Chapter One : A Crisis of Prioritization

This post is the first in a series of posts that will eventually become a book. I am looking to improve the text by incorporating readers’ feedback before I go to print. Find out more about this project or start from the beginning.

What makes modern business different? Simply put, speed plus disruption. Digital technologies are reengineering sector after sector of the economy, rapidly driving massive shifts in spending, enriching many a next-generation vendor, leaving many established enterprises high and dry. Digital disruptions have turned print media to cinders, put advertising into a tailspin, and put TV on notice. Uber is undermining the transportation industry, and Airbnb is doing the same to hospitality. Amazon, having pretty much wiped out traditional book publishing and distribution, is now in the midst of eviscerating retail, not to mention its disruptive impact on tech itself via cloud computing, and has FedEx and UPS wondering if there be drone deliveries in our future. No one can predict exactly where and when the next wave will hit their part of the beach, but everyone understands that it will be coming sooner or later.

All this begs a number of questions: What do we do in the meantime? What do we do when it’s our time? And when it is our time, what can we do to react better and faster? These are not new questions, of course—they are the very stuff of strategic management—so it is important to register one thing straight off the bat: We have been doing it all wrong! I don’t mean a little bit wrong. I mean dead wrong. Don’t believe me? Check out this list of now defunct tech icons:

There are fifty-six companies on this list, and it is hardly complete. Look at the names. These were not the losers—these were the winners! These were not our worst management teams—these were our best! But every single one of them missed in their efforts to catch the next wave. Given this track record, what in the world makes you think you won’t too?

In short when it comes to strategic management, we have spent the last several decades in the tech sector enacting a version of Einstein’s famous definition of insanity: doing the same thing over and over again and expecting a different result. Now, to be fair, in an era when disruptive innovations were few and far between, our standard approach to strategic management would work reasonably well for a reasonable length of time, so doing it over and over again wasn’t exactly crazy. But that is not the world we live in today, not in tech, not anywhere.

Today the forces of disruption and the speed with which they strike, the very dynamics that have historically set the technology sector apart from other industries, now have been broadly unleashed against whole swaths of the world’s economy. What industry could possibly be exempt from massive reengineering now that every person on the planet is carrying the equivalent of a 1990 super-computer in their pocket or purse? What legacy business process could remain intact given the digitization of all information and communication? How could you possibly imagine your company will not get caught up in this maelstrom?

So let us agree that we are in for something big. And let us at least take under advisement from our list of fifty-six deceased predecessors that there might be something fundamentally wrong with our traditional approaches to portfolio management, performance management, and resource allocation. Because all those companies did all these things in the traditional way and did them well according to the playbook they were following. After that many iterations, it’s time to call the playbook itself into question.

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Disruptive innovations create crises of prioritization. Whether they strike from outside, or whether you initiate them yourself, it quickly becomes clear there are not enough resources to go around, so how do you allocate them? Partially this is an issue of quantity—how much of your resources should you continue to deploy into your established lines of business versus how much to divert into the emerging new ones? Partially it is an issue of quality—how much value should you assign to achieving additional gains from your established lines of business versus new gains from your emerging ones? And partially it is an issue of politics and power—how much are you willing to challenge the entrenched interests that demand and reward short-term returns versus how much are you willing to risk on a bet that requires immediate sacrifices in hopes of achieving exceptional long-term gains?

This crisis of prioritization is brought on by a scarcity of resources, but not perhaps in the way you might think. Disruptive innovations do not create crises in R&D. The fifty-six established enterprises on our list all had way more working capital than even the best funded start-ups and thus could make or buy their way into any new category pretty much any time they wanted. Rather the resource scarcity that hung them up was on the go-to-market side of the house, specifically in the areas of sales capacity, marketing programs, advanced professional services, and ecosystem partner development.

Established enterprises have to stretch their go-to-market capacity to meet the needs of both their established business and their next-generation initiatives. The core of their problem is that marketing, selling, and servicing any disruptive innovation is radically inefficient, especially when compared to an established line of business. For starters, prospective customers have no budget allocated for your new offering—it is simply too new. So you have to work with the line-of-business executives in those companies to show them the possibilities and persuade them to take the risk. This takes time. It also requires relationships your salespeople are not likely to have today (theirs are with the other side of the customer house, the side that is perfectly happy with the status quo, the one that has budget already allocated for your offers, and the one that is not likely to be very happy about you engaging elsewhere in their company). In sum, this approach is both challenging and risky—you might not succeed in getting budget approved, or you might get budget approved only to lose the deal to a competitor. And to make matters worse, this is simply not a sales motion your existing sales team is good at—they are much better suited to selling more of the old stuff via their established relationships.

Now, the standard way to address these problems is to overlay a sales force that does specialize in this sort of market development and to focus it solely on the new initiative. At the outset, this approach is promising—it actually does work—but as the business begins to scale, it gets more and more expensive. And as it seeks to touch more and more of your installed base, account managers with established relationships become increasingly reluctant to bring in the new team because their presence can destabilize a deal in the works or damage a long-standing relationship by going around that person to the line of business side of the house. To scale a single disruptive innovation can easily absorb ten percent of your total go-to-market envelope before adoption reaches the tipping point.

And that raises a host of other problems. Increased expense with less revenue means your profit margins will take a hit. This can deflate your stock price and alienate your investor base, potentially to the extent it could put your company in play. Meanwhile your ecosystem partners are getting restless. They make their living supporting your established lines of business and are typically threatened by any disruptive innovation. And inside your company the leaders of your established lines of business are feeling increasingly squeezed and are signaling they cannot make their numbers without getting a bigger share of the go-to-market pie. Of course they can spare a few percent of their go-to-market resources, but ten percent?

The net of all this is painful but clear. It is just barely possible that an established enterprise through intense commitment, clear prioritization, and laser focus can grow a single disruptive innovation to scale while maintaining its commitment to its existing franchises. It is absolute lunacy to think it can do two or more at the same time. But that of course is precisely what the standard playbook for strategic portfolio management calls for you to do—Don’t put all your eggs in one basket! Sadly, that is also precisely the advice that brought all fifty-six of our companies to their knees. A better line to follow might be, These are really big eggs people—more than one will break the basket!

So, first things first: When it comes to making a big bet on your next big thing, pick one. Not two, not three—one. This is the single most important job a CEO has. Choose one thing to be your enterprise’s next big thing, and then deliver on that future—to customers, to shareholders, to partners, to employees, and to your industry as a whole.

If your company did this even once in a decade, it would be world class. IBM did. Digital Equipment Corporation did not. Microsoft did. Lotus and Novell did not. That said, Steve Jobs did it three times in one decade, with the iPod, the iPhone, and the iPad. Add in the Macintosh and Apple today has four distinct lines of business, four separate earnings engines, and an eye-popping market capitalization to match. And the single most important lesson executive teams can learn from this performance is that each of these engines was brought to scale one at a time! Steve was a challenging person to work with, but there was never any question as to what his priorities were. His core principle was “We have one team working on one thing.” He might whiff—the Lisa comes to mind here—but he would not waffle.

Fifty-six other CEOs played their hands differently. In effect, they did waffle. They were torn between funding the current business and backing the next big thing, and they did not want to put all their eggs in one basket. So they peanut-buttered their resource allocations, making sure every credible disruptive innovation got their fair share of support, but always with a tilt toward making the number on the back of the established lines of business. That by default is a kind of prioritization in its own right, but it is a painfully wasteful one, since it absolutely guarantees you will never catch the next wave, even as you spend all your scarce discretionary resources under the pretense that you can.

This brings us to the heart of the prioritization crisis: At the core you must deliver on two conflicting objectives. On the one hand, you must maintain your established franchises for the life of their respective business models, adjusting to declining revenue growth by optimizing for increasing earnings growth. This objective most of the fifty-six CEOs did indeed deliver on. At the same time, every decade or so, you must get your company into one net new line of business that has exceptionally high revenue growth. This they did not.

Disruptive innovations, when they are adopted, drive the kind of growth you seek. Under their influence massive amounts of customer spending shift out of old categories and into new ones. This growth is secular, not cyclical, meaning it is only going to happen once. That is why it is so important to catch these waves. But here’s the thing: you don’t have to catch all of them. You don’t even have to catch most of them. You just have to catch roughly one per decade.

We know this has been a high bar, but the irony is it does not have to be. The advantages established enterprises have over disruptive start-ups far outweigh the disadvantages. What is needed is a playbook to focus these resources and leverage them properly. That is what the chapters that follow intend to provide.

We call this playbook the Zone Offense. It is based on dividing strategic management into four zones. Each zone has its own distinctive dynamics—one for revenue performance in the current year, one for productivity initiatives to improve the returns on that performance, one for incubating future innovations, and one for taking one of those innovations to scale. Each zone follows its own local playbook, each of which will be summarized in the chapters that follow.

None of these local playbooks should be unfamiliar to you. There are no radical prescriptions in the Zone Offense. Rather what is radical is the strict discipline of playing within your own zone, following the playbook appropriate to it, and collaborating respectfully with other members of your enterprise who are executing a different playbook in another zone. The foundations for this discipline are established in the annual plan, the responsibility for executing it is delegated to the operating staff, and the ongoing orchestration of the activities among the zones is the focus of the CEO and the executive staff. The idea is not complicated. It’s just powerful.

Specifically, what it ensures is that resource allocation, return on investment, organizational structure, operating cadence, success metrics, and management compensation all get adjusted to and aligned with the priorities and deliverables unique to each of the four zones. These are exceptionally powerful levers. In most corporations they operate at cross purposes to one another to such an extent it is a wonder the enterprise can perform at all. When you disentangle them from one another and give each one its own space, the release of creative energy is breathtaking. You really do hold the keys to the kingdom in your hands. You just have to get them into the right locks.

Read the next chapter in this series

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Geoffrey Moore | Zone to Win Book | Geoffrey Moore Twitter | Geoffrey Moore YouTube