Book Excerpt: Living on the Fault Line

FRAMINGHAM (07/06/2000) - How should the management of a public company that rose to prominence prior to the age of the Internet manage for shareholder value now that Web dominance is upon us? The key is to strip the organization of any task that fails to contribute to shareholder value, says Geoffrey A.

Moore in this excerpt from his forthcoming book, Living on the Fault Line:

Managing for Shareholder Value in the Age of the Internet. Moore, also author of Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers (HarperCollins, 1999) and Inside the Tornado: Marketing Strategies from Silicon Valley's Cutting Edge (HarperCollins 1995), splits his time between serving as a managing director of The Chasm Group, which he founded, and serving as a venture partner at Mohr, Davidow Ventures.

The problem facing the IS organization, which is the same problem facing the corporation as a whole, is that too much time is being spent on tasks that are context, too little on tasks that are core.

A task is core when its outcome directly affects the fundamental value proposition of the company. This is where companies differentiate, and the goal of core work is to create and sustain that differentiation. To put it in terms of a very simple litmus test: Any behavior that can raise your stock price is core--everything else is context.

For such activities, the goal is to differentiate as much as possible and to assign one's best resources to that challenge. By contrast, every other activity in the corporation--and almost certainly this is the bulk of all activities--is not core. It is context. The goal with context is to execute effectively and efficiently in as standardized and undifferentiated a manner as possible.

Differentiating based on context is the single biggest waste of resources in Fortune 500 operations. It is the natural result of people wanting to make the best contribution they can. The problem is, differentiation soaks up time, talent and management attention for which there can be no return in shareholder value. If the goal is to manage for shareholder value, then such actions are simply wrong, and management needs to put an end to them.

In any given category of business, one company's core may well be another company's context. In the pizza business, Little Caesar's differentiates on price, Round Table on quality of ingredients, Domino's on time to deliver and Chuck E. Cheese on entertainment devices in the restaurant. For Chuck E. Cheese the actual pizza is context; for Round Table it is core.

In the car business, the Volkswagen Beetle is all about design. Everything else in the car is context. The same holds for the new Apple Macintosh in the computer industry. In both cases the differentiating value is in the design (the bits) and not in the manufacturing (the atoms). For both, therefore, manufacturing is context, not core. The difference is Apple is able to outsource its manufacturing whereas Volkswagen is not. In the age of the Internet, that bodes well for Apple shareholders, poorly for Volkswagen's.

Now let's be clear. If some contract manufacturer introduces a widespread defect into Apple's computers, that can lower the company's stock price. That is, failure to execute context tasks properly will undermine the company's core value proposition. Nonetheless, because such tasks cannot raise Apple's stock price, they are not core. Instead they are hygiene.

Hygiene refers to all the things that the marketplace expects you to do well but gives you no credit for doing exceptionally well. Do you bathe regularly?

Good. If you didn't, someone might have to speak to you. But even if you bathe constantly, no one is going to give you a promotion. The same goes for companies that ship what the customer asked for, send a bill that actually corresponds to what was ordered and received, and answer the phone when a customer calls for support. If companies fail to do these things, they will be in trouble, but once they achieve a certain level of consistency in them, they get no premium for doing them better than that.

Core and context interoperate to create quality, and both are fundamental to every organization's effectiveness. The interaction between core and context determines how much core value gets through to the marketplace. Without careful management to the contrary, however, context always gets in the way of core.

Here's how.

The first issue is simply absorption of time, talent and management attention.

To test whether your organization has the problem, ask yourself how much of your week is spent in context meetings. How much of your time, in other words, is spent on hygiene? Now apply that ratio to the company as a whole. In a startup, the ratio is typically 80 to 20. Eighty percent of the resources are being deployed against core tasks. In the typical Fortune 500 company, it is closer to the opposite, 20 to 80. That means the latter would have to allocate four times the number of resources to an initiative just to gain the same throughput.

But the actual situation is much worse than that. We focused on the 20 percent who were actively trying to do the core work. What about the other 80? Well, they are hard at work on context tasks. What are they doing? Trying to add value, of course. How do they do that? By differentiating their work, making it stand out, making it special. What does that take? Time, talent and management attention, of course. Whose? Now here is the nasty part. It doesn't just take their time, talent and attention--it takes everyone else's as well! Wherever differentiation occurs, it requires widespread interaction to make sure the desired novel effect is achieved.

Now we can see why failing to outsource context is so debilitating. This is where all those meetings that you don't really want to attend come from. Of course, there is a theoretical alternative. One could hire people and give them a mandate not to differentiate. But that is a hideous charter to give any human being, and even people who overtly agree to it--I am thinking of assembly line workers in particular--will subvert it over time, consciously or unconsciously.

And so whether we intend to or not, as we add context function after context function to our payroll, we build the web that eventually enwraps and immobilizes us all.

Now we might justify this course by saying that we are creating jobs, and we are. But let's look a little closer at the people in these jobs. They're not stupid. They know in the back of their minds that these jobs are not core and thus could be eliminated. So what kind of behavior does that perception generate? Conservative behavior, of course. Don't rock the boat; you might tip the boat over. Resistance to change inside established companies, in short, is primarily a function of too many resources deployed in context as opposed to core activities.

It is what one might call the Dilbert problem. Dilbert cartoons parody an organization that has become 100 percent context--it has no core. It is the contemporary version of theater of the absurd, an ongoing production of Waiting for Godot in cubicles. In such a world, individuals know their jobs are meaningless but struggle valiantly to retain them anyway for fear they can find nothing else. And so when some new disruptive technology comes to town, when aggressive change is clearly the order of the day, it runs headlong into a business-as-usual coalition, not in any one department specifically, but in every department generally. Nothing can get done quickly, and in many cases, nothing can get done at all.

Interview with Geoffrey Moore CIOs at Risk When a Fortune 500 company crosses the chasm from the old economy to the new, the CIO can get caught in the void. CIO Senior Web Editor Martha Heller spoke with Geoffrey A. Moore, author of the forthcoming book, Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet, about why the fault line is a particularly precarious place for CIOs.

CIO: How is competitive advantage changing in the age of the Internet?

MOORE: As Nicholas Negroponte pointed out in Being Digital, we are changing from an atoms-oriented world, where the value is in owning assets, to a bits-oriented world, where the value is in owning information about assets.

Owning information about oil is worth more than owning oil. Owning information about an airline is worth more than owning an airline.

Competitive advantage used to mean forming a vertically integrated corporation, but now it means building a virtually integrated corporation that focuses only on its core value-adding functions and outsources everything else. This new way of doing business is reflected in a stock market that values time over money.

People who get into the market early, even though they lose money, get higher valuations than people who come in later with a more predictable business model.

Why is this sea change particularly difficult for Fortune 500 companies to manage?

Big companies that have been successful in an old-economy environment are now confronted with a market that demands a series of bewildering behaviors and rewards a series of bewilderingly unfamiliar performances. It does not make any sense to them; it is changing too fast and the organizations cannot map their traditional processes effectively to the new situation. So, many traditional companies just reject the entire phenomenon and create a barrier to innovation inside the company.

In order to break through that barrier, they need to go through a triage process. They need to create a heavyweight management team that is specifically constructed to change the old ways of doing business and get new innovation into the marketplace successfully. The leader of the team should have the authority to trump any senior executive who attempts to block innovation and should come out of the niche market that the firm is selling back into.

Where does the CIO fit into that equation?

A company going through triage needs to completely rethink the CIO's role. The whole IS organization was a staff function in the old economy. The IS department collected information about the business and then gave it either to the accounting function or to the line manager. At the end of the day the IT function was to make other managers in the company more effective via information.

In the new economy, information technology is the company. The IT function has become a line function, like the manufacturing function in the old economy. If you think about what Amazon.com is, it's an IT system; so is Charles Schwab, so is Yahoo, so is eBay, so is Priceline.com. All the dotcoms are just IT functions with marketing wrappers around them. Ground zero of the Internet is IT.

Well now we really have done something dangerous. We've taken a function that was already overloaded with staff demand and we've given it line responsibility without withdrawing the staff function. The Fortune 500 is not competitive because it is abusing and misusing its IT function by insisting that it perform a wide variety of staff functions but not giving it enough talent, time and attention to do its line function appropriately. To make the situation really ghastly, we took the entire IS department out of action for 18 months to handle Y2K, while the dotcoms, which had no Y2K problems, gained even greater competitive advantage. It's really, really bad.

What's to be done?

The CIO has got to lead his management through an exercise [to distinguish activities that are] core versus context.

Once the company goes through that exercise, then the head of the IS organization can say, "Here's our proposal: We take the scarce time, talent and management attention we have and put all of our in-house resources on core activities. And for all of this context stuff, let's outsource."

Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet By Geoffrey A. Moore, HarperCollins, August 2000, $27 Ask Geoffrey Moore Have questions or comments for Geoffrey Moore on corporate survival and your own fault line experiences? He'll be on call through July 31 in the Reading Room at www.cio.com/books.

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