In our practice at the Chasm Group, we typically come across two types of clients … disruptors and disruptees. Disruptors literally disrupt the status quo, bring genuine innovations to market that change the rules of the game, create new categories and reinvent existing ones. Disruptees find themselves threatened by innovations that impose new business models or raise the stakes on what’s required to meet customer needs. More often than not, the enterprise is the disruptee that seeks to maintain its leadership position by acquiring disruptive innovations, partnering for missing ingredients, or in rare cases, transforming new technologies into material businesses.
Today’s successful disruptors are the darlings of Wall Street and the envy of large enterprises. As technology profit pools have shifted from Capex to Opex models usually tied to XaaS, traditional enterprises have played a “me too” game but struggled mightily to keep pace.
The rush to CASMS by large enterprises … Social, Analytics, Cloud, Mobile, Security … has created CHASMS within those organizations. This is generally not because of a lack of strategic vision but, rather, an inability to operationalize these disruptions. And when these enterprise innovations achieve a level of market readiness, they are late to a game where customer preferences have been established, value chains have been created and developer communities have taken root.
Looking at B2B SaaS and IaaS growth rates over 2010-2013, our Chasm Family partners at TCG Advisors found early players like AWS, Workday, Marketo, Splunk and ServiceNow achieve CAGR’s of 66%+ .
Being late carries a high price tag as witnessed by Microsoft Bing in its attempt to topple Google in search, Oracle CRM in fighting Salesforce, and legacy APM players in fending off newcomers like Splunk and AppDynamics.
So can you create an entrepreneurial enterprise, or are you doomed to drift away as the bloated legacy elephant that (despite Lou Gerstner’s words to the contrary) cannot dance?
Alas, it is often not a lack of vision that frustrates the entrepreneurial aspirations of enterprises, but a lack of execution. Where enterprises seek to protect what we call Horizon 1 revenues stemming from existing core businesses at the expense of their seedling innovations, entrepreneurial disruptors put extraordinary effort into cultivating a flower that delights their customers.
Great ideas from the labs never achieve revenue materiality because enterprises are unwilling to invest the required time and make the kind of asymmetrical bets required to nurture unprofitable high-cost fledgling businesses into material revenue businesses.
In our practice at Chasm Group, we see the application of inappropriate performance metrics and sub-optimal allocation of resources to sales and marketing as issues that plague many entrepreneurial endeavors. Using core business Opex performance metrics like revenue vs. plan, contribution margin and wallet share rather than “Time Ex” metrics like target accounts vs. plan, deal threshold, sales velocity and time to tipping point leads quarterly-driven management to abandon promising innovations too soon.
Similarly, core business mentalities lead many enterprises to withhold the best sales and marketing talent and underinvest in these negative cash flow businesses, starving the seedlings when they most need water and nutrients to sprout.
The conundrum of the entrepreneurial enterprise seeking to grow its mainstream businesses while nurturing its future mainstream businesses is perhaps best summed up in the economics of today’s disruptor. Where disruptees protect and invest in their profitable core businesses with single-digit growth rates, disruptors run high-growth new businesses with minimal to negative profitability. Hard chargers like Amazon ($75 billion revenues/$143 billion market cap), and Salesforce ($4 billion revenues/$22 billion market cap) have yet to turn a profit.
Can the entrepreneurial enterprise exist? We think so. What do you think?
Andrew Salzman is a principal with Geoffrey Moore’s Chasm Group where he focuses on helping tech-based companies transition disruptive innovations into growth businesses. Capabilities include business planning and product direction, corporate and product marketing, new product development, go-to-market, marketing-sales alignment, alliance/partner marketing, and digital marketing. Andrew’s career includes senior marketing roles at Siebel Systems, Compaq, e2open, and IRI preceding his move to consulting in 2011. He serves on several advisory boards working with emerging technology companies.