The Disruption Decoded Blog

Early this year I reconnected with an old friend. Martyn Crew is the founder and CEO of Bootstrap Marketing (bootstrap-mktg.com), one of the best Silicon Valley marketing agencies. If you are launching a new product, a new company, or breaking into a new market, Bootstrap is the partner you want.

But long before Bootstrap was even a glimmer in Martyn’s eye, he and I were colleagues at a software startup in San Francisco. I ran product management, and Martyn was in charge of sales. Working in a basement office on Townsend St, we were 20-somethings trying to figure it out in real time. (That neighborhood is now packed with startups. I wouldn’t be surprised to find another pair of young entrepreneurs just like us in that same basement at this very moment. Although, they probably don’t have to re-start their hard disks after a power failure by spinning the platter with a pencil eraser like I did! Ah, the good old days.)

Fast forward to this spring, when Martyn and I met for lunch. I told him about the work I had been doing with startups using the Quantitative Product-Market Fit (QPMF) framework. My colleague Chris Sorensen and I developed QPMF when we were both Entrepreneurs in Residence at a Silicon Valley Startup Accelerator, as a way to help founders clarify their customer’s needs and desires and focus product strategy on their most important differentiated benefits.

We created QPMF with product teams and product strategy in mind, but Martyn instantly recognized that it might be equally useful in a marketing context. As I mentioned, Martyn’s company specializes in launches; most of his clients are new startups, established companies launching new products, or foreign companies bringing successful products to the US market. The first step in a successful launch is a solid positioning architecture. Martyn asked me: could the QPMF framework help his clients with their positioning?

We decided to try it out. Our first client was an established player in natural gas transaction management. Next was a big data startup with an amazing new marketing analytics solution. Next, a European company that wanted to bring their very successful database replication technology to the US market. After that we helped launch an enterprise collaboration software company, a hybrid cloud IT infrastructure product, and a new crowd-sourced HR recruiting solution.

With a few launches under our belts, we knew we were on to something. By taking a few days at the beginning of an engagement to clarify the market segments, customer value dimensions, competitors, and differentiated advantages of any particular product, we helped these companies build a solid positioning architecture. And the positioning architecture is the foundation for everything else that is essential to a successful launch: branding, website, social media presence, sales collateral, PR strategy, PPC, direct marketing campaigns… everything.

Martyn and I have now integrated the QPMF framework into the Bootstrap Launchpad process, Bootstrap’s methodology for product and company launches. The basics are outlined in two short guides that are available on Amazon. This is one of the things I love about Bootstrap – in the best Silicon Valley tradition, they’ve “open sourced” their methodology and made it available to all. If you’re getting ready to launch something new, you will probably find these guides useful.

Check out the Bootstrap Launchpad guide (http://amzn.com/151687918X), and for a deeper look at QPMF see the Bootstrap Product-Market Fit Guide (http://amzn.com/151715362X). I think they’ll help you make sure that your launch takes you where you want to go.

I’m writing a series of guest blog posts on Quantitative Product Market Fit for Marketers for Bootstrap Marketing, a silicon valley marketing agency that helps startups launch.  Check it out on the Boostrap site or read on…

Case Study: To Get the Right Answer You Need the Right Question
One of the most valuable aspects of the QPMF methodology is that it quickly reveals your assumptions about what’s important to your customers, how well your product or service delivers on those customer needs and desires, and how you stack up against the competition. And with the assumptions out in the open, you can take action. A prime example of this can be seen in Bootstrap Marketing’s implementation of the QPMF methodology.

In early 2015 the Bootstrap team went through a QPMF analysis to uncover assumptions about their own product-market fit. They wanted to explore a particular type of Bootstrap customer: technology start-ups that are moving into their growth stage and need to execute a launch that will quickly build awareness and revenue. These tend to be companies that have established a strong need for their product with a small number of customers, but are still relatively unknown to the majority of their target customers.

Bootstrap has an excellent track record helping start-ups like this develop launch strategies that deliver results. But what they wanted to better understand was what these start-ups look for in a marketing partner.

In an accelerated two-hour session, we went through the analysis and defined the key Value Dimensions for the segment, selected a set of competitors to evaluate, and scored everything. Because the QPMF process forced the Bootstrap team to quantitatively rank every Value Dimension in terms of how important it is to their customers and how well they and their competitors perform, it immediately revealed interesting results.

First, the process revealed that Bootstraps two primary competitors are virtually identical in terms of how they appear to customers.

Second, it revealed that when start-ups are about to launch and are looking for a partner to help them do it, there are two main qualities they look for:

Strategy—Given the complexity of the communication challenges that disruptive start-ups face, they need an experienced team that understands how to focus marketing energy on the right audience and craft a positioning and messaging strategy that will inspire customers to take action.

Marketing Execution—Start-ups need a partner that can deliver high-quality marketing content and programs quickly and efficiently.

The team agreed that strategy and execution were the two most important Value Dimensions; however, the QPMF analysis uncovered a question the Bootstrap team could not answer with confidence: “What do our customers value more? Our strategic capability or our marketing execution skills?”

So they did what smart marketers do—they asked the customer. A survey went out, and the results came in: the clear message that customers deeply value is Bootstraps ability to help start-ups with BOTH developing an effective strategy AND skillfully executing marketing programs.

With this knowledge of what their customers value, Bootstrap has dramatically improved communications with their audience.

QPMF led them to the right question; the question led them to the right answer.

I’m writing a series of guest blog posts on Quantitative Product Market Fit for Marketers for Bootstrap Marketing, a silicon valley marketing agency that helps startups launch.  It will be a five-part series.  Check out part 1 on the Bootstrap site or read on…

A couple of years ago, after my company was acquired and I had put in my 18 months at the new place, I joined one of the big Silicon Valley startup accelerators as an entrepreneur in residence.  My job was to listen to startup pitches, give feedback, and work more intensively with a few of them to help them get from where they were to where they wanted to go.

I loved working with these entrepreneurs.  They were smart, engaged, amazingly open-minded, resourceful people who were just fun to hang out with.  But I quickly realized that most of them had a problem: in order to get from where you are to where you want to go, you need to know two things:

1) Where you are

2) Where you want to go

Sounds simple, right?  But it is not simple.  A startup’s job is to create a new product that a lot of people will buy.  They’re operating in a complex environment – different market segments have different needs, existing products are evolving rapidly, and other startups are chasing the same opportunities.  It is a high stakes game, and every player is working with partial information.  It is complex enough that frequently members of the same team have very different assumptions and beliefs about those two basic questions.

So I asked myself: how can I help these teams develop a solid, shared concept of their core value proposition?

Lucky for me, I didn’t have to come up with the answer on my own.  My fellow entrepreneur in residence Chris Sorensen was struggling with the same issue, and he had the insight that the solution had to be based on a clear-eyed assessment of product-market fit.  “What kills most startups?” Chris would ask.  “Running out of money before achieving product-market fit.”

So together we got to work on a process to help our startups develop a clear, shared, actionable vision of where they are and where they need to go to succeed.  We wanted something that would include these elements:

1) Who is my product for?

2) What’s most important to those people?

3) What are their alternatives to buying my product?

4) How does my product stack up against the alternatives?

5) What could happen to erode my competitive advantage?  What do I need to watch out for?

6) What can I do to increase my competitive advantage?   What should my strategy be?

Over the course of a few months, we refined this into the strategic framework that we call Quantitative Product Market Fit™.   We designed it to mentor startups in the art of profitable innovation.  It worked, and we continue to use it today to help both startups and enterprise product teams optimize their product strategies.

So now you might be asking: “Didn’t you say you were going to talk about Product-Market Fit for Marketers?”  I did indeed.  I have to give credit to Martyn Crew, founder and CEO of Bootstrap Marketing, for the insight that the QPMF framework and process could be just as valuable to marketers as it is to product teams.  Martyn invited me to introduce his team to QPMF, and we employed it for a few clients.  Those successes led to this series of articles.

My goal with this series is to help marketers create more effective positioning, branding, content, and strategies by using the tools of QPMF to clarify the true competitive position and the possible strategic directions of the products they are marketing.  Because after all, Marketing is about doing three things:

1) Communicating the competitive advantages of a product

2) Enhancing the competitive advantages of a product

3) Creating new competitive advantages for a product

A solid QPMF-based understanding of your product and target market can help with all three.  The better you connect the real desires and needs of your target audience with the differentiated advantages of your product, the better your marketing will perform.

Coming Next: QPMF: A Secret Weapon for Marketers

 

Poor RadioShack is getting it from all sides. Trading was halted earlier this week, and as the stock price has slid from over $23 in 2010 to 59 cents now, business and technology journalists have been eulogizing the firm with great energy.  Some of them wax poetic about the good old days, when hobbyists like Steve and Steve  used to hang out there and buy the bits and pieces that they spun into giant new industries. But other people have been asking: why has it taken so long?  Who buys anything at RadioShack anymore?  We all know that the last decade has been a tough one for bricks-and-mortar electronics retailers.  Circut City closed its last store in 2009.  Why is RadioShack still here?

RadioShack is still here because it has been able to outperform competitors in one vital Value Dimension.  But the latest chapter in the story has an interesting twist. It looks like RadioShack’s killer is missing the one thing it needs to deliver the final blow – and that one thing could be RadioShack itself.

For a company to have any market share, it has to outperform competitors in some way, for at least some customers, at least some of the time.  (Technically, it needs positive Delta V in at least one Value Dimension – see Delta V and The Innovator’s Secret Formula if you want to dig into the details of how it works.) Over its 9-decade history, RadioShack has performed well in many different Value Dimensions.  But in recent years its primary differentiated advantage was ubiquity: with over 7.000 stores, you are never far from one.  So if you need a cable or unusual battery or another electronic accessory RIGHT NOW you can always get it at RadioShack.  For the last few years, this has been the one Value Dimension where RadioShack has had the lead.  It didn’t have the best prices (Amazon), it didn’t have the best selection (Amazon again), and it wasn’t a cool place to shop (Apple), but if you needed something right this minute you could probably get it at a RadioShack store nearby.

RadioShack’s lead in this dimension is eroding.  I now get free two-day shipping from Amazon on pretty much everything.  And one-day shipping is not that expensive.  And now I can get same-day delivery from Google Express.  RadioShack’s lead in it’s last Value Dimension is slipping away.

But the lead has not slipped to zero – yet.  Which made my ears perk up when I read this in the Wall Street Journal:

---

Amazon to Open First Brick-and-Mortar Site

The New York City Location to Handle Same-Day-Delivery Inventory, Product Returns

---

And this in the New York Times:

---

“…within the next 12 months Amazon will be opening hundreds of “dark” stores, which are places where people can pick up things, or make a “transformative acquisition” along the lines of Best Buy or Radio Shack.”

---

What? Amazon buying RadioShack?  So it can open “dark stores” to provide “same-day delivery?”

Sure it is just a rumor, but think about what it means.  RadioShack’s last advantage was being able to satisfy the I NEED IT RIGHT NOW customer.  Amazon has eroded that advantage by providing two-day and then one-day delivery.  If Amazon could offer same-day delivery, RadioShack’s last advantage would be gone.  But same-day delivery requires a local presence throughout the country.  Amazon does not have that.

But there is somebody who does have it, lots of it, and a market cap under $70 million. So what’s the cheapest, fastest way for Amazon to acquire the infrastructure it needs to offer same-day delivery?  Shake out some pocket change and pick up RadioShack.

 

Chad McAllister recently posted a great summary of some of the core Quantitative Product-Market Fit concepts on the Everyday Innovator blog. In his post, he mentions the Apple Newton as an example of a product that failed to achieve product-market fit. As he says, it was packed with innovation but did not succeed with customers. There were a lot of reasons. McAllister cites the awkward size and easily-lost stylus. I would add the high price and dependence on handwriting recognition that never worked as well as it had to. But let’s allow the poor thing rest in peace.

I bring it up because McAllister’s mention of the Newton reminded me of my first experience with that product, back when it was unveiled at MacWorld Boston in 1993. My flight back to San Francisco from Boston was packed with Silicon Valley execs on their way home (including Apple CEO John Sculley, who hid behind a copy of the National Enquirer for most of the flight). Most of the execs were playing with their new Newtons. It was amazing to look down the rows (in first class anyway) and see a Newton in every other seat.

Fast forward 17 years to the release of the first iPad in 2010. It seemed that within just a few weeks, every plane flight I boarded was packed with people staring at their iPads. They are now so ubiquitous they sometimes seem to provide most of the illumination in the cabin!

The very high product-market fit of the iPad has made it a common sight on virtually every plane flight in the world today.  Which was true for the Newton only once: on that flight back to California from MacWorld Boston in 1993.

– Matt Brocchini

“Whenever you see a successful startup, you see one that has reached product/market fit — and usually along the way screwed up all kinds of other things, from channel model to pipeline development strategy to marketing plan to press relations to compensation policies to the CEO sleeping with the venture capitalist. And the startup is still successful.”

 

In 2009 Marc Andreessen (then tech luminary now venture capitalist luminary) posted an article to his blog about Product Market Fit:  “The only thing that matters to a startup.” While the concept of Product Market Fit had been around for a long time prior to Mr. Andreessen’s posting, he did an excellent job of summarizing and popularizing the concept, and his post quickly became required reading in the startup community.

Along with other experts such as Eric Reis (The Lean Startup) and Steve Blank (The Startup Owner’s Manual) Mr. Andreessen posits that there are two major phases to a startup’s maturation process: “Before PMF” and “After PMF.”

The primary objective of a newly launched startup is not to “get big fast” as many Venture Capitalists have urged (primarily to increase their own IRR), but rather to identify a sufficiently high level of Product Market Fit as cost effectively as possible – and before the initial funding runs out.

He went on to describe the effects of high Product Market Fit:

“You can always feel (high) product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers.

Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s” [1]

While this post is focused on startups, many of the PMF concepts can be generalized to all types of innovators.

For your convenience we have re-posted Mr. Andreessen’s original post below:

~~~

October 12, 2009

The Only Thing that Matters

This post is all about the only thing that matters for a new startup.

But first, some theory:

If you look at a broad cross-section of startups — say, 30 or 40 or more; enough to screen out the pure flukes and look for patterns — two obvious facts will jump out at you.

First obvious fact: there is an incredibly wide divergence of success — some of those startups are insanely successful, some highly successful, many somewhat successful, and quite a few of course outright fail.

Second obvious fact: there is an incredibly wide divergence of caliber and quality for the three core elements of each startup — team, product, and market.

At any given startup, the team will range from outstanding to remarkably flawed; the product will range from a masterpiece of engineering to barely functional; and the market will range from booming to comatose.

And so you start to wonder — what correlates the most to success — team,product, or market? Or, more bluntly, what causes success? And, for those of us who are students of startup failure — what’s most dangerous: a bad team, a weak product, or a poor market?

Let’s start by defining terms.

The caliber of a startup team can be defined as the suitability of the CEO, senior staff, engineers, and other key staff relative to the opportunity in front of them.

You look at a startup and ask, will this team be able to optimally execute against their opportunity? I focus on effectiveness as opposed to experience, since the history of the tech industry is full of highly successful startups that were staffed primarily by people who had never “done it before”.

The quality of a startup’s product can be defined as how impressive the product is to one customer or user who actually uses it: How easy is the product to use? How feature rich is it? How fast is it? How extensible is it? How polished is it? How many (or rather, how few) bugs does it have?

The size of a startup’s market is the number, and growth rate, of those customers or users for that product.

(Let’s assume for this discussion that you can make money at scale — that the cost of acquiring a customer isn’t higher than the revenue that customer will generate.)

Some people have been objecting to my classification as follows: “How great can a product be if nobody wants it?” In other words, isn’t the quality of a product defined by how appealing it is to lots of customers?

No. Product quality and market size are completely different.

Here’s the classic scenario: the world’s best software application for an operating system nobody runs. Just ask any software developer targeting the market for BeOS, Amiga, OS/2, or NeXT applications what the difference is between great product and big market.

So:

If you ask entrepreneurs or VCs which of team, product, or market is most important, many will say team. This is the obvious answer, in part because in the beginning of a startup, you know a lot more about the team than you do the product, which hasn’t been built yet, or the market, which hasn’t been explored yet.

Plus, we’ve all been raised on slogans like “people are our most important asset” — at least in the US, pro-people sentiments permeate our culture, ranging from high school self-esteem programs to the Declaration of Independence’s inalienable (sic) rights to life, liberty, and the pursuit of happiness — so the answer that team is the most important feels right.

And who wants to take the position that people don’t matter?

On the other hand, if you ask engineers, many will say product. This is a product business, startups invent products, customers buy and use the products. Apple and Google are the best companies in the industry today because they build the best products. Without the product there is no company. Just try having a great team and no product, or a great market and no product. What’s wrong with you? Now let me get back to work on the product.

Personally, I’ll take the third position — I’ll assert that market is the most important factor in a startup’s success or failure.

Why?

In a great market — a market with lots of real potential customers — the market pulls product out of the startup. (Emphasis added)

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.

The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.

In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy.

And when you have a great market, the team is remarkably easy to upgrade on the fly.

This is the story of search keyword advertising, and Internet auctions, and TCP/IP routers.

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail. (Emphasis added)

You’ll break your pick for years trying to find customers who don’t exist for your marvelous product, and your wonderful team will eventually get demoralized and quit, and your startup will die.

This is the story of videoconferencing, and workflow software, and micropayments.

In honor of Andy Rachleff, formerly of Benchmark Capital, who crystallized this formulation for me, let me present Rachleff’s Law of Startup Success:

The #1 company-killer is lack of market.

Andy puts it this way:

• When a great team meets a lousy market, market wins.
• When a lousy team meets a great market, market wins.
• When a great team meets a great market, something special happens.

You can obviously screw up a great market — and that has been done, and not infrequently — but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. Market matters most. (Emphasis added)

And neither a stellar team nor a fantastic product will redeem a bad market.

OK, so what?

Well, first question: Since team is the thing you have the most control over at the start, and everyone wants to have a great team, what does a great team actually get you?

Hopefully a great team gets you at least an OK product, and ideally a great product.

However, I can name you a bunch of examples of great teams that totally screwed up their products. Great products are really, really hard to build.

Hopefully a great team also gets you a great market — but I can also name you lots of examples of great teams that executed brilliantly against terrible markets and failed. Markets that don’t exist don’t care how smart you are.

In my experience, the most frequent case of great team paired with bad product and/or terrible market is the second- or third-time entrepreneur whose first company was a huge success. People get cocky, and slip up. There is one high-profile, highly successful software entrepreneur right now who is burning through something like $80 million in venture funding in his latest startup and has practically nothing to show for it except for some great press clippings and a couple of beta customers — because there is virtually no market for what he is building.

Conversely, I can name you any number of weak teams whose startups were highly successful due to explosively large markets for what they were doing.

Finally, to quote Tim Shepherd: “A great team is a team that will always beat a mediocre team, given the same market and product.”

Second question: Can’t great products sometimes create huge new markets?

This is a best case scenario, though.

VMWare is the most recent company to have done it — VMWare’s product was so profoundly transformative out of the gate that it catalyzed a whole new movement toward operating system virtualization, which turns out to be a monster market.

And of course, in this scenario, it also doesn’t really matter how good your team is, as long as the team is good enough to develop the product to the baseline level of quality the market requires and get it fundamentally to market.

Understand I’m not saying that you should shoot low in terms of quality of team, or that VMWare’s team was not incredibly strong — it was, and is. I’m saying, bring a product as transformative as VMWare’s to market and you’re going to succeed, full stop.

Short of that, I wouldn’t count on your product creating a new market from scratch.

Third question: as a startup founder, what should I do about all this?

Let’s introduce Rachleff’s Corollary of Startup Success:

The only thing that matters is getting to product/market fit. (Emphasis added)

Product/market fit means being in a good market with a product that can satisfy that market.

You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.

Lots of startups fail before product/market fit ever happens.

My contention, in fact, is that they fail because they never get to product/market fit.

Carried a step further, I believe that the life of any startup can be divided into two parts: before product/market fit (call this “BPMF”) and after product/market fit (“APMF”).

When you are BPMF, focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.

When you get right down to it, you can ignore almost everything else.

I’m not suggesting that you do ignore everything else — just that judging from what I’ve seen in successful startups, you can.

Whenever you see a successful startup, you see one that has reached product/market fit — and usually along the way screwed up all kinds of other things, from channel model to pipeline development strategy to marketing plan to press relations to compensation policies to the CEO sleeping with the venture capitalist. And the startup is still successful.

Conversely, you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30″ monitors for all the programmers, top tier VCs on the board — heading straight off a cliff due to not ever finding product/market fit.

Ironically, once a startup is successful, and you ask the founders what made it successful, they will usually cite all kinds of things that had nothing to do with it. People are terrible at understanding causation. But in almost every case, the cause was actually product/market fit.

Because, really, what else could it possibly be?

 

Artifact Group has recently developed a wrist mounted digital wallet prototype called Token

Token connects to the user’s various accounts including checking, savings, credit, debit cards, and PayPal, according to a recent article in Wired Magazine.

Token has four basic functions: “Pay,” to make purchases; “Give,” to transfer funds to someone else; “Ask,” to request funds from another user and “Peek,” to check bank statements.

Since the rest of the supporting technology ecosystem is not (yet) in place (i.e. compatible merchant point of sale devices, et al), Token is clearly a showcase project to demonstrate the impressive ingenuity and design skill of Artifact Group. As a masterful example of design and technology artisanship, it achieves this objective brilliantly.

However, if Token was intended to be an actual commercially launched product, we would be concerned that it falls into the category that many technology based products do which could be called “Ars gratia artis” (art for art’s sake).

Craig Erickson, a design director at Artefact says: “The big question is: What if we converged sensors and wearables to create a more efficient way of managing money?”

We respectfully disagree with Mr. Erickson’s assertion that “the big question” (essentially) is “What if we built a device that makes it easier to manage money?”

Rather we would propose that the big questions are: “Who would care if you built it?” and “How much would they care?”

Let’s take a peek at the Token concept through the lens of the Q-PMF Framework and try to reverse engineer what they are thinking to get a sense of whether Token would be a successful product if it was actually launched.

On the Artefact Group website we find the following “pain points” that they considered during the product design process (we added the implied value dimensions):

Have you ever lost your wallet and worried about whether someone went to town with your ID, money and bank information? (Security) How often do you get a replacement credit card, because the security of one of the merchants you shopped “may have been compromised”? (Security) Don’t you wish the voice of reason took over when a new bike or a pair of shoes beckoned you from the store window? (“Voice of Reason”) And how about the weekly “Mom, can I have some cash?” that turns your sulky teenager back into a pleasant person, only to disappoint her with a cashless wallet? (“Allowance Convenience”)

That is what one of Artefact designers was pondering when he imagined Token, a next generation payment device that helps you be a smarter consumer.

From this description we can make an educated guess about how the Token designers were thinking about their Customer Value Model.

They believe that Security is the most important value dimension for consumers, followed by a new value innovation we’ll call the “Voice of Reason” followed by the a desire to make it more convenient to give digital money to teenagers (“Allowance Convenience”).

The Q-PMF chart for Token might look something like this:

 

Token clearly outperforms cash and cards along each of these dimensions. Note that we have presumed that cash and cards have no performance at all along the new “Voice of Reason” value dimension, giving Token a significant Delta-V advantage in both that important dimension and overall.

Assuming that the designers have accurately identified the Customer Value Model for their target market segment, Token would have both high Product Market Fit (i.e. a high Q-PMF score) and would have a high Delta-V over other options. Based on these advantages over both cash and cards we would expect Token to be an “out of the park” Home Run.

But is this Customer Value Model an accurate representation of the real world? This is where many new product designs start to have problems. In fact a study by the Product Development Institute suggests that nearly half of new products fail – many of which may be due to poor Product Market Fit.

Let’s consider an alternate approach.

Many payment innovations approach the “problem” primarily from the merchant’s perspective which is how to make it faster, easier, and less mentally painful for the consumer to spend more money.

But are we certain that consumers themselves think that their current payment options are painfully slow, worrisomely insecure, or just inconvenient? Like most markets there is probably a range of customer opinions which creates a range of value based customer segments.

 

If the consumers who think that payments would benefit from at least some improvement have a different Customer Value Model that either places different importance weights on the value dimensions, or includes different value dimensions, then the overall Product Market Fit could be significantly different.

For example what if the way that most consumers thought that payments could be improved most was not by making it easier to pay, but instead making it easier to save money? The way that Token and many other coupons schemes address “Saving Money” is by alerting users to promotional discounts. But most promotional discounts are actually intended to be an inducement to spend more money based on the classic marketing hucksterism of “the more you spend the more you save.”

While features that increase the “Voice of Reason” dimension may help to curb frivolous spending, it may not actually help to save money on necessary spending. In this scenario, consumers most interested in saving money may feel that Token is about as effective as other digital coupon schemes which only have moderate performance in reducing their total spend.

 

Another challenge for Token may come from not considering the psychological or social dimensions associated with payments and money in general. While some people value conspicuous consumption (e.g. “bling”), many others prefer inconspicuous consumption. For this segment wearing a payment device on one’s wrist would be less attractive than keeping cash and cards out of site in one’s pocket.

Alternatively, if Token is intended to replace a traditional watch (assuming it has a clock function), how will it be perceived by the segment of expensive watch owners (especially men) who value “Prestige?” Regardless of its cost, will the Token be seen like a Rolex or a calculator watch?

Finally, while security is clearly important, consider the scenario where the designers have overestimated its overall importance. If Token is so secure that it is difficult to use, it could over-perform in the Security dimension which could be a liability (shown in red).

This exercise shows the importance of getting the Customer Value Model right the first time. If Token’s designer’s assumptions about consumer preferences are reasonably accurate they could have the next big hit; but if the Customer Value Model is different than they expect – they could have an expensive flop.

Unfortunately physical products like Token do not readily lend themselves to a “lean startup” approach, starting with an MVP (Minimum Viable Product) and then iterating based on market feedback. The investment required to build the first batch of products that doesn’t sell well, in addition to the costs of making software or hardware changes to the next generation could be prohibitively expensive.

Conducting detailed market research of customer’s preferences during the design process is often one of the best investments innovators can make, which is why we call it “cheap insurance.”

We wish the Artifact Group great success with the Token and look forward to trying one ourselves soon!

The core thesis of Rita McGrath’s provocatively titled book “The End of Competitive Advantage” is actually not that competitive advantage is no longer useful, but that most managers think of it as a static condition rather than as an ever changing battlefront.

In “The End of Competitive Advantage” Professor McGrath writes:

“Virtually all strategy frameworks and tools in use today are based on a single dominant idea: that the purpose of strategy is to achieve a sustainable competitive advantage. This idea is strategy’s most fundamental concept. It’s every company’s Holy Grail. And it’s no longer relevant for more and more companies.”

Although not mentioned explicitly, McGrath’s thesis is reminiscent of France’s attempt to protect itself from a German invasion during the build up to WWII. Based on medieval military strategy the Maginot Line was a fortified wall intended to prevent Germany from crossing directly into France.

In spite of being extolled as a work of genius by the military experts of the day, it was a tactical blunder; the Germans merely sidestepped the static defenses by invading through the “impenetrable” Ardennes forest in Belgium and conquered France in six weeks

The problem for most companies seeking sustainable competitive advantage is that since technologies, competitors, and market preferences are always changing, a company’s overall competitive advantage (Delta-V) is also always in flux; so a static competitive advantage is no longer sustainable.

Professor McGrath confirms the impact of  Hyper-Innovation discussed in our own upcoming book The Innovator’s Secret Formula and writes:

My research suggests that rather than stability being the normal state of things and change being the abnormal thing, it is actually the other way around.

Instability and change is now the normal condition interspersed with deceptive moments of transition. Companies that embrace static Maginot Line type strategies risk being overrun by a swarm of startups and other nimble competitors.

Professor McGrath writes:

“Think about it: the presumption of stability creates all the wrong reflexes. It allows for inertia and power to build up along the lines of an existing business model. It allows people to fall into routines and habits of mind. It creates the conditions for turf wars and organizational rigidity. It inhibits innovation. It tends to foster the denial reaction rather than proactive design of a strategic next step.”

The alternative to trying to preserve temporary competitive advantages is to embrace what Professor McGrath calls “Innovation Proficiency,” where companies create a well managed process of continuous innovation.

It is now clear that in the modern economy innovation is the primary driver of economic growth, and as the number of disruptive innovations increase, incumbents need to improve their rate of successful product inventions, just to stay competitive.

Professor McGrath gives many excellent recommendations for how companies can change their organization and culture to be more proficient at continuous innovation. Yet the actual process of creating new successful products and services is still largely a very inefficient, hit or miss, “black art.”

She gives an example of one company that was trying to be more innovative.

“We naively thought that the shortage of ideas must be our major problem. So we enthusiastically delved into intensive brainstorming. Some of the ideas we thought were sheer genius…We had made a profound mistake which was not engaging the leadership from the beginning and not creating a strategic framework within which the ideas had to fit.”

The Q-PMF strategic framework is designed to make the continuous creation of better market fitting products more of a science and less of an art. It provides a clear road map for successful innovation starting with a deep understanding of market segmentation based on the Customer Value Model.

The Q-PMF framework provides clear opportunities for both “sustaining” and “disruptive” innovations.

Sustaining innovations are created by improving the performance of existing products along known value dimensions. By evaluating the changes in Delta-V advantage across value dimensions and the resulting expected changes in market share, and comparing it with the cost of delivering the required improvements, managers can determine both the highest impact and most cost effective innovations.

Disruptive innovations are created by adding or creating entirely new value dimensions. The resulting new product often is targeted at a new market segment (which often cannibalizes old segments) for which it has a higher Product Market Fit.

A classic example is Apple’s iPhone, which when it was first launched actually had weaker performance in the “telephone” dimension, but added an entirely new set of much more highly desired value dimensions of being a pocket computer (e.g. applications, sensors, camera, iTunes, web access, etc.).

Using the Q-PMF framework, companies can identify product innovations that:

–          Have the best Product Market Fit
–          Can capture significant market share in the most desirable market segments
–          Create a road-map for continuous innovation

Competitive Advantage may not have ended, but the time for static Maginot Line style thinking certainly has.

Background: Halt and Catch Fire (HCF)

In AMC Network’s new retro TV series “Halt and Catch Fire” we meet the anti-hero protagonist, Joe McMillan, who is struggling to design and launch a new PC during the dawn of the PC revolution in the early ‘80’s. Their little company “Cardiff Electric” has no business in the PC market. They are a Texas software company with no experience designing or building hardware, and no credibility in the market. Joe has positioned them to go head to head with the IBM PC the recognized market leader.

 

In our previous post “Halt and Catch Fire” we examined a future scenario where Cardiff Electronics successfully launched a PC two times faster at half the price compared to the IBM PC; we expected it to be highly appealing to both power users for speed and ordinary users for cost, and estimate that it would quickly dominate the PC market outselling the IBM PC/AT two-to-one – at least for a while.

What would happen next?

Using the Q-PMF framework, we can explore various possible future scenarios to get a better sense of the landscape of potential risks and rewards. We call this process “Future Mapping.” In this process we never assume a static “state of play;” that is if one variable changes we expect that other variables will also change to reflect either a competitive response or a change in market preferences.

Since both technology and market preferences are constantly changing, each product’s Product Market Fit is also in constant flux, and therefore must be managed dynamically by trying to stay two or three moves ahead of new technology, new competition, and evolving market preferences.

Let’s look at a possible future scenario for the fictional company Cardiff Electronics, to get a better idea of exactly what they are up against.

(Please note that for the purpose of this discussion we will speculate about future (fictional) customer satisfaction levels. In reality companies would be conducting extensive market research to understand current and future customer preferences and sentiment to inform this analysis.)

At the time in which the HCF story is set (1983), Moore’s Law was still in its infancy, and so perhaps it has been correctly left out of the plot line so far.  Moore’s Law states that processing power should roughly double every 24 months at the same cost.

This means that even if Cardiff did create the technical breakthroughs necessary to make the Cardiff PC twice as fast as the IBM PC, it would only give them about a 2 year window of market leadership before Moore’s Law would allow IBM to match Cardiff’s speed as soon as the next generation of processors was available.

In fact what actually happened was worse than that due to some remarkable leaps in computer speed and performance in the first half of the 1980’s.

The HCF story is set in 1983 when Cardiff is designing a PC to compete with IBM. In March of 1983 IBM introduced the IBM “XT” based on the Intel “8088” CPU which was able to process about 1 Million Instructions per Second (MIPS). Although not made explicit in the HCF story line, this is the machine that viewers assume that Cardiff is using as a benchmark to make their machine “twice as fast at half the price.” But is it the right target?

The previous year Intel had already launched their next generation processor that could more than double the processing speed of the XT. The “80286” (a 16-bit microprocessor with a top clock speed of 12 MHz) was able to execute 2.66 MIPS.

In August 1984, IBM launched the “AT” (“Advanced Technology”) PC based on the Intel 80286 processor.

As hockey great Wayne Gretzky famously advised “skate to where to puck is going.”  In order for Cardiff to have more than just a few months of market leadership, our fictional hero Joe should be targeting the next IBM machine, the IBM PC-AT at 2.66 MIPS.  This means that to reach Joe’s goal, the Cardiff PC needs to reach 5.3 MIPS to be twice as fast as the IBM AT.

Even then the window for market leadership would still be short. Just 14 months later in October of 1985, Intel would introduce its next generation “80386” CPU that  executed 11.4 MIPS (4.3 times faster than the 80286).  In a span of only 31 months computers had become 11 x faster than the XT.  Joe doesn’t realize it yet, but in order for Cardiff to survive they will have to find a way to exceed this blistering pace of technology advancement.

Using Intel’s 11 MIP 80386 CPU, IBM would have been able to not only match, but to double Cardiff’s 5.3 MIPS at no extra cost. In fact the 80386 sold for $60 less than its predecessor (a 17% price discount).

These advances in CPU Speed would have had the potential to significantly reduce or eliminate Cardiff’s Delta-V advantage in Speed.

But again we never assume a static state of play; so for the sake of discussion let’s speculate that Cardiff created more ways to increase speed than just over-clocking the CPU (e.g. faster BIOS, etc.) which they could then also use in their next 80386 based machine.

For this example let’s say that Cardiff is able to maintain a 50% speed advantage over IBM after they both upgrade to the ‘386 CPU. How would it affect their relative strategic positions and projected market shares as driven by Product Market Fit?

Here is the initial state of play we projected after Cardiff introduced their first PC which was 2x faster than the current IBM PC. We expect Cardiff to command two thirds (66%) of IBM’s PC market (ignoring other players).

But when IBM launches its next generation ‘386 machine, it would significantly close the speed performance gap and thus greatly reduce Cardiff’s Delta-V advantage in Speed.

 

The noticeable performance improvement (4x) of the IBM PC would greatly improve customer’s perception of satisfaction in the Speed dimension, even though the Cardiff machine is still technically faster. Let’s assume that customer satisfaction with IBM in Speed would rise from 20% to 70% (green bar).

Since the performance gap is now less, it is likely that the Price satisfaction gap will also be less. Let’s assume that IBM Price satisfaction rises from 20% to 40%.

IBM could make dramatic gains in the two major value dimensions (Speed, Price), just by upgrading to Intel’s ‘386 processor – IBM would be rapidly reducing Cardiff’s Delta-V advantage and closing the PMF gap.

But now with one successful PC under their belt, Cardiff’s performance in the Brand dimension would increase. They would be becoming a recognized and trusted brand, and thus be able to attract more customer segments beyond just the Early Adopters.

The net result of this scenario analysis is that IBM would likely be able to reduce Cardiff’s Delta-V advantage from 40% down to 14%, and thus reduce Cardiff’s market share dominance from 66% down to 54%.

Under these scenarios, Cardiff’s fist PC would capture significant market share, but within two and a half years we would expect to see IBM and Cardiff offering more or less comparable machines with equal market shares.

In the first three episodes of the series Cardiff has already been through significant trials, with more yet to come; so within the context of a fictional drama, one has to ask: Is it worth it?

In 1984 IBM had $4 billion in annual PC revenue[1], more than the next four PC companies combined (including Apple). If Cardiff were to capture half of IBM’s market share, at half the price, they would create $1 Billion in revenue. Even if they only had 10% margin, that would mean $100 million in earnings.

But in the TV series, and in real life, we know that a market leader like IBM is not going to idly sit by and watch an upstart capture half their market share if they can help it. There are many other ways that they can compete so Joe had better have a few more tricks up his sleeve if Cardiff is going to survive. According to the trailers for the next episode, he does.

[1] Libes, Sol (September 1985). “The Top Ten”. BYTE. p. 418.