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Living on the Fault Line
Managing for Shareholder Value 
in the Age of the Internet

October 26, 2000, 5:30 p.m. - 9:30 p.m.
Marriott Wardman Park, Washington, DC

Give Me More

October 26, 2000 5:30 - 9:30 pm

5:30 p.m. - 6:45 p.m. Networking
Light hors d'oeuvres provided
7:00 p.m. - 9:00 p.m. Program
9:00 p.m.- 9:30 p.m. 
Coffee & Dessert


 

 

 

 

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Living on the Fault Line Overview

Living on the Fault Line is a best-seller that offers its readers insight into management challenges and solutions in the age of the Internet. Focusing on an underlying question, “How can companies that rose to prominence prior to the age of the Internet manage for shareholder value now that the Internet is upon us?” the book provides executives and managers with simple strategies, new models, metrics and organizational practices to help them meet the challenges of the new economy.

Authored by Geoffrey Moore, best-selling author of Crossing the Chasm, Inside the Tornado and The Gorilla Game, Moore divides his time between his roles as a chairman and founder of The Chasm Group and venture partner at Mohr Davidow Ventures. Moore was recently named by Upside magazine as one of the Elite 100 leading the digital revolution.

In a book that will reset the management agenda in the Age of the Internet, Moore shows why sensitivity to stock price is the single most important lever for managing in the future, both as a leading indicator of shifts in competitive advantage and as an employee motivator. Living on the Fault Line prescribes an agenda for management teams which includes new management metrics, strategies for achieving and sustaining competitive advantage, a new blueprint the blue chip companies can use to meet the challenge of the dot.coms, models of organizational change for each stage of market development, and the crucial role of culture in enabling swift response to global change.

Living on the Fault Line varies from other general management books as its focus is non-exclusive, high tech or consumer, providing a highly prescriptive guidebook for any company struggling to manage the disruptive forces of the new economy. The book's objectives are to give its readers an understanding of past inefficient processes of management and the need for change, while equipping them with navigational tools to help meet today’s defining management challenged. 

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Book Summary

Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet

The Innovator’s Dilemma, by Clay Christensen, describes the problems that established corporations have when their market positions are challenged by disruptive technologies like the Internet.  Living on the Fault Line describes the market understanding and the executive responses needed to overcome those challenges.

Ch. 1: The Age of the Internet
Explains the market forces that are privileging virtual corporation strategy over vertical integration.  Makes critical the distinction between core and context, the former referring to activity that can increase a company’s market valuation, the latter referring to all other tasks performed by the company.  Core/context ratio is thus a direct measure of effectiveness at generating shareholder value as well as an indirect measure of nimbleness (the more resources devoted to context, the less nimble the corporation).

Ch 2: Shareholder Value
Explains the financial market forces that create a correlation between market cap and competitive advantage.  Makes critical the distinction between GAP (Competitive Advantage Gap), the differentiation between a company’s offers and those of its closest competitors, and CAP (Competitive Advantage Period), the length of time a company can be expected to sustain that differentiation.  GAP and CAP are proposed to be the primary determinants of the valuation of a specific line of business, and the sum of same across all lines of business creates a model for the valuation of the corporation (once synergies, or lack thereof, are taken into account).  Core thus becomes reinterpreted as activity that creates or sustains a differentiation that impacts either GAP or CAP.

Ch 3: Competitive Advantage
Explains the structure of competitive advantage in technology-enabled markets as a hierarchy of forces, in which the lower levels have more impact on CAP, the higher more impact on GAP.  The model implies a series of strategic imperatives, working from the bottom of the model up to the top, as follows: 

  • Catch all critical technology waves, even if you have to come late to the party. 

  • Migrate into the dominant value chain, even if you have to switch allegiances. 

  • Dominate target market segments to increase your marketplace power.

  • Increase execution effectiveness by privileging some value disciplines over others.

  • Create customer and partner preference through differentiated offers.

In general, the higher levels (value disciplines and differentiated offers) can be delegated down into the organization while the lower levels (technology waves, value chain commitments, and market segment focus) require top-level executive leadership.

Ch 4: Living on the Fault Line
Explains the impact of the Technology Adoption Life Cycle on each of the layers of the Competitive Advantage Hierarchy.  Key idea is that there are four stages in the evolution of a high-tech market (the early market, crossing the chasm, inside the tornado, and on Main Street), each characterized by a different value-chain dynamic, each rewarding a different marketing approach, different value discipline emphasis, and different set of differentiated offers.  Locally, this provides a framework for evolving strategy within lines of business around specific classes of offerings.  However, as soon as offerings cross divisional lines or go global the complexity of these interactions becomes so challenging that corporations are unable to track to them.  Instead they default to a set of behaviors that work adequately for three of the four phases of the life cycle, but cause a break down in the ability to re-cross the chasm.

Ch. 5: Triage
Explains the board-level, CEO, and executive team behaviors that are required to break the back of the innovator’s dilemma and enable re-crossing the chasm with new waves of technology.  The two key directives are 1) shed context dramatically to increase the free resources for the next wave and to speed decision-making and execution, and 2) construct an executive-sponsored chasm-crossing team to drive the new initiative all the way to mainstream market acceptance.  What makes this material new is that the biggest challenges to these efforts comes from inside the corporation, not from the competition.

Ch. 6: Building to Last
Explains business culture in terms of a four-culture model, each championing a different set of principles, each characterized by a different set of practices.  The model allows executives to diagnose the existing culture of the overall corporation as well as allowing managers to do the same for their local divisions or workgroups (which may be different from the corporation’s).  Key insight is that although the technology adoption life cycle privileges different cultures at different phases, the cultures themselves cannot mutate fast enough to adapt.  Instead what they must do is adapt the principles of the privileged culture while remaining true to the practices of their established culture.  The winning outcome targets creating adaptive external effects while maintaining familiar practices to achieve them. 

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May 12, 2000 

Publication Date:  June 1, 2000    FOR IMMEDIATE RELEASE 
Contact: Liz Sloan  Michele Jacob
The Horn Group HarperBusiness
415-905-4011   212-207-7030

LIVING ON THE FAULT LINE

MANAGING FOR SHAREHOLDER VALUE
IN THE AGE OF THE INTERNET

By Geoffrey A. Moore

New Management Paradigms for a New Century

MAY 12, 2000 - Geoffrey Moore, author of Crossing the Chasm and Inside the Tornado, two best-selling works that helped guide the high-tech revolution, now turns his attention to the most important question for business in the early 21st century: How can companies be managed successfully in a time when the “new economy” seems to be shattering all the old truths that a generation of corporate managers lived by?

The fault line upon which all companies and their managers must learn to live is the Internet – an earth shaking phenomenon that is undermining and destabilizing market positions of both established Fortune 500 companies and recent Internet high fliers.   In this new world, old management truths are under intense scrutiny.  Business models that worked admirably until the last decade of the 20th century are being challenged.   The Internet has invaded every sector of commerce, overturning established relationships, reengineering markets, attacking long-established price points and disintermediating long-standing institutions.

What should management do when it is suddenly competing with companies no one had ever heard of a few years or even a few months ago?

In a book that will reset the management agenda in the Age of the Internet, Moore shows how a focus on stock price - even in a highly volatile market - provides both guidance and leverage for understanding the shifting nature of competitive advantage, and for making necessary changes in organizations heretofore impervious to change.

In Fault Line, Moore provides a blueprint for old economy franchises making a transition to the new economy, as well as new economy companies moving forward in highly unpredictable times.  He prescribes a new agenda for management teams that includes:

  • Finding a common ground for understanding how and why the capital markets are valuing companies as they are and how management can use these valuations as guides for setting competitive strategy.

  • Reinventing strategy itself in the context of technology-impacted markets, drawing on the models honed by the most successful high-tech companies of the past decade.

  • Gaining maximum leverage from scarce resources by focusing on core activities and outsourcing everything else. 

  • Freeing management teams from the paralysis of the innovator’s dilemma - when good management faces disruptive technology - by intervening at the board and top executive levels.

  • Creating a corporate culture that can absorb future disruptions and react with speed and flexibility.

According to Bob Herbold, Executive Vice President and COO of Microsoft, “When you live on the fault line, you have to reinvent yourself every single day.  In the past year we have been incorporating ideas from this book into the strategy training portions of our executive development program, and the feedback has been tremendous.”

Adds John Chambers, President and CEO of Cisco Systems, "Living on the Fault Line reveals Moore’s understanding of fast growth industries and offers insight to help us manage shareholder value in today's Internet Economy."

Today, practically every company is living on the fault line.  By synthesizing Moore’s ground-breaking earlier work on the dynamics of technology-based markets, with a new focus on managing publicly held corporations for shareholder value, Fault Line provides a highly prescriptive guidebook to managing the disruptive forces of the new economy.

In Crossing the Chasm and Inside the Tornado, Geoffrey Moore created a new language for navigating the technology adoption life cycle.  In The Gorilla Game, written with Paul Johnson and Tom Kippola, he creating a new framework for investing in the most promising high technology companies.  In Living on the Fault Line, Moore once again offers a brilliant set of navigational tools to help meet today’s defining management challenge - managing for shareholder value  in the Age of the Internet.

ABOUT THE AUTHOR

Geoffrey A. Moore is chairman and founder of the Chasm Group, where he still actively consults.  He serves as a venture partner at Mohr Davidow Ventures.  He has been named one of the Elite 100 leading the digital revolution by Upside magazine.

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Q&A with Geoffrey Moore

Has the internet bubble really burst?
The internet is not a bubble.  The over-valuation of the internet has corrected and may correct again.  But the fundamental change in competitive advantage implied by the internet is real, and that represents a stable underpinning for internet stocks.

What's causing the market volatility?
Internet valuations are based on the expectation that the invested-in stock will achieve a market domination position.  Only one company per category, by definition, can achieve this state.  So valuation is in part a matter of setting odds on each stock.  This creates enormous volatility in the market.  Once the outcome gets decided, then one stock sustains, and the others crater.  This also creates the perception of volatility.

Investor confidence has eroded in the B2C stocks.  Do you think we'll see the B2B stocks bottom out as well?
Investor confidence has eroded in BAD B2C stocks.  AOL, Yahoo, Ebay, Amazon, and PriceLine all have valuations that are very good (albeit not at their all-time highs).  The same will happen with B2B.  The good ones will return to form.  The bad ones will get washed out.

Are there certain B2B technology market segments and/or companies do you think will "make it" and why?
Sell-side and buy-side applications and services consulting firms will do extremely well providing enterprise infrastructure.  The buy-side procurement exchanges forming in consolidated industries like automotive, petrochemical, and aerospace, look like they will get early traction, but I question their long-term prospects.  Distribution exchanges forming in fragmented markets I see just the opposite - hard to get traction in the short term, but long term increasingly valuable, especially as they are used to make markets for services as opposed to products.

We all know that the Internet is the underlying foundation of "The New Economy," but can you describe other characteristics of "The New Economy" vs. "The Old?"
The key difference is making money from information as opposed to making money from assets.  In simple value chains, assets are more important than information, but as the value chains become more complex, as integration takes priority over individual component ownership, and as timing becomes an increasingly important ingredient in value creation, information comes to the fore.  The more complex the value chain, the more valuable the information system.  In a global economy enabled by the Internet it is probably not too much to say that Fortune 500 companies will become IT departments with business wrappers around them.

Which companies would you describe as "New Economy" and why?
I liked the distinction in a recent BusinessWeek article that identified three clusters:  Old Economy companies (in industries where it is still acceptably competitive to be asset-centric) such as automotive, aerospace, and petrochemicals (and even here the good ones are shifting), New New Economy companies (which are IT-centric from birth and are betting heavily on the advantages of not owning assets)¾essentially all the dotcoms, and Old New Economy companies (which have morphed from asset-centric to IT-centric business models or to a hybrid of both) which include all the gorillas from The Gorilla Game.

If you were the CEO of a Fortune 500 company that became a market leader before the Internet, would you be worried?  What are the top 5 things you would you be focusing on?
I would be hugely worried because I rose to prominence via an asset-centric model, which the current economy is transforming increasingly into a liability as owning the assets is becoming transformed from core to context.  I would be focusing on three things:  1) identifying and shedding context functions; 2) redefining my core functions through selective adoption of disruptive technologies following the discipline we are calling triage; and 3) looking forward to defining a unifying global culture around one or another of the four models described in the last chapter of Living on the Fault Line.

What about the "Old Economy" companies - are there any that are successfully transitioning into the New Economy and how are they doing it?
This is too soon to call.  Early signs of creative activity in this vein include British Petroleum outsourcing its finance and HR functions (shedding context), Dupont teaming with ICG and CSC to build new exchanges (embracing discontinuous innovation to redefine core), Charles Schwab stepping up to Internet pricing cannibalizing its traditional trading margins (again, embracing discontinuous innovation to redefine core), and Jacques Nasser at Ford insisting his company is not an automobile company but a consumer services company in the automotive industry (moving its center of gravity from asset-centric to information-centric).

Is there really a roadmap for making this transition?  What must companies do to make this transition?
Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet presents itself as such a roadmap.  In my view the way you get from Old to New is laid out, chapter by chapter, in the book.  That’s why I wrote it.

If you aren't doing business on the Web today, can you still survive?
Dry cleaners will still do fine, as will filling stations, fast food emporiums, and anything else that works with a relatively simple value chain.  But even in those industries, if someone attacks the basic business model with IT-centric assumptions, they may discover a new way to undermine these established industries.  The more complex the value chain, the more improbable it is for a non-Internet-enabled business model to succeed going forward.

Do you think the Internet-based companies that continue to post losses quarter after quarter will survive and thrive? Why or why not?
I think it depends on the company.  I am very bullish on Amazon being a dominant company going forward because it is one of the few that really did capture first-mover advantage in the B2C Internet sector.  The issue is, as long as continued losses result in increases in sustainable competitive advantage, and as long as investors see this and are willing to trust in the process, it is correct strategy.  What has happened to Amazon recently is that investors have asked to see some execution performance in order to renew their faith in management.

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In Fault Line you assert that stock price is the single most important lever for measuring competitive advantage and for motivating employees?  Can you briefly explain what you meant?   If I'm an investor, what should I interpret from stock price fluctuations?  What if I'm an employee?
Stock price represents the collective judgment of hundreds of thousands of investors deciding where they should put their capital in order to make more.  It is a Darwinian system, meaning that over time good investors get more money, and bad investors lose theirs.  A basic premise of Fault Line is that the only successful investing strategy long term is to invest in “the fundamentals of the business,” which we suggest equates directly to investing in competitive advantage.  At any given time, we think the market values of companies are the best external indicator of their competitive advantage status, and thus represent a great information system for management to use to calibrate its efforts in creating good fundamentals for the corporation.

Stock price fluctuations are inherent in any system that reaches equilibrium through trial and error.  Over time, as market dynamics stabilize, so do stock prices.  What is making Internet stock prices so volatile is that they overlay onto fundamental valuation models the “bet” that a given company

can ride a given technology disruption to market dominance.  As Graham and Dodd have said, this requires an “odds setting” discipline to evaluate, and that discipline does not integrate well with the discounted cash flow valuation mechanisms that underlie Wall Street’s normal understanding of stock prices.  So I would argue that if your company is making such a bet, you ignore your own stock price until such time as you can see whether you are winning or have won the competition.  Elsewhere, however, I would argue that stock price is a pretty good report card on management and should be treated as such.

In Fault Line you highlight the fact that traditional accounting methods are not relevant in the New Economy - why?  What metrics are better suited for measuring company performance and why?
The problem with measuring management success via P&L performance is, as management teams have complained for decades, that it rewards short-term gains even when they are achieved at the sacrifice of long-term competitive advantage positions.  In highly stable industries, where competitive advantage positions are deeply entrenched, this problem is relatively minor, and P&L metrics are a good proxy for shareholder value metrics.  But in emerging markets enabled by disruptive technologies, shareholder value is almost completely a function of capturing sustainable competitive advantage in the new order.  Here P&L performance is irrelevant as long as investors are willing to provide external capital to fuel the effort.  For such conditions, the correct metrics directly track milestones in the march to sustainable competitive advantage, be that partner commitments, market share capture, or technology design wins.

There's a lot of talk in Silicon Valley about corporate culture. Companies go all out to create and sustain certain "cultures."  How important is culture?  Do you think there really are true corporate cultures or is this just marketing hype used to attract and retain employees.  To many people, there are two types of cultures - corporate (e.g., staid EDS or McKinsey) or startup (fast moving Amazon or Yahoo!)?  Would you agree?
In Fault Line we talk about culture a little differently than is implied above.  We see it as a tacit set of norms and behaviors that shape the way companies make decisions and prefer outcomes.  We use a model of four different cultures, each predicated on a different level of Maslow’s hierarchy of needs, each leading to its own set of organizational principles and business practices.  In that model, EDS is probably best seen as a control culture, McKinsey as a competence culture, Amazon as a collaboration culture, and Yahoo as a cultivation culture.  This really is a situation, however, where you have to read the book and do your own thinking.

How important is P/E in measuring company performance in the New Economy?
It is critically important but only after competitive advantage positions have been successfully staked out.  So think of P/E as being a deferred metric.

What's your take on tracking stocks?
These are a work in progress.  They offer some relief in industries that will have to maintain a hybrid structure for some long period of transition.  I do not think the solve the problems Old Economy companies face, however, and my fear is that management teams might think they will.  At the end of the day, either the two entities interoperate successfully, in which case that will show in the core company stock price, or they do not, in which case both stocks will lose.

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How has the market's queasiness affected your investments as a VC?
The biggest impact is in the need to keep “dry powder,” meaning to retain more capital for future rounds of investment because the time to public offering may be much greater than in recent years.  In that context, “powder-consuming” business models have to be vetted more strictly than before.  Other than that, actually venture is a great place to be in a skittish market as out time horizons are typically well outside those of the public market.

What qualities do you look for in company that you will fund?
The two key qualities are a great entrepreneur and a sustainable competitive advantage platform that produces at maturity great financial returns.  Everything else is negotiable.

Would you back a B2C Internet company?
With a great entrepreneur and a sustainable competitive advantage platform, you bet.

What do you think will be the next "big" technology categories?
My favorite “new” category is outsourced services enabled by the Internet, where the market is established corporations looking to shed context so they can focus on their own core.  This is not so much new technology¾although technology innovations are typically key to making these models work¾as it is the re-architecture of business around a virtually integrated, as opposed to a vertically integrated, model.

What categories will disappear over the next decade?
Categories will not disappear so much as just get absorbed into larger categories, such that PC software will become a portion of Internet software, and PDAs will become absorbed into cell phones and pagers, just as mainframes are being redefined today as Internet transaction servers, and copiers as online scan-and-print servers.

 

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