Introduction to product strategy

Covers product strategy fundamentals, the elements of strategy and how to build one for your product

Mike Lyngaas, ex-Gusto, Director of Product, Ethos Life (Sequoia backed) Published: November 12, 2020

Strategy fundamentals | Characteristics of good strategy | Defining your strategy | Two examples: Whole Foods & Airbnb

Ah, strategy. Everyone agrees it's an important part of building a product and business, but surprisingly few people can articulate what strategy is, and put together a coherent one.

We can be especially allergic to strategy in the tech world: can't we just move fast and break things? Sure. But that works best if we agree on the direction we want to move, and the things we are okay breaking in the process. That's where strategy comes in.

In this post, we'll cover:

• What product strategy is
• Characteristics of a good strategy
• A simple framework you can use to build your own product strategy

Overview of product strategy (Top)

According to Harvard Business School professor and strategy guru Michael Porter:

"The essence of strategy is choosing to perform activities differently than rivals do." - What is Strategy? (1996).

Let's break this down:

• Activities: these are your choice of target customer, products you offer, how you distribute and support them, and at what price points.
• Different: this is the key operative word here. A strategy must be unique, and ideally, difficult to copy. More on this later.
• Rivals: I'll offer a small tweak to this one. In the case of innovative companies, these activities are not just different from rivals, but so new that direct competitors are almost non-existent: Venmo's original competition wasn't another product, but handing a friend a ten dollar bill for lunch.

💡 Tip for PMs: in your customers' eyes, your product experience extends well beyond the UX of your application, and includes your sign up flow, Instagram ads, confirmation emails, and customer support chats. When devising your strategy, take every customer touchpoint into account, not just the so-called "core product experience."

Strategy vs. product vision

Strategy is the bridge between where you are now, and your ultimate product vision. It drives your investments in product, go-to-market activities, and customer support, and culminates in your company's day-to-day execution.

Let's use Shopify to illustrate the relationship between vision and strategy.

Shopify was founded in 2006, with the product vision to "make it easy for anyone to create a beautiful and powerful online store" - Shopify announcement of Series C funding.

Some of the key strategic activities that built toward this original vision:

• Target customer: focus on helping small, tech-savvy retailers bring their brick-and-mortar business online.
• Customized storefronts: offer customizable digital storefront templates so that merchants can tailor their experiences to their unique target customer.
• Branding: allow merchants to own the relationship with their customer with branding tools: upload logos to storefront, invoices, and customer-facing emails.
• Aligned business model: subscription model augmented by transaction fees on sales, so that Shopify prospers when merchants do.

While it may not have been pretty, you can see the beginnings of this strategy evident in Shopify's homepage in 2008 - captured here by the Internet Wayback Machine.

Characteristics of a good strategy (Top)

Identifies clear trade-offs

When defining your strategy, resist the urge to solve every problem for every type of customer. In Porter's words:

"Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers."

🛍 One intentional trade-off Shopify made was forgoing their own brand awareness in favor of prioritizing their merchants'. Shopify operates mainly behind the scenes, powering massive online stores like Sephora.com, but 99.9% of customers don't know that. This makes organic brand awareness -- and the cheap acquisition that comes with it -- challenging. But their empowerment of merchants via professional branding tools is a unique activity compared to aggregator rivals like Amazon and eBay.

Commits to a long time horizon

Porter recommends that strategic positions "have a horizon of 10 years or more." Given the speed at which technology moves, and that many of us work at venture-backed companies without that kind of time, I'd shorten this to 2-5 years.

This will force you to think well beyond monthly or quarterly OKRs, but not so far out that the uncertainty of the future is daunting.

🛍In our Shopify example, each of these strategic positions are still being executed today, even as Shopify has added an ecosystem component to their strategy. On branding, for example, they've continuously built out a vast set of professional branding resources for their merchants.

Establishes a moat over time

A moat is a durable advantage a business creates that is difficult for competitors to copy.

This is worthy of a much deeper dive, but here's a Cliff's notes version of Hamilton Helmer's excellent book, 7 Powers: The Foundations of Business Strategy (2016), a framework for categorizing moats:

1. Brand Power: A durable, trusted brand with passionate fans beats a new entrant, especially in commodity markets. EXAMPLE: Lego
2. Economies of scale: Your company enjoys cost savings as a result of more production, usually after reaching a broad scale of users. EXAMPLE: Netflix
3. Switching costs: Once activated, it's cumbersome for your customers to churn from you to a comparable service. EXAMPLE: Gmail
4. Counter-positioning: Performing an activity that, if copied, would actively damage an entrenched competitor's business. EXAMPLE: Vanguard
5. Network effectsYour product gets better for everyone as more people use it. EXAMPLE: Slack
6. Cornered resource: A valuable resource or set of intellectual property that your competition doesn't have access to. EXAMPLE: Disney
7. Process power: A unique approach to your organization or production that is a step function better than rivals. EXAMPLE: Toyota

For mature products, identify which of these moats you've created, or have the potential to. It'll help you prioritize activities that reinforce these advantages and build a durable business. For startups earlier in their journey, start with hypothetical moats you can iterate into.

🛍 Back to our friends at Shopify. They've built a couple powerful moats over the years: 1) Economies of scale. Shopify enjoys low marginal costs to each new merchant on their platform. At scale, their margins and pricing power swell. 2) Switching costs. Once a merchant creates a storefront, uploads their inventory and branding, sets prices, and starts accepting payments, Shopify is a sticky product.

Becomes meaningfully different - not just 10% better

A key distinction Porter makes is between strategy and operational effectiveness:

• Operational effectiveness is performing similar activities better than rivals.
• Strategic positioning is performing different activities from rivals'.

In other words, offering the same product as your competition, but 10 or 20% better, is not strategy. It will help you win, but alone it's not enough to do so.

If I start a scooter company that is identical to Lime in every way, but rides were 10% cheaper, I may get some initial traction. But nothing is preventing Lime from lowering prices and driving me out of business.

Instead, if my scooter service focused exclusively on helping college students get around campus (instead of all city dwellers), could be unlocked only with student IDs (instead of phones), gamified ride activity with a virtual treasure map, AND rides were 10% cheaper than Lime, I've got the beginnings of a strategy! And I just might be able to beat Lime in the college student market.

🛍 If Shopify focused on incrementally beating rivals in a single point solution, that could be considered operational effectiveness: more intuitive website design than Squarespace, faster payments than PayPal, or more flexible inventory management than Quickbooks. Instead they've created an all-in-one "digital store in a box." Shopify may not be the absolute best in each category, but solving these jobs together forms a strong strategic position.

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Define your strategy (Top)

Let's put this all together. To create an effective strategy, there are four questions you and your team need to be aligned on:

Four questions to answer

1. Who are we serving?
2. What are we offering them?
3. How will we sell to them?
4. Why will we win?
• What differentiates us from existing solutions to this problem?
• What are our tradeoffs?
• What can become our "moat," or hard-to-copy advantage?

Let's answer these questions for two familiar companies:

Example: Whole Foods

1. Who are we serving?

Educated, upper middle-class customers who are passionate about eating healthy, fresh food that is sourced locally.

2. What are we offering to them?

• Best-in-class quality and variety of produce, meat, and fish.
• Align with customer values by sourcing locally.
• Help communities and appeal to customer altruism by donating 5% of profits to charity.
• Provide a welcoming cafe space with wifi for lunch, work, or a meeting.

3. How will we sell to them?

• Store with airy, open floor plans and inviting displays of produce
• High-touch, in-store customer service
• Premium prices

4. Why will we win?

• Differentiators
• Explicitly target upper middle class shoppers willing to pay for quality.
• Appeal to community with local sourcing and charity donations.
• Premium technology & efficiency (scan to pay, optimized check-out lines)
• Trade-offs
• Premium prices will shrink the addressable market, but fund highly trained staff.
• Large space with wide variety will frustrate shoppers just looking for staples, but will lead to more opportunistic purchases
• Moat
• Counter-positioning: would be harmful for rivals such as Safeway and Kroger to copy the premium model.

Example: Airbnb

1. Who are we serving?

• Guests
• Travelers looking for one-of-a-kind lodging experiences. Generally skewing younger: aged 18-45.
• Appeal to community with local sourcing and charity donations.
• Hosts
• Homeowners with excess space in their home.

2. What are we offering to them?

• Guests
• The ability to stay at unique private homes throughout the world.
• A wide variety of accomodation sizes, locations, prices, and features.
• A rating and review system to vet accommodations and hosts.
• Hosts
• A flexible new income stream that works around your schedule.
• Accept a wide variety of payment types from your guests with no hassle.
• A rating and review system to vet guests.

3. How will we sell to them?

• Guests
• Inventory is easily searchable and filterable on a mobile app.
• Referral program incentivized by credits for future stays.
• Hosts
• Help hosts make their listing look appealing with templates and services for professional photography.
• Tiered rewards program to encourage host activity.

4. Why will we win?

• Differentiators
• Unique inventory that makes guests feel like they're getting a true local experience.
• Ability to create excellent product experience across the entire price spectrum.
• Trade-offs
• Lack of on-site staff will simplify operations, but alienate guests looking for hands-on service, and lengthen turnaround times.
• Moat
• Network effects: more accommodations available → more choice for guests. More guests on Airbnb → more revenue opportunities for hosts.
• Counter-positioning: potential for hotel chains to alienate existing loyalists and damage reputation by building relationships with homeowners.

Fill out this table for your company or product line.

If you find it difficult to crisply answer any of these questions, it may be time to rethink your strategy, or re-establish it with your team. Odds are you're not the only who's hazy on your competitive advantages.

Conclusion: strategy is not a static doc (Top)

If your team is aligned on these 4 questions, you'll find that prioritizing product, sales, marketing, and support activities will come much easier. Tempting ideas will surface that are orthogonal to your strategy, and you can point to this framework as a tool to say ‘no'.

I'll leave you with an important reminder that I've been guilty of forgetting: strategy is only strategy if it's actually executed.

Strategy isn't a ‘set it and forget it' exercise. It's not a Google doc that is crafted alone in an ivory tower, emailed to your team, and then magically leads you to the promised land. It's an always-on force that your team lives, breathes, and revisits frequently.

📬 I'd love to hear about other frameworks to help develop strategy. Shoot me an email or tweet!

🙏 Thank you Vipul Chhajer, Stephanie Long, and Kenton Kivestu for reviewing drafts of this post.