Moore on B2B
thestandard.com
May 08, 2000
Approaching the Chasm
For business-to-business exchanges, the time has come to forsake breadth and focus on depth.
By Geoffrey Moore
One side effect of the recent stock marketslide is that Wall Street has lost confidence in business-to-business
Internet stocks. Given their once-lofty valuations, it should have surprised no one observers think further declines
may lie ahead. The questions is, what can investors learn from all of this?
For longtime bears in the sector, it's I-told-you-it-was-a-bubble time. But the metaphor of the bubble bursting is
not accurate. When a bubble pops, there is no residual substructure on which to rebuild. It literally evaporates. To
call something a bubble is to imply that there is not and never was true value in the property; the entire exercise was
an illusion. For b-to-b stocks, that is simply not true.
More accurately, business-to-business exchanges are transitioning from the early market phase of the technology
adoption cycle to "the chasm." This is an oft-repeated phase in the high-tech business with well-understood
mechanisms for making progress. What is bizarre is that it has normally been funded almost exclusively by venture
capital. This time it's playing out in the public markets, where investors have not been trained in its effects.
Here's what happens when technology crosses the chasm: Early in the evolution of a high-tech sector, the goal is to
gain visibility by announcing major deals with significant players. This creates market awareness of the new
paradigm and attracts support from enthusiasts and visionaries. It is a critical step to getting anything new on the
map. Virtually all of the high-quality business-to-business companies have taken this step.
The market now wants the new paradigm to make the next step,
from a concept-play validated by big deals to a real-world
phenomenon validated by people increasingly adopting it for everyday business transactions. In terms of the
development of exchanges, this step involves creating liquidity, attracting the requisite critical mass of buyers and
sellers to participate in the exchange. More generally, this phenomenon can be called "crossing the chasm."
The challenge posed by the chasm is that no one wants to be the first to switch over to a new paradigm. Instead,
they wait for someone else to make the first move, so they can see how it plays out before committing themselves.
(Think of a junior-high dance with boys on one side of the gym and girls on the other, and you have the idea.) This
creates the chasm effect, a lull in the technology adoption cycle during which everyone is waiting for someone else
to go first.
Crossing the chasm requires that one or another subset of pragmatic users breaks ranks. It turns out the only
people who will do this are "pragmatists in pain." Classically, these folks are in niche markets poorly served by
existing mechanisms and have come under pressure to perform better. They have little to gain by sticking with the
old and little to lose by taking a chance on the new.
In mature, consolidated industries under pressure to squeeze the last dollar out of their supply chains, purchasing
departments represent this class of pragmatists. They have used their clout to extract all the price concessions they
can from their suppliers, so any additional reductions have to come from new methods rather than more arm
twisting. Because they are concentrated and powerful, such companies can easily bring their entire value chain to
the Web. So far, they've lacked the imagination and resources to do it. But that's what companies like Ariba
(ARBA) , Commerce One (CMRC) , I2 Technologies and Oracle (ORCL) are preparing to supply. Both the
automotive and the aerospace value chains have been targeted as early opportunities to validate this type of
exchange.
In emerging markets in which buying and selling power is fragmented, the challenge is different. Here there are no
large institutions to lead the charge, hence no real targets for the sales forces of the enterprise software or services
vendors noted above. As a result, independent exchanges are more likely to carry the day if they can create the
first instances of genuine market liquidity, in order to find their way across the chasm. So where can they find their
pragmatists in pain to champion this effort?
One promising area is among marginalized functions charged with reselling used equipment, distressed or obsolete
inventory, or excess capacity. These people need exchanges specific to their vertical industries, and historically
have been served inefficiently by old-school networks of auctions and brokers. For many companies, this will
continue to be good enough. But for high-tech and telecommunications companies, where technology changes can
create bulges of unusable product or capacity, new mechanisms are required.
To date, we have yet to see such liquidity emerge. Part of the problem is that at the outset, creating liquidity
rewards narrowness of focus, whereas early market investors were bidding up breadth of focus. As long as the
markets reward breadth, exchanges will spend their energies adding new markets, rather than deepening
penetration of existing ones. Now, with the stock market's pullback, we will see investors reject more superficial
expansion, leading to more targeted chasm-crossing efforts.
Let's be clear, however. Focusing deeply on niche markets to create liquidity in and of itself does not generate
anything like the returns business-to-business exchanges have promised their investors. At the end of the day,
companies must deliver both depth and breadth. This focus initiates a market-growth dynamic of increasing returns.
That is, the more buyers and sellers who come to any exchange, the more new buyers and sellers that exchange will
attract in the future. As momentum picks up, the eventual result is mass-market hypergrowth, or what we have
previously termed "the tornado." Again, this is a known phase change in the development of high-tech markets, one
that was the basis of the startling valuations of b-to-b stocks.
A key lesson of the past decade is that you cannot propel yourself from the chasm to the tornado. Occasionally
someone else's tornado can pull you out, but more frequently you have to make your own way across. One piece
of good news is that there are always underserved niches that will respond if the new offering can genuinely bring
them relief. Another piece of good news is that it is not expensive to cross the chasm ? niche marketing can be
done for a fraction of the cost of mass marketing.
The bad news is that many management teams that succeed in the early market lack both the skills and the attitude
to forsake their love affair with breadth to embrace depth. This creates a Darwinian moment during which those
firms who can focus fast and hard will gain traction, while those who cling to prior successes will falter. For b-to-b
companies, it is a time for new metrics ? niche market success metrics ? to take temporary but full control of the
management agenda.
Geoffrey Moore is managing director with the Chasm Group, a Silicon Valley consultancy, and a partner with
Mohr Davidow. His latest book is Living on the Faultline: Managing for Shareholder Value in the Age of the
Internet. |
