Are you sure the world is ready for you?
 

W. Chan Kim and Renée Mauborgne
  

NEW BUSINESS IDEAS:  PART III

Many bright ideas come to nothing because companies fail to predict the public's response, say   W. Chan Kim and Renée Mauborgne .
 

Monsanto thought its fortune was made. It had created genetically modified seeds - a completely new market. The new seeds offered considerable benefits to farmers. There would be less risk of crops failing because of disease or poor climate, a lower cost, less need to spend time applying pesticides and a longer shelf-life for some crops. Arguably, the environment would also benefit: with less pesticide, fewer toxic chemicals would contaminate the countryside. And lastly, consumers might gain, especially in developing countries. With a cleaner environment, more safe water to drink and more vitamins from some GM crops, diets and well-being would be enhanced. 

So why did Monsanto get into such trouble with GM foods that to survive it was, in effect, forced last year to merge with Pharmacia & Upjohn, the drugs group? 

The reason is that Monsanto did not understand how society would accept its innovation. The company assumed that people would accept an idea that created utility. But the more an innovation challenges the status quo, the greater the chances that it will encounter obstacles. For Monsanto, the main hurdle to widespread adoption of its product was the green movement's criticism that the company was defying the laws of nature for the sake of profit. Yet many of the facts produced to date suggest that GM seeds could indeed improve the environment and people's health. 

Hurdles to adoption come in three kinds. Employees can feel threatened by the launch of a new business because it promises to transfer the company's power and resources from them to others. Partners can feel disenfranchised by a new business - as, for example, when traditional resellers are sidestepped by a company's efforts to sell goods over the internet. And the general public can reject a new idea, as it did with GM foods, because it is poorly understood. 

To avoid Monsanto's plight, innovative new businesses need to deal with employees', partners' and society's concerns from the outset through fair processes and education. To do this, they must engage people in a debate on why the innovation is necessary, explain its merits and set expectations of the innovation's ramifications and how the company will tackle them. For Monsanto, this would have meant initiating a debate about GM seeds and explaining how they would help eliminate pollution, disease and famine. The company would also have led people to expect that, given their continuing reservations about GM foods, it would give consumers a choice between organic products and GM products by means of explicit labeling. 

Had Monsanto taken these steps it might have become the "Intel inside" for the food of the future. 

Companies that take the time to identify potential adoption hurdles will find it well worth the effort. They can learn, before billions are spent, whether potential resistance to the idea is well founded. They can find out whether they have overlooked factors that invalidate the new business idea. And they can learn, as in the case of GM foods, whether the public lacks a clear understanding of the new idea's utility and work out how to build an educational dialogue. 

Over the past two days, we have discussed how to recognise whether you have a winning new idea and how to assess its commercial worth. Our ideas can be summarised in what we call the Winning Business Idea (WBI) index. As the table shows, the index scores new business ideas in terms of the factors we have identified as critical to success: 
 

• Buyer utility economics: does the new idea offer buyers a leap in utility? 

• Strategic price economics: is the product or service priced so as to capture the mass of buyers from the start? 

• Cost economics: what is the target cost the company needs if it is to charge its strategic price and earn a decent profit? Has the target cost been met? 

• Capability economics: have the company's shortcomings been offset by the strengths of the right partners? 

Together, cost and capability make up the company's business model. 
 

• Adoption economics: have the obstacles to adoption been identified and dealt with in advance by means of a fair process with employees, partners and the general public? 

The first two factors determine a new idea's potential to generate sales and win over enthusiastic customers. They allow companies to earn their brand's status, rather than buy it with extravagant advertising. Bloomberg, Amazon.com, eBay, Enron and Wal-Mart became champions in their customers' eyes thanks to exceptional utility and price, not exceptional advertising. To build a strong profit engine, however, companies must also pass the remaining two tests in the WBI index. 

Our research suggests that many companies fail to subject their ideas to these straightforward questions and analysis. As the table shows, Motorola's Iridium satellite telephones and Philips' CD-i both failed one or more of the WBI index tests. 

The common response to the dotcom crash is to evoke the need for consolidation. That would allow loss-making companies to cut their advertising budgets, their staffing and many of their other overheads. But is that the real issue? We would argue that it is more important to put right these businesses' underlying faults: the lack of a strong value proposition, of a business model that will really make money and of an understanding of adoption hurdles. 

Webvan, once a rising star of the internet in the US, launched itself as the home deliverer of groceries. Its target group was career-minded individuals who had little time on their hands. But to receive deliveries, people needed to be at home and Webvan could not promise exact delivery times. The delivery costs were relatively high for a commodity such as food, which is sold with razor-thin margins. 

So what does the future hold for Webvan? Not much, according to the WBI index, unless Webvan rethinks its business model and utility proposition. 

Consolidation may buy time for dotcoms that score poorly on the WBI index but it will not be the cause of any subsequent success. For that, they need to recast themselves. If venture capitalists identify a company that scores poorly on the index, we believe they should not invest in it. 

And if you are thinking of joining an exciting company that is seemingly committed to building the industry of tomorrow, you should use the index to help you assess its prospects. 

Otherwise, you may soon join the growing list of people let down by dotcoms. Forty thousand and counting . . . 
 

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