona, and their problems.
Innovation. We have solved a problem in a unique way.
Research. We have evidence to support our claims.
Expertise. We have proven skills in this area.
These business factors help determine how much you can leverage corporate assets to develop and deliver a new product idea.
Use the ASPIRE worksheet to document your competencies in these six areas.
How to Measure Success
How will you know if you are successful if you do not define how you will measure success? Do you know if your results were because of your strategy and plans—or despite them? Can a key financial metric, lever, or indicator be used to measure success? Can you measure the value you create for your customers and the market?
Think ahead a few years; what would you consider a success? Hitting a certain revenue or profitability number, having a certain number of active clients, or something else?
Whatever it is, that is what success looks like.
With the knowledge of the current situation and a guiding policy in place, you can start identifying potential product initiatives for your coherent set of actions, eventually focusing on the few with the best chance of success.
Commit to a Set of Coherent Product Initiatives
What is your process for defining and committing to coherent product initiatives? “I talked to a guy” is not a completed market evaluation. Neither is “I read something cool in a magazine.” With a current diagnosis and a defined guiding policy, identifying a set of coherent actions begins with brainstorming as many potential ideas as possible of what you could do to overcome the situation.
The best sources of new product ideas come from the market—customers and non-customers. These ideas could be:
new features that could help you enter new personas or market segments,
new problems to solve,
new programs to better enable your sales channel.
Bring together a team of people who know the market and product—including sales, marketing, support, and anyone with great ideas. And don’t forget your people who know the technology; they are often the best source of new product ideas.
Evaluate and Score Your Ideas
Knowing which idea is best is difficult, particularly when you have a long list of good ideas. You want to find the vital few from the compelling many. For each idea, write a summary of the idea and its expected impact. You will need this context when scoring or reviewing ideas.
Use a Product Canvas to document your assumptions for each new idea, problem to solve, or market to serve.
If you have ten or more ideas, triage the list to limit the number of ideas you must define and score. After all, you cannot do everything; you must choose the vital few. While there are many ways to score ideas, many leadership teams prefer the IDEAS method. Rank your product ideas on these aspects:
Impact of the Problem is your customers' perception of how the problem affects their organization—reduced productivity or revenue, for instance.
Dissatisfaction relates to their lack of satisfaction with the existing state. Are they annoyed or frantic? Do they care just a little or a lot? (I didn't need more than 280 characters on Twitter. Did you?)
Evidence is how many are experiencing the problem. Is it a small percentage or the entire market segment?
Advantage to us represents the importance to your organization—this could be increased revenues or cost savings, or initiatives to increase customer satisfaction or remove technical debt.
Strategic Alignment is the extent to which this idea aligns with current or future organizational strategy. It counter-balances strategic items over items with smaller effort.
Effort to deliver embraces the logic that if two things are roughly the same, work on the easier one first—so this format skews in favor of the easy stuff.
Use the IDEAS worksheet to profile each opportunity.
Use Prioritize with IDEAS table to rank multiple opportunities.
Focus Your Product Initiatives
With a scored list of ideas, each with some level of definition and context around them, it is time to determine which ones to focus on.
The scoring is a guide to a discussion. Discuss each option with a trusted team and decide which two or three ideas to pursue. Discuss whether these ideas depend on other ideas or functions outside your control. Define the next steps and assign a responsible team member and an executive sponsor for each idea you intend to pursue.
Build validation into your entire product development lifecycle. Once you have decided which initiative to pursue, do the work to validate (or invalidate) the assumptions.
Use the Product Strategy Initiatives template to document these decisions.
Make the Business Case Externally and Internally
With a focused list of initiatives built on assumptions that have been validated, it is time to make the business case for the initiatives to gain commitment.
Every company has a different threshold for needing full business plans and formal go/no-go decisions. Whether you need to go through a formal process or not, it is important to make sure you are making the business case for the initiatives externally and internally.
Strategic Positioning is the External Business Case
A strategic positioning exercise is a great way to make the external business case. Positioning is not messaging or a marketing technique. Positioning is defining what it is and who it is for. Strategic positioning ensures that you have a valid value proposition. Can you clearly define the themes around problems to solve for the market? What value will the market gain by addressing these problems? Do you have any differentiation that will help you win?
For more on this concept, read The Importance of Value-Based Positioning.
OKRs help Define and Measure the Internal Business Case
Earlier, you used a product canvas to document the product idea or initiative. Depending on each initiative’s size, many companies require a pro forma to justify the business financially. In these cases, partner with your finance team to ensure this is done correctly.
OKRs (Objectives and Key Results) are a key element of an internal business case. For each of the product initiatives, define what your qualitative objective is for each objective (what winning looks like) and then identify the key results you will measure to show progress toward success.
Use an OKR template for each product initiative.
Achieve Product Success on Purpose
There you have it. The path to product success is a strategic plan with clear responsibilities, goals, and measurements. Begin with a current state assessment, both within your organization and in the market. Understand the market personas you can serve, those that value your capabilities. Understand the competitive and alternate offerings. Use strategic positioning to align your product with customer needs and differentiate your offering.
Define a successful strategy, execute your plan, and measure measure measure.
A good product strategy is a quest to achieve product success on purpose with three keys: current state analysis, a guiding policy, and coherent product initiatives.
Ongoing Product Success is the Goal
Product management aims to turn good ideas into successful products systematically. Not just one random success for a product or company but ongoing product success. Product success is delivered through a systematic and intentional approach to defining, managing, and marketing products.
Success means your products meet or exceed their success goals and metrics, whether your metrics are adoption, growth, profitability, or customer satisfaction.
You launch a new product or enter a new market. You manage your product through its lifecycles. You make strategy changes as the market, customer needs, and competition evolves. You can do this across multiple markets and products. It is scalable.
This is the goal.
A recent article reveals that executives believe they lose 40% of their strategy's potential value due to breakdowns in execution. A symptom of this potential value loss is that only 18% of middle managers can list three of their company’s strategic priorities. And that is assuming companies even have a strategy. The absence of a coherent strategy is even more common than the failure to execute a strategy. And an annual budget is not a strategy.
Strategic product management is critical in helping your company attain strategic alignment. Your product strategy is informed by your organizational and portfolio strategy, informing the go-to-market strategy and execution. And as you gain market insights, strategic product management informs the portfolio and organizational strategy aligned with the changes and opportunities in the market.
The key is this: understand your markets and their problems and identify product opportunities that solve these problems by leveraging your organizational abilities in ways that competitors cannot or will not. Develop a product strategy guiding policy and commit to a set of coherent product initiatives that align all teams.
It is simple, but it’s not easy.
Templates to Download
Download the PowerPoint file of the templates referenced in this guide. These templates are from Principles of Product Strategy, an applied learning program where you learn the concepts and apply them to your specific situation.