Getting to plan B, by John Mullins and Randy Komisar, is an important book. In short, the thesis of the book is that successful startups very often had to change their initial business plan. To quote Mullins and Komisar: "If the founders of Google, Paypal or Starbucks had stuck to their original business plans, we'd likely never had heard of them." The startup process, largely driven by poorly conceived business plans based on untested assumptions, is seriously flawed. And the authors to give a few interesting examples of business plans changes that were successful. If only for this, the book is important because, despite many criticisms, business planning remains the cornerstone of entrepreneurship courses at business school, and well honed business plans are a must-have to pitch venture capital. The fact that no business plan survives the first encounter with reality seems to bother no one in industry. Importantly, the flaw does not lie in some limitations of the planners. In other words, it is not because of poor planners that business plans are useless, or even harmful. It is the very process of planning that is problematic. Behind the notion of planning lie the idea that to control the future, we need to predict it. However, recent research on entrepreneurship by Sarasvathy (see the concept of effectuation) showed that in uncertain environments, it is simply not possible to predict the future. Hence prediction is really a gamble.
Then maybe it’s worth going back to the history of a few great companies.
That’s one of the things that Jim Collins and Jerry Porras did for the millions of readers of "Built to last". The first myth they shattered in their book was the "great idea" myth, meaning : "it takes a great idea to start a great company". You need evidence ?
It’s an unfortunate thing that Geoffrey Moore is not so much read these days. Moore has written essential things about marketing new technologies that are as true today as they were ten years ago. In particular, in his book “Crossing the Chasm”, Moore discusses why most companies fail at marketing disruptive technologies. If your job is to market new technologies, it’s a very bad idea not to read the book.
In the book, Moore makes the following observation: when a company introduces a revolutionary product,
it usually enjoys an initial success with sales with a few key clients, but just when all signs suggest that take off is imminent, sales stall and the product eventually fails on the market. The same story happened, and continues to happen, to countless startups with brilliant products. Why is it so hard to sell revolutionary products?
To answer this question, Moore looks at the well-known technology life cycle. According to the underlying theory, your revolutionary product is first bought by the techno-enthusiasts. These are the guys who buy any new technology, whatever it is, because their passion is to get their hand at unproven technologies. There are
not many of them, they have no budget, and indeed they think they should get the stuff for free, but they prove invaluable in testing the technology and providing feedback. But nobody listens to them, so once you’ve sold the product to the few who are likely to, you’re back to square one. The next in the list
are the strategic (or early) adopters. Those have an entirely different motivation: they buy innovative technologies because they want to gain a competitive advantage. They were the first buyers of SAP, and they bought the first PCs when corporations thought they were just toys. It is with these guys that you will close the first sales, and start the first pilot projects during which you will improve the product. They are your first source of revenue, your first reference, but their projects are never-ending and you can find yourself completely trapped with a totally specific product if you don’t learn how to say no at one point, unless you want to become a service company.
Again, the strategic adopters are not many, and there lies the problem leading to the growth stall. You will
sign big projects, but never ever think that this is kick-starting growth. There are only so many of them… After a few projects, the source dries up, and you are again back to square one.
The real money lies with the next group: the mainstream buyers. This is an entirely different lot. They
only buy completely mature products that present zero risk for the company. A typical mainstream buyer is the IT manager of an insurance company. He couldn’t care less about innovative technologies and cool stuff. Any new stuff is by definition a headache, and a potential source of problems, not to mention costs.
A common assumption is that you can convince the mainstream buyer with your successes with strategic
buyers. Moore’s luminous insight is that nothing could be further from the truth: between the strategic adopter and the mainstream buyer, there is nothing. No continuity, hence the notion of chasm. After a few successes with lonely strategic buyers, you have to cross the chasm to reach the mainstream buyer. For him, the strategic buyer is not really a valid reference. In fact, the mainstream buyer buys on only one criterion: the reference. He only buys from the leader of the market, because he doesn’t want to take any risk, which
means that as long as there is no leader on the market, as is often the case on emerging markets, he will not buy. He forms his opinion by reading the professional press -as conservative as it can be- , by talking to peers in other companies. If John has chosen Product X and is happy, then I can consider buying X, rather than Y which nobody knows. The result: as long as you are not the leader, you won’t sell anything to the mainstream buyer, which means 95% of the market is out of reach. This is of course a catch-22: because, by definition, as long as you don’t sell to them, you won’t become the leader.
This explains what happens to the usual start-up. When the new product is introduced, it triggers excitement among the techno-enthusiasts. This is the cool stuff of the moment. Blogs and bulletins boards talk about the product. After a big effort, the sales force lands a few big contracts with strategic adopters, usually some R&D managers. First revenues, first references. That’s usually when number crunchers start plotting a straight line of revenue growth, and eagerly send it to anxious investors. Big mistake. Because after selling to the few strategic buyers around, there’s nothing much to sell, and certainly not to the mainstream who are horrified by this new stuff that threatens their existing view of the world.
To move on to the next step, you need to convince them. Usually, they are business unit heads, a very
different population from R&D managers. The kind that ask for you last three annual reports (but we’ve only been around for 9 months!!!), how many people you have in the quality department, and if you’re able to have a dedicated 24/7 support line for their Tokyo office. Of course, you’ve none of this, so the buyer is put off. You’re just to much risk for him. How many real deployments do you have, and I’m not talking pilot projects here? None, Sir, you would be the first! Ah, being the first, the absolute no-go for a mainstream buyer… He’ll just wait until you’re the leader of the market, because then there will be no risk.
So what is the solution? Very simple… in theory: become the leader, and come back to him. How to do that? Simple, and brilliant answer from Moore: reduce your market until it is no more than a micro-niche, because it’s always easier to be a big fish in a small pond than a small fish in a big pond.
Once your market is reduced, which means that you have carefully micro-segmented it and selected the best segment, you can target similar clients, members of the same group. For instance, the retail banks in the northwestern part of the US, or the Rap music fans in New-York. If you target similar clients, a successful sale to one client can be leveraged to sell to the next one, whereas a sale to a bank will be useless as a reference to sell to a car manufacturer. So the golden rule is: focus, focus, focus. The counter-intuitive approach consists, therefore, when the going gets tough after the initial successes, not in running all over the place trying to sell to anybody, but rather to sit down and select just one segment, and put all efforts to conquer it.
The segment will of course be chosen based on what has already been sold, by determining which sale to a
strategic buyer can be leveraged to sell to a mainstream buyer – that can happen. Once this is done, approaching the next mainstream buyer will be a bit easier. With this approach, the micro-segment can be conquered. The strategy consists then in choosing the next segment to conquer the same way, such that
the first segment can be used as a reference. After a few iterations, the micro-segment gradually coalesce into a real segment… of which you are the leader.
In summary, Crossing the Chasm is a very insightful analysis of radical innovation marketing, which
identifies the difficulties, explain the causes and suggest very effective solutions. No wonder the book is a best seller, and a bible of high-tech marketing.
The book on Amazon.
In "Fast second", already mentioned in this blog, C. Markides and P. Geroski suggest an innovation typology. They rely on two criteria :
- the effect of innovation on consumer habits and behaviors;
- the effect of innovation on established firms’ competencies and complementary assets.
What if the smart strategy to win the over competitors was to be a "follower" ?
This provocative question is raised in "Fast second", written by Constantinos C. Markides, management professor at the London Business School, and Paul Geroski, economy professor, former Dean of the LBS MBA, and current Chairman of the UK Competition Commission,
Which firm create onlined bookselling in the 90s ? If you instantly think of Amazon, you’re wrong. The concept of online book selling was born and put into practice by Charles Stack, an Ohio-based bookseller in 1991. Amazon started selling books over the internet in … 1995. In the same spirit, Ford didn’t create the automobile market, nor Procter & Gamble the disposable diapers markets.
C. Markides and P. Geroski remind us of what we all know : individuals or companies who create new markets by innovating are not always in the best position to make these markets grow. Other organisations are often more adequate to bring the new market to its full potential. A must-read if you still think "first-mover advantage" is a golden rule of strategy…
In "How breakthroughs happen" (Harvard Business School Press 2003) Andrew Hargadon , professor of technology management at UCLA, takes us into the history of radical innovations, from Edison’s incandescent lamp to Reebook shoes. He takes into pieces the complex mechanisms at play behind the "lonely inventor" myth. After studying for ten years the companies which demonstrated their ability to bring radical innovations to the market, Andrew Hargadon concludes that the ones which succeed are "technology brokers". It’s the ability to understand and integrate previous or exogenous technologies, to creatively recombine ideas and concepts, which enables a few companies to work as "innovation factories". A unique and well-researched point of view really worth reading.