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Innovation Models - part four

This article concludes my series of posts on innovation models ("Innovation Models - part one", "Innovation Models - part two", and "Innovation Models - part three").


Geoffrey Moore


Geoffrey Moore's revolutionary books, Crossing the Chasm, Inside the Tornado, Living on the Fault Line, and Dealing with Darwin provide a framework and provocative vocabulary to describe the changing market strategies required to ride the wave of new technology markets.


The basis of Moore's observations is the distribution of technology adoption profiles originally defined by Everett Rogers. As mentioned in an earlier post, Rogers identifies five categories of adoption behavior, which he calls "innovators", "early adopters", "early majority", "late majority", and "laggards". Moore recasts these categories in terms more suitable to his marketing purpose: "techies" are eager to try new technologies; "visionaries" are looking to gain competitive advantage; "pragmatists" stick with the herd, at first avoiding new technologies en masse until they have been vetted, then adopting them like lemmings when they have been suitably packaged to meet their specific needs; "conservatives" hold on to old technologies until at least half the market has adopted their replacements; and finally, "skeptics" are the ultimate laggards, delaying adoption as long as possible. As mentioned in the earlier post, these categories follow a bell-shaped normal distribution.



Moore observed the influence that this distribution of technology adoption profile has on technology-based market formation. His first major contribution was to identify "The Chasm", which forms as pragmatists wait to determine which technologies to adopt. He also named the other market phases, as illustrated in the diagram below.



Pins in the Bowling Alley represent specialized applications designed for niche market segments. The Tornado represents generalized solutions designed to be mass-marketed across industries and geographies - a Tornado forms when demand for the mass-marketed solution outstrips supply; when supply catches up, the Tornado transitions into Main Street.


Moore's second major contribution has been to outline appropriate marketing strategies for each phase of market development. One of his breakthrough observations was that the appropriate strategies change as the market goes through the phases.


For the Early Market: the successful value chain combines Technology and Consulting Services to sell a disruptive opportunity to Visionary Executives; the primary value discipline is Disruptive Technology, and the offering should not target specific industry segments.


The Chasm is the gap that comes from the difference in adoption drivers for the Visionaries and the Pragmatists; the strategies that worked in the Early Market are a complete failure in this next phase. Moore's first book, Crossing the Chasm, addressed this issue, focusing attention on a specific segment "head pin" that sets up a Bowling Alley approach to market development. In this phase: the optimum value chain combines a segment-specific application built on the new technology platform, together with application support services, to sell a complete "shrink-wrapped" solution to a Department Manager with a broken business process. The primary value discipline here is Customer Intimacy, and the offering should target particular segments.


In the Tornado, the successful value chain combines the new technology product with efficient sales services to sell the new platform to Infrastructure Buyers. The preferred value discipline here is Product Leadership, and you should not segment.


Finally, in the Main Street market phase, the best value chain combines product features with customer services to sell increasingly specific functionality to end users. The primary value discipline here is Operational Excellence, and the offerings should be segmented to meet the specific needs of different target user groups.


By combining these two diagrams, the Technology Adoption Curve and the Market Development Phases, we've created the following diagram representing "The Innovation Pipeline", or growth engine, of a healthy business. We use this diagram to frame discussions for IT planning.



Moore's marketing strategies focus on the adoption side of Roger's innovation diffusion processes. By taking into account the buyers' perspectives, and the different markets that are formed by those perspectives, Moore has guided many technology companies through the changes in their customers' reasons for buying.


 


Summary


Remembering these models of innovation defined by Everett Rogers, Peter Drucker, Clayton Christensen, and Geoffrey Moore can be quite helpful if you need to commercialize innovation, to decide when to adopt innovations, to recognize changes and the innovation opportunities they create, to determine appropriate growth strategies, and to navigate the changing tides of technology markets. We all need to do these things, so the models should be of value to everyone. In short, you can either let the complexities of market dynamics defeat you, or you can learn how to use them to your advantage, whether you are selling or buying innovations. You can fight against the wind or you can have it fill your sails. May these masters of innovation be with you!

To Matter or Not to Matter

It's been five years since Nicholas Carr tossed his "IT Doesn't Matter" hand-grenade into the CIO's bunker. He followed it a year later with his book Does IT Matter? Information Technology and the Corrosion of Competitive Advantage. Carr argued that IT was no longer a source of differentiation because it was available to everyone. With no monopoly on IT, there could be no advantage from IT. The resulting furor was entertaining as CIOs defended their position, both themselves as individual CIOs and the CIO position itself as a legitimate executive role in business.

Since Carr's original May, 2003 article, CRM software vendor Salesforce.com has multiplied its revenue from $51 million (with 5,700 customers and 76,000 subscribers as of January 31, 2003) to $748.7 million (with 41,000 customers and 1,100,000 subscribers as of January, 31, 2008).

This example cuts two ways. It challenges Carr's argument in that Salesforce.com's unique IT assets, a CRM application and the infrastructure to deliver it as on-demand Software-as-a-Service (SaaS), and the growing number of customers and subscribers, have created a differentiated competitive advantage worth $8 billion in market value. For Salesforce.com, IT clearly matters, at least for their CRM service offering. IT underlies their very business. The same could be said of Google, or eBay, or dozens of other companies that wouldn't exist or have their market valuations without IT.

On the other hand, Salesforce.com doesn't need to have unique payroll or benefits administration IT systems or even the staff to perform these business functions. They would gain no shareholder value by performing these functions better than their competitors because they are not competing in the payroll or benefits administration services markets. So they should hire another service company, one who specializes in payroll and benefits administration, to perform these business functions for them. This service provider would bundle the IT assets with the staff needed to perform payroll and benefits administration.

The difference has to do with Geoffrey Moore's general business strategy concepts of "core" versus "context" from Living on the Fault Line, and their alignment with in-sourcing versus outsourcing, as I discussed in "Outsourcing and BATOG". CRM services are part of Salesforce.com's core, but payroll and benefits administration are part of their context. Salesforce.com has invested in its IT solution for CRM and has created significant shareholder value by doing so; on the other hand, it shouldn't be wasting its valuable IT resources on payroll and benefits administration, both context activities.

For each of Salesforce.com's customers, CRM applications and the infrastructure they run on are part of the customer's context; for these companies, there is no advantage to having their own custom CRM application, or their own dedicated IT infrastructure to run it on. By hiring Salesforce.com's CRM software-as-a-service solution, which has unique advantages in the CRM industry, these companies waste no IT investment or management budget on building custom CRM applications or infrastructure. They can focus their IT efforts on their core activities, which depend on the markets they are in and their individual competitive business strategies.

This discussion helps to resolve the conflict between Carr and his detractors. IT has to matter for a company's core activities, but IT shouldn't matter for a company's context activities. In fact, the company shouldn't have any IT for their context activities; they should outsource these functions, including the IT needed to perform them. Their own IT staff would then be free to focus on the company's core activities.

In summary, Carr and his opponents are both right (and both wrong if their conclusions are applied too broadly). On one hand, Carr's argument that differentiated IT cannot increase shareholder value is correct, as long as this principle is applied only to context activities. On the other hand, his opponents' argument that IT can provide significant business value is also correct, as long as it is applied only to core activities. The key is to keep IT strategy aligned with business strategy.

Outsourcing and BATOG

Combining Geoffrey Moore's business strategy ideas with EDS' BATOG model provides a good perspective from which to view the long-term, enterprise-level, big picture I mentioned in an earlier post. EDS BATOG is a business foundation for technology planning.


The following diagram illustrates EDS' five BATOG elements (Business, Applications, Technology, Organization, and Governance) from a particular viewpoint that incorporates some of Moore's concepts.


 


"B" as in Business


In the current discussion, the key attribute of Business is the company's strategy concerning "core" versus "context", as defined by Geoffrey Moore in his book Living on the Fault Line. Moore defines "core" to be those activities that can increase shareholder value if they are performed better than the competition. These core activities need to be differentiated; they are the source of competitive advantage, the source of economically profitable revenue. He defines "context" to be all the other activities required to run the business; for these activities, poor execution can decrease shareholder value, but exceptional execution cannot increase shareholder value. Context activities must be performed using best practice, no better and no worse. It is important to take account of the dynamic nature of core versus context; to quote Geoffrey Moore, "Today's core is tomorrow's context."


"A" as in Applications


Applications support the business activities needed to run the company. Each company must perform Industry, Enterprise, and Information Technology process activities. Industry process activities are common to companies in the same industry; for example, manufacturing companies perform manufacturing activities and financial services companies perform financial services activities. Enterprise process activities are performed by all companies, and include human resources, finance & accounting, supply chain management & procurement, sales & marketing, customer relationship management, and legal.


"T" as in Technology


Information Technology includes infrastructure platforms and services, and application platforms and services. For most companies, Technology is a context, enterprise activity. For some, especially those in the IT industry, Technology is a core, industry activity.


"O" as in Organization


For present purposes, the key attribute of the Organization dimension is determining which people are in-sourced and which are out-sourced. Organization and Business should be aligned: core business activities should be in-sourced to gain competitive advantage, whereas context activities should be outsourced to provide non-differentiated, best practice service performed with appropriate "hygiene" (to use another Geoffrey Moore term). Outsourcing context activities allows the company to focus its scarce resources (money, time, talent, and management attention) on its core value-creating activities. In addition, the company benefits from the focus the outsourcer places on performing the context activities.


"G" as in Governance


The Governance dimension defines ownership of the various business processes. It is common for the "Business" to own the Industry processes, "Corporate" to own the Enterprise processes, and the CIO to own the IT processes. As Charlie Feld points out in his recent synnovation article, the success of most companies depends on their ability to keep these three complementary functions in synch with one another.


Custom versus Replicated versus Shared versus Infrastructure Solutions


Company-specific custom applications or dedicated platforms should be reserved for core activities that need to be differentiated to create competitive advantage. In contrast, context functions should be outsourced by using either replicated or shared solutions. Industry and Enterprise frameworks and packaged commercial, off-the-shelf (COTS) applications are examples of replicated solutions. Infrastructure, application platform, software, and business processes, each being delivered as services (i.e., IaaS, PaaS, SaaS, BPO), are examples of shared utility solutions. There can be significant differences in the economics of these different kinds of solutions (i.e. "The Economics of IT Solutions"). To take full advantage of these economic tradeoffs, the company must efficiently manage the integration at the boundaries between themselves and their solution providers.

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About the Author(s)
  • Steve Simske is an HP Fellow and Director in the Printing and Content Delivery Lab in Hewlett-Packard Labs, and is the Director and Chief Technologist for the HP Labs Security Printing and Imaging program.
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