This article discusses the technology adoption life cycle illustrated by Geoffrey Moore in his book Inside the Tornado. Moore's model identifies where the product is within the life cycle and the corporate strategy necessary to ensure success. Investors can benefit greatly from understanding whether companies are using the correct strategies to maximize the market potential of their products.
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The technology adoption life cycle can be visualized as a bell curve segmented by certain characteristics that must exist for the products to transition throughout each stage of the cycle. The bell curve consists of several phases: Innovators, Early Adopters, Bowling Alley, Tornado, and Main Street.
Innovators
Innovators are like friends of yours who have just about every gadget you can think of. They are the first to buy into the next great "fad," and the first to retire gadgets to the proverbial closet floor when they have moved on to the next latest, greatest new product. For example, a person who purchased a PalmPilot while the casing had the U.S. Robotics logo on the front is a likely Innovator.
The total market size of the Innovators phase is quite small, only about 5% of the entire area inside the life cycle bell curve. While success in the Innovators phase means very little financially to a company, Moore stresses the importance of the Innovators because they are the "gatekeepers." Any discontinuous technology product must get their stamp of approval and support before moving on to the next phase of the technology adoption life cycle, the Early Adopters.
Early Adopters
Moore calls the Early Adopters "visionaries." Early Adopters are eager to embrace new technologies to solve their problems and exploit competitive advantage, and they have money to spend. Unlike pragmatic buyers who are pessimistic in nature, Early Adopters are more optimistic -- their glass is half full. In technology terms, they are satisfied with a product that provides 80% of the solution to their problem, while pragmatic buyers want a 100% solution. For technology vendors to make headway in this early market, they must focus solely on product leadership. Once the last of the early adopters has been penetrated, a break in the bell curve exists: the Chasm.
The Chasm
The Chasm represents a critical phase from the last early adopters to mainstream acceptance of the product. As Steve Jobs of Apple (Nasdaq: AAPL) says on the cover of the book, "The Chasm is where many high-tech fortunes have been lost. The Tornado is where many have been made." Crossing the Chasm is vital to long-term value creation and market dominance.
To cross the Chasm, Moore suggests that the company focus on a "beachhead" or a total solution for a problem built around the needs of a niche market. Moore calls this total solution a "whole product," an imperative for penetrating the pragmatic buyers. Moore defines the whole product as "the minimum set of products and services necessary to ensure that the target customer will achieve his or her compelling reason to buy." The whole product created for a niche market represents the entry into the mainstream market, an area called the Bowling Alley.
The Bowling Alley
Once across the Chasm, the Bowling Alley phase begins, representing the early majority. The creation of the whole product to fulfill the needs of a niche market requires an additional strategy beyond product leadership: customer intimacy. Once the whole product satisfies the needs of a niche market, pragmatists embrace the technology, and a "pin" -- as Moore calls it -- is knocked over. Technology vendors should seek a beachhead that will allow them to leverage their success in one niche market to attack another. For example, an application may be created to better enable customer support via telephone. Once this market is dominated, the application may be modified to address customer support on the Internet.
As more niche markets are successfully penetrated, the solution is perceived to be less of a niche product and more of an all-purpose solution. This creates momentum around the technology, and the hypergrowth phase of the Tornado begins.
The Tornado
For an investor, the tornado is the most exciting phase of the technology adoption life cycle because the investment opportunities can lead to market-thumping returns. In transition to the Tornado from the Bowling Alley phase, the technology has proven itself in several niche markets. When enough pins have been knocked down, the product begins to look attractive to mainstream pragmatic buyers. The Tornado is a period of hypergrowth when the pragmatic buyers flock en masse to adopt the technology as the standard. The product focus has also shifted away from the problems of the end user and toward the infrastructure buyer that can implement the technology to solve their problems.
Successful companies with technology in the Tornado "just ship" the product and focus less on the customer because this is a hypergrowth phase where market share is determined and leadership is established. A leader is needed to create stability in the market, and the company that sets the standard for the technology will reap tremendous financial rewards. Companies create value in the Tornado phase by balancing product leadership and operational excellence, or the ability to successfully execute the business plan.
Investors can also measure the Tornado quantitatively. Robertson Stephens analyst Paul Johnson has suggested that the Tornado begins when year-over-year revenue growth exceeds 100% and sequential revenue growth is accelerating. Companies such as Network Appliance (Nasdaq: NTAP) in data storage and Fibre Channel switch provider Brocade Communications (Nasdaq: BRCD) as well as Siebel Systems (Nasdaq: SEBL) in the customer relationship management software sector (covered by Motley Fool Research) have been experiencing the Tornado phase. Once the hypergrowth of the Tornado has passed, the product moves on to Main Street.
Main Street
Main Street represents a time when the purchasing fury has subsided and supply and demand is brought to equilibrium. Moore describes the entrance into Main Street as a "calamitous" experience. Revenue shortfall, loss of talented employees, and shareholder lawsuits due to a floundering stock price are not uncommon. However, if a corporation comes to terms with the fact that Main Street is an inevitable part of the life cycle, it can be quite profitable. To ensure success, corporate strategy must shift once again toward a combination of customer intimacy and operational excellence.
Moore suggests that firms entering Main Street pursue a "whole product +1" strategy that tweaks the existing product with minor modifications or new value propositions to renew the compelling reason to purchase the product. In addition, the company can begin to pay attention to new technologies and Tornadoes that are forming in order to sustain growth.
Conclusion
From an investor's perspective, it is important to understand which phase of the life cycle a category of products is currently residing, and whether a company is utilizing the appropriate strategy to ensure success along the way.
This article only scratches the surface of the depth of information contained within Inside the Tornado. For any investor interested in high-technology stocks, Tornado is a highly readable guide to better understanding technology markets.
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Motley Fool Research: Siebel Systems
Inside the Tornado (buy the book or read reviews)
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