January 2005

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January 2005
The Next Big Thing? Generating ideas and creating
innovative products
Douglas Abrams
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Generating ideas creating innovative products

• Selecting the right industry
• Finding opportunities
• Identify innovation inflection points

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Product or service?

• Odds of starting a company that made the Inc 500
  list of fastest growing young private companies
  from 1982 to 2000
• Biotech 265 times higher than restaurant
• Software 823 times higher than hotel
• Choosing the right opportunity is the most
  important determinant of success

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High risk, low return?

• Product-based start-ups
• High risk of failure
• High return if successful
• Service-based start-ups
• Higher risk of failure
• Lower return if successful
• Choose an industry favorable to start-ups

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Look for favorable knowledge conditions

• Less complex production processes
• Less reliance on knowledge creation low RD
• More codified knowledge
• Innovation from outside the value chain
  universities and research institutes
• Lesser proportion of value added in manufacturing
  and marketing activities

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Look for large, fast-growing, segmented markets

• The cost gap between new and established firms is
  smaller in larger markets
• In fast-growing markets, new firms can serve new
  customers rather than customers of existing firms
• Segmented market provide niches for new firms to
  enter and reduce retaliation by existing firms

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Industry life cycles and structures

• Choose a young industry more demand and less
  competition
• Enter before a dominant design has been adopted
• Labor intensive rather than capital intensive
• Advertising and branding less important
• Less concentrated industries smaller
  competitors

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Generating ideas creating innovative products

• Selecting the right industry
• Sources of opportunity for innovation
• Identify innovation inflection points

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Sources of opportunity

• Technological change
• Large, general-purpose, commercially viable,
  alter industry dynamics
• Political and regulatory change
• Allow more variance in ideas, increase demand
• Social and demographic change
• Alter preferences and create demand
• Changes in industry structure
• Change industry dynamics and open niches

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Past and present trends and mega-trends
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Past and present trends and mega-trends
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Examples of current tech trends and mega trends
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Examples of current tech trends and mega trends
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Examples of current tech trends and mega trends
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Case study Lets sell books on the internet

• Technological change internet
• Market change disintermediation
• Large potential market fragmented
• Timing young industry

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Which form to exploit an opportunity?

• New product
• New way of organizing
• New raw material
• New production process
• More difficult to imitate
• Exploit an innovation that is appropriate in the
  industry you are entering

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Case study Onsale vs. EBay
Onsale
EBay

• Allowed anyone to sell anything to anybody
• Advantage of mass and momentum

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Sources of new business ideas

• Forces, trends and mega-trends tech, macro,
  social, political
• Changing market structures and needs
• Market inefficiencies
• Products in the market
• Personal experience, hobbies and pastimes,
  personal passions
• Cross regional, discipline or industry

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Recognizing opportunities

• Check out opportunities based on innovations by
  universities and government agencies.
• Identify weaknesses in established firms
  approach to innovation.
• Pick jobs, social networks, or life activities
  that put you into the flow of information about
  new business opportunities.
• Develop a mind-set or way of thinking that helps
  you recognize entrepreneurial opportunities when
  you come across them.

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Opportunity mindset - observe yourself

• In unfamiliar situations traveling, trying new
  experiences
• Ask Why and Why not?
• Take notes, especially of problems Bug Lists

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Opportunity mindset - being there

• Keep close to the action
• There are no dumb questions
• Be aware of the world around you ready to spot
  trends

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Opportunity mindset - being left-handed

• Develop empathy for consumers needs
• People are different from you
• Ages, cultures, sizes
• Talk and listen to kids

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Characteristics of successful new business ideas

• First mover advantage?
• Not necessarily a new invention
• Not necessarily a new idea
• Notion that is poised to be taken seriously in
  the market place
• Idea that is a tiny push away from general
  acceptance

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Innovation evaluation framework

• Original?
• Feasible?
• Marketable?
• Profitable?
• Sustainable competitive advantage?

Good idea
Viable business
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Case study Liquid Paper

• Bette Nesmith noticed artist corrected mistakes
  while decorating holiday windows by painting over
  the error.
• Tried the same at work but colleagues said she
  was cheating and one boss warned her not to use
  her white stuff on his letters.
• Renamed the fast-drying, non-detectable fluid
  Liquid Paper applied for a patent trademark.
• IBM wasnt interested in buying her business.
• Sold out to Gillette for 50 million within a
  decade.

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Expect the unexpected - Velcro

• Chance offers unanticipated insights
• Be open to surprises
• Velcro
• Swiss mountaineers returned from hike covered
  with prickly cockleburs.

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Expect the unexpected TiVo

• Personal TV machine
• Used Sorbathane (the elastic material found in
  shoes) to dampen vibration and reduce noise
• Less noisy than competitor products

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Sometimes failure itself generates innovation

• Post-It notes - failed glue
• Scotchgard - spilled on shoes
• Combat - failed additive for cattle feed

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Generating ideas creating innovative products

• Selecting the right industry
• Finding opportunities
• Identify innovation inflection points

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The technology adoption S curve
Measure of performance
Measure of effort invested
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Implications of the S-curve for entrepreneurs

• Technologies originally experience slow
  performance improvement due to learning curve
• Transitions to new S-curve taken by new rather
  than established firms
• Established firms have little incentive to go to
  new S-curve
• Inferior performance
• Limited application
• Cannibalizing existing technologies
• Can improve existing technologies

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Timing the S-curve Dont go too early or too late

• Look for paradigm shifts
• Watch technological frameworks that scientists
  and engineers are using as they often signal new
  opportunities
• After changes in core technology have time to
  settle but before a dominant design emerges
• Try to establish a technical standard
• Low price
• Work effectively with complementary technologies
• Simple products

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Establishing a technical standard - Linux

• Linus Torvalds, aged 21, couldnt afford an
  operating system thus spun out his own.
• Today, Linux has 15 million users thousands of
  independent developers working to make the system
  better.
• Made Linux open source software
• Challenging the old assumption that the best
  software is proprietary and maintained by a
  single company.

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Target an increasing returns business

• Up-front costs are high relative to marginal
  costs
• Network externalities
• Complementary technologies are important to use
• Producer learning is strong
• Switching costs are high

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Interesting product ideas

• Tivocorder
• A tiny, pen-shaped digital audio recorder. Once
  in your shirt pocket, it would continuously
  record the sound around you. At any time, while
  continuing to record, you could play back the
  last 20 minutes of whatever you've just heard
• MP3-toothbrush
• An MP3-playing toothbrush for use during a
  hygiene moment.
• Weather-forecasting toast
• The slice of bread pops up with a simple icon of
  the days outlook a shining sun, a cloud or
  raindrops
• A step towards integration of a modern household
  with internet technology

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Sources and references

• Finding Fertile Ground by Scott Shane, Wharton
  School Publishing
• The Art of Innovation by Tom Kelley with Jonathan
  Littman, Doubleday

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Contact us

• Douglas Abrams
• dka_at_parallaxcapital.com
• necadk_at_nus.edu.sg
• 65-9780-5381 (hp)