Power and Moore's HCAM
On Power
The concept of "power" is one of the most elusive in the social sciences. Some say it is the root metaphor of sociology. If so, where is power? Is it in the corporation, the customer, the charismatic CEO, the wise BOD, the discontinuous technology, the product as killer application, the value chain, in skillful execution, the brand name, the financial report, the Fed, innovative R&D, customized marketing, or the integrative glue of software, and the like? Power seems to be everywhere and nowhere at the same time, making it difficult to grasp, much less to use as a means of controlling investments in the stock market.
Here, the problem is that "power" is an evocative core concept that must be embedded in a context to anchor its meaning. The meaning of "power" cannot be immaculately isolated from the context of other ideas. The concept of "power" is nested in a theory of power, a theory composed of other concepts, connected by a model of specific interrelations, where both concepts and posited relationships can be linked to data, to observations that help ground us in reality.
On this thread, we all experience the power of the metaphor, "Gorilla power." The metaphor evokes a feeling that is active, strong, and good. Moore selected the concept of "gorilla," I assume, because of its evocative power in American culture. For example, take the joke, "What does Henny Youngman say when a 600 lb gorilla is bird dogging his wife?" "Take my wife, please." Take that joke away, please! Americans want to get that Silverback on your side, because a "gorilla" is a larger-than-life metaphor, conjuring up an image like that of King Kong clinging to the Empire State building, holding Fay Wray, and swatting away bi-wing airplanes.
The potency of the word "power" itself is so strong that it sells books that include it in its title, like "The Power of Gorilla Investing." Does that sound like a compelling read? This is so because "power" as an idea is alluringly seductive, promising us the Midas touch in stock selection. First, with Tornado and now with Earthquake, Moore has selected other evocative metaphors that promise the tremendous power of the storm gods. A Tornado of hypergrowth forms from a whirlwind of pragmatic adoption that forces a value chain to standardize on a total solution. In the Internet age, businesses live on a fault line, forever vulnerable to the earthquakes created by discontinuous innovations.
The power of such metaphors resides in nesting the commonplace idea into a fresh and strong idea that evokes emotion. When you imagine the price of a stock spiraling upward in a Tornado, you feel excited. When you imagine the stock of a business you own about to collapse during an imminent earthquake of discontinuous innovation, you feel frightened. Playing god-the-theorist, Moore has selected these metaphors to impart life to his creations. Just as I used the metaphor in the preceding sentence to produce a similar "lively" effect. Moore appropriates these "power" metaphors, giving them fresh and restrictive meanings by anchoring them in the context of his Gorilla Game Model.
The advantages of choosing "power" and its evocative metaphors (Gorilla, King, Tornado, Chasm, Fault Line, etc.) probably outweigh the confusions that come when outsiders use the words in an investment context but with their everyday meanings. For example, a stock analyst (or another SI member) insists on saying Company X is a gorilla, when we, the cognoscenti, know that it has no open proprietary architecture with high switching costs.
Moreover, in analyzing Moore's Model of the Gorilla Game (#29114), I argued that Moore "created a fertile union by linking business strategy to financial markets through a mutual interest in power. Management strategically values the power that comes from gaining competitive advantage; whereas, investors strategically value the power of a company's competitive advantage because it adds value that, over time, is associated with higher stock prices." Moore's "power" was linked to "competitive advantage." Moreover, Moore linked strong and sustainable" competitive advantage to the model of discounted cash flow analysis (DCFA), creating his GAP/CAP Model, which illustrate the tall-and-wide market capitalization of the Gorilla.
Notice how the concept of "power" takes on form, including specific and concrete observable manifestations, when the concept is linked to the context of Moore' models and data. In science, the meaning of a concept is nested in its relationships to other theoretical ideas and to observable data. No longer nebulously floating as free as the gods, the meaning of "power," as in a "Gorilla in a Tornado," is netted, made manifest through its avatar of "competitive advantage." When anchored in Moore's models, the pragmatic meaning of "power" dwells in the strategic rules for management and investing that he generated using his model of competitive advantage.
From CAM to HCAM
Not only has Moore put Porter's competitive advantage model to good use, he has put it to new use in Fault Line. Porter's classic Five-Forces Model (FFM) specified five constituents (suppliers, customers, existing competitors, new entrants, and substitutes) who vie for control of the marketplace. Moore considers that model still useful today because, after determining the relative power of the Five Forces by isolating the specific and comparative leverage of each in the marketplace, management can make informed strategic decisions.
However, Moore (2000, p. 93) continued, "Nonetheless, the model is weak when it comes to dealing with discontinuous innovations, in large part, because it takes a fundamentally company-centric view of competition, presuming no significant disruptions in technology, value chain, or market structure." Moore argued that the FFM is limited to use with mature companies because their technology, value chain, and market structures are established and stabilized, leaving only differences in company execution to influence competitive advantage, that is, leaving only execution to produce cost advantage and differentiation.
(Author's note: Did you notice that Moore, in just the space of one paragraph, in his low-keyed style, so characteristic of intellectual arguments, just cut Porter's balls off! Moore just castrated Porter by slashing the power from his pair of major characters, "differentiation" and "cost advantage," which are his key classes of competitive advantage, as weak and company-centric in an Internet age. These eunuchs are only capable of guarding only the harems of mature companies who are about to get blind-sided by inevitable discontinuous innovations because they are living on the Fault Line in the Internet age. If not, we need multimedia hypertext here, so I can create the dramatic music that warns of the impending razor and the streaming video necessary to portray the bloody, bouncing balls rolling across the floor.)
This undercutting was the prelude in Fault Line that preceded Moore's advance of his Hierarchical Competitive Advantage Model (HCAM). His model is a hierarchy because it ranks different competitive advantages one above the other. It is an inverted hierarchy actually since Moore's metaphor runs from depth to surface, ranking the best as deepest and strongest, as foundational, as the very core of cores. (His overarching metaphor in Fault Line is the "core" metaphor used to distinguish core--what adds competitive advantage--from context--everything else. So, he inverts the hierarchy by using a variant of that core metaphor.) From surface to core, ascending in power as it descends to the core of cores, the Hierarchical Competitive Advantage Model ordered: (1) Differentiated Offerings, (2) Company Execution-Value Disciplines, (3) Market-Segment Leadership, (4) Value-Chain Leadership or Domination, and (5) Catching the Technology Wave.
Moore began his discussion with an integrative overview: (a) the foundation of competitive advantage is catching the technology wave formed by the new paradigm of a discontinuous innovation that disrupts forever the old paradigm, rewriting all the rules of competition; (b) a new value chain forms in phases that integrates the new technology into an end-to-end solution that meets customer needs, in the process generating power for the dominant company that lasts for the life of the paradigm; (c) initially the value chain supports a single integrated market that is defined by the new product category, but, over time, specific vertical market segments emerge, providing opportunities for other companies to create strong GAPs and sustainable CAPs over a limited market domain within the segment; (d) throughout their competition for market-category or market-segment domination, to achieve competitive advantage through execution, companies differentiate themselves by prioritizing among the value disciplines-discontinuous innovation, product leadership, operational excellence, or customer intimacy-selecting one as their focus of execution, as their lever for attaining competitive advantage; and (e) none of the underlying sources of power in the HCAM model create shareholder value until they touch the customer as a differentiated offering that defines the whole product, giving targeted customer a compelling reason to buy. What is new here is Moore's focus on the significance of catching the technology wave and the formation of new value chains as deep, strong forms of competitive advantage. Always sensitive to changes through time, Moore continued to focus on phases of competition and how this alters the competitive landscape and the strategies for achieving competitive advantage.
Catching the technology wave is crucial because it generates the highest GAPS and the longest CAPs. Using Joseph Schumpeter's concept of "creative destruction," Moore argued that the Internet generates massive new wealth at the expense of traditional sources, creating fault line vulnerability in the entire economy. Moore listed a dozen paradigm shifts within the computer industry in the last twenty years that created new value chains: mainframe computing, minicomputers, personal computers, desktop publishing, LANS, client-server computing, wireless telephony, home computing, campus area networks, Internet wide-area networks, world-wide web, intranet computing, and handheld devices, with more to come.
Each technology wave created an order of magnitude change (the 10X factor) that was worth ten times the value of the status quo. Simply by catching (or being perceived as catching) the wave, companies' stock rise accordingly. Mixing his metaphors, Moore (p. 102) argued that the 10X wind of a new category GAP "is the fundamental driving force behind the technology-enable markets." Moreover, he believed that this phenomenon rested on the back of Gordon Moore's law of inexorable increases in computer performance at ever-lower prices. Not only does catching the wave lead to 10X increases in value, but also none of these paradigm shifts has yet become obsolete, still sustaining deep persistence, creating long CAPs.
According to Moore (p. 102), "And so it is that all strategy in technology-enable markets must begin with identifying which waves we will ride, which winds we shall raise our sails to catch." Thus, Moore is giving core-centrality to the issue of adopting or failing to adopt discontinuous innovation, making this key distinction with established vendors in mind, and he urged them to adopt the Cisco-strategy of acquisition of new technologies as part of the Microsoft-master-strategy of co-optation: "embrace-and-extend."
By the way, Moore (p. 104) also said, "…the emergence of Internet-based institutions represents a one-time transformation of the economic landscape that will change virtually all of the rules of business. Indeed, the Internet is more accurately described as a 100X change."
What Moore Has Not Yet Said
In the paragraph above, I hope that you noticed my casual "by the way;" it is a sneaky literary device that is used to introduce a shock. Here it is: I know what book Moore is writing now (or, at least what he should be writing). My by-the-way paragraph telegraphs precisely what the unfolding development the Internet age compels, what is necessary, what is required, the must-have that is mandated as the next step.
When you change all the rules of business, you necessarily change all the rules of investing. The Internet represents a change-of-change: it is the exponential change of the already exponential changes arising from discontinuous innovation. The Internet is a meta-change, a discontinuous innovation so great that it accelerates all future discontinuous innovations. Given an already accelerated velocity provided by one discontinuous, multiplied ten times, that is now accelerated by the Internet from one order of magnitude to the next, another exponential increase to a hundred times. This network effect generated by the Internet is a one-time, but forever-change, that we as investors must address.
Two points made by Moore are important here. First, in his discussion of value chains, Moore used both the concepts of "self-organization" and a "virtual cycle of increasing returns." This is a clue. Second, when power was linked to a hierarchy of competitive advantages in which catching the technology wave was given priority of place as the core of cores, and this was followed by the introduction of what Moore called 100X change, and I call the concept of change-of-change, then an unstated implication was left for us to infer. And it is this: we must catch the second-order-of-magnitude wave of the first-order-of-magnitude wave of disruptive technology change.
Of course, I don't even have all of Moore's answers--much less all of the answers--for how you catch and ride that second-order technology wave. That is something that must be worked out over time by building and testing models in this community. Because it is implicit in Fault Line, I do know Moore's first-step: wake-up and notice the wave; don't fail to respond; and reorganize and catch the wave!
This is a clarion call to adventure, a call to venture forth from the land of the microcosm into the world of the telecosm, while keeping one foot firmly planted in each domain, an adventure in modeling and testing an extended model of the gorilla game. To begin that process, I will try my hand at hoisting the sail by offering another essay, "The Exponential Power of Network Effects," that might help us begin, hoping that I am not merely hoisting myself by my own petard. Of course, you may or may not choose to join in, playing whatever role suits your fancy, leaving me to play the fool rushing in.
I hope this helps.
Don |
