Lee Cooper is a professor and director of the Venture Development Project at the UCLA Anderson School of Management. His session touched on how to recognize the kernel of an innovation from a business perspective, how to identify the correct market to enter first, and how to assess and enter that market. What follows is a partial transcript of his Ad:Tech talk:
I’m here wearing three hats. I’m a professor at the Anderson School of Management, where I’ve been a faculty member for 35 years. There, I manage the Venture Development Project, which works to take things out of the lab and into commercial application. And then I chair the Faculty Innovation Group. There’s only so much you can do on the inside.
At UCLA, this is more obvious than at CalTech or MIT, but major research universities are efficient at producing innovation — but not at translating those innovations into commercial applications. We’re trying to move university innovation toward commercial applications, but we’re also teaching Andersen students to assess markets and strategically plan for new ventures.
The Faculty Innovation Group purchases intellectual property, and either starts new ventures or licenses that technology. We’ve done several projects, but the framework is more important. The venture relies first on its ability to understand faculty goals and desires. Most of the time, people bring their own agenda to the table and complain about recalcitrant faculty. You also need to gather top-level advisors with expertise in technology, markets, capital, and intellectual property.
Most of what I know I put in a book called Midlife Startup. Sometimes you need to not move at Internet time. You need to step back and reflect. Consider the Cambrian period. During periods of radical explosion and radical change, one of the characteristics we see is that you get many different forms serving the same basic function. Look at what bicycles went through. They were enormously popular at the end of the 1800s. You saw many different forms. Bicycles were a radical innovation in the sense that they had an enormous impact on women’s roles. It was socially acceptable for women to ride bicycles, but you couldn’t ride a bicycle with a bustle or hoop skirt. You could ride a bicycle without an escort. That showed up a lot in the related advertising.
It was hard to bicycle on cobblestones, so a lot of urban areas paved, which paved the way for automobiles. In times of radical innovation, you can see some amazing things. We saw the same thing with the early cars. You had internal combustion engines competing with steamers. You have electric cars. They meet the same basic year. What won was not the internal combustion engine but a hybrid. In the internal combustion engine, you really have two engines. The emergence of the hybrids now is a re-hybridization. It’s not really anything new.
My thesis is that a radical innovation is like a long leap across a rugged landscape. If the new venture can’t find an ecological niche that fundamentally values the kernel of the innovation, it will die. In eras of high uncertainty, traditional marketing research is much less applicable. What we really have to do is market finding. And in order to find the right market, we need to understand the kernel from a business perspective, not a technology perspective.
Let’s consider some innovations. There are continuous innovations, alterations of a product. There are dynamically continuous innovations, which are more disruptive, but still do not change basic consumer patterns. And then there are discontinuous innovations, which create new consumption patterns.
From a consumer’s perspective, alpha change is a change in position like Oldsmobile tried rather unsuccessfully a few years ago. Beta change is a change in values. People’s perceptions of the environment don’t change, but what they value changes. And finally, gamma change is a variation that can only be measured by redefining the dimensions of the scale. Think about an innovation like collision avoidance systems, which radically change people’s perception of safety. When you can change what judgments people make, you’re dealing with radical change. And disruptive innovations start a new technology adoption life cycle.
Geoffrey Moore’s technology adoption life cycle framework is perhaps the most useful. He wrote about the chasm and early adoption. But the real business is on the other side of the chasm. After you figure out what that first market is, how do you serve that segment — and then how do you serve additional segments?
Now we’re at a point where we can talk about analyzing the kernel of an innovation. This is where people get particularly confused. A company like Nolan Bushnell’s Atari, which was originally big on the arcade side, faced tremendous copy-cat competition. But instead of suing their competitors, they worked to out-innovate them. What if games could be plugged into a box? What if the game wasn’t in the box? That allowed them to jump from being a business-to-business company into the consumer market.
What is the kernel of the innovation? Atari had piles of technological breakthroughs, but the real kernel was the separation of the content from how that content was delivered. They decided that the arcade was not the way to go. What is the market that fundamentally values that kernel? Who cares? What is the minimum augmentation of the kernel required to generate a compelling reason to buy?
At the same time, if you augment the kernel and then realize you’re not in the right market, you can’t go back. There’s a joint criterion. You want as big a market as you can address combined with the smallest augmentation so that you don’t bet the company on what the first market is.
I’m going to illustrate that with a company called Strategic Decision Corp. If you know enough about a person who visits a Web site — or in another market — you can know a lot about what kinds of ads they prefer. What we’re trying to do with radical innovation is evaluating candidate markets. What is the market definition? What’s the value network? What’s the business design? Have you done a competitor analysis? What about an opportunity analysis.
This is a game. You have a finite market size. The total available market depends on how general the articulated need is. In the case of SDC, we were working off well-published general trends. Those trends came from an external source. We fit in them and were able to get the funding we needed.
We used to talk about value chains. What has happened is that traditional companies like IBM that did all of these things used to be the only outfit out there. Those vertical silos have become horizontal cooperative networks. Instead of being part of a value chain, you’re in a value network. That said, what’s your value proposition? What market sector are you targeting? What value do you deliver? What pain do you address?
For business design, use Adrian Slywotsky‘s process. It’s got 11 steps, and if you can answer each in a sentence for you and your competitors, it’s a good way to sketch your framework. Who are your existing competitors? What are their benefit propositions? What are the key differences between the offerings of these competitors and those of your new venture? Who do they see as primary competitors?
Radical innovations can impact many markets. But it needs to find the right first market in order to survive. Then it can move naturally into other markets, but only if you find the kernel of innovation from a business perspective. One example is how steamers took over the transatlantic shipping trade from the clipper ships. Steamers broke down often, cost more, weighed more, and were slower. So how’d they take over? They found a home in river trade. It’s easy to steam upstream but not to sail. They went through incremental change once they did that, and eventually, the clipper ship companies were supplanted. Their incremental innovations were bigger and faster. They’d add another mast while the steam ship companies were operating in a totally different arena.