IN THIS CHAPTER
- Understanding the value of the business case
- Breaking down a business case’s sections
Before you invest a large amount of time and money developing a new product or service it is best to create a cohesive business case. In product management, a business case has two key components: external market factors and internal product factors. In this chapter , we cover the external factors to consider when devising your business case (see Chapter 11 for information on the internal factors). The business case helps gain buy-in from your company’s executives to move forward with developing a product.
Here’s a look at what external factors this chapter discusses:
- Looking outside the company to the problem a customer has
- Seeking the potential opportunity to profitably address the customer’s problem
- Completing a deep analysis of the market and the competition
As part of your purchase, a Business Case template is included with the Product
Management LifeCycle T oolkit (included as a free download with this book; see the
Introduction, page 4, for details). The toolkit includes a template and completed sample
business case. The sample document is written for a fictitious product which is an always-on, super-connected, hands-free phone in your ear . The code name for this product is “EarBud.” We refer to EarBud in this chapter as a way of demonstrating how to put together a business case. Figure 9-1 shows what EarBud looks like.
Making a Business Case for the New
Product or Service
Having a great idea is never enough. You’re always faced with a moment of truth: Can you get your management on board and get them to fund the development? Given that
executives examine opportunities at a pretty high level, you don’t want to bury it in lots of details. You want to clearly tell your story and follow up by convincing management
factually that this idea is a worthwhile investment of time and resources.
Remember Business case or business plan? The tendency is to use these terms
interchangeably . However , they’re two distinct concepts. A business case is made on
the product level and gives the reasons creating or modifying a particular product or
solution is a good idea for the company for strategic and/or profitability reasons. The
business case is intended to get company buy-in and funding for the idea as a first
step along a more complex journey . A business plan is a detailed plan for the overall
company and how it will operate and grow over time.
Recognizing the importance of a business case
The business case is critical in order to get company buy-in. Without it, your company
won’t give you the funding to get the product out the door . To make your business case
easy to comprehend, divide it up by the following three components:
- The story: The why of the problem you’re looking to solve. Why is solving it so important for a particular customer set or sets? T ell this part as clearly and as simply as possible. Forget fancy words, and don’t go on and on.
- The numbers: The evidence that supports your story . It’s nice that you want to solve a problem for somebody . In the numbers portion, you bring the proof — for example, you have this many potential customers, and with a certain amount of budget an expected level of profitability . Again, simplify . You may have a huge spreadsheet of numbers as background material, but focus clearly on the ones that are most important to support your story .
- The downside: These are the risks and tradeoffs that the company need to be aware of .Here’s a tip from human psychology: If you admit to the weak parts of your business case, the people who hear you will trust you more. Be realistic; tell your audience about the potential downsides, and you’ll actually be better off .
Outlining your business case
Your business case has many components. T able 9-1 briefly outlines the main headings, and we give a more detailed breakdown of each piece of the business case puzzle throughout in this chapter .
TABLE 9-1 A Typical Business Case Outline
|Executive summary||This piece is written last but placed first in the document. It summarizes the entire business case.|
|What is the problem, and how can your company take best advantage of solving it?|
|Market landscape||What is happening in the market as a whole that makes you believe solving this problem is the best use of company time and resources?|
|What is happening with competition in your chosen market that makes you believe solving this problem will allow your company to compete and win?|
|How much money and other resources does completing the project take?|
|Risk analysis||What particular risks do you see, and how can you mitigate them?|
|Assumptions||Are you making key underlying assumptions about the market, economy , and/or internal situation?|
|Open issues||Does anything (such as a key person, a key relationship, or an unknown technological advance) remain up in the air?|
|What is the bottom line? Why should the company say yes?|
Just because a business case has a lot of pieces doesn’t mean it needs to be long.
Focus on what is important. Don’t repeat yourself needlessly . When you’re finished
writing, put it away for 24 hours and then reread it from the beginning to find any
repetition or extraneous information that you can eliminate. Make your goal to cut 30
percent of the content from your completed draft so that you hone in on only the most
critical and necessary parts.
Gathering the necessary information
To gather the necessary information for each of the sections of the business case template you’ll do market and competitive research (in many cases by the time you are writing the business case you have already completed these). See Chapter 6 for details on how to do these. One good way to make sure that your business case has enough detail and information is to ask your manager and others in your company what the executives expect to see in a typical business case that is presented to them. Check this against the sections of the business case template and add anything that is specific to your company and the management’s expectations.
Putting It All Together: Documenting
Your Business Case
The following sections contain the main components of a business case as outlined in Table 9-1 earlier in the chapter . Follow the guidelines in each section to create a successful business case.
Part I: Executive summary
Though the executive summary is the first section of the business case, you write it last,
after you know what information you’re summarizing. The goal is to include the following
content: problem statement, vision, project evaluation, risks, return on investment(ROI),
and recommendation. The summary should be approximately one page — two pages at
most — for a completely new idea. See the sidebar “For Example: Executive Summary ” in this chapter for a sample of an executive summary . Here are three reasons for making the executive summary short and to the point:
- Executives won’t read anything that is too lengthy .
- When you present the business case for approval, you should already have pre-sold the idea within the organization.
- The details appear in later sections of the business case if questions come up or anyone wants to drill down on the information.
Part II: Problem and opportunity
The problem and opportunity section of the summary addresses what the customer
problem is and how your company would solve it. T able 9-2 breaks down the different
sections of Part II of your business case.
TABLE 9-2 Problem and Opportunity Questions
|Section||Key questions to answer|
|Problem statement||What problem does a particular customer have? This section can easily be a few paragraphs or a few pages. A lot depends on how complex a problem you’re trying to describe.|
|Vision of the solution||What is your vision of a possible solution? Why is it so great — a compelling must-have for your potential customers? Does your vision have any downsides? Include analogies and similar examples if doing so helps build a strong and irresistible vision.|
|Current alternatives||What else are people doing today or planning to do at the time the product is available?|
What do customers do today that you can do better with your proposed solution?
and business value
|Is the opportunity one that aligns with the overall company or divisional goals and adds business value to the company within that context?|
|Goals and objectives|
|What are the numbers that let you know you’ve succeeded or are on track to succeed?|
|When must this product be delivered in order to capture the market and maximize profitability? Why should the company proceed immediately? What are the impacts of|
delaying moving forward?
|Exit strategy||If it’s a temporary opportunity , how do you plan on leaving the market?|
FOR EXAMPLE: EXECUTIVE SUMMARY
Based on the EarBud example used in this chapter , the following is a very abbreviated executive summary . You can see how quickly the opportunity is discussed and how the final request is to the point.
“Our company believes that the technology exists to create a discrete wearable audio network access device for many unmet needs. Such needs include completely hands-free cellular phone use as well as the ability to listen to audio information (music, audio casts, directions, and so on). The solution we propose solves many of the challenges by being always on and always accessible.
Our company can best address this market because of our portfolio of patents, especially in the long-distance Wi-Fi space, which form a barrier to entry for other companies to compete. Our company also has unique engineering expertise that will allow us to take advantage of this market more quickly than
our competitors. Though we have engineering expertise, we would need to rapidly develop expertise in marketing and sales to reach customer segments that we don’t currently sell to.
This is an entirely new market that will develop over the next 5 to 10 years and that will allow us to target consumers as well as specialized B2B markets and government first responders and armed forces.
The potential for this product is a $200 billion business with 25 percent gross margins. We expect to build to a market share of 10 percent. The initial investment is $250 million in development with a further $250 million investment in marketing and sales. The ROI is 10,000 percent.
There are two potential options.
- Proceed with the initial planning of the project for two months. This requires an
investment of $100,000 to further understand the opportunity , develop some initial
working technology , determine in-depth market requirements, and create the go-to-market plan.
- Proceed with the full development proposal for one year at a cost of $250 million with quarterly progress reviews. The result of this work will be a fully functional product that is ready to launch in the market, and the $500 million will adequately fund all development, marketing, sales, and other activities.
The team’s recommendation is to proceed with option 2. Given that many other companies are likely to be working on this technology and on similar products, we believe that the window of opportunity for delivering this product and capturing the market is within the next two years, and proceeding with full
development will give our company the best chance of success.”
Part III: Market landscape
The Part III section contains the following three main components:
- Overview: Provide a general overview of the market. Is it a growth industry , or is it an established market that is growing more slowly? Include a brief analysis of where you believe your product’s technology is in its adoption cycle. List the market size, growth, and future projections. Identify any key data points about the market in general. What is the total size of your market? Provide an estimate of the total available market (TAM) in revenue terms if available (total number of potential customers × total number of units per customer × price).
- Trends: What are the top three to five trends you foresee in the industry , both short term and long term? Identify and describe the market growth, competitive situation, trends in consumer or business preferences, and trends in technology in your targeted (and other related) market segments.
- Barriers to entry: Common barriers to entry are high capital costs, high marketing costs, shipping costs, tariff barriers and quotas, brand recognition, consumer acceptance, network effect, vertical integration, training and skills, unique technology , government regulation and patents, unions, and so on. What barriers to entry do you face entering this market?
In the competitive landscape segment of your business case, you answer the
question “What barriers do competitors face that we can put in their way?”
Part IV : Competitive landscape
The competitive landscape section describes who you believe your main competitors will be. It begins by describing what your organization is all about and then provides details about your competitors and their products.
In the first part of the competitive landscape, the focus is on the alignment between the
company and the proposed product.
Begin by defining what your organization is all about. Identify the following factors
regarding your company:
- Goals: Goals are destinations. Where do you want your business to be? One example of a goal is to have a healthy , successful company that is a leader in customer service and has a loyal customer following.
- Objectives: Objectives are progress markers along the way to goal achievement.Examples of objectives tied to the goals in the preceding bullet are annual sales targets and some specific measures of customer satisfaction.
- Values: What is important to your company? Certain products just don’t fit with the company values, and you need to ensure that your product fits within that scope.
- Strengths: In what areas is your company particularly strong? Are there areas that your company excels in that other companies would find hard to match?
- Core competencies: What are the main things that your company does very well? What defining capability or advantage distinguishes you from other companies?
- Barriers: What existing barriers to entry work for the company and against the competition (or can be reinforced to do so)? What new barriers can your company create? Examples include cost of switching from one product to another when the new product is from a new supplier , customer loyalty , control of resources, economy of scale, pricing, patents, network effect, vertical integration, and so on.
In this section of the competitive landscape, you answer the following questions: What
companies will you be competing against? What are their attributes? Will they compete
with you across the board or just for certain products, for certain customers, or in certain
locations? Will you have important indirect competitors? (For example, video rental stores used to compete with theaters, although they’re different types of businesses.)
If you’ve created competitive analysis using SWOT or Porter’s five forces analysis
(see Chapter 6 ), include it in the competitive landscape section.
Compare the top three to five competing products. T o retain the focus on the customer ,
include the value or benefit to the customer for each feature listed. In Figure 9-2 , you can see a simplified feature matrix comparison.
Don’t make the mistake of comparing your future product to current competitive
products already being shipped. You need to project where you think your
competitor’s future products may be when you ship.
Describe how the company is doing in the context of competitors, life cycle, and from the
If a product history exists, bring this information to the attention of the decision makers
here. How has the company tried to address this opportunity to date? What has succeeded, and what has failed? Why?
Part V : Financial and resource impact analysis
Part V covers the financial and resource impact that bringing your product to market will
have on the company . This includes how much it will cost, what the revenues and projected profits will be, and what resources will be required.
At this point, the rubber hits the numerical road: Will the product make money , and how
long will making the company’s investment back take? Rather than provide all the details in the summary , cherry-pick the ones that tell the clearest picture and put them here. A simple table or clear graph works best. If necessary , use arrows to point out the
information you want to highlight.
The metrics that you will want to include are the following:
- Expected revenues: How much money do you expect to make by selling this product(price/unit × number of expected units to be sold)? Include a one, three and five-year estimate.
- Expected profits: How much profit will you make by selling this product (profit per unit × number of expected units to be sold)? Include a one-, three-, and five-year estimate.
- Return on investment (ROI): How much profit will the company make if it invests to bring the product to market. For example, if the product costs $5 million to develop and market during the first year and you expect to make $20 million in profit, the ROI would be $20 million/$5 million = 400%.
- Payback time frame: How long will it take for the profits to pay back the initial investment. Using the same example, a $5 million investment making $20 million in profits the first year ($5 million every three months) would have a payback of three months.
- Break-even: How many units of the product must be sold in order to break even and pay back the initial investment? If the profit on each unit of the product is $50,000 and your initial investment is $5 million, then $5 million/$50,000 = 100 units. In other words, once you sell the first 100 units you have paid back the entire initial investment.
By providing the financial information at this level of detail, your executives can very
quickly see what the risk and reward are for the investment. If they want more details
about the assumptions and financials, they can read farther into the document.
Summarize how the project would impact the use of resources (especially head count) at the company . Include all groups that are impacted, such as development, sales, and
support. What resources would be required from the various groups, such as development, support, marketing, and so on? What is the availability of those resources?
No, we aren’t talking about eating people! Cannibalization for product managers describes a project’s possible impact on sales of , or its replacement of , the company’s existing products. For example, the Apple iPhone cannibalized sales of the iPod because many customers who would’ve purchased an iPod instead purchased the iPhone, which offered the same (and more) functionality . Explain the transition plans between existing products and your new product in general terms and specifically in your financial analysis.
Estimate the required costs to adequately build and go to market with this project. Which internal organizations can the company approach to help fund this service effort? Can it access external financial resources such as other companies that might want to form a strategic partnership? The budget should include all sales, promotional, and marketing communication deliverables.
Part of your calculations should include the human cost of funding, often referred to as
fully loaded head count . In addition to the cost of an employee’s salary , additional taxes, benefits, and even overhead for desk space in the office come into play . A good rule of thumb for calculating this number is to add 25 percent to the average salary . For example, a fully loaded engineer with a $200,000 per year salary actually costs the company $250,000.
Part VI: Risks
Identify the key barriers that could impede the progress of the project in terms of
development and bringing it to market. How could the risks affect the company? For each risk, provide an estimate of whether the risk is low , medium, or high. Also include
recommendations for reducing the risk. For example, if developing your product is highly
dependent on one of your engineers who has deep expertise in an area that no one else in the world does, you might recommend providing a financial incentive to ensure the
engineer stays on until the product ships. Keep your answers brief , but make sure you
clearly state the risks.
Parts VII through XI: Other sections
Here are some other sections that you can include in your business case for further
explanations. Pick and choose from these as needed based on what your executive
management is likely to want included.
- Assumptions: A business case is about predicting the future, so unless you have a time machine, you have to make a number of assumptions while writing it. Record your assumptions in this section and be prepared to defend them.
- Open issues: Track any open issues that have come up so far in the project. When the issues are resolved, document it. Assign any unresolved issues to a responsible party .You’ll likely have a number of open issues, which tend to get resolved as the project proceeds. Identify where in the process these issues need to be resolved.
- Conclusions and recommendations: State your conclusion and justification of the recommendation, including the likely effect of following your proposals. What are the pros and cons? Describe alternative options as well as what may happen if the company pursues this opportunity .
Also identify what will happen if you don’t go forward with the project. Every
good executive will ask the question “What if we don’t do this?” at least once. Be
prepared to answer it clearly and coherently .
- Governance: Governance is the process for getting approval and moving forward; it includes who needs to be informed of and approve the decisions. Describe the governance processes and structures within the company . What has happened up to this point, and what are the next steps after a decision is made? Be brief .
List the roles and names of the contributors and key reviewers of this document. Some
companies require many signatures and others very few . Some transfer a document
electronically , while some create a stapled document that makes the rounds. Keep track of getting full sign-off from everyone that is required so that the project isn’t delayed.
- Exhibits and appendices: This is the place for additional or more detailed information that details the core of your argument. Other pieces common to this section are a glossary , profit and loss projection (see Figure 9-3 ), any supporting data, and external references.
BASICS OF PROFIT AND LOSS
As a product manager , you aren’t expected to be a financial whiz. If you are, congratulations. If you haven’t had much exposure to financial calculations, check out the following descriptors of a profit and loss (P&L) statement:
- P&L statements show projected revenues, expenses and profits over time. Typically , a P&L is annual, but in faster moving businesses, it may be quarterly or even monthly
- Revenue = Number of units × price.
- COGS (Cost of good sold) = Number of units × cost per unit.
- Revenue – COGS = Gross Margin (GM).
- Sometimes you’ll be asked for a gross margin percentage (GM%), which you calculate by dividing the gross margin dollars by total revenue. Gross margins vary widely by industry as well as by where a product is in the product life cycle. For example, in a mature market with many competitors, the gross margins may be lower due to price competition.
- R&D = Research and development: your product development costs are here.
- Sales and mkt = Sales and marketing: The cost for product management is also usually included here.
- G&A = General and administrative: The cost for HR, operations, buildings and support and anything else is here.
- Expenses = R&D + Sales and mkt + G&A.
- Operating Income = GM – Expenses.
- Net margin (NM) percent is another calculation that you may be asked for . NM percent = operating income ÷ revenue, and it’s a measure of what the company really makes on the product in the end.
- You may have questions about the cost per unit you should use in the P&L statement. Your operations and finance counterparts should be able to give you a reasonable estimate of the cost. Cost is never a hard-and-fast a calculation due to a variety of factors. Exchange rates, preplanned component cost decreases, and manufacturing changes that add and remove cost make this figure more of a moving target than many people realize. Find a method of getting a number that you believe is reasonable and that your finance people and executives will see as a good estimate and move on without trying to find a perfect answer for costs.
Work on getting better at reading P&L statements. Quickly calculate the gross margin and net margin percents. What is the average cost per unit sold? What does the level of sales and marketing expenditure tell you about how hard it is to sell this product? Compare different P&L statements from different companies to get some practice.
Getting buy-in for your business case
When the writing is done and you have polished the writing to clarify each part of your
business case story , make sure everyone who had input has reviewed it and provided
feedback. Your likely next step is to create a short, focused, and compelling presentation to tell your story to your executives to get the funding. The presentation should include
everything in your executive summary of the business case. The executives make many
decisions every day , so you don’t want to make it hard for them to figure out what’s going on. The clearer your story is, the more likely your business case is to be approved.