Geoffrey Moore (the iconic author of “Crossing the Chasm”) and his research highlights the “10% rule,” a critical threshold for new product success in large enterprises. For a new product to “move the needle” and significantly impact a company’s financial performance, it must typically reach approximately 10% of total corporate revenue within a relatively short timeframe (2-3 years, often coinciding with the startup Traction Gap Framework timeline). This creates a significant hurdle for innovation in large organizations.
For a $1 billion company, this requires generating $100 million in new product revenue within the Traction Gap Framework timeline (1-3 years). So, for a $5 billion company, the target is $500 million. Most new products never approach these thresholds, leading to their eventual demise or relegation to “pet project” status. This reinforces the “innovation paradox”: large companies, while possessing the resources to pursue ambitious innovation initiatives, struggle to scale new products rapidly enough to meet internally defined success criteria.
The 10% Rule and Apple
The following is an example of this phenomenon rearing its ugly head when I was running an engineering/product division at Apple.
At the time, Apple had been at war with Microsoft and had lost significant share to PCs, Windows, and MS Office (e.g. Excel, PowerPoint, Word, et al) in corporate and government organizations. In many of these organizations, both corporate and government, IT organizations had banned Apple hardware to reduce system complexity and support.
My engineering team was chartered to port a version of Unix to Apple hardware so we could sell Apple hardware into the US government. We discovered a way to port the MacOS to popular Unix workstations (e.g., Sun Microsystems, IBM, and HP). We were able to create a product that anyone could install onto a Unix workstation and run popular MacOS applications – including MS Office – without requiring someone to purchase an Apple laptop. This application also supported Appletalk – a dynamic and proprietary Apple networking protocol – by tunneling TCP/IP so the workstation could easily communicate with other Unix workstations and Apple systems.
We performed some market research that led us to believe we could price this commercial software product at $199 with an estimated 95% margin. Our stated strategy was to use this application to reach F500 companies and government agencies to reestablish a foothold for the Apple brand. We presented the plan to Michael Spindler – CEO of Apple at the time – and his executive team; the people who ran various functions and developed, marketed and sold myriad Apple hardware products. These people were the power structure that drove Apple’s revenue.
Spindler initially asked how fast I thought that we could get to $500M revenue, from a standing start. At $199 per unit we would have to capture at least 2,500,000+ workstations: Then, Apple was generating $11B per year in annual revenue. The average high end Mac hardware system cost about $4,000. So, 2.5M hardware units * $4,000 = $10B. I said it would likely take 5 years, probably longer. Spindler wasn’t impressed. And Spindler’s executive team came unglued. Why would we trade a $10B business for a $500M business?
The logic flaw, of course, was assuming we could sell those 2.5M Apple hardware systems into organizations where the Mac was “machina non grata”. Due to the objections of the executive team our project was shelved. It wouldn’t be until the latter part of the 90s and early 2000s when Steve Jobs returned, invented the iPhone, iPad, etc. and rebuilt a relationship with Bill Gates that Apple regained much of the market share it had lost in corporate and government agencies.
The Cost of Inaction
Failure Rates and Market Share Erosion
The failure rate for enterprise-launched products has been demonstrated to be substantial, with estimates ranging from 30-40% within the first year, increasing to 70-90% over the longer term; 5+ years. (Sources: various recent surveys and research reports – HBR, Nielsen, and McKinsey).
Furthermore, research like a study by Innosight suggests that the average lifespan of companies on the S&P 500 has decreased significantly over the past few decades. This decline is often attributed to the inability of established companies to innovate and adapt to disruptive market forces. These studies also show that new offerings from enterprise product teams, from initial product release (IPR) to Minimum Viable Traction (MVT) can take as long as 6 years, twice that of their startup counterparts.
This slower pace of innovation makes enterprises particularly vulnerable to disruptive competitors who can capitalize on emerging opportunities more quickly and efficiently––unconstrained by traditional budget cycles and internal resistance from entrenched business units. The cost of inaction is not merely the loss of potential revenue from new products, but the existential threat of market share erosion and eventual displacement by more agile competitors.
Traversing the Traction Gap – 2nd Edition
In the next edition of Traversing the Traction Gap, currently in progress, I am covering how enterprise product teams can avoid many of these issues that affect new products released from within mature companies.
One approach is the use of a “business spin in” – move the new product team outside the auspices of the mature company using different financing methods. Let it grow like a startup until it reaches a point where it is large enough to stand on its own internally. There is a lot more to it but you will have to read the book the learn how to do it…or engage my firm Traction Gap Partners now at www.tractiongappartners.com (shameless plug, I know.)