with Geoffrey Moore
the internet bubble really burst?
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.
causing the market volatility?
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.
confidence has eroded in the B2C stocks.
Do you think we'll see the B2B stocks bottom out as well?
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.
there certain B2B technology market segments and/or companies do you
think will "make it" and why?
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
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.
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?"
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.
companies would you describe as "New Economy" and why?
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
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
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?
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
about the "Old Economy" companies -
are there any that are successfully transitioning into the New
Economy and how are they doing it?
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
there really a roadmap for making this transition?
What must companies do to make this transition?
on the Fault Line: Managing for Shareholder Value in the Age of the
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.
you aren't doing business on the Web today, can you still survive?
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.
you think the Internet-based companies that continue to post losses
quarter after quarter will survive and thrive? Why or why not?
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.
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?
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
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
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.
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?
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
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.
people, there are two types of cultures - corporate (e.g., staid EDS
or McKinsey) or startup (fast moving Amazon or Yahoo!)?
Would you agree?
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
really is a situation, however, where you have to read the book and
do your own thinking.
important is P/E in measuring company performance in the New
is critically important but only after competitive advantage
positions have been successfully staked out.
So think of P/E as being a deferred
your take on tracking stocks?
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.
has the market's queasiness affected your investments as a VC?
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.
qualities do you look for in company that you will fund?
two key qualities are a great entrepreneur and a sustainable
competitive advantage platform that produces at maturity great
financial returns. Everything
else is negotiable.
you back a B2C Internet company?
a great entrepreneur and a sustainable competitive advantage
platform, you bet.
do you think will be the next "big" technology categories?
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.
categories will disappear over the next decade?
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.