Julian Birkinshaw:New business opportunities are rare.

from MLab:

We agree that exciting new business opportunities are rare. Given this fact, companies can choose to cast the net wide in search for such opportunities, but at signifi cant cost – both in terms of actual expense incurred as well as the opportunity cost of not focusing properly on the existing core business. Alternatively, companies can take a much more selective approach, as Andrew proposes, but with a risk that exciting opportunities get screened out early. Would Dixons have launched Freeserve using Andrew’s traffi c light approach? Would Carphone Warehouse have launched Talktalk? It is impossible to draw defi nitive conclusions here; we have to accept that there are risks with whichever approach is followed. (Andrew responds: “Both Freeserve and Talktalk were the result of ‘good old fashioned strategic planning’ rather than ‘net casting’. Freeserve would have passed the Traffi c Lights (Dixons was one of the companies in my research), but Talktalk would probably not. So having a tough screen does sometimes cut out opportunities that subsequently prove successful.”)

There is, of course, a third approach for large companies that my colleague Costas Markides calls “fast second”. This is an extreme version of Andrew’s tough screening process: you wait until the opportunity is well-enough established that most of the risk has been taken out of it, and you then move quickly to either acquire the early mover, or to use your deep pockets and existing resources to catch up. Cisco famously applied this strategy throughout the 1990s, using its strong share price as currency to buy out scores of small players. But it can be a very expensive approach. Unilever paid $326 million to buy Ben & Jerry’s, a premium ice cream brand that arguably it could have built itself.

There are broader issues raised by Andrew that deserve further discussion. As he notes, most early-stage innovation is done by “hobbyists, whose activity could be considered consumption rather than production”. This is a really important insight. We tend to build our theories on the assumption that there is an economic return to be had from early-stage innovation and basic research. But I think Andrew is right in suggesting that the Net Present Value of early-stage innovation is less than zero. This is why most venture capitalists avoid early-stage seed funds, and it is why most large companies have closed down, or dramatically reduced in size, their basic research activities. Yes, these things are needed by society for progress to be made, but if there is no functioning market for early-stage ideas, then we shouldn’t try to incentivise them through traditional micro-economic models. Instead, we need different models that encourage “consumption” in these areas.

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