I have been doing a lot of thinking about where my expertise lies in the “Product” realm, and of the foundational concepts of business and product management that were provided by Peter Drucker. These are separate paths of thinking, but they do intersect.
First, Some Backstory
Before I knew who Peter Drucker was, hell before I had my MBA or worked for GE, I was trying to understand the financial drivers of businesses. I remember sitting at a bar in Myrtle Beach, SC with my best friends from college and high school celebrating college graduation and I was asking the owner/bartender questions trying to figure out the profitability and business model for the bar. I still do it today (ask my wife), and often I still find myself looking at a business and seeking to understand their profitability, or working through an idea and trying to “back of the napkin” figure out the potential market size, revenue and profitability.
In time I had the realization that my strengths, my expertise, center on the business and strategy sides of product, and this is where my thinking on – and reading of – Peter Drucker intersect. In “The Practice of Management” (HarperCollins 1954) Drucker says “that a business cannot be defined or explained in terms of profit.” He offers that “there is only one valid definition of business purpose: to create a customer” as it is the customer who in the end can determine the value or a product or solution:
“It is the customer who determines what a business is. For it is the customer, and he alone, who through being willing to pay for a good or for a service, converts economic resources into wealth, things into goods.”
I will spend more time digging into Drucker’s introduction of the concept of market/customer focused businesses in further blogs and papers, but right now let’s get back to Profits. While profits cannot define the business (or product), Drucker asserts that they are “the test of their validity.” If a business cannot make sufficient profits to cover their costs for a product or offering – their product/offering concept is not valid in the eyes of the customer.
Managing the Business of the Product
To paraphrase Mr. Drucker: profitability is a key yardstick in portfolio management. This yardstick should be used “to prevent management from pouring money and energy into bolstering the weak, ailing and declining, rather than into strengthening the strong and growing, among its ventures.” It is within this concept that the importance of a product/business leader being able to manage the profitability of their product/business. In a Boston Consulting Groups (BCG) matrix (learn more about the BCG Matrix here – https://en.wikipedia.org/wiki/Growth–share_matrix) mentality understanding how to shift money and resources from “Dogs” (low market share, slow growth market) and “Cash Cows” (high market share, slow growth market) into “Stars” (high market share, high growth market) and with proper vetting “Question Marks” (low market share, high growth market).
Much of the focus on Product Management training, innovation books, and the like start with a blank canvas, either a net new market and product (start-up) or in an existing business and opportunity (market segment and need) which has already been defined. For most Product Management jobs, or Business Leader jobs responsible for building the market and product strategy, the hard part is understanding the current situation in your portfolio and knowing where to invest and where to divest. Having the ability to understand the Profit and Loss (P&L) for each product, understand the market dynamics (maturity and market share), understand your core competences and differentiation, and using all of these factors to make decisions of where to focus for growth, for the future. To do this it is critical to have basic skills in reading and understating an Income Statement so you can manage your profitability, the lifecycle of your offerings and optimize your portfolio.
Making Decisions About New Opportunities
While Drucker believed that profitability was a great “yardstick” and should be used to manage investment and divestment in existing products, he also saw it as a key foundation for decisions for new opportunities. He offered that the decision to enter a new product or market (business) needs to be “sound on the basis of market standing, innovation and productivity” management was responsible to “make it produce the needed minimum profit.” Because no matter how great the opportunity may be (based on market standing, innovation and productivity” if management cannot make the “needed minimum profit” (as defined by that business) they should not invest in that opportunity.
This for me lays the foundation of an opportunity assessment and business planning process for new opportunities, and new investments for existing products for that matter. We need to understand these opportunities from a business perspective, from the market dynamics (market standing, growth, maturity, competition), from the alignment with the corporate strategy (fit with the strategy, leveraging core competences and differentiation), from the value for the customer (value proposition, impact on their business) and from the profitability to our company (ROI, Break-even, NPV).
This is a major component of what I do. This is a major component of what I help companies do. How to manage the business aspects of product. How to define your business or product from the customer’s point of view. How to use profitability and financial metrics to manage your product and portfolio. How to use profitability along with market dynamics, corporate strategy and customer value to determine what new opportunities to invest in.
If you want to talk further about my approach and philosophies around managing the business side feel free to e-mail me at firstname.lastname@example.org, as these are things I love to talk about and explore and I look forward to the conversation.
If you are interested in learning how you can help your company become better at managing the business of the product, check out how Product Growth Leaders can help you at – https://productgrowthleaders.com/services/.
Sourcing for Quotes
Note on Peter Drucker: These quotes are all taken from “The Practice of Management,” Peter Drucker, 1954, HaperCollins. They are also found in “Management: Tasks, Responsibilities, Practices,” 1973, HarperCollins, which included most of the chapters/sections from The Practice of Management with some updated and new content. Here are the full quotes that were used:
“The first conclusion to be drawn . . . a business enterprise is created and managed by people. It is not managed by ‘forces.’ Economic forces set limits to what management can do. They create opportunities for management’s action. But they, by themselves, do not determine what a business is or what it does. The second conclusion is that a business cannot be defined or explained in terms of profit.” Chapter 5 – What is Business
“There is only one valid definition of business purpose: to create a customer.” Chapter 5 – What is Business
“It is the customer who determines what a business is. For it is the customer, and he alone, who through being willing to pay for a good or for a service, converts economic resources into wealth, things into goods.” Chapter 5 – What is Business
“This does not mean that profit and profitability are unimportant. It does mean that profitability is not the purpose of business enterprise and business activity, but a limiting factor on it. Profit is not the explanation, cause or rationale of business behavior and business decisions, but the test of their validity.” Chapter 5 – What is Business
“In fact, it is one of the main uses of a profitability yardstick to warn against such businesses and to prevent management from pouring money and energy into bolstering the weak, ailing and declining, rather than into strengthening the strong and growing, among its ventures.” Chapter 6 – What Is Our Business—And What Should it Be?
“But if the decision to go into a business is sound on the basis of market standing, innovation and productivity, if it is sound according to what makes a business, it is the responsibility of management to make it produce the needed minimum profit.” Chapter 6 – What Is Our Business—And What Should it Be?