How can small companies grow into large companies? It’s a simple question to pose but not so easy to answer. Some of the most persuasive answers have been offered by Geoffrey Moore. The Silicon Valley consultant made his reputation with two books that offered the tech industry a strategy and perhaps more importantly, a vocabulary for thinking about their business challenge. His 1990 book Crossing the Chasm analyzed the dynamics of high tech markets and offered advice on how tech marketers can cross “the chasm” that separates early adopters from mainstream customers. Five years later, he followed this up with Inside the Tornado, a sequel that suggested how companies that have “crossed the chasm” can survive the period of highly competitive hypergrowth that often ensues. His latest book is Escape Velocity: Free Your Company’s Future from the Pull of the Past.
In this interview with CKGSB Knowledge, Moore provides some pointers on how companies can counter the challenges that come with hypergrowth.
Q. Your books Crossing the Chasm and Inside the Tornado were two of the most influential marketing books of the dotcom era, and gave many companies a very vivid picture of the challenge they faced in marketing a new product. Is there anything about your original model that you would revise now, given that we’ve had so many more examples of companies that more or less fell right into that “chasm”? Are there factors you underplayed then, maybe in your marketing checklist, which you think are more significant now?
A. The biggest change for me came with the rise of consumer IT. For the first time, a whole wave of disruptive innovation came into being in a business-to-consumer (B2C) market, as opposed to being adopted first in a business-to-business (B2B) market. It turns out that B2C markets, especially on the Web, are “tornado or else” affairs, meaning that there is no role for the early market, the chasm, or the bowling alley. It is only in the past few years that I fully appreciated this, and that led to developing a B2C model called the ‘Four Gears’ as a kind of companion model to the B2B models in Crossing the Chasm and Inside the Tornado.
But for B2B markets the models in these two books have held up remarkably well.
Q. Many companies in China are growing by hundreds or even thousands of percent a year. In your experience, what goes wrong most frequently for companies that have entered a hypergrowth phase? What are the best ways to prevent those stumbles?
A. In B2B markets, the stress falls first on production capability, showing up in issues around quality and availability, then around inventory management, and then around keeping up with category changes. The goal in the tornado [the hypergrowth phase] is to rapidly and relentlessly improve the price/performance of the product, specifically in relation to the “killer app”, the one use case [application] that everybody is rushing to. For example, Nokia did very well for price/performance for SMS and RIM Blackberry did very well for email, but both lost out when Apple moved the killer app to internet browsing.
In B2C markets, “tornado or bust” as we like to say, the key factors are:
- Speed of ‘acquisition’ of new customers
- Depth of ‘engagement’ with those new customers
- Ease of ‘monetization’ of that traffic
- Breadth of ‘enlistment’ of super-fans to help evangelize the next wave of growth
Here the biggest mistake is to get so caught up in ‘acquisition’ and ‘monetization’ that you fail to ‘engage’ and ‘enlist’. That is what has happened to MySpace and Groupon, for example.
Q. In your more recent work, you’ve turned your attention to the company lifecycle. Assuming a company is navigating successfully through hypergrowth, what risks and opportunities should they be on the look out for next?
A. When companies are going through their first rush of growth, they are united around scaling a single product line for as far as they can, or scaling a service capability to the maximum. At some point, that growth levels off, and the company becomes what we call an “established enterprise”. At this point they have extremely strong economics in their core markets, but they are relatively slow growing, and more importantly, are subject to the next wave of disruptive innovation. Now they are no longer the disrupters but have become the disrupted. Think Microsoft, Intel, Cisco, Oracle—all very strong franchises with great profit margins which have now become the targets for the next wave.
Such companies, of course, do not stand still. They aggressively invest in the next wave, both organically and through acquisitions. But their success record, as a class, is very poor indeed. There is a very long list of such companies from prior decades that no longer exist as independent enterprises, having been acquired at a fraction of their market value during their heyday.
Q. If you want to build an innovative company, how important is it to start off in an ecosystem like Silicon Valley? Is there anything you need to do differently if you’re far from that kind of hub?
A. All hypergrowth markets rely on an ecosystem to scale as rapidly as they do. Silicon Valley’s ecosystem is particularly good at disruptive innovation. China’s ecosystem is particularly good at production innovation. Each of us is far from the other’s hub.
When you are far from the hub, you must follow, not lead. This is what made life so hard for Nokia and RIM. They were used to leading, but after Apple disrupted, they needed to become fast followers. RIM did okay for a while, Nokia completely missed the point.
Q. You’ve said that one of the big problems young companies face is not identifying the right-size target market and ending up not a big fish in your pond but a minnow in the ocean. What sort of questions should you ask yourself about your company, your competition, and your prospective customer base to make sure you’re targeting the ‘right-size pond’?
A. If a small company is to have power, it must become a leader in a sub-segment of the total market. For this to happen, it needs to get at least 40% share of that sub-segment, and to be safe, more like 60 to 70% of it. So do the math. If this year, the company is doing $10 million, and its most optimistic plan is to growth 100% next year to $20 million, and it wants to have, say, 50% segment share, then the biggest possible sub-segment it can target is $40 million—and that would be assuming that all its sales came from that one sub-segment. A more realistic goal would be to get half its sales from its core target market, or $20 million. So a good rule of thumb is that the core target market, the pond in which you are going to be the big fish, should not be much bigger than your company’s total sales goal for the next year.
The other thing to keep in mind is that you do not want a lot of price competition in your core target segment. You need it to be very profitable. For this to work, you have to solve a very challenging problem that is unique to this set of customers. The challenge makes your solution valuable, and the small size of the market keeps bigger competitors from investing to match your offer.
Q. For two decades now, a lot of technology has followed a ‘Designed in California/Made in Asia’ model. Any guesses as to how much longer that will remain the case, and why?
A. This model was particularly attractive for high volume consumer electronics, but I think that the sector will transition to more established enterprises, with Apple leading the pack. Going forward, I think there will be more investment in enterprise technology around cloud computing and around systems of engagement—essentially the consumerization of enterprise IT. A lot more value add will come from software than from hardware in this sector, so I think it behooves China to accelerate its capabilities in the software design domain, and be ready for another wave of intense price pressure on the manufacturing side. Because you have improved your economics so much, China itself has now become an “established enterprise”, and your market share will now become the target for the next wave of low-cost disrupters.
Q. Do you think Asian companies face any particular innovation challenges? And if so, how can they be overcome?
A. The demographics of Asia, specifically China, are still biased toward hypergrowth, so this should be an incredible next decade for you. Your biggest risks are corruption and piracy, both of which create short-term success but sow the seeds for long-term isolation. The world is open to a China century, but only if China acts in the interests of the world in a responsible and predictable manner. This goes not just for the nation, but for leading companies as well.