Product

Development
Strategy
[ 2022 Guide ]

John Carter
Principal, TCGen

TCGen Inc.
Menlo Park, CA

© 2022 TCGen. All Right Reversed | www.tcgen.com

 CONTENTS
TABLE OF
3 What is product
development strategy?

4 Product development
strategy examples

7 Product development
growth strategy types

11 The difference between corporate

strategy and product development
strategy

11 How Much Do Companies Spend

on Research and Development?

12 What are typical R&D as a

percent of sales figures?

14 How Do You Succeed with

Make-Or-Buy Decisions?

15 How To Develop A Product

Development Strategy

18 Conclusion

19 About
John Carter

19 CONTACT
Contact Us US

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 What is product development strategy?
Product development strategy enables product organizations to create a stream of
innovative offerings that disrupt the competition and delight customers.

Product development strategy is a subset of corporate strategy. It sets the direction

for new products by establishing goals and through funding decisions. The aim of
product development strategy is to gain competitive advantage by placing product
offerings in the best possible position to drive business goals such as sales growth, rev-
enue, and profits.

New product development strategy is the means to…

Mitigate risk in developing a product concept

Improve the fit between products and markets

Overhaul a product line

Increase the sales of existing products by enhancing them

Although market research and marketing strategy are necessary in most cases, there
are other inputs to business strategy. A fully formed product strategy includes your
brand, your platforms, your technology, etc.

Here are five examples of a product development strategy:

1. Innovate new product/service areas outside your core product

2. Clarify your direction: innovator, follower, or low cost participant

3. Establish your product portfolio consistent with risk tolerance and

market position

4. Tie your corporate vision, to product strategy, and then to yearly budgets

5.. Implement right governance, funding, and process for setting new
product strategy

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 Figure: Product development strategy links vision to product development

Product development strategy examples

(Technology)
Amazon’s product development strategy
Amazon is an example of a customer-oriented approach to product development
strategy. Their product strategy is focused entirely around customer needs. Amazon
likes to work backwards from the target market. They write the press release for the
product first, and hone it until its language is simple enough for anyone to under-
stand. The press release has no technical jargon about technologies or UIs. They then
work backward from the press release to the product. This is a product development
strategy that focuses on Amazon’s internal process, in engaging with customers to
create a specific product that meets an identified need.

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 Apple’s product development strategy
Apple is an example of a platform/derivative strategy. They connect their top level
strategy to their product development process. The tech giant tends to be prod-
uct-driven Apple creates products and then finds the market for them later. Steve
Jobs famously suggested that customers do not always know what they want. Apple
bets that customers will pay a premium for superb products and tends to focus on
optimizing existing offerings. Apple relies on brand loyalty and is happy to allow com-
petitors to control the market in lower-priced products that compete with Apple’s.

Google’s product development strategy

Google’s new product development strategies tend to be technology driven. Google
bets on technology “to solve a big problem in a big way.” This is a market oriented
approach since Google favors growing the market for everyone, which serves Google
as the market leader. Google also optimizes for growth, not for revenue. Google’s
product development strategy takes the long view; it is typical of a company that has
been a consistent market leader.

Microsoft’s product development strategy

Microsoft is an exemplar of product innovation strategy carried out through part-
nerships. “Our industry does not respect tradition – it only respects innovation,” said
Microsoft CEO Satya Nadella. The maturing tech giant began its strategic transforma-
tion in 2014. It conceded the smartphone market to its rivals and invested in AI and
Cloud. It created an AI division with thousands of engineers and scientists. It also
dropped its aggressive ways and began to emphasize partnerships. It embraced
open-source software, becoming the leading open source code contributor by 2017.
Microsoft is now unique in offering a discrete product unlike Google, Twitter, and
Facebook where user data is the product.

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 Netflix’s product development strategy
Netflix has a Profit and margin driven strategy to maximize adoption and retention.
Netflix is the largest streaming service in the world. Netflix’s core offer is a subscription
including unlimited access to content. Its product strategy emphasizes margin
growth. Monthly retention is a key metric. It has increasingly focused on providing
high quality original content to pin eyeballs to screens. Netflix relies on a strong, trust-
able brand promising “movie enjoyment made easy.” Its strong brand, ease of use,
and personalization are difficult for competitors to duplicate.

Product development strategy examples

(Consumer)
Coca-cola’s product development strategy
Coca-Cola has a strategy that is all about the voice of the customer. “If we embrace
where the consumer is going, our brands will thrive, and our system will continue to
grow. This is Our Way Forward,” said then Coke President and COO James Quincey in
2017. Coca-Cola has become focused entirely on consumers and what they want
from beverages. As consumer tastes change, for example toward options with less
sugar, Coke is moving with them. In recent years Coke have rolled out new products
in response to consumer demand, from juices to coconut water, to organic tea. Con-
sumers want beverages with benefits. Some call for smaller, more convenient pack-
ages than the classic Coke can. Coke’s strategy is to continue to listen to the voice of
the customer and to respond.

IKEA’s product development strategy

IKEA has a strategy to focus on low cost at a consistent level of quality. The high
volume of interchangeable parts requires an extensive, worldwide supply chain.
Initially the company leased out equipment to suppliers and provided training to
ensure quality. Later, as it became an international brand, it re-organized its supply
chain to manage the large volume and geographic dispersion of its suppliers. With its
core competency in supply chain management, Ikea can pursue a product differen-
tiation strategy offering furnishings for any home. Ikea also has a commitment to sus-
tainable design principles. Its product strategy relies on smart design driven by its
unmatched supply chain.

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 Kellogg’s product development strategy
Kellogg has a strategy of divest and acquire. Kellogg may have to divest its most cher-
ished cereal brands in order to move into a future that serves consumer’s better. Kel-
logg’s iconic brands like Corn Flakes, Frosted Flakes, and Froot Loops were the Boom-
er’s favorite breakfast growing up. But times have changed and the market for cereal
is declining as more consumers avoid sugar and carbs. Following a strategy of acquisi-
tion and divestment, Kellogg sold off its Keebler and Famous Amos cookies brands,
while acquiring brands like RXBAR which are more health-aware

Product development growth strategy types

There are many approaches to product development strategies that focus on differ-
ent dimensions of the new product process (including what to do with existing prod-
ucts) and the product development organization. Most often product development
strategy is driven by three market position categories:

1. Premium, innovative and differentiated products

with High Price/High Value (Apple iPhone Pro)

2. Competitively priced products that differentiate on minor factors

including pricing (Crest Toothpaste)

3. Low cost products where often the quality is good enough

(Kirkland, Costco’s house brand)

The first category above will have the highest product development or R&D expenses
– typically in the range of 10-20%, the competitively priced strategy is in the 5-10%
range, and the low cost category requiring lower engineering and R&D spends, below
5% of sales. Tech product development strategies are expensive, where software com-
panies typically run in the 10-25% of sales spent on development and testing. This is
also true of companies that focus on new product introductions. Note that the com-
pany’s risk tolerance may come into play here, and often it is advantageous to take a
product portfolio management approach.

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 Product development strategies either augment those positions or enable them by
focusing on time to market; on a calculation of technology and market risk; on a
strong platform that spins-off families of products; or on customer insights and inter-
nal procedures to produce the best existing solution.

Time-based approach
One approach to product development strategy emphasizes when your new product
offering enters the market. In this approach, entrants compete on time to market.
Either a company is an innovator, that creates a brand new product category; it is a
rapid follower in that rapid commercialization is the goal; or it lags behind as a “me
too” product.

These three product strategies are often described as:

First to market

Fast Follower

Laggard

The research favors the view that companies that are first to market reap the rewards.
There is a strong correlation between innovation and long term success in creating
new products. (One technique that is commonly used to shorten time to market is an
escalation process.)

Market-oriented approach
Another common approach to product development strategy is around the dimen-
sions of the target market, or target audience (marketing strategy focused). Often this
takes the form of a relative emphasis on technological or market innovation.

Either a new product development represents a technological innovation within an

existing market; it finds new market applications for existing products; or it opens up
an entirely new market.

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 Research on a market-oriented approaches yielded five different types of product
development strategies:

Innovators that use their existing resources to create new technologies that
they sell within existing markets.

Investors in technology, mainly through acquisition or partnerships with other

entities (for example with a university research center).

Searchers for new markets, take existing products and try to find applications
for them in new markets. For example, a company that designs games might
sell a game-like app that helps HR test new applicants.

Business As Usual companies continue to push out already existing products to

current markets and attempt to compete on price, margins, or distribution.

Middle of the Road companies are happy to take an incremental approach

with low or moderate innovation in products and markets, and stick more with
modifying existing products.

Platform-based Approach
According to David Robertson and Karl Ulrich, a platform is “the collection of assets
that are shared by a set of products.” A platform then spawns families of derivatives.
These families have a relationship to one another with respect to cost, performance,
quality, or feature density.

For example, in the computer business, 15 inch laptops might constitute a family
within a platform of laptops of various sizes. The variants within a family might
appear at various price points, with different feature sets, such as amount of
memory, hard disk size, CPU speed, and graphics capability.

A platform approach to product development strategy represents a way of optimiz-

ing innovation. Usually, the platform is the result of many years of research and
development, and codifies all the efforts resulting from one or more innovative con-
cepts. A platform’s greatest benefit is that it maximizes the revenue and business
impact of an invention by spreading across different new product offerings. Often-
times this is best illustrated by showing the relationships between platforms and
derivatives in a product roadmap.

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 When you leverage the significant design work embodied in a platform, your subse-
quent product variants will require much less engineering time – and less calendar
time – to bring to market. Innovation processes become much more efficient by lever-
aging the know how from existing products. This also allows you to enter a new target
market efficiently by creating a derivative of a product family.

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Platform approach to product development strategy yields product families

Customer-oriented approach: Design Thinking

Another approach is to focus on the company’s internal process for producing valu-
able innovations that delight customers as a core part of your product development
strategies. The customers’ needs come first in this approach.

In the Design Thinking approach to new product creation, companies invest in a

deep understanding of the customer. They then convert information derived from
customers into successful products in the market, through a set of consistent steps.

This approach sees the creation of winning new products as the result of an informa-
tion processing procedure that includes:

Product concept generation based on customer insights

Product planning

Product engineering

Manufacturing (or launch) engineering

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 This approach does not concentrate on what competitors are doing as much as on
what customers require. This approach is more customer facing and often it is part of
an Agile Product Development process. It puts the onus on an internal process to
deliver for customers. This methodology can apply to existing products too.

The difference between corporate strategies

and product development strategies
Product development strategy flows from corporate strategy. It is corporate strategy
applied to the product development process.

A yearly strategic planning process for new products is a small facet of your company’s
overall strategic plan. The larger strategic plan provides a “north star” that directs and
deploys the totality of capital and assets within the company. The management of
product concepts is a small but crucial part of this yearly strategic process.

Product development strategy connects to corporate strategy in every possible way:

from the technology hub of your company; to core, augmented, and transformation-
al products; to distribution channels, geographic segmentation, etc. It is very helpful
for a given cross functional team to see how their efforts fit into the larger picture,
too.

How Much Do Companies Spend on Research

and Development?
A portion of product development strategy relates to budgeting and
expenditures. Companies often wonder…

How much of an investment should companies make in new product

development?

How much should we invest in a new product idea?

What is the right mix of investments across our product portfolio?

Should we continue to invest in existing products or their existing target

market?

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 Typically, investments in new product development are grouped together according
to the amount of risk assumed. For example, a company might organize its projects
as follows:

Core products

Adjacent products

Transformational products

According to research, a stable company in a mature industry might allocate 70% for
core products, 20% for adjacent products, and 10% for transformational products. This
is a relatively low-risk approach.

A tech startup might allocate less than one half of its development investment in core
or existing products since the company does not have a large established target
market and is willing to absorb greater risk in creating a new product. A startup might
have 40% invested in the core, 40% in adjacent, and 20% in transformational initia-
tives. In all cases, you need to align your strategy with your product development pro-
cess.

What are typical R&D as a percent of sales figures?

R&D spending varies by industry. The site Idea to Value found that in 2018, Tech com-
panies accounted for 31.3% of the world’s reported R&D spend; Pharma and Biotech
spent 18.7% of those R&D dollars, while companies making Automobiles and compo-
nents, spent 16.8%. Together, these three industries spent more than two-thirds of the
world’s combined reported R&D budgets.

Percentages of R&D spends per industry:

Tech - 31.3%
Pharma/Biotech - 18.7%
Automobiles and compoments - 16.8%

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 The Pharma and Biotech sector tops all other companies with respect to R&D as a
percent of sales, since many are completely dedicated to research. In many cases, the
R&D spends of pharma start-ups far exceed their revenue. The top 100 spenders on
R&D as a percent of sales, are small, niche companies in tech, pharma, and biotech.
Large Pharma giants such as Bristol-Myers Squibb (28.65%), Merck (25.44%), and Eli
Lilly (23.09%) are recognizable names in the second one hundred of the top 1000 R&D
spenders.

Average R&D spending as % of revenue among the top 25

investors in R&D in 2018

Tech - 15%
Pharma/Biotech - 17%
Automobiles and compoments - 5%

The biggest spenders on R&D in actual dollars were Amazon ($22.62b) and Alphabet
Corp., Google’s parent company ($16.225bn). Apple spent the eighth most in R&D dol-
lars ($11.581bn), but ranked 565th among the world’s top 1000 R&D spenders as a per-
cent of sales, at just five percent. Alphabet ranked 258th out of the top 1000 compa-
nies with respect to R&D as a percent of sales (14.64%), while Amazon (12.72%) ranked
302nd on the list, despite having the highest overall R&D spending.

Among the top 25 investors in R&D worldwide in 2018:

On average, Pharma/Biotech companies invested about 17% of their annual

revenue on R&D

Tech companies invested about 15% in R&D

Companies in the Auto industry invested about 5% of sales in R&D

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 How Do You Succeed with
Make-Or-Buy Decisions?
One of the persistent questions in product development strategy for companies as
they scale is how much they should depend on organic technology development vs.
an M&A strategy.

Another way to ask the question: when it comes to new technologies how much
should a company make vs. buy? Should they use their existing development team or
go outside for development? Or even invest further in a line of existing products?
These questions and more are often part of a product development consulting
engagement.

Make/Buy decisions involve many factors but the main dimensions under consider-
ation are the strategic value of the technology in question and the cost of producing
it. In the matrix below, the X axis represents the cost of the investment required in the
new technology, while the Y axis represents the degree of strategic value to the com-
pany. About strategic investment ask: Is the technology you’re trying to make or buy
vital to your company’s core product and future success? Rate its strategic value as
low, medium or high.

This yields a matrix with four quadrants as follows, with the default decision for tech-
nologies in each:
Make/buy decision-making matrix weighs cost
against the strategic value of the technology

High strategic value; high cost

Weigh
Make - Make
Cost / Benefit
Strategic Value

High strategic value; low cost

- Weigh Cost/Benefit

Low strategic value, high cost

- Defer or Judgment Call
Defer/
Buy Low strategic value, low cost
Judgement Call
- Buy

Cost

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 This matrix, a simplified version of models created by BCG and GE-McKinsey. There
are many considerations that go into a make/buy decisions but the most important
factors come down to strategic value of the technology, and the cost of developing it
in-house with your development team.

Often these kinds of decisions are made with the operations (or manufacturing) orga-
nizations and may be part of your New Product Introduction (NPI) process which
applies a manufacturing point of view to new product development.

How To Develop A Product Development Strategy

Whatever product development strategy a company chooses, it will need to execute
it. How do you develop and execute a new product strategy?

A viable product development strategy begins with:

A vision: a broad statement of where you’d like your company

to be (3-5-year horizon)

A strategic plan for product development: steps you intend to take to achieve
that vision (2-3-year horizon)

Product and technology roadmaps, project priority lists and budgets,

connected to specific programs that realize the strategy

A strategic product planning process links together the company’s vision, usually
encompassing a three-to-five-year time horizon, with the strategic steps, over a
one-to-two-year horizon, required to realize that vision.

It then connects the strategy to product and technology roadmaps – representations

that allow decision-makers to see the progression of products and technologies, and
their changing relationships over time. These roadmaps then need to connect to the
yearly budgeting process that prioritizes future products, and provides them with the
resources they need in their early stages.

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 The first step is to take your existing annual budgeting process and business analysis
process and determine how planning for product innovation fits into it. The strategic
product planning process comes after you formulate the overall strategic plan for the
year, but before you complete the budgeting.

Two yearly systems for the strategy process

To improve the planning and execution of a product development strategy, we advo-
cate two systems:

A yearly, systematic portfolio planning process, tied to budgeting

A monthly and ongoing portfolio management process for:

a) selecting emerging product concepts, aligned with the company’s

strategy and

b) prioritizing and initiating work on new product concepts.

Two Innovation Systems

Vision Roadmaps

Portfolio Strategy Investment Priorities

Yearly Innovation Process Agile Portfolio Process

Two linked systems for product development: a yearly strategic process and an agile portfolio process

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 The outputs from the yearly process become the inputs for an ongoing system that
manages products to completion and launches them into the marketplace. Success-
ful companies take control of their future by creating a tight link between their strate-
gic direction and their product concepts. What is at stake is the future of the compa-
ny’s product portfolio. Often this process includes decisions to stop producing existing
products to free up development and support resources.

The two processes are linked but distinct. Strategy without ongoing management is
ineffective; while managing product concepts without adequate strategy and plan-
ning is often aimless and counterproductive. The system we advocate, with two relat-
ed processes, supports planning with execution and increases the reliability of devel-
oping new products.

Having both a yearly strategic product planning cycle and an ongoing front-end
management process is effective because product innovation and competitive
threats can and do emerge at any time. The two systems together steer your compa-
ny’s intent, while also providing a real time approach to manage investments, ensur-
ing readiness for development.

New Product Development Process (NPD)

The new product development process is the bridge between strategy and execu-
tion. Although many believe that this is primarily product design, it also includes busi-
ness factors that shape the product definition (before product design) such as prod-
uct life cycle profitability (over the whole product lifetime). While NPD tends to focus
on the current product under development, it also should include the impact on simi-
lar products in the product line as part of the product definition.

The most striking product innovations are the result of both strategic planning and
the careful nurturing of innovative product ideas. And yet many organizations not
only fail to have systematic tools or processes for dealing with both aspects of their
future product portfolio – many insist that it is impossible to have any such system.

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 Product Development Strategy:
Connects Vision to Roadmaps

A complete product development strategy links a vision to a strategy that drives budgets, priorities,
roadmaps, and investments, realized through a consistent development process

Conclusion: Five Tips for a Successful Product

Development Strategy
Too long, didn’t read? Here are your five takeaways about product development strat-
egy:

Tip #1: Innovate away from your core product. Consider the total user and customer
experience and find a way to be innovative that has nothing to do with the core prod-
uct, but produces an ancillary benefit. For example, Fedex beat UPS not because of
planes, trains, and trucks. It was package tracking that put them over the edge. You
can dominate markets on the augmented product and not only on the core product.

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 Tip #2: Find applications for existing products in new markets. For example, a gaming
company might find a use for its platform by creating a game-based app that HR
departments could use in screening applicants. Think of products that could succeed
in adjacent markets.

Tip #3: Tie your corporate vision to product strategy, and then to budgets. Create clean
lines of sight between strategy, budgets, technologies, and products. Use road maps
to show the route you will take to execute your product development strategy.

Tip #4: Managing a product portfolio requires a yearly process tied to R&D spending
and budgeting, and an ongoing, day-to-day process, where an empowered team can
push projects ahead until they are fully funded and supported.

Tip #5: Nurturing new product ideas, and loading the pipeline with successful new
products needs the right governance, funding, and a proven process for vetting,
selecting, and executing product development projects.

Product Development Expert

John Carter is a widely respected expert on product development. He is an inventor of
Bose’s Noise Cancelling Headphones and designer of Apple’s New Product Process.
As Founder of TCGen Inc., he has consulted for Abbott, Amazon, Apple, Cisco, HP, IBM,
Mozilla, Roche, and 3M.

CONTACT US... WE'D LOVE TO HEAR FROM YOU.

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