This article is part 7 of an 8 part series. Read part 6 here.
Geoffrey Moore's latest book, Dealing with Darwin, addresses how to achieve innovation at each stage of a company's development. Businessweek describes this book as 'a detailed menu of meals that can be prepared to turn your competitors into dinosaurs.' In order to cook these different meals, businesses need to know where they stand. Below, Moore discusses how a company can find their economic sweet spot, especially when the answer isn't obvious.
Curt-In your books, you discuss the volume business versus the complexity of operations business.
Geoffrey-Yes, complex systems versus volume operations. Imagine a graph with two bell curves, one for complex systems and one for volume operations, and they both peak. Let's say the canonical complex systems company has between 100 and a thousand customers and they are paying them between $200,000 and a million dollars. And the volume operations company has a million to 50 million customers that are paying $100 a year or $20 a month. And then there are a bunch of companies that are neither a complex system nor a volume operation; they're right in the middle. It's harder in the middle because at the two peaks, everything in the world lines up for those two business models in that size and scale. But when a company is between scales, then they've got to work other levers, and the world is not perfectly aligned with them. Curt, I know your company is a complex systems company because, in general, volume operations products are bought and complex systems products are sold. My bet is you still have to sell your software, though, right?
Curt-Sure. It's interesting to think that we started out as volume operations and we've moved into more of a complex systems company. It used to be that we didn't have any services associated with our offering. Over the years, our offering has become a lot more fully functional with services.
People talk about consolidation in the software industry, particularly in the project management software industry, and yet it seems like there are more competitors in the space than ever. Yet Gartner says that the PPM (project portfolio management) markets stalled in 2009 and 2010. Maybe it's the economy, maybe it's not. Perhaps it's the way they conducted their research. It's really not obvious to me which levers I should push right now based on the advice of volume versus complex.
Geoffrey-When you look at the two curves, have you seen the complex system/volume operations drawing?
Curt-Yes, I've seen it in your Dealing with Darwin book (pg.30).
Geoffrey-There is an overlap in the middle. That's the place where most small businesses stay because they are below the radar of the really large complex system companies. But many small companies are dealing with a level of complexity that a volume operations company doesn't want to deal with. So these small companies have all the difficulties of a complex system but all the roles of a volume operation. These companies are defining more complexity while trying to lower their prices. That's a difficult situation to be in because it's like farming on rocky ground. It's hard to get a great crop because it's not one of the two economic sweet spots.
But again, the notion of charming customers becomes really important because when a company wins new customers, they still need to work to keep them. As the customer grows, they may outgrow the company at some point, which means they've also got to look for the next generation of customers. The problem is that there are many competitors with a very cheap solution. Companies must continually court customers into their install base. At the same time, some of their current successful customers will start to move up into a more complicated product.
Basically there is a window when companies have these customers. Companies need a model that actively farms their install base to continually bring those customers up. It's almost like having locks to bring a boat up to different levels for the Panama Canal. Companies should have a really easy entry level forum, get customers into their system of locks and then bring them up through their capabilities, raising their subscription revenue as they go.
Curt-In other words, companies should have a light version and a more complex version.
Geoffrey-Yes, exactly: have customers moving forward. Another thing companies can do to embrace switching costs is to create user groups where customers exchange information with each other, such as templates or macros. This exchange of knowledge creates an atmosphere where customers want to stay with a particular platform. Because then there is just enough invested added value. We are in a world where crowd sourcing and customer collaboration is becoming a much more interesting idea than it ever was before.
Curt-Essentially, it's the network effect.
Geoffrey-The millennial mindset is that people should collaborate to solve problems. People shouldn't try to solve the same problem by themselves in isolation. If a business helps their customers share their best practices with each other, that's a smart thing to do. The small business increases the intimacy with their customers and they can use that to their advantage because they don't have such a large volume of customers that they can't get to all of them. The problem with becoming a really big company is that there are too many customers. Big companies can try to be intimate with their customers but it's hard. Let's put it this way: if the customer pays enough money, big businesses can afford to be intimate with them. If you're one of IBM's top 1,000 customers, believe me, they know a lot about you. But if you are in the next ten thousand customers, they don't know as much about you. After that, they don't know you very well at all.
For small businesses, they can't play the operational excellence card very well, unless they've got some really cool engine that runs on the web automatically. But small businesses can excel in customer intimacy with product leadership. But it must be these two things in combination: pure product leadership is where the big guys can dominate because they have a bigger research and development budget. Small businesses succeed when they combine customer intimacy with the granularity of growth model followed by the ‘whole product plus one' idea.
It's about fine tuning the offer to be better directed toward that granular bubble. It's possible to get about 25% of next year's revenue from a new segment. The new segment shouldn't be so small that only 5% of next year's revenue is available. It shouldn't be so big that even after revenue doubles, the company is still an almost invisible blot in that segment. It's the ‘fish to pond' ratio. Companies need to be the big fish in their pond. Companies should annex ponds that will allow them to become a bigger fish, and if not the biggest fish in the pond, at least a reasonably-sized fish. What you don't want to be is the minnow in the ocean. And a lot of small businesses die because they become minnows in the ocean.
My Geoffrey Moore series ends the next post (part 8). Don't miss it!