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« Why you need to get out more | Main | Startups and the Art of Surfing »
Tuesday
Jul092013

The Ugly Reality Behind Innovation

Your job is to undermine the free market

Odd, isn’t it? Business supports the idea of free competition but spends most of its time trying to undermine it.

That’s the job. Call it creative destruction, innovation or disruption – the principle is still the same. Somehow, you have to find a way of making the playing field uneven.

Underneath modern capitalism is the theory of perfect competition. It states the price of anything will always gravitate toward the optimal level – the one that’s best for both consumers and producers. It explains why capitalism should be the most efficient way to run anything.

Yet competitive markets are dynamic, not static. The theory doesn’t work perfectly because perfect competition never exists. It’s a state of equilibrium to which we are always heading but where we never stay.

The reason? No business wants to operate in the perfect conditions required by the theory.

What are they?

  1. Lots of buyers and sellers. No one has an edge.
  2. Products are homogenous. Everyone produces the same thing.
  3. No barriers to entry. Anyone can enter your market, anytime, for free.
  4. Equal information. Everyone knows everything they need to know.
  5. No artificial market restraints. No activity gets favorable support.

The opposite attracts

These five conditions are good starting points for a successful business strategy. The aim of product and market development is to create their exact opposite.

  • Isolate a niche where your buyers aren’t swamped by huge numbers of sellers. Use any advantage you have – location, special skills, quality people, unique service – to dominate a market segment.
  • Constantly upgrade models and bring out new products - anything to differentiate your business from others.
  • Focus on proprietary ownership of any aspect of your business. What can keep those hordes of competitors off your patch?
  • Research your market. Dig deep for information. An informed business fully understands what their customers want. Know them better than the opposition.
  • Be wary of artificially protected industries. Tariffs, subsidies or special tax breaks are fickle. Subject to politics and the current vogue in social engineering, they can disappear at anytime. A sustainable business goes where its natural advantages drive it, not where artificial stimulants drag it.

In short?

If you are serious about developing a successful strategy for your business, start by trying to counter anything that might make your market perfectly competitive. Sounds ugly, I know. But that’s the reality. It’s the force behind some of the greatest innovations in history.

Of course, eventually everyone starts doing the same thing. That’s where the equilibrium bit comes in. Competition forces prices down and everyone starts buying some form of the same thing from all sorts of suppliers whether it’s fantasy novels or smart phones. At that point, it’s time for someone to start undermining those conditions again. That’s called innovation. The challenge is to be the first. Start undermining now.

 

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