ECONOMICS:
A World of Opportunity

INTRODUCTIONTO INNOVATION

i) First Principles of Innovation

1. You are creating a practical way to improve human happiness. An innovative product meets both of the following conditions:
   • it is a better solution to meet a human want
   • it is available at a price the consumer is willing to pay

   Since the maximization of individual happiness appears to be the goal of every individual, an innovative product must offer an improved way for the consumer to be happy. Every product in the marketplace fundamentally sells happiness and nothing else.

   But because there are very many competing vehicles for human happiness, a successful new product must offer more happiness per dollar of price than its alternatives. A new product that lacks this competitive advantage is doomed to fail.

   Fundamentally a new product sells only if its perceived value by the consumer (utility) divided by its price exceeds that of its best competing alternative. The greater the difference in the ratios; the greater the opportunity.
   

   Utility of New Product / Price of New Product > Utility of Existing Competing Product / Price of Competing Product
   

   (There is ALWAYS a competing product; See MARKET RESEARCH,)

   Assume a benchmark of 100 for the utility of the best competing product and $1 for its price. Therefore, a new product can be successful under the following conditions:

   1. New product has same utility and a lower price than the alternative
      e.g. 100/9 > 100/1
   2. New product has higher utility and same price as the alternative

      e.g. 110/1 > 100/1

   3. New product has higher utility and a higher price than the alternative

      e.g. 150/1.2 > 100/1

      Note that this possibility is true only if the price difference is proportionately less than the difference in utility. In practice, mistakes are often made in this type of estimation.

   4. New product has lower utility and a lower price than the alternative

      e.g. 90/.5 > 100/a

      Note that the price difference must be proportionately more than the difference in utility

   5. New product has higher utility and lower price than the alternative

      e.g. 150/.8 > 100/1

   This is potentially the most powerful possibility; this is true of much of the computing industry.

2. There are an unlimited number of way to improve human happiness. In the development of better way to provide happiness we are aided by the observation that human wants are in general unlimited (although specific wants for specific products most certainly are limited). There is no shortage of work to be done on this planet. Even if all six billion inhabitants of earth were working on innovative, new solutions, the effort would be inadequate to the demand.

   Unlimited wants could be taken to mean that human being are by nature insatiably greedy gluttons ready to pillage and plunder, parasitic leaches eager to drain the host to death. (Some certainly are.)

   Or unlimited wants can be taken to mean that human beings have an infinite capacity for growth, development, experience and exploration and that this manifests itself in an unending series of new interests, activities, technologies and market demands.

   The prevalence of boredom reflects either a restless search for new arenas for accomplishment or mindless caprice. Some products offer the mind enrichment, others a way to pass the time until death.

   Which market you choose is your choice.

3. You are looking for problems to solve.

   The search for new products basically is a search for a problem to which a better solution can be offered. Every problem is a potential new product. And identifying the problem with the best potential often is more difficult than actually generating the solution.

   It is very important to recognize that an innovative product occurs when any aspect of a product is an improved solution to meet human want. We have a new product when any one of the following conditions is satisfied.

   1. a new product capability
   2. a new use for an existing product
   3. improved use of an existing product
   4. improved after-sales service of an existing product
   5. improved aesthetic appeal of an existing product
   6. improved convenience of distribution and delivery of an existing product
   7. an existing product sold at a lower price because of improved techniques of production

   You can create an innovation either by finding a problem and then finding a solution or by finding a solution (technology) and then finding a problem to be solved. However, when doing the latter make sure you find a problem which is actually there, not one you want to be there. While you should love the technology you are working with, you must never be blinded by love.

4. Search for innovation efficiently.

   Every step in the development of new products must be conducted as efficiently as possible. Research and development projects must be planned with efficiency as a primary goal. You never have resources to waste. A concern for efficiency does not just begin with large-scale production.

   The development of a new product is always an experiment and therefore always involves a risk of failure. The objective of methodical product development is to contain this risk to its irreducible minimum.

5. You are looking for the most significant innovation you can find, the one which the greatest potential impact on the marketplace and society.You are looking for a big idea.

   Warning, warning! Danger, danger! This advice is often confused and abused.

   You are usually told to start small and do not be too ambitious. Be realistic.

   That is good advice.

   Yes, be realistic. No fantasy and wild, ill-considered schemes. Plan, document, research, sweat. Critique your idea and plans ruthlessly. Pay others to do so. See MARKET RESEARCH, CAPITAL RAISING, PLANNING

   But that just means you are looking for a big idea which is real and practical. That is very difficult. Being an entrepreneur is very difficult work. Stupid big ideas are everywhere and frequently seduce the unwary.

   Yes, start small. But think big.

   Starting small is the only practical way to begin. It minimizes risk, preserves flexibility and affords the opportunity to follow unexpected turnings in the marketplace.

   You can be unrealistically ambitious and prematurely ambitious; but you cannot be "too" ambitious.

6. Note why smaller ideas tend to fail.
   1. Small changes are what large organizations do best. It is what competition drives them to do. And because of their scale and volume small changes can have large cumulative effects for them. If they shave ¬% off their costs, they save millions; the new entrepreneur saves the price of lunch.

      When you are big, you can harvest the effects of small changes; when you are small, it is much more difficult to do. Do not try to compete with Northern Telecom, Bombardier or Microsoft.

   2. Small ideas tend to be easier to generate. Millions of persons; thousands of smaller businesses produce many small ideas. The danger that someone else is about to produce your idea (almost) or has produced your idea (and failed) - and many small "new" ideas have hit the market time after time. So now you are squeezed by General Motors on one side and the legions of small business on the other. [Of course, some businesses do not even intend a small new idea; they intend to profit through pure imitation]
   3. Small ideas are easier to generate so they are easier to steal. They are generally harder to protect and with a small change, a small idea could be someone else's "new" small idea. Also small and easy means easy to produce and imitative competitors can appear quickly.
   4. Small ideas tend to offer small rewards, modest profit, and so have trouble attracting capital. Because this is still a NEW small idea, there is still risk of failure. So a modest profit is further discounted because of the risk, often to zero. While it is challenging to raise capital for new ventures, the most common reason for failure is NOT the availability of capital or the preferences of the investors, it is that the expected rate of return is far too low. [Or if projected return is high, it is viewed, often correctly, as unrealistic]. So start small and think big. And no matter what idea you start with, always try to make it bigger, of more consequence.

   [Note that some persons start a small business with a small idea to practice their entrepreneurial skills and/or to troll for a larger opportunity. That is entirely appropriate as long as these goals are pursued explicitly and aggressively].

7. A big idea has large impact on the marketplace and society. This means that the idea must offer much improved benefit to the consumer/user. Specifically, the entrepreneur tries to make: many people happy or a few people very happy or many people very happy by offering a product which many people want or a few people want very much or many people want very much. Usually, but not always, an idea of consequence is a departure from past practice. There is some tendency for the scale of the consequence to be related to the degree of the departure from past practice. The more the consequence to society, the more the idea is radical.

   BUT the form of the idea is not related to its degree of difference from the past. A small idea can have an elaborate form even if it is a small departure.

   e.g. 1 million-line software program can be less radical than a one-sentence instruction.

   And radical ideas often look evolutionary in retrospect but do not be deceived: Even if they look logical, easy, non-creative now, they were radical when they were introduced. For example: PC's and mainframes and just in time inventory.

8. Even though ideas of small consequence have little chance of commercial success, big ideas with radical solutions will be actively resisted by society and the marketplace. Society wants you to give them a big consequence with a slight change from conventional practice, in small iterative, evolutionary step. So will investors. This is usually impossible and resolving this contradiction is the task of the entrepreneur.

   Entrepreneurs always battle the conservative bias of society. They recognize that there is resistance to change always and everywhere in the marketplace and in society. The resistance to change is pervasive, relentless, insidious, unyielding and generally a problem. Recognize that the force of habit is a rational part of everyone's life. There is also the resistance of existing entrepreneurs who are defending their ideas and ventures. It takes energy, time, effort and resources to change - the transformation cost is often very high and often ignored by prospective entrepreneurs. There will be resistance by those who will be disadvantaged by the change (someone is always disadvantaged), in particular by powerful, entrenched interests.

   And no large entity of any kind, public or private can change quickly. Slow change is the best they can do. There is the resistance by those who are afraid, and often uninformed. Never underestimate the power of fear; never treat it with disrespect. For these reasons only the commitment of the entrepreneurs is strong enough to deflect the resistance.

9. Innovations of consequence must affect individuals strongly and fundamentally. You need a framework within which to search for a way to satisfy human wants. Consider that there are only four basic human needs: to live, to love, to know and to do. And there are only six basic problem categories to solve.
   1. The Preservation of Life
   2. The Preservation of Health
      Both (a) and (b) appear to be logical first priorities, satisfied before all else. However, except for immediate instinctive life-threatening situations, many persons treat these concerns as minor matters.
   3. Command of Resources (money, income)
      To satisfy all basic needs, resources (income) are essential. However, beyond certain reasonable, "normal levels", strength of concern abates. Most persons do not want millions if they have to work more/harder. The time spent working for income competes with time spent using income.
   4. Family and Friends
      Of commanding and growing importance
   5. New experiences / new information / enlightenment
      Driven by the mind's insatiable desire for more new grist for its mill. Avoiding the dreaded boredom.
   6. Opportunities for accomplishment
      Many persons satisfy this need outside work; for example, sports, recreation, do-it-yourself. But even those satisfied by work look for other arenas of accomplishment.

      All problems and their solutions ultimately address one of these basic concerns. The more strongly the solution addresses the basic concern, the more successful it is likely to be. If a particular solution addresses more than one basic concern, the more successful it is likely to be. Strongly addressing more than one basic need with one solution can be very advantageous.

10. You cannot ask individuals to just tell you how to make themselves much happier. Most persons are intimidated by the scope of the problems around them. They are only vaguely dissatisfied and lack the energy or imagination to know exactly how to help themselves.

    It is essential to understand that recognizing a problem is as much an act of imagination as solving a problem.

11. A idea of great consequence is a commercial opportunity only when you can foresee how immediate competition can be deflected (long-term competition is nearly impossible to prevent). You must be able to identify barriers to immediate entry by your competitors, actual or potential.
12. The single most effective way to reduce the risk involved in innovation is to generate as many alternatives as possible. Alternative problems, alternative solutions. You can never have too many possible avenues of exploration. The likelihood of finding a great idea increases the greater is the pool of potential ideas from which it is drawn. The best idea out of 3 might be OK; the best out of 20 might be superb.
13. The likelihood of generating a successful innovation is much higher when you are working within a topic, technology or industry you find genuinely interesting for its own sake. You can bring an intensity of focus and depth of knowledge far beyond that motivated solely by financial gain.
14. If it appears that your particular interests do not have commercial potential, then you redouble your efforts to find such potential. And you broaden the focus of your interest; interests can and should develop/evolve/grow. And you may explore areas of apparent commercial potential to determine if you might become interested. If you know more about the area, you might find yourself genuinely interested. You can, after all, have more than one interest. But in the end you must have a deep interest in the innovative work you wish to do.

    If, after such examination, your principal interest remains non-commercial, you prepare to create an innovation for which you will raise funds from either an appropriate employer or from non-commercial sources, such as private donors, foundations and public agencies.

15. The most significant innovations can most easily be found in "vacant" fields, that is, where few others are looking. It is always easier to find a new, untried idea in an unexplored territory and easier to develop it there, without attracting premature interest by powerful adversaries. So put logic on your side. It is not impossible to find treasure in crowded fields, only very difficult. And the treasure will certainly not be found by most of those who are looking there.
16. There are vacant fields in all domains, even apparently crowded ones. So, for example, even though Internet products and services is overcrowded territory, there are vacant fields within it, if you look carefully enough. Remember the herd does not explore obscure pathways even when they are directly in its line of vision.
17. In order to decide whether a vacant field is merely stoney ground (where there is no opportunity for good reason, where others have tried and failed), determine why it is vacant. Perhaps no one has tried yet. In this case you will find no record of failed attempts. A better possibility is that the herd has positively decided that there is no potential in those fields and that this decision is based on an error in their thinking, an error you recognize and they do not. Equally attractive is a field vacant because the herd has a deeply-rooted gap in its information or perspective.
18. Vacant fields frequently occur, among other reasons, because inter-disciplinary barriers are not or cannot be bridged, historical analysis is not conducted and educational background is inappropriate to the domain.
19. Information technologies make it easier to look for vacant fields. Warning, warning! Danger, Danger! The Web is not representative of activity. Used alone it can be profoundly misleading. For more information on vacant fields, SeeTECHNOLOGY MARKETS
20. Problems, solutions and vacant fields are all discovered by taking the facts past and present, of any situation and looking at it in an as many different perspectives as possible. Rotate the array of data until something unexpected appears. Then do it until something useful and unexpected appears. And if nothing still happens change the array by altering the domain boundaries/definitions. And then look at the new array a dozen different ways. Or a million. Until you get dizzy. It will be a function of your imaginative powers.
21. The process of entrepreneurship and innovation is an unending conflict between two sides of your mind. There is the power of your imagination to see what does not yet exist and the command of reality which always appears as a set of constraints. At the level of immediate implementation these two impulses are at war with each other. The entrepreneur will always struggle to hold them in balance. Many fail. Some let their imaginations overwhelm the practical and they become the dreamers, doomed to see no vision realized. Others let their practical orientation kill all their ideas at birth. They run forward on momentum, leaving others to shape their destiny.

    Successful entrepreneurs, by contrast, use the force of their determination to hold the imaginative and the practical, these two mutually repelling forces, side by side in absolute balance. They do so until the tension is relieved by a lightning bolt of penetrating insight; the imaginative and the practical meld into one.

ii) Intellectual Property: Barrier to Entry

Assuming you have a feasible solution and willing customers, how will you protect yourself from competition, from the imitation of your solution? How will you make yourself a monopoly? This step is frequently overlooked or minimized; many entrepreneurs just expect competitors and intend to fight them off in some vague way. Note: protecting intellectual property effectively requires legal advice. The following is only enough information to ask informed questions of your advisors.

1. Patent the Solution
   • gives monopoly of production in country issued for time specified
   • enforcement is the responsibility of the patent-holder
   • only certain forms or manifestations of an idea may be patentable
   • an idea itself cannot be legally protected in most cases
   • obtaining a patent is an expensive and lengthy process

   Enforcing a patent is an expensive and lengthy process. A patent can be a powerful monopoly. All new solutions should be searched for patentable aspects. If the idea cannot be patented, can a vital part of it or the machine which makes it or the package which holds it or the attachment to another product or etc. be patented?

   Can the design be reoriented to create more patentable aspects? Note: patenting successfully requires highly-trained, highly-paid professional advisors.

2. Industrial Design
   • protects shape or form
   • can be effective in some cases
   • less expensive and complicated than patents
3. Copyright
   • protects the words themselves, not the ideas, or the content
   • easy to obtain: by declaration
   • enforcement is the responsibility of holder; can be expensive; copyrights often violated
   • protection lasts longer
   • is especially important in the information economy
   • can be helpful providing supplementary protection e.g. copyright manual of instruction
4. Logo, trade market protection
   • protects identity of products, that it is YOURS, not its features or attributes
   • relatively easy to obtain
   • need never expire
   • can have great commercial value . . . eventually!
5. Legal Thicket Defence
   • patent, industrial design, copyright and trade mark
   • every aspect of your product whether or not especially useful or enforceable
   • act/look like you would sue anyone who got anywhere near you at the slightest provocation
   • the threat to the other party is the great expense and uncertainty of manic litigation (of course, you can be counter-sued for harassment).

   Can also sue based on trade secrets, proprietary knowledge, industrial espionage (see below).

6. Trade Secret
   This is information or knowledge without which a competitor cannot imitate you. Often used, often very effective. That's why you need to create an innovation which is difficult; so a lot of information is necessary to solve the problem. Trade secrets are most effective when there are MANY secrets to defend.
7. Proprietary Information
   Information vital to success of your solution/venture which is specialized and which you generated or collected and which you always kept private may be protectable in some situation. e.g. stopping an employee from communicating this information to the competitor. Best to guard truly vital information very carefully. You want to force your competitors to duplicate all your research efforts. The effort of uncovering many secrets discourages competitors. And continuous product evolution, expansion and spin-off just keep adding to the fund of secrets.

The TRUE and ULTIMATE barrier to ENTRY is INFORMATION. The real lesson of the information economy is not that we all sell computers or write software. It is that for all of us information is a powerful tool and weapon. A competitively powerful venture has a growing fund of exclusive, highly-valued information. It is irrelevant through what vehicle that information is sold - through a physical product or on a database. The information is EXCLUSIVE because only you took the time to find it, to analyse it. Only you know where to look. Then it appears easier to buy it from you, than to chase you. You are more powerful than your competitors when you know more than they and you always do (which is why the innovative thrust of your venture can never ease). "We have taught our competitors everything they know. We haven't taught them everything we know." Mercedes-Benz

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