In the first of a three-part series on new business ideas, W. Chan Kim and Renée Mauborgne reveal how investors can avoid innovations that are destined to flop.
 
 

A good idea will always find a backer. Even today, with stock markets more nervous than for a decade, money is not a scarce commodity. US companies received nearly $50bn in venture capital funding last year, 25 times as much as in 1990. The amount of money raised in initial offerings in 1999, nearly $70bn, was about 15 times the amount raised in 1990. 

The rare commodity now, as ever, is the understanding that makes it possible to spot winning ideas. 

Clearly, small companies and their investors have made plenty of mistakes. Since the end of last year, about 250 dotcoms have sacked more than 40,000 employees. More than 40 dotcoms have given up altogether, including companies once touted as the stars of tomorrow. Remember Boo.com, the European fashion site; Boxman, the European compact disc retailer; Eve.com, the US online beauty products company; and Pets.com, the US online pet company? Today, the stock of 90 per cent of dotcoms is trading below the offer price. On Nasdaq, 100 new dotcoms have stock prices below the $1 threshold needed to maintain a listing. 

B2C and B2B used to mean "business-to-consumer" and "business- to-business". Closer to the truth today for those high-flying MBAs who left jobs in the old economy to join dotcoms is "back-to-consulting" and "back-to-banking". 

However, big business also finds it hard to back the right innovative ideas. Motorola, a formidable company, spent billions of dollars on Iridium, a satellite communications system, which went bust in 1998. Philips, the Dutch electronics group, devoted its world-class research staff and billions of dollars on CD-i, a video machine, music system, game player and teaching tool all wrapped into one. It flopped - even though the company bet on its being the biggest thing since the VCR. When Monsanto backed genetically modified seeds, it cost billions of dollars, tarnished its corporate image and saw the departure of Bob Shapiro, its chief executive. 

Are such failures an inevitable part of launching an innovative business idea? Or can ideas be sifted systematically to distinguish those with commercial appeal from those destined to fail? 

We have spent 10 years exploring these questions, studying more than 200 successes and failures to assess what predicts the fate of new business ideas.*

The common view is that innovation and new business creation are a random process in which high odds of failure are an inevitable adjunct to the huge rewards of success. However, our research has revealed four underlying sets of economic conditions that successful ideas have in common. Collectively, they make up what we call the Winning Business Idea Index, a way for companies to assess whether they are building the next AOL or another Boo.com: 
 

• Buyer utility: is there a compelling reason for customers to buy a new product or service? 

• Strategic pricing: how can a company price its new product or service to attract the mass of buyers? 

• Business model: how can a company profitably deliver the new idea? Are its costs, capabilities and pricing appropriate to the task? 

• Adoption hurdles: are there reasons why an idea may not be accepted by employees, partners, or society - as Monsanto's seeds were not? 

In a series of three articles, we will explain these underlying economic conditions and how companies, venture capitalists and entrepreneurs can use them to pick winners and salvage ideas that are drifting into trouble. This article looks at buyer utility and describes a simple tool for assessing it. 

Assessing buyer utility may seem self-evident. Yet many companies forget to ask even the most rudimentary questions because they are obsessed by the novelty of their product or service - especially if new technology plays a part in it. Unfortunately, buyer utility and technical advance are not the same. Indeed, most failures score highly on technical wizardry. 

Such ideas fail to make buyers' lives simpler, more convenient, more productive, more fun or less risky. Consider Philips' CD-i, an engineering marvel that failed to offer consumers a compelling reason to buy it. This was promoted as "the Imagination Machine" because of its diverse functions. Yet the CD-i player did so many different tasks that customers could not understand how to use it. In addition, it lacked attractive software titles. So while the CD-i could theoretically do almost anything, in reality it could do very little. Customers lacked a compelling reason to use it and sales never took off. 

To grasp whether a new idea creates exceptional utility, the starting point is to understand the "buyer experience cycle" (see chart). This shows the range of activities customers experience when they use a product or service, from its purchase to its disposal. 

There are six "utility levers" that a company can apply to each of the activities in the cycle: 
 
 

• Customer productivity - Dyson's leap in suction power made vacuum cleaning quicker and easier. 

• Simplicity - Intuit's Quicken software eliminated accounting jargon from personal financial accounting. 

• Convenience - Virgin's business class door-to-airport-to-door limousine service helped ease the hassle of air travel. 

• Risk - Enron's commodity swaps and futures contracts stripped the volatility out of gas prices. 

• Fun and image - Starbucks' chic coffee bars are much more than a place to buy a hot drink. 

• Environmental friendliness - Philips' Alto light bulb used less mercury than earlier designs. This allowed fluorescent office lamps to be easily disposed of, eliminating the cost of using special dumping sites. 

The question is whether the new product or service pulls one or more of the levers. The beauty is that you can obtain an answer today even though what you want to create are the markets of tomorrow. Whether your customers are steel mills, investment banks, developing-country government agencies or cyber-kids, the questions and method behind the business experience cycle are the same. If exceptional utility is being created, companies should be able to pinpoint where and how. 

In the same way, companies should be able to see when an idea falls short - as Iridium clearly does, despite being an engineering marvel. The phone was large and weighed about a pound (inconvenient use); it came with a bag of clunky, confusing attachments (complex and inconvenient supplements); it could not be used in cars or buildings, where most business people use cell phones (counterproductive usage). Across the buyer experience cycle, the "utility levers" of convenience, simplicity and customer productivity would have highlighted how the product, its use, and its supplements all needed to be improved. 

Having assessed your idea's utility, you may have convinced yourself that you have a success on your hands. But that is not enough: you also have to convince others. So you should ask managers to sell the new product or service to you - not in an elaborate two-hour presentation but in 10 minutes with 15 minutes of questions and answers. That is about all the time companies have to capture a customer's interest. So force this discipline on new business ideas - and make people use simple words that any customer can understand. If people say the time is too short, it could be that your engineering marvel is a solution looking for a problem, not the other way round. 

Ask yourself these questions: 
 

• Does your idea offer customers a compelling utility proposition? 

• Across what activities of the Buyer Experience Cycle does it offer a leap in utility? 

• What "utility levers" are you pulling, not just to create customers but to create enthusiasts? 

*Knowing A Winning Business Idea When You See One, Harvard Business Review, September-October, 2000