Monday, February 29, 2016

The Signal

The opportunity was vast.

The product would enable hospitals to go all digital, eliminating paper records and improving physician's access to high-resolution images. Lower costs, better outcomes. No wonder the company had already closed on eight hospitals. The growth projections from there were obvious.

So it was that Arnold Parnassus left a soon-to-be fortune in Oracle stock options on the table to run this hot new start up in the digital radiology space. And then reality hit. The company stopped dead in its tracks, not selling another system, and Parnassus moved on.

What happened?

First let me assure you that this is a true story, although his name I changed. The post-mortem would find that the first eight adoptions were all by hospitals where the company's founders had close relationships. Once their network was tapped out, growth stopped. Apparently this product was not nearly as compelling as the initial returns implied. The team thought the market had given "the signal," but it was a false positive. The early returns were not really a signal of product-market fit.

But at the time, this diagnosis was not so clear. Parnassus and his team racked up the miles (and the burn rate) making sales calls and attending conferences. They even got a call from GE, which they rebuffed wanting to go it alone. After all, they thought the market had given them the signal, and now it was time for execution.

I see the problem of false positives all the time when I talk to executives. I typically ask "do you have product-market fit?" when I meet with an executive and her team. Normally she will say "yes," and then I'll ask "how do you know?" Then the hand-waving begins, featuring a lot of talk about "value propositions" and such. I listen for the evidence of product-market fit. Are the dogs eating the dog food? If so, can we be sure about why? Or are we like Parnassus, misreading the signal like an embarrassed suitor misreading a wink.

There are many ways of misreading a signal. For instance, just recently an executive told me, "BigCompany is a potential customer, and they want to invest!" OK, this remark raises the obvious problem that customers and investors have very different motivations. But the real problem is the executive. He's getting excited for the wrong reason. An offer to invest is not a purchase order. It is not evidence of product market fit. It is not "the signal."

What's more, an investment like this not only gets misread as the signal, it also buys the firm more time to keep doing what they are doing - even though the dogs are not eating the dog food. Investments often kill firms by cushioning their management teams, allowing them to feel like they are doing a good job even when they should be desperately reconsidering their strategy.

Can you tell signal from noise? What does that say about your leadership?


Marc Andreessen has an interesting article on product market fit.



Monday, February 15, 2016

The Whole Product

Next time you are in Brazil, leave the typical tourist locations and visit the nearest Magazine Luiza, the growing retailer headed up by Chairwoman Luiza Helena Trajano. There you will see another side of Brazil - the many up-and-coming consumers just entering the lower middle class. Brazilian families looking to buy their first refrigerator, or other modern convenience, probably do not go to the retailers that are so well known globally. Rather, they probably head to Magazine Luiza or one of the other, similar home-grown retailers. Why?

Of course, this company knows its logistics, and understands distributions channels in Brazil. But what makes this company special is that it understands the “whole product” – although probably nobody in their organization uses this phrase.


To see what I mean by whole product, consider what it is like for a family now able to afford their first refrigerator. A job is bringing in some income, but the family cannot afford a large cash payment. Neither do they have credit. But when they go to the local Magazine Luiza store, they are approached by a worker who talks to them about their needs. The conversation is friendly, and the store is abuzz with neighbors and friends. If things work out, Magazine Luiza will extend them credit, and the purchase may even take place using the internet – but on a terminal right there in the store.

The “product” sold in this case is not just a refrigerator, but the credit to make the sale, access to the technology needed to identify the right refrigerator, and even the physical location of the store and the atmosphere that makes the experience comfortable to the novice customer. Had you tried doing market research in advance of this purchase, the customer would not have known what they needed to make all this work out. But in action, all these elements combined so that the purchase could take place. Taken together, these elements are the whole product.


Sometimes a product can be too focused. You need to identify the whole product – the full set of features (including services) that are required to delight the customer. The tough part is that those features are typically discovered through experience. For instance, over time Cemex became a force in the global Cement business by acquiring and making efficient many of the world’s inefficient cement operations. But Cemex’s value to the customer was due as well to their ability to deliver cement to the right place at the right time, which required excellent logistics, and other service benefits that made them a good partner in the construction business. That full set of features – the whole product of efficiently manufactured cement, logistics, and service – was discovered by Cemex in the early years of its global expansion. Similarly, in the disk drive market, firms like Seagate evolved the product we now know as the disk drive. They brought together a set of individually-important components such as substrates, heads, motors, software, ASICs, and other such parts. While each of these components is important, much greater value is experienced by Seagate’s customer from being delivered a complete disk drive than would be the case if it were to buy only some of the disk drive’s components.

Is your product the “whole product”? This is a tough question, because in trying to build out a whole product you may be losing focus. Some firms add features in order to please different kinds of customers, and end up being just so-so for each customer. In other cases, companies bring many different benefits to the same customer – the troubled one-man-band of the integrated product. The whole product delights your customer by satisfying completely a single need.


For more on this idea, read Regis McKenna's original book published back in the 1980s.