Soundview Live presents Geoffrey Moore
Discussing: “How to Achieve Escape Velocity”
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Interviewer:
Hello and welcome to Soundview Live, an interactive conversation that puts to you in
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Now for today’s guest. There is no greater challenge for businesses than creating
sustained success. Our guest is with us today to help increase your company’s ability to
orchestrate its own continued success. He’s the chairman emeritus of three consulting
firms: the Chasm Group, the Chasm Institute, and TCG Advisors. He’s also a venture
partner with Mohr Davidow Ventures. Soundview is very pleased to welcome the bestselling author of Crossing the Chasm and Escape Velocity, Mr. Geoffrey A. Moore. Mr.
Moore, welcome to Soundview Live.
Interviewee:
Well thank you Andrew. It’s a pleasure to be here. So I guess I should just takeover from
here?
Interviewer:
Absolutely.
Interviewee:
Okie dokie. Well let’s get going with this.
As Andrew mentioned, Escape Velocity is a book that just came out and the purpose of
today’s session is to kind of give you a chalk talk about its content. As you can see from
the slide it’s part of a series of books that I’ve been writing about the technology sector
going back to 1990, and just I just wanted to make a point why another book now if you
will. So if you look at the old tech challenge and the ones drove Crossing Chasm, Inside
the Tornado, those kinds of books, the key element in the early 90s was technology was
still an emerging sector and we were trying to leverage disruptive innovations, we’re
trying to break into developed markets and the challenge was captured in something
called the Technology Adaption Lifecycle and Crossing the Chasm was kind of the
flagship book of that series if you will.
What happened since then and certainly in the most certain decade is that technology has
become very mainstreamed for a wide slots of sectors not just its own sector but many
other sectors as well. Now the challenge is we have tech companies who are very well
established, part of the Fortune 500, part of the Fortune 50. The most valued company in
the world is Apple, which is a tech companies as you well know. So the challenge then
becomes how do you break out of developed markets meaning how do you transcend the
franchise as they got you there in order to participate in the next generation of growth.
Back in 90s was a very good book written about this challenge by a guy named Clay
Christensen called The Innovator’s Dilemma and that it’s been the perennial challenge of
this decade and Escape Velocity seeks to make a contribution to solving that and they
intend to give you and your team a vocabulary for really sizing up what’s holding you
back and where we do we go from here.
So if you look at what’s holding you back, there are four things I think that we really
have to focus on. The first one I thing has gotten a good amount attention but the other
three have not. So just to recap The Innovator’s Dilemma, the problem with The
Innovator’s Dilemma is when you’re an established franchise your very best customers
want you to stay being who you’ve always been and they want more of whatever it is that
you’ve always done. They don’t want necessarily something new form you because from
their point of view you’re doing a great job. The challenge is that the world moves on and
if you don’t move on to keep up with the new categories as they emerge eventually you
become marginalized and eventually you will go away. So that’s problem number one.
Problem number two though is something we call the asymmetry of risk. People often
say, “The problem with big companies are so risk averse.” Well the reason they’re risk
averse is that the bigger you are the more you have to lose and the less you have to win.
And so there’s just a fundamental asymmetry on things which causes larger companies to
be more conservative, the world kind of wants them to be more conservative but at the
end if you’re too conservative you get stuck in the past and you can’t move on.
We seek up means like HP right now who are in the news this morning struggling with
that. We’ve seen Yahoo struggled with it. We’ve seen many companies including Apple,
by the way, 10 years ago struggling with that and IBM five years before that so
asymmetry of risk, big problem.
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The third one and the one that I find most insidious is something we called the pragmatics
of annual planning. That is every year when you start the annual planning process
typically the CFO circulates last’s year operating plan, circles the fourth quarter and says,
“Why don’t you multiply your fourth quarter numbers by four and tell us what you need
in order to make that happen next year.” That sort of thing. And what that does is that
immediately confers on the legacy business kind of a first come, first served position and
the resource allocation line and that causes next generation businesses to get marginalized
even at the starting gate so we have to do some things to readjust the pragmatics of
annual planning.
And then the final things is if the dynamics of contemporary financial markets, which
there’s just such a strong emphasis on quarterly performance and if the margin quarterly
performance tends to lock you into your path because your best performing, most reliable
cash cows if you will are your past businesses and there’s always some sort of a J Curve
involved in going down before you go up with a new business and so there’s a strong
disincentive to play both hands equally and so there’s a tendency to discriminate against
the future in order to achieve the immediate present.
So I don’t think any of these are shockingly new but the combination of the four of them
has been incredibly powerful in terms of keeping people in their path and trapping them
and we’ve seen up to 45 companies in the high tech sector since the time I started writing
books. They were in the Fortune 500 that no longer exists. That’s a pretty dramatic
testimony of the power of these issues.
If you were going to say, “Well how would you take these things on? So what does it
takes to break out of the past to free your company’s future from the pull of the past?”
Well, in looking at this over the last decade, the conclusion that my colleagues and I have
come to is it takes the focus on power particularly in distinction with performance. So the
idea here is we have lots of vocabulary and lots of metrics and lots of attention paid on
performance but performance consumes power and that’s you actually consume your
power in order to achieve performance and so therefore you have to continually invest in
sources of power in order to deliver future growth, but to do that you have to defer
performance.
Some amount of performance you have to actually take off the table and invest in power
in order to create that next generation position that turns out to be challenging in
performance oriented organizations with short term metrics and emphasis. So put power
before performance for breakout growth. That in turn means you have to put leadership
before management. Management exploits the current assets to deliver performance in
the current term. That’s incredibly important.
Leadership invests asset in the future to develop power so the leadership initiatives and
the management initiatives are kind of a Yin and a Yang. Sometimes we say leadership is
more important than management. That’s not true but it is important as a balancing
function and you need both of them. The tendency in larger and larger organizations is to
spend more and more time on management because it’s more complex, it’s more
challenging. And therefore to get leadership become marginalized to a few days at the
strategic offsite that will not work to solve this problem.
In fragment it is a problem with metrics that you’ll look at more closely in a minute,
which is until you reach a tipping point with any breakout growth initiative, there is no
point in trying to measure in terms of performance metrics that we normally use whether
it’s return on investment or return on return on invested capital, the invested rate of
return. But what you really should be pushing forward is did we get past the tipping point
and we’ll talk a lot about the tipping point at the end and those of you who read Malcolm
Gladwell’s book on that is going to appreciate the power of tipping points and in this case
they’re fundamental.
So if we look ahead and if we say we’re going to talk about power the interesting thing is
we don’t have a very good vocabulary if we’re talking about power. We have a very good
vocabulary for talking about performance but when we come to talk about power it’s a
little bit sketchy. So the intent of the book is to lay out in five chapters five hierarchy of
powers from category power to company power to market power, offer power and
execution power.
In each case to provide models and frameworks that let you isolate that type of power
from the other four in order to figure out where do we stand relative to that power. One of
the things we discovered in our strategy practice and consulting is that we tend to mix
powers just all over the place like goolas[ph] as it were and we get very confused and we
talk pass each other. So by isolating the types of powers you get to be able to call each
one out separately. What you notice when you do this kind of work is that when
marketplaces are unstable the power issues tend to be the one – important ones tend to be
the one at the top of the hierarchy.
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So what’s going on in the category? Which companies are kind rising or falling in terms
of their relative power in the ecosystem or the value chain? And which markets are the
ones that are built by the market for these changes? Offers and executions are less
important because they’re either – you’re either talking about legacy offers, which are
probably not relevant to the future, or you’re talking about brand new offers, which
haven’t prove themselves. So you tend to – the market is more as to vision than execution
at that time.
By the contrast, we go to the bottom of the hierarchy. You say, “Look, in a stable market
where companies have stable positions it really is about execution.” And then the issues
around market power, offer power and execution power, the bottom three become the
really key ones because category and company are pretty much taken as given. So then
the questions are the markets have the margin that could be won or lost with maybe the
next generation of offers and how you execute the big deal. Strategy is in the middle,
strategy kind of plays in the middle.
So what we’re going to do in the next few slides is we’re going to go through the
hierarchy of powers. I’m just going to share with you a few frameworks with respect to
each one to give you a sense of the kind of material that’s in the book and the kind of
conversations that you and your colleagues can have leveraging these models. The higher
score to beat is to actually have separate conversations about each of these five powers is
the kind of a higher order bit of the book.
Okay. Well let’s move to the first of the five powers, which is category power. Now
category power means our company has a major franchise in a growth category and we’re
kind of – our company’s growth, we’re achieving breakout growth just by being in the
category. By being in the category of social networking, Facebook and LinkedIn and
other folks have had a lot of growth going forward. Being in the category of cloud
computing is a big thing in tech right now. Whereas being in the category of PC desktops
not so much growth.
So if you look at that issue you say, “What is the model for thinking about ‘where is our
portfolio businesses relative to category power?’?” We use this model called the
Category Maturity Lifecycle and basically what it says is at the front end of markets, just
when disruptive innovation come in, there’s a technology adaption lifecycle. This is the
focus of Crossing the Chasm and Inside the Tornado and the market goes through a set of
gyrations to figure out will the new technology get adapted, and if so, who will be the
market leaders.
And they it’s followed by a period of cyclical growth, which marked as B on this market.
The adaption part is probably over but we’re still growing heavily year after year after
year because the market hasn’t absorbed all of the impact of the new technology. That’s
the best time to be involved in a category. It’s growing well and everybody kind of does
well during that period.
Eventually the category begins to level off and it goes into a mature market state marked
by C. We call it sometimes the indefinitely elastic middle because this could go on for
decades. The automobile industry has been in probably its 8th decade of mature market.
But mature market has cyclical growth. They typically grow at less than 10% and kind of
oscillate up and down and if down, usually it’s one or two percent, and up it’s usually
eight or nine percent but they’re kind of just moving along if you will, stable markets, but
this is where most of the money in the world is actually made and where most of the jobs
in the world actually are funded out of that area C.
And then as new technologies really begin to displace older technologies you watch the
declining power – we’re watching the declining power of bookstores, for example right
now and paper-based books right now. And then eventually you have an end of life
situation as we’ve seen with say photography and the challenges that Kodak and Polaroid
and companies like that have had.
So that’s the portfolio analysis model. It doesn’t take a genius to realize. Geez, we’d like
to make sure we have really strong mature market franchises kind of the cash cow idea
and then we’d like to have power at the beginning. We’d like to have franchises in B and
we better watch out for our franchises in D as we go along. So okay, fine. That doesn’t
seem too hard to ask. Why is that so hard to do?
Well in spending time with Cisco and HP and Microsoft and SAP and companies are
very large companies. We realized that there is a challenge built in to the investment
analysis in these companies that is causing them to misallocate resources against a very
small set of opportunities. Here’s how it work.
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The model that really do this to our attention was called The Three Horizons. It was
developed by some folks at McKenzie and basically what it said was the way in which
large corporations deal with future investment should be broken up into three chunks.
There should be one chunk, which is what are we doing to essentially make the current
fiscal year? The return on investment will be this year. Let’s call it Horizon One. It’s
designed to meet our performance commitment.
There’s a second chunk which is what are we doing to bring on our next generation of
franchises to get them into that very valuable sort of B section of the category of material
lifecycle. What do we do in there? And then the third one is what are we doing for the far
future in terms of creating options for future big category businesses?
And the wrap on big companies is they do well on Horizon One and then don’t do well
on Horizon Two and Three, but that’s not what we found. We found that big companies
do well on Horizon One. They also do very well on Horizon Three because Horizon
Three is primarily an R&D investment and large corporations do create surplus to put
into R&D and their incentive to do so by our tax system and whatnot. That is not the
problem. There’s lots of technology innovations and product innovations going on.
The problem is Horizon Two and specifically the problem is competing for the sales and
services and marketing resources, what we call the Go to Market capability of the
company, against Horizon One because the people that – you need to build your Horizon
Two franchise to take it from an exciting but very small not yet material business into a
large vibrant franchise are the very same people that you used to win your Horizon One
performance business.
At the margin, we tend to compensate our sales and services and marketing organizations
in terms of their Horizon One performance, so with the margin they tend to shrink back
from the Horizon Two commitments. We also tend to give them too many Horizon Two
commitments so at the end of the day they say, “Look, I just can’t do all these stuff.” And
so part of what we have to learn is to say Horizon Two is a high risk moment of
investment, we need to have far fewer Horizon Two initiatives even though out path’s
failure rate might want us to keep more. You say, no, if you’re going to get the feels real
attention you have to have fewer.
Apple, for example, this year in the last decade did one at a time. It did the iPod all the
way through until it did the iPhone. It did the iPhone all the way through until it did the
iPad. So one at the time, single file and then just really do demand that the field connect
up with a new initiative and that may require you to fix compensation programs, fix other
things and among other things, it requires you to fix metric.
So again, I’m kind of just giving you a sort of quick going through some of these models
but hopefully if they resonate you can come back to these materials or the book and dig
in a little deeper. But here’s kind of one of the things, which is the core of the Horizon
Two challenge. We’re very good at running Horizon One businesses because look at
those things key performance indicators. They’re very, very familiar. They’re building to
our ERP systems; we get feedback on them, that’s not a problem statement. I mean it’s a
challenge. It’s real work but it’s a work that we understand.
Similarly if you go over to the Horizon Three side, this also – same brand customers with
big deals, with big partners, et cetera that also can get the attention of large corporations
in the field because it kind of a flagship heroic stuff. But when you’re trying to build a
Horizon Two business, what you’re trying to do we say is become a material business.
What that means is you’ve go to go from maybe a $10 to $50 million business to $100 to
$500 million business probably to $1 to $2 billion business. At some point, you’re
probably got to have to do some acquisitions to get to that boat but to get big enough to
acquire if you will to be hosting acquisitions, you’ve got to win some markets, defend it
and you go to win them now, and it’s a tipping point exercise.
What you do is you pick markets that are in transition, you focus intensely on those
markets, you try to speed up the sales velocity, you build strong deals threshold, you’re
going to cut capture segment share and the goal is I need to take my target markets to
their tipping point to where they actually pull us in because they’ve realized we’re new
sheriff in town. In becoming the new sheriff in town across the entire world takes too
long but if becoming the new sheriff in town in a specific target market is well within the
capability of any Fortune 500 company and that’s what you’re going to focus on.
But if you look at compensation plans, if you look at the KPI indicators in our report,
they tend to make it very hard to see that set of metrics so you have to again do special
work to make that work and that’s part of the emphasis in the book. So if you have or
what I would take away from this section is, if you have Horizon Two business, you’re
trying to make material in your company right now. First of all, clear the decks. Don’t
have two or three or four, five at the same time. Put them in some sort of serial order.
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Whatever is the one who is first in the queue, think about it like metering lanes coming
on to a freeway, get that car unto the freeway and do whatever it takes to get it to the
tipping point. That’s sort of idea number one. So okay, well, that’s the category of power
thing. We want to get to these good categories. It’s really important for our company. Our
shareholders want us to get there. Okay, I got it.
So now let’s go down a level and talk about company power. The deal here is how
powerful is your company? The way you measure the power of a company is by the
behavior of the other companies in your ecosystem. If they go out of their way to send
you business, then you are a power player in that ecosystem. If you have to call them and
kind of go begging, then you are not. And it’s not a question of feeling bad or good. At
different points in your history, you’ll be powerful in some ecosystems and not powerful
in other ones. The first thing to do is to figure out realistically how much power do we
really have and to build strategies and tactics that are suitable and appropriate for that
degree of power.
How do you think about power in an ecosystem? In particular, how do you think about
changing your power or achieving a new level of power? Normally, in any ecosystem,
your role is – I’m sort of modeling with this yellow circle here, you and several other
competitors are kind of identified at a particular role in the ecosystem. You might be a
manufacturer, you might be a retailer, you might be a service provider, you might be a
sales channel, whatever you are. People in your ecosystem see you and your competitive
set as a somewhat substitutable, interchangeable group and so they tend to bargain with
you and they tend to hold you accountable for best price because they’ll pick one of your
competitors if you don’t give them the best price.
As long as you’re in that set and in that role, basically, your bargaining power is
[moderate][0:21:56]. But if you can take an offer and drive it outside the old circle and
sot of redefine the picking order by setting a new standard, then all of a sudden you don’t
have this competitive set to bargaining both anchors on you and you can charge your
prices. We talked about Apple a lot because they did this not once, not twice, three
separate times in one decade. Steve Jobs lead the company to do that. And to redefine the
music and then to redefined the smart phone and then to redefine the whole portable
computing experience which now we’re calling tablet. So it can be done now.
I think once in a decade would be fabulous. I think three in a decade is a world class
probably never to be repeated but that’s the sort of thing that’s involved. Now, what does
it take to actually do that? You have to create really unmatchable capability. In some
vector of innovation that really your competitors either will not or cannot follow. And
that means you’ve got to leverage your crown jewels.
Now, my belief is that most large companies have the capability of doing this but
probably don’t have the will because it’s such an asymmetrical bet. You really have to
throw the rudder way over to the right or way over to the left and that’s very, very
challenging for large institutions. It’s no accident that the people we tend to praise in this
role are founders, CEOs, who have enormous personal power. So in addition to Steve
Jobs, you’d look at Larry Ellison, you’d look at Jeff Bezos, you’d look at Larry and
Sergey at Google, you’d look at Mark Zuckerberg at Facebook or that’s pretty early for
those guys but you say these are the guys that can do it. It’s much harder to manage your
way. In fact, I would argue it’s impossible to manage your way out of the old circle.
But periodically, you can lead your way out. Now, if you’re going to do this, it’s
important that you understand crown jewels. And to understand crown jewels I have two
more slides here. The first one is to understand at the margin which of these two power
positions is the best fit for your company. All categories have both a complex systems
and a volume operations expression. The volume operation once tends to be the step that
the technology that’s a little bit over, it’s commoditized and it’s often moving towards the
consumer. The complex system tends to be the next generation, tends to be more
complex, needs more integration, et cetera.
And there are two ways in which to become a Fortune 500 company that is sustainable.
One is to say I have to be essentially a B to B model in power position one and I do – I
have hundreds of thousands of customers but they pay me millions of dollars a year, tens
of millions of dollars a year. And the other power position I have billions, maybe tens of
millions so maybe even hundreds of millions of customers. They’re paying me $8 a
month but in either case you should be very powerful. Now, their challenge is why can’t I
be both? And when you look at the next slide you can kind of see why it is so hard to be
both. So if you look at the kind of crown jewels that make a complex systems company
great, the kind of thing that they can get outside, be able to circle it.
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It’s things like systems architecture, end-to-end integration, proprietary technology,
domain expertise, project management, ecosystem relationships, all that kind of stuff,
relationship, marketing is part of that whole thing. And you can see that yeah that makes
sense. That sounds like Goldman Sachs, that sounds like IBM, that sounds like Boeing, it
sounds like Cisco, it sounds like Accenture, it sounds like really you know, the
companies that are on that side, Cognizant, lots of interesting companies. You go to the
other side, the product design, user experience, price point, particularly hitting up
compelling consumer price point, brand image, ease to support, viral appeal, I mean it’s a
very recognizable cluster.
It’s not just Apple, it’s Facebook, it’s LinkedIn, it’s YouTube, it’s all these exciting
companies and the consumer package goods come. It’s the Nike shoes and folks like that,
totally different from the one on the left and it is not that the very large companies will
have some of each but there’s going to be what we call a stronger hand and knowing
which is your stronger hand, you can’t make one of those break up bets on your weaker
hand. You must be playing to your stronger hand when you’re doing it and then you have
to make very asymmetrical bets around one particular sort of vector of innovation in your
sweet spot as it works.
So again, this is a vocabulary for you and your colleagues to talk with each other about
where are we making our investments but you often discover in well managed
organizations is you’re splitting your resource allocations across both sides, you’re being
fair, you’re being equal, you’re being kind of socially acceptable and you’re being
strategically weak because there was a famous memo about Yahoo a few years ago called
the Peanut Butter Manifesto where an executive said, “Look, with peanut butter R&D
across everything, we never get deep into anything.”
The breakout growth initiative around company power is just the opposite. As long as
you’re doing, as long as you’re being reasonable, it’s pretty easy for the other competitors
and your competitive set to keep with you. The people that actually break out of the
yellow circle are the people who at one point or another in their history become
unreasonable and do things that their competitors look at and say, “I can match it but I
don’t even think I want to match it. I’m going to let that person go,” and that’s when this
sort of stuff happen.
Okay, so that’s sort of like what a conversation around company power may look like.
Now, as you’ve been noticing, these are pretty high level conversations. These are
conversations that typically take place in boardroom. They take place in the executive
strategic offsite, the staff meetings, take it a little bit down to the middle of the
organization but mostly happened towards the upper middle and the top. As we’re going
to work down the rest of the hierarchy of powers, you’re going to see we’re getting
deeper into the organization where more of the middle management of the organization
has the power to make the difference so keep your eye as we go forward.
So next one down is market power. So market power is the way you know you have
market power is: Do your customers actively go out of their way to send you business?
Not just their own business, but refer new customers to you. Do you have that kind of
customer loyalty? And again, if you have that kind of power, your cost of sales goes way
down, your cost to marketing goes way down, your competitors tend to frankly leave the
market because they realize it’s an unfair fight and you get even more advantage and so
winning market segment power is a critical sort of coming of age point for emerging
companies that Horizon Two strategy that we look at those metrics, we look at all about
getting market power very, very quickly. And so at looking at getting the market power
conversation going in your company is really important.
Now historically, that conversation has been built around the complex systems model.
This has came out Crossing the Chasm and Inside the Tornado and basically, what this
model says is rather than try to knock down all the pins all at once, pick a head pin. Pick
a target customer, meaning a particular market segment, customers that talk to each other
when they’re making their buying decisions and pick a particular used case, a compelling
reason to buy and the whole product that fulfills that compelling reason to buy for the
target customer. Just pick one. So I’m going to go after the problem of new drug approval
and the pharmaceutical organization where they document management of whole
products. That’s what documenting did in the early 1990s, that kind of stuff.
Then what you say is once you knock one of those pins over, whatever is the right pin for
you, then look for leverage. Either because that customer has other needs you can fulfill
now that you’ve become a trusted supplier or vendor or partner even with those
customers, they’ll say, “Wow, you were great.
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“Let me take you into other areas of the company where your technology or your product
buying can apply.” Or actually it’s not an [inaudible][0:30:09] end and at that same time,
take that ecosystem that helped you knock over the first bowling pin into new markets so
same use case, same sort of partners but now new customers.
And in this way, what you can do is leverage market power what you discover is that by
knocking over a few pins, they help you knock over more pins and it can take you
forward rapidly, you can outgrow your category, the other companies in your category
dramatically if you take a highly focused market development approach to it and that’s
kind of the winning play. And that works for the complex systems model but in the last
ten years where you see that a very interesting model are developed around something in
the volume operations world around the internet and social media and search and online
e-commerce, etc, etc.
Now this is an animated model so forgive the current static representation but let me kind
of say how it plays up. This model says if you are trying to get a volume ops model
going, a volume operations franchise going, you need to get to probably a million end
users particularly in this world of the web very, very quickly and obviously you’re not
going to do that by knocking over bowling pins one at a time or whatever. So the way in
which this model works is there is an entrepreneurial energy in the middle behind that
tornado and you’re trying to get these years of spending. You’re trying to get the
acquisition years of spending. You’re trying to get the engagement to your spending now.
Acquisition means the person came to your property or is doing a trying a trial on your
consumer package goods. Engagement means they commit to it. They go deep into your
site. They start using your product. They play your game. Whatever it is, they are now
kind of hooked. They become kind of sticky if you will. These become part of their life.
That internally is the modernization gear. Now you have an opportunity to monetize this
customer whether it’s through advertising or subscription or purchasing of goods or
purchasing of virtual goods, variety ways of people monetize these things. And then for
some subset of those customers, you actually can enlist them. And what enlisting a
customer means is they actually become part of the community that tries to get new
customers to come and participate. So whether that’s spreading the new fad or whether
that’s expanding the realm of the game or whether that’s sharing something with your
friends on Facebook, we call that virality and in going forward and the offset if you can’t
enlist people and they begin to opt out then it’s called churn.
So what you discover with these gears and if you could – the object is to get them all
spinning faster and faster and faster and faster till it creates what we call a tornado that
the rapid up uprise of adaption. Now when you talk with companies, the pieces of this
model are your franchise is only as good as its lowest gear. On this quest to get from one
customer to a million customers within like a year, two years would be very, very fast,
you’ve got to get these things spinning like crazy. So which is the gear that’s slowing you
down?
Now what’s interesting when you talk to companies who are in these kinds of markets
they have very good data and lots of pressure on them under what we call their
performance gears which is how fast you’re acquiring new users and now quickly are we
able to monetize and which are business models and which are modernization model.
What you discover however from the companies that have actually succeeded in creating
enormous success here is that the engagement here and the enlistment here are the
powered gears, either of them of which is immediately easy to measure and neither which
pays up immediately. But if you think about it, engagement is what drives the
opportunities to monetize and enlistment creates the viral impact that causes acquisition
to [Inaudible][0:34:11].
So again, if you’re thinking about market power, this is the kind of framework where you
say, if we’re in a high volume operations model, can we use something like the four gears
to get us squared away? And if by contrast we’re in a complex systems model, can we
use something like the bowling pin to get us together, but don’t try to combine the two.
It’s very important to pick the one that fits your company.
Okay, we’re heading toward the end. Here we got two more powers to hit – offer power.
So offer power is just what it says it is. How good is your offer when we stack it up
against the other offers in your category? You’re kind of hoping that it’s unmatchable. As
they say, great work when you can get it. But let’s look at the offer power just from the
point of view of a single model.
[0:35:00]
And that is our return on innovation model and what this model says is everybody spends
resources in R&D and in the field and with partners to make their offers better and there
are three ways you can make those investments can pay off and there are two ways they
can actually lose money.
So the three ways they can pay off, the biggest payoff is differentiation. If you generally
get your offer outside, it’s a little yellow circle as it were. So for people say, “No, I really
want that one, I don’t want any of the other ones,” then that’s a big win because you
accelerate your sales, gets you pretty in pricing, all your channel parts want to sell it. I
mean it is great. So differentiation when you get it is great.
Neutralization is not as much fun but I have to say it’s probably the bulk of the work and
it’s incredibly important. Neutralization is when you bring your next release of the offer
up to snuff by catching up to things that your competitors have done in the interim. So
competitors are always doing things you’re not doing and the things that they do that are
popular, you need to find some way to neutralize either by incorporating the same
capability in your offer or finding some other way to create the same effect.
So neutralization doesn’t differentiate you but it keeps the value of your offer, sustains
the value of your offer, keeps your existing customers happy and at least it gets you in the
game to compete further that’s new customer. And then the third way you can make
money from innovation is by optimizing your product or your processes to take cost out
and this will allow you either to lower your price point, maybe get some more sales or
improve your profit margins to have more money to invest. So, differentiate,
neutralization, optimization, the key point of those three wedges, they’re very different
from each other.
And it’s important when you innovate that you make very clear to the innovation team
which of these three goals they’re pursuing and I would submit to you that they are
mutually exclusive. So if you’re pursuing one, you are explicitly not pursuing the other
two and most of the time we tend to have a little of all three in most release trend and that
causes you either to slow down your neutralization or dumb down your differentiation
and frankly, to soften your optimization is just bad management. You’ve got to find ways
to isolate. Obviously, they have to be woven together but you’ve got to find ways to
isolate.
Now, how do you lose money in innovation? Well, you innovate and it fails. That’s
called failed attempts. That’s part of the price of poker. If you don’t fail at all you
probably are taking enough innovation risk. If you fail dramatically and frequently,
maybe God is giving you a different kind of message. Maybe I’ll try a different career.
But failed attempts are what they are. The real nasty wedge here and I frankly think that
that dark green wedge is much larger in most companies than I portrayed it here is how
much innovation investment is wasted.
This is really, really a tough, bitter pill to swallow but if you’re going to understand offer
power you really have to swallow it and here are the places it gets wasted. We did a
differentiation project that the end of the day our product was not that differentiated
enough to get people to essentially we will not consider the competition it has to be at so
we spend our R&D money but frankly we didn’t get any bargaining power for. It’s just
tragic.
The second one is neutralization projects that go too far or too slow. So, when you’re
neutralizing, you don’t need to link fraud the other company. You just need to catch up
and in fact you should kind of – your goal should be good enough not to be outstanding.
Outstanding is differentiation. Good enough is neutralization. The game, the challenge is
to do it as quickly as possible. I would say the greatest neutralization, innovation
company in the history of tech has been Microsoft. They have magnificently neutralized a
whole host of competitors.
All of them got to market with a remarkably better offer than whatever Microsoft had at
the market at the time and Microsoft just raced after them and [inaudible][0:39:13] and
took them down. Neutralization can create enormous shareholder value. It’s a very
difficult game to play but the game you play for speed, not for imagination and so many
of us want to lionize imagination and kind of play down the speed that neutralization
requires. It’s incredibly important. And the larger your company, the more important it is.
And as optimization projects are essentially aren’t allowed to take on sacred cows so you
end up optimizing, you end up what we call majoring and minors. You do a few things
but you don’t really free up the resources that matter and as a result you don’t really get
the agility or frankly the savings that you need in order to play stronger hands in the
differentiation and neutralization zone.
[0:450:00]
So again, this is I think a really important model for those of you in R&D or IT or any
place where you’re allocating innovation resources across a broad set of opportunities to
critique yourself relative to this model and say, “Couldn’t we increase our offer power a
lot if we just be more disciplined in this way.” And finally, if we get to the bottom of the
hierarchy powers we get the execution power. Now, when you first think about execution
powers, that’s performance, right? Then why are we talking about power here? And then
most of execution is indeed about performance and is measured by performance metrics
but as I said in the earlier slide, there is a time before you reach a tipping point that no
other metric matters except reaching the tipping point. I want to just give you one sort of
visual for thinking through that idea.
So if you look at any strategic initiative in the world, it goes through a pattern of
invention and then deployment and then optimization as it goes from an idea being
incubated as it crosses the chasm if you will. It gets accepted. If it gets deployed in scale
and then it has to get increasingly optimized. Strategic initiatives, whenever they’re
launched, are resistant not because they were bad ideas but because the world in general
prefers the status quo and people don’t like the change and so when you launch a
strategic initiative, it encounters resistance.
And interestingly, as it gets more momentum, it encounters more resistance because the
world really doesn’t want to have to change. But at some point in that transition to scale,
the word capitulate – and this is what Malcolm Gladwell was talking about with The
Tipping Point where you’re going uphill, you’re going uphill, you’re going uphill and
then all of a sudden, you’ve crested the hill and you’re going downhill and the world
moves from a posture of resistance to a posture of assistance. And they actually start
pulling you in their direction. They start to say well, okay, I guess you guys are going to
make it to the new state.
So rather than me trying to prevent you, I’m now going to jump on the bandwagon and
go forward. And it’s a transition in our earliest work from the chasm to the tornado. It
happens kind of in a flash in terms of the herd finally deciding to go with you instead of
against you. The point about this exercise is until you get to the tipping point, no
performance metric matters because at the end of the day if you don’t reach the tipping
point, eventually your initiatives will go back to the starting point. It will fall back where
it’s an over time. It will fly into disrepute; then it will fly away.
And one of the most sort of depressing thing about being a large company is to see
strategic initiative after strategic initiatives launched to a great fanfare, great executive
support only to have it sort of sink back into oblivion two or three or four years down the
pike. Sometimes with the change of executive and the new executive just doesn’t
embrace it. So the key thing here is when you launch a strategic initiative, you must get it
to the tipping point during your watch if you will and therefore any other metric and
performance metrics, always other metrics are just a complete distraction because they
just don’t matter until you reach the tipping point.
As soon as you reach the tipping point, they matter in spades and that in fact, they will in
fact derive that second transition for yield and a second tipping point downstream but it’s
that first tipping point that I’m most concerned about because I just see too many large
corporations fail to get too many initiatives across that really – it’s not a finish line, it’s
just a very important inflection point in the history of an initiative and the reason often is
because we’re distracting ourselves with the wrong metrics at that time.
So just to recap before to our side before Q&A, this is a side that we looked at before but
let me now just kind of recap in the light of the material that we’ve just kind of frankly
skimmed through a bit but hopefully if this is of interest to you, you can again, download
these slides and this podcast or by the book Escape Velocity. So the three ideas are – and
the first one is the driver – put power before performance. Now, when I say before
performance, I mean actually, in time, what I mean to say is if you start your annual
planning for at two at the top of that category of the hierarchy powers.
If you say you’re annual planning in the third quarter and then finish it in the fourth
quarter, you need that the very first performance oriented activity that will be largely
dominated by next year’s operating plan then you need to work in the quarter before that
which would affect what would be the second quarter to put your power initiatives in
place and resource them and ring sense those resources so that they don’t get
compromised by the third and fourth quarter activity which means you’ve got to be very,
very disappointed about how much Horizon Two activity you take on and I’m back to
this issue of I think a single file approach when you’re getting on to the freeway, the
metering light and then just get that one initiative really just laser focus on that thing to
get it to materiality before you bring another car under the freeway.
[0:45:00]
So that’s all about power before performance. Use these models to isolate the kind of
power that you need to focus on and then drive a strategic initiative around taking that
power to the new level. That does require to put leadership before management.
Management has to be based on fact. It has to be based on data. It has to be based on
iterating around proven things, all of which are critical to large companies. The
leadership tends to be based on making what we call high risk low data decisions where
you’re early in the life cycle there really isn’t a lot of comfort facts are there.
Almost whatever you decided there will be wrong so you’ve got to be prepared to be
agile and make these course correction says you go forward but there’s just have to be a
passion and a commitment to say I’m going to take this initiative, this power initiative to
a new state or beyond the tipping point and that’s the third and the final idea that we are
able to take tipping points to a plate where we can apply the traditional metrics to them
but until we’ve changed the state from one of resistance to one of assistance that doesn’t
do any good. So with that I think we should go to Q&A and I’m going to turn the
moderation back to Andrew and hope to entertain some really interesting question.
Interviewer:
And if you have a question for Geoffrey Moore, the author of Escape Velocity, you can
ask it by going to the chat function on your player. It’s in the lower left hand corner. You
click private, then you click leaders and assistants and if you type your question into the
box that appears you will be able to click the arrow and send us your questions. All
questions are asked anonymously so you don’t have to worry about your name or your
company name being read over the air.
Geoff, why don’t we start with a question about the annual planning which you had
discussed? That seems to be such a fundamental place for so many businesses as to how
they approach their company. A couple of people have asked about the way in which you
can break a dependence on that. Is it best to start with one segment on the business and
then apply it more broadly? Is there a way to get away from it?
Interviewee:
There really is not a way to get away from it and I think to get away from it might be to
look at from the fight of the wrong ones. Large corporations have to do this. There has
been an enormous amount of time on it. They could probably do it with a little bit of
grace frankly but at the end of the day, it is what it is. So the only way to get away from it
is I think as I said in that last slide is to move forward in time and conduct a prior
initiative, prior to the start of next year’s annual planning which include identifying the
strategic power investments and figuring out the initiative that you can support and then
taking that initiative and resourcing it and making those resource commitment prior to the
allocations that will come out of the annual planning process.
What most companies do instead is they kick off their annual planning with a strategic
offsite so they pull all the strategic options invisible to people, but they don’t actually do
the prior resource allocation. So then with these options in mind, they jump immediately
into the picks and take of next year’s annual planning and by the time you get to that
exercise, everybody’s exhausted and so are most of the resources so it’s very, very hard
to get quality resources in place the kind that could build new franchise under that
methodology.
Interviewer:
What’s interesting about some of what we’ve discussed here today are that these are
solutions to help a company continue its success and be able to continue exist as a
business but during a difficult economic period like we’re experiencing now it may
become difficult for people to see the value in that when they need you to stay alive
quarter to quarter and we have a couple of people asking about ways that you can expand
a leader’s comfort zone during difficult times such as this to be able to look more for
growth strategies?
Interviewee:
Well you see it is interesting to say we’re in difficult times and yet I think, at least in the
tax sector, there’s more cash on the balance than I can remember in a long, long time. So
I think there’s a bunch of anxiety around how to invest and how to invest with success.
The problem that this book I think tries to put front center is we believe in break out
growth investing for multiple decades but our track record is kind of spooky. We’re not
very good at it and so in that context you say well, maybe I should just keep the cash in
my balance sheet or do acquisitions.
And by the way, in mature sectors, the way you don’t actually get breakout growth in
mature sectors so you do consolidate and do acquisitions. But acquiring for growth which
is part of the solution I think for large companies has to be done in conjunction with
innovating for growth if you just try to acquire the growth quite buy some cool new
startup, just doing something you didn’t know how to do, the problem is when you try to
integrate it into your company it just doesn’t work.
[0:50:00]
You’ve got to have enough capability inside the company to be a receptor for the new
acquisition going forward. But I think if your company is in a very top spot then you
probably can’t do a Horizon Two initiative this year and you may had to just gut it out or
you may have to get acquire it yourself. You may have to get it consolidated into
somebody else’s world, but my view is that real hesitation in the boardroom and then the
[inaudible][0:50:42] is around a lack of confidence that we can deploy this capital that
we’ve worked so hard to get into something that will genuinely get all the way past the
tipping point and create our next big franchise because with just so much institutional
memory of how many times we’ve tried and not gotten there.
Interviewer:
That’s a great answer. Thanks for that because it addresses the question that someone else
had asked about larger initiations, it is better to focus on acquisitions as a way to
capitalize on growth markets rather than attempt to develop that innovation internally and
I think you’ve kind of given the indication that you can’t just solely focus on acquisitions.
You need to have the foundation within your own company to be able to make that work.
Interviewee:
Yeah, that’s right. It’s a one-two punch. I mean in other words, organic innovation when
you’re at a certain size you just cannot grow organically big enough, fast enough to be a
material part of the total revenue of the company in a timely fashion so you are going to
have to make acquisition at some point a part of strategy. So I think the right way to think
about it is innovate organically to get enough of a – to be a really intelligent acquirer and
to have sort of a place to plug the organization into your company and then go out and
acquire.
Interviewer:
Moving on a bit, you brought up the Horizon Two projects and I think that touched a
nerve with a few people because one question from a listener and – forgive me if this
doesn’t exactly apply. It’s about the attempt to serialize your Horizon Two projects. In
his company he says that there are three different managers that each would have his pet
project, what’s the method to be able to ensure that the right one gets selected and the
right one gets to move forward.
Interviewee:
And by the way, his company is off companies so what most people do because Horizon
Two has a checkered history is first of all they think well I need to syndicate the risk so
what I’m going to do is I’m going to have multiple Horizon Two horses in the race and
hopefully one will get to the finish line. To have multiple Horizon Two things you – it is
perfectly natural to say well, each division, why don’t you come up with your Horizon
Two opportunity and we’ll kind of play them out.
The problem with that is when you go to the field and your field resource which is
playing across divisions and you say, okay, guys, we need you to not only make the
current quarter around the legacy businesses but we need you to help us get these
Horizon Two candidates to the finish line. There’s too many of them. That’s a failure
mode and it will result in failure over and over and over again and we just have massive
history to show that again and again.
So then the question is how would you serialize it that has to happen in an executive
offsite because you got to get all three business owners in the room plus the CEO plus all
the other stakeholders and the deal is not we’re only going to pick one. The deals we’re
going to put – just imagine you’re getting into the metering light to get on the freeway.
Eventually one car has to be in front of the other car and front of the other car because
there’s only one car at a time.
And then the deal is who’s in the front lane and that car’s job is we have to do that car as
fast as possible because we’re holding up cars behind it that also want to get on the
freeway but until we get this one on there’s no point in driving the other two. Then, you
have to get the field on board to say, “This is the car, this is the one that we need you to
accelerate and we need to just your camp in some way to make this car your car so that
you will do that.
We’ve got to grow this thing at a meteoric speed or in part two we need to integrate this
acquisition and get the acquired company’s capability integrated into ours at meteoric
speed and so we’re not going to try to do. We’re going to soft paddle.” And the other
ones you just say, “Stay in the Horizons Three a little bit longer. You don’t have to stop
work. You don’t have to like stop selling or you’re not going to be our Horizon Two
candidate this year.”
Interviewer:
Actually that brings us to an interesting point because what may end up occurring in that
situation is that the people that have the projects that weren’t selected to be the first in
line, there’s little doubt that they’ll be asked in one way or another to participate even if
it’s just the land resources or the land knowledge so they’re still part of the process.
[0:55:00]
I think what people are struggling with is the political aspect of it.
Interviewee:
Now we’re at kind of the heart of the whole book which is “All organizations are social
and political.” That’s just the way human beings are. This is a political issue and by far,
the most politically the course of least political resistance is not to do what I just said.
The course of least political resistance is to give everybody a shot and fail together but
that’s bad for the economy, it’s bad for the company, it’s bad for the shareholders, it’s
bad for the employees, it’s bad for the customers but it’s easy on the management team
that has to make that decision. What I’m asking you for, this is where leadership has to
preempt management because this is if you’re going to actually win this game, you have
to play it differently and it’s not going to be politically easy to do.
Interviewer:
We have a couple of different questions about tipping point but one I thought was pretty
interesting is someone is asking for a bit of a recap about tipping points but specifically,
have you seen instances particularly in the tech build where company seemed close to a
tipping point with something that they just failed to reach and what causes that to occur?
Interviewee:
Well, it’s interesting and it sort of happens all the time. An interesting one from that is
that Lotus’s notes could not getting to the tipping point inside of Lotus. IBM acquired it.
It kind of got assimilated. I’m not sure that they’ve really achieved this destiny but that
was one. If you think about Yahoo trying to catch back up to Google, if we get closer it
would fall back but you see these things happening and at the end of the day, I think what
happens is often is somebody loses patience so even the board loses patience and changes
the leader in which case the new leader comes in and says, “Well, that’s a failed
initiative. I’m not going to take responsibility for that,” and that begins the three essence
of the old initiative.
Or the executive team kind of plunges under the pressure of we can’t afford to miss a
quarter so even though the right thing might be to do this. We’re not going to do that. So
that’s a second place where it happens. And let’s not feel superior to this stuff. If you’re
in that room, it’s a very, very tough – that’s a very tough meeting to be in the middle of.
So it’s perfectly from a human point of view, it’s perfectly understandable.
The place where we I think we actually should correct our behavior is when we say well,
you notice the operating margin isn’t right where they missed a revenue number here. Or
you know, I think the cost of goods or their cost of sales is too high because we have no
overlaying sales force. All those issues would be great issues to raise after the tipping
point but they’re absolutely disastrous issues to raise before the tipping point because
either we’re going to get there or we’re not.
There’s kind of a binary all or nothing here and if you start using management metrics
and “good management” as you are nearing that point of highest tension before you get
over the tipping point kind of that last 50 yards you have to pedal uphill and your muscles
are screaming at you, that’s the worse time to bring in then that perspective.
Interviewer:
Let’s close the question. We have time for one more question about the differentiation
projects. Someone asked about the acceptable level of failed attempts when working on
such a project and the way in which that can be pursued when you have a board or
shareholders that are sort of breathing down your neck, what’s the way to give an
acceptable level of failed attempts when working on that project?
Interviewee:
Well it’s interesting. I actually think if you’re going to give any project real attention that
the failure mode will happen early and not very expensively because it’s – the waste is by
far, the more common problem to solve than the failure problem. Failure means you just
tried it and it didn’t work. With most of these things, what happens is you tried it and it
wasn’t quite right and it needed another – for sure it needed another thing or whatever
and at some point, the patience of the organization or the elasticity of the organization to
adapt is to a point where it just says you know, well, I’m just not willing to do this
anymore and so the organization kind of shrinks back from creating differentiation.
And also differentiation is scary because you’re doing something by definition that other
people in your category aren’t doing and anybody who are sort of prudent managers think
“Is that really a good idea?” But I can remember every product that Steve Jobs ever
lunched had something drastic missing from it. And you think you can’t launch a product
in that category without that feature and he would do it and he would do it to make a
point, and he would do it to be different so there is a moment in the differentiation agenda
where you really have to have the courage of your convictions and have the backing of an
executive sponsor who can have your back because at the end of the day if you could
expose to all the naysayers and obviously with every innovation there are always
naysayers and you have not executive sponsorship, you’re going to die the death of a
thousand meetings, a thousand reviews.
[1:00:00]
Interviewer:
The idea of launching a phone with only one carrier service available –
Interviewee:
It’s crazy. It can’t possibly be a good idea, right?
Interviewer:
Absolutely. Escape Velocity is absolutely the book to read if you’re looking for ways to
you as the subtitle clearly says Free Your Company’s Future from the Pull of the Path.
Geoffrey, it’s been quite an education today about the ways in which companies should
be able to find growth when they’re instead of relying on the things that have sustained
them to this point.
Interviewee:
Well, thank you very much, Andrew. I certainly had enjoyed to have the opportunity to
address this audience.
Interviewer:
Thank you to Geoffrey Moore for appearing today on Soundview Live. We’d also like to
thank all of you for participating. Please remember to look for the follow up email in
three to five business days with links to the slides from today’s presentation as well as
some exclusive content and a link to replay today’s event.
Special thanks go to Ursula Sharp, the executive producer of Soundview Live. Join us
next week Thursday March 1st at noon eastern for the next installment of our Soundview
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Worthiness Era. Our guests next Thursday will be Laurie Bassi and Ed Frauenheim, the
authors of Good Company, a good event for leaders at every level of your organization.
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For Soundview’s executive book summaries, may name is Andrew Clancy, thank you
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[1:02:18]
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