Leaving the Chasm Behind
Whether companies accept it or not, all of them are market-driven. The chasm pushes all the developing high-tech companies to a crisis point where they should leave the reasonable safety of their early market and discover a new segment in the mainstream market. The main question is if management can become aware of the changes on time to leverage the opportunities such awareness provides. So far, we have considered the chasm as a market development problem and have mainly focused on marketing strategies and tactics for crossing the chasm. However, the chasm’s impact extends beyond the marketing strategy and tactics to other aspects of the high-tech enterprise. This is why, in this final chapter, we will be exploring three other important aspects of change such as finance, organizational development and R&D. Your overall goal is to guide behaviours that make the enterprise proceed into the mainstream market and not let it go back to the chasm.
What you need to understand here is that the post-chasm enterprise is bound to the commitments of the pre-chasm enterprise. If these pre-chasm commitments are made in a hurry to get a foothold in an early market, they will be unmaintainable in the new situation. This means that one of the first jobs of the post-chasm period is to manage one’s way out of the clashes put by the pre-chasm agreements. This can involve a massive devaluation of the enterprise’s assets, many demotions of employees who are unsuitable for the responsibilities that their position requires and marked changes in authority over the product and technology’s future which can end up in disappointments and resentment. Therefore, the best solution to avoid all these problems is to prevent the wrong type of commitments in the pre-chasm period. According to Geoffrey A. Moore, by foreseeing at the beginning while you’re still in the early market to where you must go to survive the chasm, you can vaccinate yourself from making the wrong kind of decisions that sabotage your enterprise. This is extremely hard to achieve than it may seem. Nevertheless, the high-tech enterprise must accept it’s going through a phase and act wisely with that knowledge. Let us now explore the first set of impactful decisions that post-chasm enterprises gain from their pre-chasm situation – finance.
Financial decisions: breaking the hockey stick
The post-chasm enterprise aims to make money. However, this isn’t the aim of the pre-chasm enterprise. When building an early market, the important return on investment is investor risk reduction achieved by transforming an amalgam of technology, services and ideas into a duplicate deployable offering and showing that there are customer use cases that have a demand for this offer. Early market revenue is one way of measuring this demand, however, they are not usually a source of profit. Therefore, the early market organization isn’t needed to adopt the discipline of profitability. Even the pre-chasm organizations don’t encourage themselves by profitability or any other financial goal. However, the most exciting rewards closer at hand is the freedom to be your leader, the opportunity to discover new technology and handle more responsibilities than any big organization. These exciting rewards are that encourage early market enterprises to work for long hours. Thus, early market entrepreneurs are not called to focus on and are not oriented toward making a profit. This is extremely important to understand as most management theories assume that there is a profit motive. When this motive isn’t there, people make financial decisions that have consequences that they don’t or don’t bother to foresee! Although this comes in many forms, the most common is the ‘hockey stick forecast of revenue growth.
Entrepreneurs can be complicated in terms of financial issues. However, they are not usually slow in understanding. If venture capitalists possess money and a hockey stick forecast is one of the rules you adopt to get that money, they will undoubtedly follow those rules. Thus, entrepreneurs raise capital using the hockey stick graphs of revenue attainment. This means they propose a business plan with no revenue development for a specific period as long as they can postpone, after which there is a strong inflection in the curve and quick, continuous and what any average person would call a miraculous revenue growth at that point.
Hockey stick curves are made through spreadsheets. In theory, the revenue line is close to an accurate profile of how the company can capitalize on a growing market opportunity. It would serve as the “master line” in the spreadsheet, the one to which others should report to. This is how profitable operations work. Actually, the revenue line is a slave to two masters. At the front end, it’s a slave to the entrepreneur’s cost curve, and at the back end, it’s a slave to the venture capitalist’s hockey stick expectations. Once the revenue numbers are discovered, market analysts’ reports are scoured for suitable citations, which any other means of proof or credibility are obtained to reason what is essentially an arbitrary and unreasonable prediction of revenue growth. This might work or work more often if the present model of the high-tech market development wasn’t a mistake. However, the revenue development looks more like a staircase than a hockey stick. This means that there is a starting period of rapid revenue growth representing the early market development, followed by a period of slow to 0 growth which is the chasm period, followed by the second period of rapid growth representing the return on one’s first mainstream market development. This staircase can proceed forever, with the flat periods representing slower growth because of transitioning into adjacent mainstream market segments and the quick rises representing the ability to capitalize on those efforts. Eventually, as more segments are served, the uncertainties begin to get abolished, and one can achieve the minor bumpy results that Wall Street mostly prefers. The staircase model is practical unless you mortgaged your bet in the company to make the hockey stick situation come true. Unfortunately, this is what most high-tech funding plans show importance on, and when it doesn’t come true, the founder’s equity gets diluted, things don’t go as planned, and the company dies in the chasm. So, if you have the chasm model to work with, what would you do differently to avoid this problem? This lies with the financial group that provides the sources of capital and the high-tech executives who give the sources of management. In terms of the former, the main issue is how to reframe its valuation concepts and expected rate of return. For the latter, the main problem is when to spend capital and use the discipline of profitability. We will now look at them a bit deeper.
The role of the venture financing group
All the investment is a bet on performance against the competition in time. The chasm model surfaces a need to reconsider these variables. From the point of view of investment, the most critical question at the start is how vast is the chasm? Or how long will it take before I can achieve a reasonably predictable ROI from an adequately large mainstream market? The answer is as long as it takes to make and implement a whole sustainable product. The chasm model states that no mainstream market can be established until the whole product is ready. Geoffrey A. Moore reasonably believes that once the whole product is ready, the market will quickly develop around the company that drove and led the whole product effort. But can you predict how long this will take? By studying the target customer and their strong reason to buy and then analyzing all the components of the whole product, you can reduce this process to a manageable set of performance factors where each of them can be predicted ahead of time with a predictable point of convergence. This is simply another type of business plan.
Assuming that this business plan has some credibility, other questions follow immediately. Such as how big will this market become? The answer is as big as can be encouraged by the target market’s use case, which is its strong reason to buy as the whole product provides. Market boundaries occur at the point of failure of either the value proposition or the whole product. In comparison, alliances, competition, positioning, distribution and pricing don’t influence the market size but the market penetration rate. Given that there are free-market economy incentives, better solutions in these areas will appear eventually if the market exists. Market size estimates, penetration rate, the cost to achieve market leadership and expected market share can be made. However, there will still be disagreements about the possibility of success and the extent of risk. However, there shouldn’t be a leap of faith. Thus, the call to action to the investment community is to ensure your client companies incorporate chasm crossing into their business plans. You must demand broad, long-term market characterizations and specific target customers for the D-Day attack. Force them to refine their value propositions till they are strong and then use these to examine how many target customers are there. Force them to define the whole product and help them build relationships with the correct partners and allies. Once again, you need to use these results to test the assumptions about the market size. Use the chasm crossing matrix of ideas to make sure there is proper management of financial assets.
The role of the venture managing group
The entrepreneur’s main concerns are how long can I live off venture capital? And when should I follow the discipline of break-even cash flow? Nothing is safe until the break-even cash flow is achieved. This encourages the early adoption of profitability. In fact, in slow-developing markets with low capitalization needs, there is a strong case for using profitability from the very start. Early adopters will pay the consulting fees and prepay royalties to help fund low-capitalization startups. These prepaid royalties cannot be immediately booked as revenue from an accounting perspective. Still, they can make your cash flow positive from day one and keep 100% of the equity preserved for the future.
The benefit of having the discipline of profitability at the beginning is that you don’t have to learn it later. Even when experienced managers guide them, venture-funded enterprises for a long time fall into a “welfare state mentality”, losing their pressure and searching for their next salary slip to come from another set of financing and not from another market. Moreover, the discipline of profitability teaches you to “just say no” early and always. There are no funds for most ideas due to resource limits. This reduces time to market as people are not focused on doing something else and because they are aware that the market is paying their salary. Finally, when one searches for external capital, there is no stronger proof of a high company valuation than having it already showing the actual market demand and its ability to process that demand profitably. There are two solid reasons for choosing this route at the beginning. Firstly, the price of category development and market entry is always too great to fund with sweat equity or consulting contracts. This is the situation in any manufacturing-intensive operation. Secondly, the category is expected to rapidly develop, so you cannot afford to grow organically as a mute.
There is a minimum level of capitalization needed. You need to make direct sales calls, look presentable and have an office and a phone to answer professionally. You need to invest in early market PR to launch the product for your early market success. Still, you don’t need to advertise or invest in developing partnerships or building channel relationships. This is all premature until you’ve created some early market credibility alone. However, the equation changes once you’ve established early market leadership. The whole product investment takes a lot of funded initiatives, including the channel development process, creating demand and providing sales incentives. It’s vital during this period to adopt an effective marketing communications program consisting of PR, market relations and advertising.
Thus, you must not start this process until you have established the early market leadership and don’t commit to investing much cash in the chasm.
Organizational decisions: from pioneers to settlers
To leave the chasm behind, cross it and not go back to it, a transformation is involved in the enterprise that few individuals span, which is the shift from pioneers to settlers. In the development organization, pioneers push the edge of the technology application envelope and don’t institutionalize. They don’t like to establish infrastructure and document. All they want to do is great deeds, and when there are no more great deeds, they want to proceed. Their brilliance secures the early market, and there would be no such thing as high-tech without them. However, they can become a liability after you have crossed the chasm. Their interest lies in innovation and not administration. Industry standards, common interfaces and adaptations to installed solutions, especially when these solutions are technically inferior, are all Greek to high-tech pioneers. Thus, when the market infrastructure starts to surround them, they will already look for a less crowded country. Meanwhile, they are unlikely to cooperate in the required compromises and can be most likely disruptive to groups looking to carry out this agenda. It’s therefore essential that as the enterprise shifts from the early market to the mainstream market, pioneers should be shifted to another future project within the enterprise or, if this isn’t an option, to another company where their talents can be better used.
On the other hand, the sales force at the forefront is the pioneers of high-tech sales. These people have a special gift of selling to the early adopters as they understand technology and product to an extent where they can easily control them and adapt them to the early adopters’ dreams. They talk the same language as the early adopters, understand the breakthroughs that early adopters want to achieve and ensure that their products are wrapped around that cloak. They think big and get huge orders. Without them, it’s hard to achieve early market leadership.
However, they are also a liability after crossing the chasm as they are mainly responsible for dragging companies back into the chasm. This is because they continuously make a sale to the early adopters, which is a sale based on providing custom implementations of the whole product. Such agreements are made by robbing from the mainstream R&D effort to the custom R&D effort required to achieve the early adopters’ buying objective. The importance of leaving the chasm behind is to halt custom developments, institutionalize the whole product and build a set of standards that the market as a whole or at least one segment of it can support. This mainstream effort puts too much pressure on the R&D department, which shouldn’t be distracted by another wild venture.
Now, we can see that we have technology pioneers and technology salespeople who are essential to the success of the early market and a liability after the company crosses the chasm. They should be replaced. However, is this morally fair? One thing most high-tech companies should understand is that pioneers don’t like to settle down. If everyone can accept this fact initially and the pioneers’ goal is to create a mainstream market and go unemployed after that, they can have a reason to move forward without them. Settlers don’t take the places of pioneers as they settle for positions that pioneers would never have taken or would never choose. They take over the employment roster, management positions, authority, and budget. They create procedures. This is all a good sign for the post-chasm market populated with pragmatists who like trustworthy and predictable people and hate surprises. But it’s not pleasing to the pioneers, so how can you make the shift between the pioneers and the settlers practical? You should introduce two new positions in the crossing the chasm effort. The first position is the target market segment manager, and the second is the whole product manager. Both are short-term and transitional positions. During the chasm transition, these two roles should be assigned for particular one-time-only responsibilities, and when they are in that phase, you will use their “interim” titles:
In the temporary job life of a target market segment manager, there is just one girl – convert an early adopter customer relationship into a possible beachhead to enter into the mainstream vertical market in which that customer participates in. Once you have closed an account as a part of an early market sales program, you should hire the target market segment manager as its account manager with a charter that permits them the type of extensive customer contact that will let them actually learn how their business operates. Such as:
- They should attend trade shows, study the systems and meet people within one account and later in related companies.
- Meanwhile, they should supervise the early adopter’s project, ensure it’s divided into achievable phases, supervise the introduction and unfold the early phases, gain feedback and buy-in from the system’s end-users and cooperate with the in-house to spin off the type of localized implementation which gives these first deliverables immediate value and influence.
- Meanwhile, they will work with the whole product manager to discover which parts of the early adopter’s project are appropriate for a current role in the whole product and which are not. The goal here is to separate the distinctive elements as account-specific changes, ensuring not to hamper the present product development team with the burden of controlling them.
The market segment manager isn’t expected to generate additional profit from the account in the short run as the early adopters think they have already paid for any possible changes they might require. They can, however, be expected to do the following:
- Speed up the implementation of the initial installation of the system. This doesn’t only contribute to the essence as it will speed up the purchase of extra systems. It also protects the beginning of a reference base in the target market segment. Unfortunately, most companies fail concerning this. Thus, it’s important to remember that pragmatists are not interested in knowing to whom you have sold your products but who has a whole system.
- In the implementation of the initial installation, introduce their replacement into the account who happens to be a settler who will help the customer for future generations. The pioneer salesman will still exist at this point and still has a relationship with the early adopter. Still, the daily operations of the account are entirely in the hands of others. The pioneer is usually fine with this as they recognize it as the type of detailed-oriented settler work they don’t enjoy.
- Leverage the current project to establish one or more whole product extensions that correctly solve some broad industry issues. The aim is to absorb these elements into the product line or informally distribute them as an unsupported product extension by a user group. In either case, such add-ons increase the product’s value in the target market segment and obstruct the entry of any other vendor.
The whole product manager
While the target market segment manager follows these tasks in the customer’s environment, an internal role should be filled simultaneously. The transition is from the product manager to the product marketing manager through the temporary role of the whole product manager. We will explore these three titles separately to avoid confusion.
The product manager is a member of the development organization responsible for ensuring that a product is made, tested and shipped on budget, on schedule and based on specification. It’s an internally focused job, separating the marketing and development organizations and requiring a high degree of technical knowledge and project management experience. Sometimes, companies try to migrate this position into the marketing organization to make it more market-driven; however, this undoubtedly encounters organizational resistance and hardly succeeds.
A product marketing manager is a member of the marketing organization responsible for introducing the product to the market and making it accessible to the distribution channel. This comprises all the elements on the chasm crossing agenda. It’s considerably an externally focused job. Unfortunately, most companies don’t separate the product manager and the product marketing manager. If both positions are combined, one result or simply nothing is achieved.
The whole product manager is a product-marketing manager-to-be. The reason for this is that the job is premature. Until there is a successful chasm crossing, there are no significant market relationships or understandings to drive the future of product development. The target market segment manager is away from getting these started, but they are not there today. On the other hand, what’s there today is a list of bug reports and product enhancement requests growing faster. The entire development organization will sink if this list isn’t managed well. The tactic which once and for all secures proper management of the list and starts the transitioning from pioneer to the settler is to take this list from the product manager and hand it over to the whole product manager. The issue with the pioneer continuing to guide the future of the product is that they will be encouraged by their commitments made to early customers. Unfortunately, this doesn’t support the mainstream market customer. What should greatly become the prioritizing factor for current product development work is the contribution to the mainstream market, which is contributing to the whole product. Thus, there needs to be a transition of authority. After the authority is transferred, the company has taken a big step in moving from a product-driven to a market-driven organization. As the mainstream market comes and as the needs of this market can easily be discovered through market research and customer interviews, the whole product manager comes into the picture as the product marketing manager. To take this step in the early phase of the market development cycle is absurd as it’s essential to be product-driven in the early market and give more power to the product manager. But failing to take those powers back at this point is equally absurd, for every day the pioneers handle the enhancement list, the company is risking making additional development commitments to non-strategic ends.
Compensation plays a considerable role and nuisance within high tech companies as compensation programs recognize the different contributions from pioneers and settlers or their time at the enterprise and end up discriminating the two positions against each other. Organizations fail when this happens. According to Geoffrey A. Moore, a few general principles must be followed when managing compensation schemes for the two positions.
In terms of the sales angle, a pioneer sale consists of a huge purchase agreement based on the successful execution of a pilot project. Even if there has been a considerable payment upfront, the practical way to book this business is to postpone acknowledging the larger order till it has been confirmed. That could be at least a year away, and during that period, several new players would have been introduced into the account, including the target market segment manager. The pioneer salesperson might even be gone by that time. Let’s assume that an account manager is hired, inherits the account, and suddenly orders start flooding in. What do you think is the most suitable way to compensate him? It’s important to discriminate between account penetration and account development. Account development is a more expected, less remarkable and long-lasting achievement. The compensation should thus reward the durability of the relationship, customer satisfaction and predictability of the revenue stream. Over time it should be endless and not grouped into dramatic payments. Since there is high value connected with the continuous customer relationship’s intangibles, most of it can be based on an objectives-based formula instead of pure revenue achievement. Suppose equity is included in the compensation strategy for the firm mainly. In that case, it’s a reasonable component here if it’s distributed slowly, with more significant portions of equity coming at the end of the program to reward service stability. Since this isn’t a high-risk role, it shouldn’t be a high-reward role.
On the other hand, compensation for account penetration by a pioneer salesperson should possess the opposite features. It should quickly award the mass of its rewards based on acknowledging one main achievement- winning the account. This is a remarkable event which only a few can achieve, and it’s essential in deciding the company’s future in the long run. It’s a remarkable high-risk endeavour where the salesperson doesn’t have a high chance of winning. Therefore, it deserves noteworthy compensation. However, if it was achieved by a promise more than anyone can deliver, this shouldn’t be a behaviour that deserves to be rewarded. Although the compensation needs to be rewarded, there should also be a reality check in the process. As the pioneer salesperson will be moving on, you don’t want a continuous compensation program, and equity isn’t a suitable medium. By considering this together, the situation favours a bonus-based program more than a commission approach.
Compensation for developers
Considering development, there is one compensation challenge which is the pioneer technologists. They can be divided into two groups: true company founders and early employees. The company founders are confident in equity and hope to preserve a large quantity of equity to fund the chasm crossing. On the other hand, early employees pose a real problem. They can confidently claim that they created a large part of the core product. Thus, if that product becomes a mainstream market hit, they fight to gain a larger share of the profits. In fact, they don’t, and they don’t deserve it. Mainstream market success is a function of the whole product and not the core product, and it’s an enormous team effort.
However, pioneer technologists have a right to a larger share of the early market returns as here, it’s the core product that drives success. Unfortunately, the cash is too tight in this period, and there is no cash available to provide as a reward for them. Thus, equity is the usual fallback. This is a compromise as equity should be preserved for individuals who cross the chasm and stay, which isn’t the pioneer’s role but is more frequent than them leaving the company.
In summary, unsuitable compensation wastes money and discourages people. For it to be suitable for high-tech companies, compensation programs should consider the differences between the required performance in the early and mainstream markets, the types of people needed to achieve these performances and the possibility that some of them will have to leave the company soon before it accomplishes excellent profitability. If you can deal with these problems and come up with a suitable distribution of compensation, you can tackle the agony and loss of momentum that comes with crossing the chasm.
Decisions of R&D – from products to whole products
R&D is high tech, and others are secondary. As an industrial sector, you’re mainly technology-driven. Eventually, you learn to make products, markets and then companies to dominate those markets. However, this all starts with technology. The products, markets and companies you build grow up to make continuous and legitimate demands on you, and you have no choice but to obey them. Once this situation starts, R&D doesn’t get to pay attention to the generic product anymore as it should become ‘whole product R&D’.
The whole product R&D is not driven by the laboratory but by the market. It doesn’t start with creative technology but with innovative market segmentation. It doesn’t penetrate the protons and procedures but instead into habits and behaviours. It prefers to group its creations from current technologies and products instead of inventing new ones from the beginning. R&D isn’t really exciting, which is why it’s always ignored. High tech companies use the word ‘maintenance’ for the whole product R&D. The people they assign to it are usually janitorial types, not top gun types. Instead, the top guns want to make more discontinuous innovations, populate the market with more technology than it could absorb, and complain about how the product life cycles are becoming shorter. This doesn’t lead them to cross the chasm.
A growing discipline
The whole product R&D is a growing discipline. It represents a type of convergence between high-tech marketing and consumer marketing where for the first time, consumer marketing tools can be of great use in solving problems of high-tech marketing. We will explore two examples – focus groups and packaging studies.
As innovation considerably continues, focus groups which are useless in guiding the early market development become practical tools. This is because the fundamental product proposition already exists in the market and is absorbed. Until this is the situation, consumers get confused by trying to foresee the value and usage of a new high-tech product. However, once the proposition is ready, the tool is practical. It can be specifically used to guide the extension and changes of an existing product line to comply with the unique requirements of a target market segment. In this case, all that the consumers are required to do is address minor derivatives from an established entity. The information they provide is therefore valuable.
Another growing discipline is the packaging. Packaging has been considered as a mere box, logo and cover. However, packaging happens not only on the outside but on the inside. Thus, good packaging aims to ensure a successful experience immediately, which is an area that requires more research in high tech. Focus groups and packaging are usually located in the marketing department, but in high tech, the marketing team is too ignorant to drive the bus. As a result, what may appear to the all-rounder to be a mere change might cut across some important technology boundaries in a radically inappropriate manner. Or what might look hard to achieve might be a by-product of a minor adjustment. In either situation, engineering should be a direct partner in this effort, or it’s wasted. This is a whole product R&D with market research and product development cooperation.
We have now come to an end to the chasm crossing series by Geoffrey A. Moore. It’s therefore essential to understand that the post-chasm enterprise is bound to the commitments of the pre-chasm enterprise.