This article is aimed for early-mid career PMs who are trying to flex their strategic thinking muscle. When I started out as a PM, I auto-piloted into execution mode and didn’t know how the product(s) I worked on made strategic sense in long-term. I outline aggregation theory and the power of creating a product ecosystem and provide tactical steps on how to do it for your own team and product.
Standalone products usually work fine. They solve one or two pain points well and…. that’s about it. Most product companies start with a single product — they identify a gap, seek product market fit and ship software. Over time though, to maintain growth, the most successful product companies have built a suite of products that sustain each other in a closed-loop ecosystem and try to capture the entire value chain.
A value chain depicts all the activities and intermediaries involved to create a product or service. The idea being that each step in this chain adds some value, ultimately adding up to a final product (or service) that is offered to the market.
The value chain for a B2C market generally is divided into three groups.
Monopoly over any or all three parts of the value chain is usually the best way to maximize profits for a company. There are two ways to do this — gain horizontal monopoly or backward integration. Horizontal monopolies refer to gaining full (or major) control of one of the three parts (eg. controlling supply).
Backwards vertical integration refers to having control of two of the parts to gain a source of sustained competitive advantage (eg. supply and distribution). In the pre-digital era, backward vertical integration strategy has been a staple business strategy for industries like taxis, hotels and publishing.
Then— Backward Integration: NYC Taxicabs
- NYC taxis integrated their dispatching capabilities (distribution) with control over the medallions (supply). By doing so, they enjoyed absolute monopoly (well, until Uber came long).
In the digital era, integration to control the supply or distribution stopped becoming a source of competitive advantage. The internet made distribution of digital goods virtually free and has commoditized supply. This leaves only one thing in the value chain left to monopolize: Consumers (aka users). Building exclusive relationships with users and having direct access to them is today’s version of vertical integration of the value chain. This is why companies invest heavily in user acquisition.
Now — Forward Integration: Uber
- Uber commoditized supply by attracting drivers to drive on their platform, this gave them full control over the fleet supply
- Then they built exclusive relationships with users by attracting with contactless payments, easy of use and a personal chauffeur experience at the tap of a button
- Uber also controlled distribution by becoming the dispatcher
- In doing so, Uber gained control of supply, distribution AND consumers and the rest is history
Ben Thompson defines aggregation theory as the following¹
Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way.
Previous monopolies like the taxi industry, hoteliers and newspapers have since lost their place in the value chain to companies that were able to forward integrate by building strong, exclusive relationships with users — Uber, Airbnb and Google respectively. These companies built a single product first and attracted millions (billions) of users with a strong value proposition. They then invested to expand their product portfolio to keep the exclusive relationships they had built with their users within their ecosystem. The most successful products are ones that support and uphold other products in their ecosystem. They contribute to the strategic initiatives and growth of each other, moving the company forward as a whole.
A Mini Microsoft Case Study
For instance, Microsoft has transformed itself into a cloud based business model with Azure, Windows and O365 at its core. Almost all of their products sustain one of these three flagship products either directly or indirectly.
Example: Github as a standalone product vs platform player
We all love Github, it made version control easy, enabled easy collaboration on open-source projects and also hosts the code bases of some of the most loved products in the world. It’s great as a standalone product, yes?
Hol’ up though
Github’s real strength is in its platform play. Believe it or not, Github plugs perfectly into the Microsoft ecosystem and contributes directly to the growth of Azure. Microsoft made a brilliant decision by acquiring Github. Pre-acquisition, Microsoft had a set of developer tools and products like Visual Studio and .NET. However, they didn’t really play into each other’s strengths or contribute to their growth in meaningful ways individually.
Github’s addition to the Microsoft product portfolio enabled three things to happen:
- Github Codebases allows devs to get setup really quickly and embrace the device agnostic future of computing → Impact: Builds the reliance on Azure cloud because guess where Codebases is hosted?
- It integrates nicely into VS Code, one of the most popular IDEs around at the time of this writing → Impact: Drives growth and acquisition for VS Code and attracts developers into the Microsoft developer tools ecosystem
- It allows all software and apps built in Github + VS Code to be easily hosted, deployed and monitored in Azure → Impact: Drives growth of Azure services
Github’s addition to the MS portfolio allowed Microsoft to own the entire software life cycle and create a self-enforcing enterprise feedback loop. This is aggregation theory applied in real-life. Cool eh? Microsoft leveraged its existing relationships with customers and monopolized supply (version control, IDE and hosting) by backwards integrating with Github.
- Develop an understanding of your company or product’s value chain. Map out all the activities that are needed to bring your product to market including supply, distribution and access to users
- Balance your short-term product initiatives with the longer term mission of your company. Think about how the product you’re working on fits into your company’s broader product portfolio. If your company only has one product, then revisit this exercise at a later time
- Identify all the players in your value chain that you think you can replace. Think about how your product can backwards integrate or forwards integrate in the value chain to create a moat for your product and your company
Congrats if you made it this far! This is my take on Microsoft’s portfolio. Each blue circle represents a group of products that contribute to one of the three flagship products. For example, the “Hardware” group containing Surface and HoloLens create enterprise lock-in for customers by building a dependency on Windows OS, directly supporting Windows. As you can see, not many products are standalone products!