The Three Rules of Product Development
In their book “The Three Rules”, Raynor and Ahmed attempt to find rules for business that are always true – regardless of industry, type of company, the economy, etc. They found three:
Rule #1: Better before Cheaper
Rule #2: Revenue before Cost
Rule #3: There are no other rules.
“Better before Cheaper” means that if you are faced with a choice between making your product better, or making it cheaper, always choose better. Apple did not focus on finding ways to design and manufacture for less cost, they were focused like a laser beam on how to design and manufacture a great product.
“Revenue before Cost” means if you are faced with a choice between making more revenue or lowering your cost, choose more revenue. Apple did not focus on re-engineering, right sizing or doing more with less. They focused on selling more great products – ever been in one of their stores? Amazing. I do not think their stores were the result of any cost cutting initiative. Instead, they focused on finding ways to sell more.
“There are no other rules” means that everything else is dependent on the particular situation. They do not mean that there are no other rules, just that there are no other rules that are always true.
Keep in mind, they are not saying spend money like there is no tomorrow – this is about choices, and where you spend your time, money and energy.
One of the things that distinguishes this book from the crowd is their research method. Too many books simply find successful companies; look at what they did and then attribute the success to this strategy or behaviour. Although this may seem at first to be a perfectly rational approach there are two things wrong with it. First, correlation is not causation – that is, just because someone who is smart also has freckles does not mean that the freckles caused their intelligence; and second, not all strategies/behaviours work all the time and in all situations. What works well for a large company maybe a complete disaster for a small company.
To be successful, you must also study failure – otherwise, you are likely to attribute strategies/behaviours to those things that also correlate with failure and you will not have any understanding of strategies/behaviours to avoid, in order to reduce the probability of failure. Some strategies/behaviours cause failure – regardless of compliance with successful strategies/behaviours.
In our work, developing products for startups and small companies, we have discovered similar rules about product development. Through our years of collecting data, we have found strategies/behaviours that work, that do nothing, and that cause failure.
If we had to rewrite the three rules in terms of product development (especially for startups and small companies) they would be:
Rule #1: Figure out how to work with the best, not the cheapest (better before cheaper)
Rule #2: Sales and Marketing are just as important as engineering (revenue before cost)
Rule #3: Don’t worry too much about anything else. Spend most of your time with great engineers, great product managers and great sales and marketing people.
Rule #1: Figure out how to work with the best: The most common reason most small companies fail at product development is that they hire a cheap engineer – or engineering team. Their assumption (not necessarily articulated, or even aware of) is that since they have very little money or budget, they must hire people for less than the market rate – presumably they believe that the amount of work is a fixed thing (the number of hours needed to develop the product) and that their roles are to find a “bargain” in order to afford the necessary service.
The reality is quite different. People who are really good are often much more productive than mediocre people (see the book First, Break All the Rules to learn just how true this statement is). Although their cost per hour will be a lot more, their productivity makes up for the difference and a lot more. Many times the “cheap engineer” will actually create negative value.
The most common “failure story” in our database goes something like this:
- Company finds some cheap engineer who states the development can be done for $100
- Meanwhile, other “market rate” engineers try to convince the company that this budget is much too low and needs to be at least $200.
- Company hires the cheap engineer.
- Engineer spends $100, then $200 then $400
- At some point company stops the project.
- When the company re-starts the project, the “market rate” engineers discover that very little of the prior work can be used – typically, the wrong thing had been done – even if it was done well, it is of little value.
- New project is done for $200
Of course many fail to ever re-start the project – especially in a startup or small company with limited resources and little tolerance for failure.
Focusing on cost only, or believing that you are the special person lucky enough to find a bargain is one of those strategies/behaviours that cause failure.
Finding great engineers to work with is not the easiest task. This is especially true in a small company with limited budget and clout to attract this type of talent. However, it can be done, and focusing on “better before cheaper” is one of those “always true” rules, so here are a few tips to help you along:
- There are plenty of product development companies out there. Some even specialize in small companies and startups. You may not be able to afford a full time team with proven reference design, experts and mature processes, but it can be rented for a fraction of the cost of full time ownership.
- Individual consultants are another way to rent vs. buy talent. One word of caution, consultants often specialize in very narrow areas of specialization and suffer from the “if you’re a hammer, everything looks like a nail” syndrome. Don’t use consultants to determine what to do, but they are a great resource for getting it done.
- Sometimes it is possible to “buy” product development, that is, an existing technology owned by another company. Indeed, it always surprises us how often this occurs, even when it would seem unlikely. Almost everything has already been invented, and even perfected. Often, technologies from one industry can be used in a completely different industry. The trick is being able to find, and recognize, were these technology might be and strike a deal that works for both parties.
Rule #2: Sales and Marketing are just as important as engineering: The second most common reason for failure in our database is a lack of sales and marketing. This is typical of the companies that possess a lot technical skills and/or the inventor-turned-entrepreneur type company.
This story typically goes like this:
- An idea or invention is discovered
- All focus is on “making the prototype”
- Lots of money and time are spent
- Finally the prototypes arrives – and they work
- No one buys the product
- Some time and money are spent on Sales and Marketing
- It is discovered that the product does not meet the needs of the market
Generally speaking, it is not possible to know what the market wants, especially if you are a startup trying to disrupt a market (see the book The Lean Startup for more on this topic). It is true that, “if you build a better mousetrap, the world will beat a path to your door”. However, your idea of “better” and the market’s idea of “better” may be very different (product management); and they will only beat that path if they know and understand it is better (marketing) and there is someone to guide them along the path (sales). Without sales, marketing and product management you are likely going to build the wrong product and even if you get lucky, no one will even know it exists.
Ignoring the market or assuming you have complete understanding of the market is another one of those behaviours that causes failure and needs to be avoided. Here are some tips:
- Follow a product development process. Product development is like any other business activity – it needs a defined methodology if you wish to be world class. This doesn’t need to be some overly complex thousand-page document. Small companies can find very simple ones online.
- Validate the market. The most successful companies in our database do extensive market validation using MVPs (Minimally Viable Products). They start with the simplest of MVPs (often just a rendering) and try to sell it. They learn why it does not sell, or sell well, and iterate the MVP and try again. Many of these companies will complete this cycle every couple of months for two or more years before they finally are at the point where they decide to scale the current MVP iteration to production. The resulting product is usually very different than the original concept.
- Make sure the roles and responsibilities on the team are clear. Every product development project should have (at least):
- Engineering manager responsible for creating the drawings and prototypes
- Product Manager responsible for generating product requirements
- Marketing Manager responsible for creating the GTM (Go To Market) plan
- Sales Manager responsible for creating the sales plan
- Have regular meetings. Despite the cliché (and all the great Dilbert cartoons) about meetings being a waste of time, our data indicates they are necessary. Our data also indicates that, in order to be effective, there must be some kind of structure and teamwork (read The Five Dysfunctions of a Team). In each of these meetings, which should be weekly, each team member should:
- Discuss progress towards his milestone
- Discuss how this progress affects the overall plan
- Highlight any areas of difficulties and/or surprises
- Discuss how other members’ progress is affecting their plan
Rule #3: Don’t worry too much about anything else: Assuming your role is to manage the product development team, don’t allow yourself to get caught up in minutia. Time, energy (mind share) and money spent making other decisions will all be for naught if you do not get rules one and two right. If you have the right team – that is, they are the best and they are a complete team – then all other details will be worked out in good order. Your primary role as the leader is to always be asking yourselves these two questions. If you’re not spending 90% of your time on these two questions, you’re likely not fully optimized. Here are some tips:
- Have you created and communicated the vision to the team. Do all team members have the same vision?
- Great team members understand the value of great teamwork. They know we succeed or fail as a team. They never blame others and are always focused on positive action going forward – not on personalities or personal agendas.
- Projects change, sometimes quickly. This may mean a team member is no longer right for their role. Don’t be afraid to make a move when it is necessary.
- Is your team balanced? Does it have someone for each role and is everyone able to have an equal voice – or is there one dominant personality who must always get his way? Do not forget that this person may be you.
- Product development is difficult. We are all familiar with studies that show the likelihood of success is much too small; yet, we see companies “believing” that their project will be an exception to this rule. These are generally the same people who have magical thinking about getting something for less than market rate (rule #1 – cheap engineers) and somehow have a priori information about the market (rule #2 – no need for sales and marketing).
Like most things in business, product development is simple, but that does not mean it is easy. It takes a strong leader who understands the landscape and keeps the troops focused on the one true path to greatness.
Steve Owens, Founder and CTO of Finish Line Product Development Services, has over 30 years of successful product development experience in many different industries and is a sought after adviser and speaker on the subject. Steve has founded four successful startups, holds over twenty five patents, and has experience in Internet of Things, M2M, Oil and Gas, and Industrial Controls. Steve’s insight into the product development process has generated millions of dollars in revenue for startups and small businesses.