The Pareto principle applied

Back in 2012 I engaged in some consulting work based around Geoffrey Moore’s “Escape Velocity”, a book that built on “Crossing the Chasm” and took a deep look at the challenges of disruptive technology on an established market.

An example, Kodak made their money selling consumables; film and chemicals. The camera was a source of the demand for the consumables, the disposable camera to address an opportunistic need. Yet in 1975 Steve Sasson, an engineer at Kodak, invented the digital camera, having the vision that technology was about to disrupt the established business.

Kodak denied the change was coming, and shelved the project. The digital camera revolution happened anyway, in fact the technology grew so fast in capability it migrated into mobile phones, so now we all carry very capable cameras and use online storage to capture our memories.

When the business was dying, the traditional management model is to look to cost cutting to establish a base for their future growth, yet the business is being disrupted, the management rarely see the earthquake is coming.

In fact, I have seen it multiple times now, they apply the “long-tail” or 80/20 Pareto principle. That is 80% of the customers deliver 20% of the business, and 20% of the customers deliver 80% of the business.

A product/engineering company will cut products and engineers and focus on the 80%, this would be Kodak focusing on improving the film and the chemicals in some way and coming up with alternative like products to strength the revenue stream.

A market drive company would look to the market direction and make sure they seeded a number of spin off focused sales and marketing folks to ensure an established position in the spaces the market is moving too.

So rather than cut the 20% they use the income from the 80% to invest in the 20%, in the Kodak example this would be a division designed to establish a digital camera business. Looking for consumables used in this space, batteries, memory cards, cloud storage, additional album management code, picture editors, etc.

If these spin off divisions fail, bring the people back into the core, then attach them to the next market driven innovation, do not fire them and lose all that experience.

Furthermore, companies often think marketing is about promotion, and that product marketing is about features. However, applying the 80/20 rule again, marketing needs to help guide the company (price, product, promotion, place) where 80% of the effort will deliver 80% of the results.

What is the TAM, SAM and SOM, the latter being the most important as its what can be achieved if a company secures 100% of the prospects they can deliver too. Marketing should have these numbers, who the focus customers are and where the business growth can come from.

Watching the companies around struggle with the oil market, the Brexit situation, the businesses engaging cost cutting seem to just keep cutting. I am not sure that cost cutting would have saved Kodak, they needed to tune into the market and invest in the places where the market is going, if uncertain then engage in all and any options, but do not fire anyone in those sections that fail … bring them home, reset them onto new opportunities and enable them to use their learning to establish success.

IBM is a past master of this, there are very few others that have shown they can manage this, pity.


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