Crossing the Second Chasm
9th August 2012 · 2 Comments
Two momentous tipping points threaten most businesses during their lifetime. The first is an external threat that challenges startups, and the second is an internal threat that challenges established, growing businesses. Failing to address either one adequately can result in disaster.
In 1991, Geoff Moore introduced a powerful concept in Crossing the Chasm that became a key concept in the universal business vocabulary. He observed a startup company must leap from (a) an early market dominated by early adopters who seek new solutions to (b) the mainstream market where buyers are more conservative but sustainable financial returns are available. To survive, an emerging company must cross this chasm to secure a beachhead in the mainstream market.
The second chasm is described in Doug Tatum’s 2007 book called No Man’s Land. While less publicized and not as universally understood, this second chasm is no less real and just as inevitable. It’s encountered during “the adolescent stage in which an established but rapidly growing firm is too big to be small, but too small to be big.”
Crossing the second chasm does not call for securing a second beachhead. Instead, the challenge is personal: the CEO must modify the way the business operates without losing the uniqueness that created its initial successes. Tatum identified four “M word” dangers confronting the CEO of a company negotiating this second chasm: misalignment, management, model, and money.
Misalignment of the company with its market requires clarifying the purpose and uniqueness of the company, then focusing all its resources on activities that leverage its best strengths. To paraphrase Tatum, avoiding the hard work of clarifying and systematizing the core business has killed many companies after they make it well past the startup phase. Understanding the strategic positioning of the company (e.g., primary audience and target customers, primary benefits delivered, competitors, and unique differentiators), then aligning everyone in the company with this shared vision is vital to survival.
Outgrowing its management team is the second danger of an established company attempting to grow. Small companies are highly dependent upon the talents of the founder and CEO, but a growing company inevitably exceeds the bandwidth of its CEO and early management. Getting to the next level requires that the CEO relinquish his/her tight control over every aspect of the business in favor of bringing in established managers in key areas. The CEO’s challenge is to retain direct responsibility for key areas, where he/she is most talented, while delegating the other areas to managers who have already developed critical systems and processes before at larger companies.
Outgrowing the model is the third challenge faced by companies crossing the second chasm. The financial model of most young companies depends upon high performance of cheap labor. The CEO works for little or nothing while dedicated employees work crazy hours too for lower-than-industry-standard pay, but this doesn’t scale. As the company outgrows its management, a new financial model accommodating competitive pay, more intense competition, and maintenance of profitability must be quickly developed.
The fourth challenge is money. Entrepreneurs are often surprised that, when the growth they crave starts to happen, cash becomes more scarce rather than more abundant. They are even more surprised by the difficulty they find in getting the financial backing needed to finance more growth. What looks like good news to the CEO looks like significant risk to investors. “The key to raising money is reducing the real and perceived risk of the company” and the key to reducing risk includes taking the previously described three steps.
If you’re a CEO of a growing company and you missed No Man’s Land when it came out, reading it will provide a clearer picture of your business and the challenges you face in growing it.
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Thanks for the intersting article. When you mentioned Geoffrey Moore’s book and Doug Tatum’s book, I started to wonder if there may be a third chasm. Geoffrey Moore’s latest book Escape Velocity http://www.escapevelocitybymoore.com talks about how large companies end up resting on their laurels instead of innovating and end up losing their competitive edge. Take Kodak for example. They grew past the second chasm, but then they failed to stay relevant and relied upon their past thinking until it was too late. I guess I’m just thinking outloud. Thank you again for the intersting read. It certainly got me thinking.
Thanks for that observation, Rick!