Archives For Moores Law

In 1995 Geoffrey Moore brought us ground-breaking information in his book entitled, Inside the Tornado.  This book was required reading for many technology manufacturers, including HP, a strategic partner of my employer at the time.  Using a standard marketing normal distribution curve, Moore showed us how market adoption changes when you start talking about technology.  It takes years for, what he refers to as discontinuous innovation, to catch on when talking about cars, phones, or air travel. But when speaking of today’s hot technology innovations, suddenly adoption is taking place in months.  Why is that important?

Well, to the technology manufacturers, Moore showed how products met the first inflection point of that model where early-adopters transitioned to early majority, a new audience of buyers.  He explains in his book that this audience is a bit more conservative than the first, and unwilling to work with technology that is bleeding edge!  This group represents people who might be risk adverse or, like many information technology professionals, goaled and paid on up-time, not innovation.  The first group however, representing those who will take a risk on new technology, is likely in the camp of profit center managers, looking for technology that puts them out in front of the competition.  This is further explained in Bosworth’s book, Customer Centric Selling, as he applies the model in a slightly different way to various kinds of buyers.

Manufacturers studied these models with profit and adoption in mind.  Moore’s point was that, manufacturers needed a way to enter the larger markets of early majority and late majority (possibly representing 33% and 33% of the possible market for each) if they were to enter the larger majority markets with their products.  The first one there would be given the greatest opportunity to become the market’s defacto standard.  Once there, the channel was established to meet the accelerating demand for their products, which Moore termed, The Tornado, thus the title, Inside the Tornado.  This is where the manufacturer views the channel, but this is not necessarily where the profits are for the channel partner.  The problem is, most resellers (VARs) are positioned exactly in the middle of Moore’s Model; perhaps the most unprofitable position possible for a reseller, which in turn, hurts both the reseller and the manufacturer – the company depending on their partners to bring in more and more of their business.  This is a problem.

(You’re probably wondering what this has to do with the red hydrant…nothing, it’s just a fun picture I took while photo shooting with my daughter).

© 2011, David Stelzl

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What allows a company or individual to command higher fees?  I’ve written various posts over the past few weeks on fees, and yesterday, I commented on setting higher fixed fees vs. totaling your projected hours and presenting a fixed amount (this generally leads to underestimating and a decrease in project GP).  But what allows a company to propose higher fees without the competition coming in to win the deal on lower pricing?  Commodity sales compete on price…high-value sales don’t.  Here is a list of category offerings I use when considering how to go to market.

1. Product

2. Staffing

3. Projects

4. Strategy

5. Vision

The order builds from pure commodity to greater intellectual capital.  On the low end, companies like Dell are selling low priced desktop systems online.  Nothing unique here, but they are fulfilling a market demand; consumers want inexpensive computers, in fact they demand them.  Dell can fulfill this market demand by finding more efficient ways in manufacturing and distribution.  What was once a $5000 entry point in the early 80’s (and 5K back then was something to talk about), is now a few hundred dollars.  Netbooks and IPads may further change the game here.

Staffing follows with various skills that set apart individuals.  Projects help companies move forward with initiatives that change the business.  This is where value pricing really starts to make sense.

An interesting question arises with my model at this point.  What about a utility such as SaaS like Salesforce.com?  Cloud computing should fit in here somewhere…but we’ll come back to that another day.

As we move up, start thinking about Accenture or PWC.  Strategy commands big dollars.  In a prior life I referred to our growing company as, The Andersen Alternative (Back before the days of the Accenture brand).  The message was clear; we were consultants, working up the model toward higher value consulting, while selling the technology to implement those things we recommended doing.

Finally we have people who create vision.  People like Geoffrey Moore (Author of Inside the Tornado) come to mind.  Consultants working at the top with large high-tech companies, helping them figure out where to go next.

Most resellers are not built to reach vision creation; their sweet spot is probably in the project area.  Larger integrators are beginning to build business process, ITIL consulting, and other forms of business consulting into their model to offset the commoditization of product.  If you don’t start thinking about this now, you may find yourself without profits next year, and perhaps out of business in the near future.  But let me point out, the problem is not with the area you play in, rather it is in the model you’ve built.  Resellers are built to sell projects, Dell was built to sell hardware.  Both have high profit potential…but building one model and selling another is destined for failure.

© 2010, David Stelzl