Articles on entrepreneurship..summary(2)

[object Object],New technologies and a growing capacity for innovation are playing fundamental roles in the search for answers to the current economic situation. At the Wharton Global Alumni Forum in Madrid, three executives from Spain's high-tech sector and two entrepreneurs in Africa's growing technology sector took part in a panel session titled, quot;
Technology and Innovation: Panaceas or Chimeras?quot;
The session was moderated by Alberto Durán, founder and CEO of Rio de Janeiro-based Mundivox Communications. To set the stage for discussion, Durán noted during the panel and in a later discussion that, while technology and innovation will help create the basis for societal growth, it is demographics that has quot;
completely changed the economics of the way we live, and is creating both immense opportunities as well as immense challenges.quot;
As an example, he pointed to the 85 million plastic water bottles that are thrown away every day. quot;
The pile of bottles in the middle of the Pacific is twice the size of Texas, yet we don't talk about that,quot;
he stated. quot;
Political will is needed to address these issues. Today we can create amazing financial instruments to fund real estate, telecom and other industries. Why don't those instruments exist to fund new technologies for plastic? Someone has to come in and say, 'Look, we need to do this.' It is political will that will make this happen.quot;
 Durán also noted the challenges that the global economy will face over the coming decades because of population growth. While 50% of people today live in big cities and 50% in rural areas, over the next 30 to 40 years, 75% will live in cities, and 25% in rural areas, along with a world population that quot;
is growing exponentially,quot;
not in Europe but in the rest of the world, including the U.S., he stated. Panelist María Garaña, president of Microsoft Spain, suggested that the debate today should focus on practical applications of technology in corporations and on the ways that technology can help improve corporate productivity and competitiveness. quot;
The people who get the most out of technology aren't the ones who invest the most money in it, but the ones who use it to become more productive. Occasionally, it is enough to take advantage of the tools in technologies you already have at your disposal.quot;
She suggested quot;
abandoning technological messages and additional technical terminology in favor of making information system tools relevant for companies and people.quot;
 In Spain, Garaña noted, quot;
half a million people work in the high-tech sector. Yet the penetration rate of customer relationship management (CRM) information systems is barely 23%. Options such as CRM, virtualization [technology] and mobile technology have enabled companies to reduce their costs by as much as 30%.quot;
 Garaña mentioned two trends that are affecting the way new technologies are being adopted by corporations. quot;
The first trend is 'cloud computing.' It is not about new technology but about a new way of consuming it that adds flexibility to the business.quot;
The second trend is consumerization, a word that incorporates the possibility of achieving the same objectives by using different mechanisms at any hour and in any place. quot;
It is not easy.... The technology in the major consumer sectors is developing more rapidly than companies are adopting it.quot;
 Opportunity and Responsibility Panelist Antonio Zufiria, IBM's president for Spain, Portugal, Greece and Israel, agreed that the crisis precipitated the need for innovative technology as well the need to apply new discoveries to change existing conditions. quot;
Now is the time when we have to increase the level of efficiency and sustainability in our society,quot;
he noted. The world quot;
is full of inefficiencies. A hundred years ago, there were only 15 cities [in the world] that had more than one million people. Now, that number has multiplied 20-fold. Yet the world is much better connected [via communications technology], and there is a greater capacity for analysis that permits us to improve our cities.quot;
 Along those lines, IBM has devised a project called Smarter Cities, whose goal is to make European cities more efficient through technology. This year, the project will devote half of its budget to research and development. In Denmark, for example, IBM is developing a system that will enable ordinary citizens to access health services over the Internet, the way they access banking online. In Stockholm, highway tolls already rise and fall as a function of traffic volumes, and thanks to the use of technology, traffic jams have gone down by 25%. This benefit has had a domino effect by reducing gases that have a greenhouse effect. quot;
And in New York, they have reduced crimes by 20% thanks to a mathematical algorithm that permits [authorities] to predict criminal activity,quot;
Zufiria said. quot;
In energy, transportation, security, health, public services ... inefficiencies exist and, as a result, there are business opportunities in many social systems.quot;
 The economic crisis has only quot;
accelerated the need to employ technology,quot;
Zufiria added. quot;
A recession is an opportunity in the sense that it enables people to measure the success of their initiatives and carry them out. Is this the right time to invest in innovation? At IBM, we are convinced that it is, more than ever. Nowadays, being cautious is to stop moving, and when you stay quiet, you're dead.quot;
 Panelist Regino Moranchel, chief executive of Indra, the Spanish information systems company, agreed with Zufiria that technology companies have an quot;
obligationquot;
to redefine the way that people share information. Moranchel took stock of the last 80 years in the history of multinationals. quot;
Today, information is accessible in real time and it is easy to share. It is our obligation to redefine the way we use and share information to create value.quot;
 Like Gara ña, Moranchel left aside technical discussions to focus on the value that technology can contribute to businesses. quot;
Actually, innovating is easy if you know the problem that must be solved, [and you also know] how it can be solved and who can help manage the process,quot;
he said. quot;
We believe in [the sort of] innovation that is focused on our customers, so we can try to understand them, learn about their needs and, that way, anticipate what our competitors will be doing.quot;
 Moranchel also insisted on the quot;
crucialquot;
value of talent within any organization. quot;
You will always have more talent outside than inside an organization, so collaboration and motivation are important for getting the maximum return from your team. Unfortunately, there aren't any simple rules to follow.quot;
Gara ña pointed out that new technologies have reached many companies through their own employees who are accustomed to using every sort of technology on a daily basis in their personal lives, and who eventually demand that those tools be used in the workplace as well. ,[object Object],To come up with the next iPad, Amazon or Facebook, the last thing potential innovators need is a group brainstorm session. What the pacesetters of the future really require, according to new Wharton research, is some time alone. In a paper titled, quot;
Idea Generation and the Quality of the Best Ideaquot;
Wharton operations and information management professors Christian Terwiesch and Karl Ulrich argue that group dynamics are the enemy of businesses trying to develop one-of-a-kind new products, unique ways to save money or distinctive marketing strategies. Terwiesch, Ulrich and co-author Karan Girotra, a professor of technology and operations management at INSEAD, found that a hybrid process -- in which people are given time to brainstorm on their own before discussing ideas with their peers -- resulted in more and better quality ideas than a purely team-oriented process. More importantly for companies striving for innovation, however, the trio says the absolute best idea in a hybrid process topped the Number One suggestion in a traditional model. quot;
Manufacturers prefer 10 machines with good output over one very good machine and nine really defective ones. You would rather have 10 good salesmen than nine poor salesmen and one superstar. In those areas, what matters is the total cumulative output, the total picture,quot;
Terwiesch points out. quot;
When it comes to innovation, however, what really matters is not getting many good ideas, but getting one or two exceptional ideas. That's really what innovation is all about.quot;
 Although several existing experimental studies criticize the team brainstorming process due to the interference of group dynamics, the Wharton researchers believe their work stands out due to a focus on the quality, in addition to the number, of ideas generated by the different processes -- in particular, the quality of the best idea. They say the research is also distinctive in its study of how teams select the most promising initiatives that come out of the brainstorming phase. quot;
The evaluation part is critical. No matter which process we used, whether it was the [team] or hybrid model, they all did significantly worse than we hoped [in the evaluation stage],quot;
Terwiesch says. quot;
It's no good generating a great idea if you don't recognize the idea as great. It's like me sitting here and saying I had the idea for Amazon. If I had the idea but didn't do anything about it, then it really doesn't matter that I had the idea.quot;
 'The Boss Is Always Right' Forty-four University of Pennsylvania students were recruited to help test how the two processes fared. The undergraduate and graduate students were divided into groups of four and asked to employ the hybrid process and team process separately to come up with student-friendly new product concepts for a hypothetical sports and fitness products manufacturer and for a hypothetical home-products manufacturer. Teams were given 30 minutes to brainstorm using the traditional group process. To test the hybrid model, they were asked to spend 10 minutes generating and ranking ideas individually and 20 minutes discussing those thoughts as a group. The ideas generated by both methods were evaluated independently, by three separate panels asked to evaluate the product ideas on their business value; attractiveness to potential customers and overall quality based on the feasibility of actually building the product; the idea's originality; the size of the potential market for the product, and the extent to which it solved a particular problem. The students came up with a total of 443 ideas -- including a trash can that reduces the odor of the garbage inside it, a water bottle with a built-in filtration system and a waterproofing system that allows for reading in the shower. Business leaders trying to integrate innovative ideas into their office culture can learn from the structure and intricacy used to generate and evaluate the ideas, suggests Terwiesch. He and Ulrich are also co-authors of the book, Innovation Tournaments: Creating and Selecting Exceptional Opportunities, which suggests that companies should use coordinated competitions to filter the most exceptional proposals. He says an online system that creates a virtual quot;
suggestion boxquot;
can accomplish the same goal as long as it is established to achieve a particular purpose. quot;
People like having a process because they understand that it's fair. In a typical brainstorming meeting, it's not fair and everybody knows it: The boss is always right,quot;
Terwiesch says. The results of the experiment with the students showed that average quality of the ideas generated by the hybrid process were better than those that came from the team process by the equivalent of roughly 30 percentage points. The hybrid method resulted in about three times more ideas than the traditional method. In addition, the quality rating was higher for the top five ideas produced through the hybrid process -- and the difference in quality between the team and hybrid methods in terms of the best idea was much higher than the average difference in quality, suggesting that quot;
in an innovation setting, examining only [average] quality as opposed to the quality of the best ideas is likely to underestimate the benefits of the hybrid approach,quot;
the authors write. Self-Censorship and Build-Up There are several reasons why people are less likely to offer an unbiased opinion in a purely team-based brainstorming process. Employees might censor themselves to go along with the status quo or to avoid angering a superior. Putting several people in a room together is bound to create a lot of conversation; if everyone contributes, there is less time for individuals to share all of their ideas. Some people may think less critically about a problem because they are happy to let others do the heavy lifting. quot;
We're fighting the American business model where everybody is [creative], which is just not the case,quot;
Terwiesch states. quot;
We find huge differences in people's levels of creativity, and we just have to face it. We're not all good singers and we're not all good runners, so why should we expect that we all are good idea generators? But it's not politically correct to say so, even though there is more to being a good businessperson than generating ideas.quot;
 Build-up, Terwiesch believes, quot;
is a social norm showing that you listened. If a group is working together on an idea that's already on the table, you're wary of coming in with your own agenda because you might be seen as selfish and not a team player. So you build on the idea that is currently on the table.quot;
 But that kind of thinking is what keeps the team from doing the kind of quot;
sky's the limitquot;
thinking that leads to the development of a product or process that hasn't been seen before. quot;
Instead of searching the world broadly, we are all kind of searching only in this little sphere,quot;
Terwiesch says. quot;
In innovation, variance is your friend. You want wacky stuff because you can afford to reject it if you don't like it. If you build on group norms, the group kills variance.quot;
 ,[object Object],While posing for photographs before her high school prom, Becca Brown's high heels sank into the grass. She found herself stumbling around at a time when she most wanted to appear mature and sophisticated. The experience inspired SoleMates, the business Brown launched on the Internet in 2008 with former Goldman Sachs colleague Monica Murphy. The pair designed a plastic cap with a wide bottom that can attach to high heels to provide a more stable base while walking on uncertain terrain, such as grass or cobblestone streets. Although getting stuck was the problem that led to the founding of SoleMates, Brown hasn't allowed inflexibility toward change to trap her business in a web of inertia. As part of a panel discussion at the recent Wharton Women Business Conference, she and three other female entrepreneurs showed how the ability to compromise is key to long-term, positive growth. She believes that concentrating marketing and sales on boutiques and wedding planners will build a following for Connecticut-based SoleMates and convince customers to pay more for the original if and when lower price knock-offs begin to appear. Brown and her partner are currently the company's only employees. quot;
Has it been difficult to launch a consumer product in this economy? Yes,quot;
stated Brown, who quit her job to launch the company in 2008, just as the global economy began to crumble. But she and Murphy are pitching SoleMates as a necessity. quot;
It's an insurance product against losing a heel and preserving the assets we already have by extending the life of our shoes,quot;
she said. Caviar and Tuna Fish Jennifer Hyman's idea to create New York-based Rent the Runway, a service that allows women to rent designer dresses at a fraction of the cost, was inspired by her sister's efforts to satisfy caviar taste in fashion on a tuna fish budget. But her business plan came to fruition, in part, thanks to harsh criticism she received while gathering input from leading designers and retailers. Hyman approached designer Diane von Furstenberg and Bergdorf Goodman CEO James Gold up front to curb potential industry opposition or efforts to kill her company. Rent the Runway delivers dresses by courier to subscribers who order them over the Internet, much like a Netflix movie. Gold and von Furstenberg each told Hyman that quot;
'there is an idea here, but here are the problems I have with it,quot;
she said. quot;
Then I came up with a model to address the problems and create something that might be beneficial to the community.quot;
 She convinced von Furstenberg that Rent the Runway could lead to an overall increase in sales for the designer's line because dress rentals would tap into an audience beyond those willing to buy the garments at full price. Indeed, letting women experiment with high-end brands via rentals would turn them into full-price customers of the designers with styles that worked best for them.The company, which launched in November 2009, would not have developed as well if von Furstenberg and Gold had immediately embraced her idea, Hyman said. Her advice to budding entrepreneurs is simple: quot;
Think about who hates the idea most and actually listen to what they have to say.quot;
In addition to learning from industry insiders, Hyman and partner Jennifer Fleiss are also listening to their customers. They initially expected that Rent the Runway's target audience would be women aged 18 to 30 living in New York, Los Angeles and San Francisco. But early customer data revealed a much broader subscription base of women between the ages of 16 and 50 living all over the country. Customers like the chance to sample designer duds, but they also embraced the convenience of not having to trek to the mall to buy a dress, Hyman noted. quot;
We're finding that when we ask middle-aged baby boomers why they are renting they say, 'I've never worn any of these brands before and I work eight to nine hours a day. [Rent the Runway] couriers [the dresses] to the office.'quot;
Said Hyman: quot;
We're using that information to grow the business in new directions.quot;
 ,[object Object],When an entrepreneur has identified a potential business opportunity, the next step is developing a business plan for the new venture. What exactly should the new plan contain? How can the entrepreneur ensure it has the substance to find interest among would-be investors? In this installment of a series of podcasts for the Wharton-CERT Business Plan Competition, Wharton management professor Ian MacMillan explains that business plans must contain several crucial elements: They must articulate a market need; identify products or services to fill that need; assess the resources required to produce those products or services; address the risks involved in the venture; and estimate the potential revenues and profits. A business plan is a 25-page, maximum 30-page, document, which is a description, analysis and evaluation of a venture that you want to get funded by somebody. It provides critical information to the reader -- usually an investor -- about you, the entrepreneur, about the market that you are going to enter, about the product that you want to enter with, your strategy for entry, what the prospects are financially, and what the risks are to anybody who invests in the project. Developing a detailed business plan unless you have done some initial work. Basically what happens is that by doing a little bit of work, you earn the right to do more work. The first thing I would do before you start a business plan is think about a concept statement. A concept statement is about three to five pages that you put together and share with potential customers or investors just to see if they think it's worth the energy and effort of doing more detailed work. The concept statement has a few pieces to it. You are going to have a description of the market need that has to be fulfilled; a description of the products or services that you think are going to fulfill that need; a description of the key resources that you think are going to be needed to provide that product or service; a specification of what resources are currently available; an articulation of what you think the risks are; and then a sort of rough and ready estimate of what you think the profits and profitability will be. The idea is to put together this concept document and begin to share it around with people who are going to have to support your venture if you take it forward. This allows you to rethink as a result of feedback that you get. You might get word back from the various stakeholders -- like potential customers or distributors -- that this really wasn't such a good idea after all. That saves you the energy and effort of putting together a big business plan. It's really important to go out and speak to the potential customers. also need to find the people who you think will buy your product and talk to them about what dissatisfies them with their current offerings. You should get a sense from them about who is providing the alternative at the moment. Remember, the world has gone for maybe 100,000 years without your idea -- and people are getting by; they're not dying. Something out there is servicing their need. So what is the closest competitive alternative to what you want to offer? That is what you need to find out -- and that involves talking and listening. And for all the enthusiasm you have for your venture or your idea, you really need to listen to people who are eventually going to write a check for it. Before you go on to write a business plan, you have to do some more work. If the concept statement looks good, then the next step is to do a 15- to 20-page feasibility analysis. This means we are now going to take this idea to the next level. We've learned from potential customers and distributors. We've learned who the major competitors are. We've shaped the idea more clearly, and now we're digging deeper. The idea of the business plan is to convince the stakeholders. First, what we need to do in a business plan is show that we understand the needs -- the unmet needs -- of potential customers. Second, we need to understand the strengths and weaknesses of the current most competitive offering out there. Third, we need to understand the skills and capabilities that you and your team have as entrepreneurs. Next we need to understand what the investors need to get out of their investment, because they have to put their money in and they need to have some kind of sense of what they are going to get in terms of returns. In addition, the investment needs to be competitive with alternative investments that the investors might make. The most important idea in the business plan is to articulate and satisfy the different perspectives of various stakeholders. This process sets in motion some basic requirements in the business plan -- to tee up right from the start --- evidence that the customer will accept it. Probably a third of the ventures out there that fail are because some person came up with the right product that they thought the world would love and then found out that the customers couldn't care less. What you want to try to do in a business plan is convince the reader that there are customers out there who will in fact buy the product -- not because it's a great product, but because they want it and they are willing to pay for it. Now let's look at the various components of the business plan document: First, you need an executive summary that grabs the attention of the potential investor. This should be done in no more than two pages. The executive summary is meant to convince the potential investor to read further and say, quot;
Wow! This is why I should read more about this business plan.quot;
 Next, you need a market analysis. What is the market? How fast is it growing? How big is it? Who are the major players? In addition, you need a strategy section. It should address questions such as, quot;
How are you going to get into this market? And how are you going to win in that marketplace against current competition?quot;
 After that, you need a marketing plan. How are we going to segment the market? Which parts of the market are we going to attack? How are we going to get the attention of that market and attract it to our product or service? You also need an operations plan that answers the question, quot;
How are we going to make it happen?quot;
And you need an organization plan, which shows who the people are who will take part in the venture. You need to list the key events that will take place as the plan unfolds. What are the major things that are going to happen? If your plan happens to be about a physical product, are you going to have a prototype or a model? If it happens to be a software product, are you going to have a piece of software developed -- a prototypical piece of software? What are the key milestones by which investors can judge what progress you are making in the investment? Remember that you will not get all your money up front. You will get your funds allocated contingent on your ability to achieve key milestones. So you may as well indicate what those milestones are. You should also include a hard-nosed assessment of the key risks. For example, what are the market risks? What are the product risks? What are the financial risks? What are the competitive risks? To the extent that you are upfront and honest about it, you will convince your potential investors that you have done your homework. You need to also be able to indicate how you will mitigate these risks -- because if you can't mitigate them, investors are not going to put money into your venture. After that, what you get down to is a financial plan where you basically do a five-year forecast of what you think the finances are going to be -- maybe with quarterly data or projections for the first two years and annual for the next three years. Finally you need a financial evaluation that tells investors, if you make this investment, what is its value going to be to you as an investor. That is basically the structure of the plan. This doesn't mean you compromise your objectives. The idea is that I want to keep on trying to meet my objectives, but how I meet them must change as the plan unfolds. That's basically what led to all the work that Wharton has done in the last few years on discovery driven planning. It's a way of thinking about planning that says, quot;
I'm going to make small investments. If I'm wrong early, I can fail fast, fail cheap and move on. But as I find out what the true opportunity is, I can aggressively invest in what this opportunity is.quot;
 ,[object Object],A key question that all would-be entrepreneurs face is finding the business opportunity that is right for them. Should the new startup focus on introducing a new product or service based on an unmet need? Should the venture select an existing product or service from one market and offer it in another where it may not be available? Or should the firm bank on a tried and tested formula that has worked elsewhere, such as a franchise operation? There are many sources for new venture opportunities for individuals. Clearly, when you see inefficiency in the market, and you have an idea of how to correct that inefficiency, and you have the resources and capability -- or at least the ability to bring together the resources and capability needed to correct that inefficiency -- that could be a very interesting business idea. In addition, if you see a product or service that is being consumed in one market, that product is not available in your market, you could perhaps import that product or service, and start that business in your home country. Many sources of ideas come from existing businesses, such as franchises. You could license the right to provide a business idea. You could work on a concept with an employer who, for some reason, has no interest in developing that business. You could have an arrangement with that employer to leave the company and start that business. You can tap numerous sources for new ideas for businesses. Perhaps the most promising source of ideas for new business comes from customers -- listening to customers. That is something we ought to do continuously, in order to understand what customers want, where they want it, how they want a product or service supplied, when they want it supplied, and at what price. The first step that everyone should go through is to ask the question, is the market real? In order to do so, the first thing you want to do is conduct what we call a customer analysis. You can do that perhaps in a very technical way, by conducting surveys. Or perhaps, in a less technical way, you can attempt to answer the question, quot;
Who is my customer?quot;
What does the customer want to buy? When does the customer want to buy? What price is the customer willing to pay? So, asking the quot;
W questionsquot;
-- who, where, what, when -- is the first step. At the end of the day, the one thing every entrepreneur is looking for is revenue, and the revenue will come from customers. That is why you need to ask yourself, is there a market here? The second thing you want to ask yourself is, who else is supplying that particular market? That is what we call competitor analysis. Ask yourself who else is in this market, and what are they doing for the customers. Are they supplying a similar substitute product or service as you have in mind? That is the second thing you have to establish, and by doing that, you can understand better what need is not met at the moment. That will also give you the opportunity to zero in on the price points and feature points of where you can differentiate yourself from existing players in the market. You also need to conduct a broader industry analysis to understand the attractiveness of the industry you're going to enter. Is the industry growing or shrinking? What power do the suppliers have in this industry? How many buyers are there? Are there substitute products? Are there any barriers to entry? If so, what are they? That is very important for you to understand, because it will help you realize whether the industry you're thinking of entering is attractive. In addition, you may want to look at regulations that affect that industry. Are there any regulations that you would be subject to? This especially applies in the life sciences sector, where there are strict regulations that control the supply of products into the market. In the United States, the FDA, the Food and Drug Administration, is a significant regulator. Every country around the world has a regulator in the life science sector. So, these are the high level questions that you may want to ask yourself. When starting a business, there are many risks that need to be considered. One way to think about the various risks an entrepreneur is faced with -- or, for that matter, an investor in an entrepreneurial venture is faced with -- is to break them down into several buckets. Let's start with the first bucket, the company bucket. Well, here, the biggest sources of risk are the founders. Do they have the wherewithal not just to start the company, but also grow the company? Experience has shown that the prevalence of individuals such as Bill Gates or Michael Dell, Steve Jobs, that can not only start companies, but also manage its growth -- the prevalence of such individuals is relatively limited. A second source of risk is technology risk. To the extent that your company employs technology, there are obviously issues of, how long will this technology be the leading edge? Secondly, are there any intellectual property issues that need to be addressed? Lastly, there exists the product risk. If you haven't developed a product yet, can you manufacture it? Will it work? All these issues are under the bucket of company risk. A third bucket consists of risks associated with the industry. Are there any factors in that industry that relate to availability of supply? In some cases, you need to have certain raw materials that are in limited supply, and that some suppliers might be able to take advantage of that. Barriers to entry might change. Regulations might change, and adversely or positively affect your business. Lastly, there are financial risks. And here, the question is, will you be able to raise the money early on? At what valuation will you be able to do it? Will you be able to raise follow-up money? And then, from the investor's standpoint, obviously there's a risk that if the company is very successful -- and I can tell you that most early stage companies don't work out, but for the few that do, when it is time for, say, a public offering, will the public market be open? We have just gone through a substantial period of almost two years where IPOs were few and far between. At the time you make the investment, you don't know what the state of the capital market will be in five to seven years from the date you make the investment. That's a big risk the investor is assuming. Obviously, it's a big risk for the entrepreneur to be able to have some liquidity, and perhaps realize the fruits of her investment, of her time, talent, and in some cases some of the money she puts into that venture. The most frequent mistake that people tend to make is to think everybody in the market is like them. If they like the product, everybody else will. Sometimes -- too often -- entrepreneurs, and especially entrepreneurs with an engineering background, are too focused on the engineering features or technology features of the particular product, rather than on the need that they are trying to fulfill. Customers don't buy technology. Customers buy products that add value. Customers buy products that they need, in order to satisfy some issue that they wish to satisfy. But not the technology, per se; it is the services of the technology that matter. ,[object Object],Five years ago, C.K. Prahalad published a book titled, The Fortune at the Bottom of the Pyramid, in which he argues that multinational companies not only can make money selling to the world's poorest, but also that undertaking such efforts is necessary as a way to close the growing gap between rich and poor countries. Key to his argument for targeting the world's poorest is the sheer size of that market -- an estimated four billion people. How has Prahalad's book -- a revised, fifth-anniversary edition of which has just been published -- affected the behavior of companies and the well-being of consumers in the years since its publication The Fortune at the Bottom of the Pyramid was published, what impact have your ideas had on companies and on poor consumers? C.K. Prahalad: The impact has been interesting and profound in many ways -- much more than one could have expected. For example, several of the multi-lateral institutions -- The World Bank, UNDF [United Nations Development Fund], IFC [International Finance Corporation] and USAid -- have fundamentally accepted the idea that involvement of the private sector is critical for development.... I asked 10 CEOs of companies as diverse as Microsoft, ING, DSM, GSK and Thomson Reuters to essentially reflect on whether the book has had some impact on the way they think about the opportunities. Uniformly, everybody -- whether it is Microsoft or GSK -- essentially says not only that it has had some impact, but that it has changed the way they approach innovation and ... new markets. I also asked people to update the case studies that were in the original book. It was a pleasant surprise for me that almost all of them had grown, improved their offering and were doing quite well in this marketplace. I wrote a new introduction on what the lessons are that we have learned. So while the issue of poverty still remains -- and is not going to be solved in the next 10 years -- the active involvement of the private sector and its role in poverty alleviation ... have been quite surprising. And we shouldn't forget it is just five years old as an idea. Knowledge@Wharton: Could you now talk about the major lessons companies have learned through serving poor consumers? Prahalad: I think when the book came out five years ago, there was a fair amount of skepticism -- and rightly so. People could not just dismiss the idea; they knew that it was an interesting and a different one, and they could not walk away from the compelling videos and the stories in the book. Still, there was some skepticism about whether this was going to work. In a very short period of five years, many of the concerns have been put to rest. I can illustrate it with a simple example of one industry, which has broken many of the myths and cleared the way for profound rethinking about the opportunities at the bottom of the pyramid. What I have in mind is the wireless cellular phone industry. For the first time in human history, four billion people are connected. Now, of course, when you talk about four billion of the total six billion people, it is a large number. Maybe two and a half billion people are BOP consumers as described in the book. So the first thing that has happened is this dramatic shift in the use of cellular phones and the dramatic build-up of subscribers. It is taking place across the world -- sub-Saharan Africa, South Africa, Latin America, India, Southeast Asia, and China. All the companies in every one of these areas -- Celtel, Safaricom, MTN, Airtel, Reliance, Globe -- all of them are making money. So the first lesson here is if you can find the right sweet spot in terms of business models, there is a really huge and very profitable opportunity. For example, India alone is creating more than 12 million subscribers per month -- not per year but per month.... The second [concern] that people had was, can poor people and possibly illiterate people adopt new technologies? Do they need new technologies? Cell phones have again shown that the rate of adoption of this technology has been spectacular. People just understand how to use it and they are using it to good advantage. Third, in order to participate effectively, fundamentally new ecosystems are being created, including business model changes. For example -- pay per use -- prepaid cards -- has become the norm in most parts of the world. We are moving away from average revenue per user, which has been the core metric of this industry for more than 50 years, to profitability per minute of cell phone time. We are also moving away from very intensive business call carriers to very low capital intensity to building alliances and partnerships. For example, Airtel in India has outsourced its IT networks to IBM and its capacity to Ericsson and Nokia, and it has built a large number of application developers. So, essentially, if you look at what has happened, Airtel has found a way of converting its fixed costs into variable costs and creating an ecosystem that dramatically reduces capital intensity. The most important of all these is the creation of very large pools of micro-entrepreneurs -- small shops which download minutes to your phone, which allows you to charge your phone. Lots of entrepreneurs are being created. And, finally, we find that BOP markets can be an extraordinary source of innovation. If I look at Safaricom -- with the M-PESA, which stands for Mobile Cash -- it is allowing poor Kenyans, who do not have access to banks, to transfer money from A to B by text messaging. So you go to an agent. You pay them money and receive e-mobile money or e-money, which you can text to your friend. And he can go with an encrypted message and pass that text and collect real cash. This is not a small business. Seven million consumers are involved. On average, every day, there are a million transactions of $20-$25 per transaction -- a total of $20 million to $25 million every day. This is bypassing banks. In the same way, if I am a Filipino maid working in Singapore, I can send money to my grandmother at home through an SMS message. Fundamental new applications are also being developed so that BOP is not only a source of markets for micro-consumers. There are also lots of innovation opportunities. So just taking one industry, we are now able to see what a profound impact an understanding of ... BOP markets can have. Knowledge@Wharton: Where do you see this trend of using mobile technology creatively going in which mobile services can be harnessed to serve poor consumers in various ways? Prahalad: I think mobile is going to be in public health and education -- in managing pandemics like SARS and swine flu. It is going to be in entertainment -- in video games and a wide variety of other things that use the mobile platform. Video gamers are now [asking], quot;
Why can't I download, not necessarily every complex game, but most of them, why can't I create a seamless integration of my play at home in front of a PC and also on the go, where I can play with the mobile platform?quot;
This is becoming a major opportunity for video gamers. And so it is for education. There is absolutely no reason why we cannot mobilize everything from simple additions to multiplications and so on. [We could] teach children how to learn by themselves on their mobile phone and take tests remotely which are measured. Feedback is given to them, and if they don't pass the test, you start all over again. I see infinite possibilities, and I believe a lot of these innovations are going to come from BOP markets because there is a necessity there. Knowledge@Wharton: What major obstacles do companies face when they try to implement BOP strategies? Prahalad: I think there are three types of problems. The first is mental. If you start by saying, quot;
Poor people don't have money; therefore, they cannot be our consumers,quot;
you already have a big impediment. Sometimes it is useful for us to go back to our own history and ask the question. The Singer sewing machine used to cost $100 and the poor in this country could not buy it, so they came out with a $5 a month payment plan. The rest is history. Singer became the first global company out of the United States. The same thing happened with the Model-T automobile. Making a car for $200 enabled farmers to move out of villages and then to travel to small towns and so on. So the first hurdle is mental. It is not how much income people have -- it is how to create a capacity for them to consume. That means we have to change from a mentality of quot;
my current costs plus profit equals the pricequot;
to a much more consumer driven quot;
price minus profit must equal cost.quot;
That means you start with affordability. The second impediment is the assumption that we can take existing products and somehow sell them in these markets. [That] is unlikely to work because I think we need to fundamentally understand consumer needs. If you focus on that, many times you can improve upon existing products in the West. Let me give a simple example. GE has been in the game of producing EKG machines for a long time. They sell for about $10,000 in the United States. They are big and clunky -- 60 pounds or so. And they sit in a corner in hospitals. [GE] asked a simple question [several] years ago: How do we get an EKG machine that doctors can use in rural India? That means it must be battery-operated. It must be light so people can carry it. It must have a printer attached so the doctor or the paramedic can read it on the spot. And it better be connected so that if they are not able to figure out what is going on, somebody remotely in a large hospital can diagnose and give a message on what needs to be done. So they created a product which weighs three pounds. It is networked, has a printer and can travel quite easily since it is battery-operated. It sells for $800 rather than $10,000. It has better, improved functionality; it is an extremely good machine, and it is technically the equivalent of what we have in the U.S. except it has more functionality. So now the FDA has approved it so it will be sold in the U.S. It has already been sold in Europe and is being sold in China. So I find continuously that BOPs not only serve micro-consumers and markets -- it creates micro-producers and, more importantly, it creates opportunities for innovation -- whether it is Tata's Nano or GE's EKG machine or Netbooks. There is a huge opportunity, when you focus on these markets, for making fundamentally interesting innovations. Knowledge@Wharton: You referred to the development of the GE EKG machine for rural markets. Is there a difference between rural and urban markets at the Bottom of the Pyramid? How does the strategy to reach consumers in each of these markets differ? Prahalad: I think the Latin American development of poverty is much more urban poverty -- there is some rural poverty -- but it is primarily urban poverty. It is shantytowns in Sao Paolo, Rio and so on -- or Mexico City. In India, you have both -- urban poverty and shantytowns. But also 70% of India still lives in villages. So there is a tremendous amount of rural market opportunity that requires extremely complex distribution from logistics frameworks, which is somewhat different from just being in an urban environment where at least the logistics and distribution are reasonably simple. So there is some difference between how you access rural consumers compared to urban consumers at the BOP level. Knowledge@Wharton: We were speaking earlier about the obstacles. Could you address some of the cultural and communication barriers that prevent companies from being able to serve consumers at the Bottom of the Pyramid? How can they tackle these barriers? Prahalad: I think it is reasonably straightforward once senior management recognizes that there is an opportunity to innovate and there is a market to be served. The difficulties of approaching these markets are not intercultural, but the ability to identify and immerse in consumer experience in these markets. Let me give a simple example. If I am Unilever, Nestle or Procter & Gamble, I recognize that emerging markets are going to be significant for me 10 years from now. All three companies will have more than 50% of their revenues coming from emerging markets -- China, India, Brazil, Mexico, Indonesia, Turkey, Russia and so on. I also recognize a significant portion of these populations will remain in the BOP realm and, therefore, I need to straddle the pyramid. I need to serve the top of the pyramid, but I also have to serve people at the bottom. Therefore, I have to create either a new format ... or new products. In other words, I have to innovate. And I have to keep in mind the 4 As of penetrating these emerging markets like the traditional 4 Ps of marketing (product, price, place and promotion). The 4 As are awareness, access, affordability and availability. Once you come to that conclusion, then operationalizing it becomes a lot easier than the other question: Are there India-like markets? Can I use India as a source of innovation? Can I use South Africa as a source of innovation? You don't have to participate in innovating for every market in the world. You identify critical markets and then you innovate there and let it flow to other markets with similar characteristics. Knowledge@Wharton: Have any of your ideas about the Bottom of the Pyramid changed since you wrote the book? What has surprised you most? Prahalad: I think three things have surprised me most. Even though in the book I said that BOP can be a source of innovation, [I was surprised by] how much of the innovation is happening in the BOP and the rate at which people are moving to innovate -- whether it is Google or Microsoft or Intel or AMD. It is quite amazing how fast it has moved. The second thing that I think is very interesting is, while I talked about building ecosystems and so on, it is clear today that no company -- however big it is -- can afford to go it alone for cost reasons but, much more importantly, for access reasons. You have to participate with local NGOs. You have to participate with micro-entrepreneurs, small- and medium-sized enterprises, and in many cases with the public sector. So the boundaries of the firms, which are primarily large global companies -- [and the attitude of] quot;
I'm going to do it myselfquot;
-- are becoming less and less possible. You have to partner. It is continuously becoming part of an ecosystem and, in many cases, building the ecosystem. That was a second big surprise. And the third, which I think is very interesting ... is: How you can dramatically build global scale without necessarily making the investment? How do you get 2.2 million farmers to bring milk to 10,000 collection centers so that they become the largest processor of raw milk in the world -- almost 7 million kilograms of milk per day? That is possible because of highly decentralized origination and fairly centralized processing using logistics, cold refrigerated trucks or information technology to make this happen. It is the same thing with ITC -- four or five million subsistence farmers who collect and aggregate all the produce and make it world class. Similarly with Jaipur Rugs, which is a new case introduced in the book: Jaipur Rugs gets all the wool from Australia, New Zealand, Argentina and China and blends it with wool from Rajasthan, produces carpets using weavers who are highly distributed -- 40,000 of them in five states of India -- and then sells all the rugs produced in the United States. So you can even create a global supply chain where raw materials are sourced from around the world and value-added activities are created in a highly decentralized fashion, with significant quality control, and then new products are sold in the United States. So these have been interesting surprises. Even though they were partly mentioned in the first version of the book, the rate at which these models are evolving -- whether it is shipping flowers from Kenya or harvesting soy beans in India -- how you can build virtual scale has been quite interesting. Knowledge@Wharton: One last question. What are the emerging rules of engagement for serving consumers at the Bottom of the Pyramid? Prahalad: The rules are fairly straightforward.... The consumer environment is critical. We need to continuously balance global standards of safety, quality and such without any compromise for the Bottom of the Pyramid with a capacity to be locally responsive and, more importantly, to work within the ecosystem and provide affordability. And what you learn must be rapid. You first learn, then invest and scale -- not just invest and hope to learn. So the cycle is experiment at low cost, learn fast and scale rapidly so that you don't make investments hoping to learn. And, finally, don't push business model management practices and, most importantly, products and services that you are used to and accustomed to in the West onto these markets. In fact, the latest Harvard Business Review has a piece where GE is now recognizing that they have to create disruptive management models disrupting itself and its own management models if they want to succeed in countries like India. So the whole idea of building from within, learning rapidly and [having a] willingness to disrupt your own dominant logic is fundamental to succeed here. ,[object Object],Financial innovation is often blamed for having landed the global economy in a mess, but it has also been said that innovation will get us out of the present downturn. Still, companies can be forgiven for feeling that spending time and money thinking about the quot;
next big thingquot;
is a frivolous exercise. After all, every dollar counts these days, and CEOs and their executive teams are busy enough just getting their companies through the day-to-day demands of the recession. It needn't be that way, according to Christian Terwiesch and Karl Ulrich. As the two Wharton professors of operations and information management point out in their new book, Innovation Tournaments: Creating and Selecting Exceptional Opportunities, if done with greater focus, identifying new opportunities shouldn't be seen as a luxury, but a necessity. They note that creativity and process-driven rigor can actually go hand in hand when it comes to vetting and managing new ideas. One way to do this, they explain, is by making new ideas compete with one another in numerous rounds of vetting -- that is, by running them through quot;
innovation tournamentsquot;
-- so that the strongest and most promising ideas make it to the final round. Rich rewards await companies that make the leap. Among the innovative firms that the professors cite is the U.S. pharmaceutical giant Merck, whose cholesterol-reducing drug Zocor, launched in the early 1990s, has delivered gross profits of $10 billion on an investment of around $500 million. Below, in this edited transcript from a recent interview, Terwiesch and Ulrich discuss how companies can indeed find exceptional opportunities, regardless of the economic climate. Let the games begin. Terwiesch: You can also leverage new technologies, especially on the web, which is ideal for idea management -- going beyond the good old brainstorming meeting where you have people sitting around a flip chart. By using web-based tools -- some of which we developed as part of our research for this book -- teams are substantially more successful in generating exceptional opportunities. Knowledge@Wharton: How did the Red Bull energy drink come about? What does that experience teach about identifying innovation opportunities from external sources?Terwiesch: As important as it is to generate ideas internally, there's nothing wrong with sourcing them externally, going around the world with open eyes and looking for opportunities that you then translate and apply to other markets. Red Bull, with the super success that it enjoyed initially in Europe and later on in the U.S., was not brewed by some big pharma company or food company; it was a local drink in Asia. The big commercial value was created in the case of Red Bull by identifying or understanding the value of this opportunity and putting it in another context, initially into the German and Austrian markets and then into the whole world.Ulrich: In fact, it was a drink used by Thai truck drivers originally. On a visit to Thailand, Dietrich Mateschitz, an Austrian entrepreneur, sensed that the formula might appeal to club goers and youth throughout the world. Knowledge@Wharton: You say that some innovation tournaments are cascades while others are whirlpools. What do you mean by that and what are the implications?Ulrich: If we go back to the American Idol example, it is almost a completely pure cascade in the sense that several hundred contestants arrive on day one, they are filtered, and once they've been eliminated, they're gone. Those who are voted out don't have a chance to proceed. Moreover, no new singers show up in the middle of the competition; if you weren't there on day one, you aren't going to be there in round four. That's actually a little bit atypical. In a more typical innovation tournament, two things can happen. First, it's not unusual that an idea or an opportunity that's killed early on might re-emerge when the world has changed, or when the opportunity has been further developed. Second, it's also possible that a new opportunity will sprout up in the middle of the process because of something new that's been learned or as a result of developing some of the other opportunities. That kind of tournament resembles more of a whirlpool -- that is, it has more iterations and reflow than a cascade, where everything that starts in the beginning just flows in one direction.Knowledge@Wharton: How should companies organize themselves for innovation?Terwiesch: The decision you need to make is how to run your tournament and who is allowed to play in it. It's maybe helpful to distinguish two things that are happening in the tournament. One is the generation of contestants. The other is the referee or the people who decide who is allowed to go to the next round. Both these decisions can be done in the firm or outside the firm. A firm can rely on its customers, its suppliers or just the general public to generate ideas, or it can generate ideas in internally. Similarly, a company can rely on its marketing and its senior management to judge which ideas are moved forward or it can rely on early customer feedback. It can rely on, especially these days, on media like YouTube. QVC, the television-based shopping channel, is testing out a lot of its products, early on, on cable television. It can rely on the external world to do the filtering. The two key organizational decisions you have to make with respect to idea generation are: Are you doing it internally or externally; and [with regard to] the filtering and selection, are you doing it internally or externally? A World Transformed: What Are the Top 30 Innovations of the Last 30 Years? Imagine this is 1979: If you were reading this article back then, chances are you would have read it on paper -- with a printed newspaper or magazine in your hands. Today, you are probably reading it on a desktop computer, a laptop (or as a printout from either of these), or perhaps even on your Blackberry or iPhone. The pace of innovation has been so hectic in recent years that it is hard to imagine which innovations have had the greatest impact on business and society. Is it possible to determine which 30 innovations have changed life most dramatically during the past 30 years? That is the question that Nightly Business Report, the Emmy Award-winning PBS business program, and Knowledge@Wharton set out to answer to celebrate NBR's 30th anniversary this year. NBR partnered with Knowledge@Wharton to create a list of the quot;
Top 30 Innovations of the Last 30 Years.quot;
The show's audiences from more than 250 markets across the country and Knowledge@Wharton's readers from around the world were asked to suggest innovations they think have shaped the world in the last three decades. After receiving some 1,200 suggestions -- everything from lithium-ion batteries, LCD screens and eBay to the mute button, GPS and suitcase wheels -- a panel of eight judges from Wharton reviewed and selected the top 30 of these innovations, which were revealed on air and online February 16. The list is as follows, in order of importance: Internet, broadband, WWW (browser and html) PC/laptop computers Mobile phones E-mail DNA testing and sequencing/Human genome mapping Magnetic Resonance Imaging (MRI) Microprocessors Fiber optics Office software (spreadsheets, word processors) Non-invasive laser/robotic surgery (laparoscopy) Open source software and services (e.g., Linux, Wikipedia) Light emitting diodes Liquid crystal display (LCD) GPS systems Online shopping/ecommerce/auctions (e.g., eBay) Media file compression (jpeg, mpeg, mp3) Microfinance Photovoltaic Solar Energy Large scale wind turbines Social networking via the Internet Graphic user interface (GUI) Digital photography/videography RFID and applications (e.g., EZ Pass) Genetically modified plants Bio fuels Bar codes and scanners ATMs Stents SRAM flash memory Anti retroviral treatment for AIDS quot;
Innovation is a surprisingly hard word to define,quot;
says Werbach. quot;
Everyone thinks they know it, but when you ask them to explain exactly what an innovation is, it gets very hard.quot;
In order to achieve the best results and narrow down the most authentic list of winners, Werbach and his fellow judges defined innovation as more than simply a new invention. quot;
It's something new that creates new opportunities for growth and development,quot;
he says, citing cellular technology, which ranks three on the list. quot;
We've gone from zero to close to three-and-a-half-billion people who have a mobile device and are connected to each other.quot;
 An example in the pharmaceutical industry is the development of new chemical compounds to treat medical conditions, as seen in number 30 on the list, anti-retro viral treatments for HIV and AIDS. quot;
We don't think of that as a product design,quot;
says Ulrich, quot;
but we would think of it as an innovation.quot;
 Finding Money for Innovation: Develop Those People Skills Innovations typically involve trial, error and outright failure before turning into successful products or services. Thomas Edison, for example, conducted approximately 10,000 failed experiments before perfecting the incandescent light bulb. For decades, leading businesses have willingly shouldered the expense and the risk of innovating as the price of staying ahead of competitors. But innovating has become a lot tougher lately, according to a panel of technology experts who recently spoke at the University of Pennsylvania's Executive Master's in Technology Management program. With R&D budgets shrinking and markets retrenching in a worldwide economic crisis, the panelists noted, technologists will need more than lab expertise to convince their employers to keep the research funding spigots open. Indeed, the ability to communicate well and other quot;
soft skillsquot;
are just as important as technological expertise when it comes to selling new ideas to investors or senior management, suggested several members of the panel, which was titled quot;
Street-Smart Innovation to Align Emerging Technology and Business.quot;
In addition, future scientists, researchers and program managers should focus on aligning innovative projects with company goals. As panelist Nicholas D. Evans, vice president of the innovation division at Unisys, pointed out, it's much easier to justify budgets for speculative projects that show an obvious commercial benefit to the parent company. So, how do organizational entrepreneurs keep innovation alive in companies looking to slash costs? And how do start-ups and growth companies attract investors when the rest of the economy is melting? That's another place where those soft skills come in handy. Several of the panelists suggested that while technical people are generally not known for soft skills, those individuals who desire funding to continue their work would do well to acquire them. Anthony P. Green, a vice president with first-round funding group Ben Franklin Technology Partners, said he frequently sees entrepreneurs stumble because they lack such skills. All too often, entrepreneurs come across as rude, dismissive and disrespectful to audiences of potential investors, thereby quot;
infuriating the investment community.quot;
Panelist Eric F. Bernstein, a laser surgeon, dermatologist and technology entrepreneur, echoed that point. quot;
Business is all about relationships. They need to like your idea, but they also need to like you.quot;
 Suzanne Taylor, portfolio director of corporate operations for Unisys, pointed out that budget handlers are also more inclined to favor innovation if it can be shown to cut costs. Innovation department heads must become adept at quot;
making the case for maximizing productivity and reducing waste,quot;
Taylor said. This requires excellent communication skills, she added, including the fine art of schmoozing. And the higher up the case is made, the better for the innovator, added Sanjoy Ray, director of global application engineering for pharmaceutical giant Merck. quot;
Executive sponsorship is very powerful. It provides 'air cover.'quot;
 From Nanotech to Alternative Energy The panelists agreed that amid the ruins of the current economy lie vast opportunities. The question is: Where? Bernstein, who is involved as an investor in four companies, said a huge opportunity exists in digitizing and networking medical information. Medicine is a final frontier for information technology as paper records contribute to the escalating costs and delays of healthcare. Green also sees possibilities in nanotechnology, which involves engineering at the atomic level. Some products have already come to market, but the technology has yet to reach its commercial promise. Bioethicists have noted that nanotech presents a host of as-yet unanswered questions, including the issue of what it will mean to be human if, as predicted, quot;
nanobotsquot;
are developed to attack disease and enhance performance. quot;
If [nanotechnology] is really as disruptive as biotech was, it will make a big difference,quot;
said Green, a self-described quot;
veteran of the biotech wars.quot;
 Alternative energy, which had been gaining steam in 2008, has been undermined as an investment because the global slowdown has resulted in lower prices for traditional fossil fuels, the panelists said. That makes alternative energy projects tougher to justify to jittery lenders, who bank on the projects being cost competitive with fuels such as oil and natural gas. quot;
The ills of Western banks mean, inevitably, that the supply of debt finance for wind farms, solar parks, biofuel plants and the like will be less plentiful, and more expensive, in the months ahead than it has been in the last two years,quot;
notes a recent report by New Energy Finance, a research firm that covers the deal-making environment for renewable energy projects. On the other hand, President-elect Barack Obama has pledged to devote much of his economic stimulus plan to investments in green technologies. But in times like these, is there any money for enterprising business people with superb ideas in these fields? Are angels and venture capitalists still in the game? Green conceded that quot;
it's brutalquot;
for those seeking early stage, non-seed funding. quot;
No one is funding at the $1 million level,quot;
he said. The problem surfacing right now is that full-blown venture capital groups want to deal only with requests in the $6 million to $8 million range. quot;
Not everybody needs or wants thatquot;
amount to get a business to the next stage, he said. Where the Toys Are According to Wharton marketing professor George S. Day, many well-known companies remain committed to innovation in spite of downturns and earnings myopia. quot;
There are some companies that see beyond that and continuously invest in innovation and growth,quot;
said Day, co-director of Wharton's Mack Center for Technological Innovation. quot;
The best known ones are Samsung, American Express, Nokia. These companies are not cutting back on innovation.... We're not just talking about products and services, but about customer experience.quot;
For example, American Express last year invested $50 million in its quot;
Chairman's Innovation Fund,quot;
money that is reserved for financing employee ideas to improve the business long-term. quot;
Since true innovation entails uncertainty, as opposed to quantifiable risk, there will always be an element of vision, entrepreneurship and faith involved,quot;
noted Mack Center research director Paul J.H. Schoemaker. quot;
The C-suite recognizes that business is about taking risks and that not everything can be analytically proved or supported when venturing into the unknown. Too often, companies focus on incremental innovation -- since it is more predictable and less disruptive.quot;
 Ted Leonsis: 'It's the Greatest Time to Be an Entrepreneur' Meet the new consumers of the new media age. They want things to be better, faster, cheaper and, even more important, free. quot;
This new consumer is very, very different from [the ones] we dealt with before,quot;
said Ted Leonsis, vice chairman emeritus of AOL, who is considered an Internet pioneer and whose business portfolio over the years includes an impressive array of online companies. It doesn't matter what business you're in -- restaurant, real estate or financial services, he added. quot;
We're living in a world where consumers have taken control of everything.quot;
 Leonsis, a keynote speaker at the recent Wharton Entrepreneurship Conference 2007, traced his own life story to explain how consumers and the marketplace have changed because of the Internet. quot;
The expectations of our consumers are off the charts,quot;
he said. quot;
They want everything great. They want it really, really fast. And it's got to be free. Trying to build businesses around that model becomes a challenge.quot;
 Using an illustration of a highway map with signs and dates posted along the main route, Leonsis walked the audience through his own stops on the path of entrepreneurship -- from his first startup company in 1981, to the beginning of his relationship with AOL in 1993, to his acquisition of the Washington Capitals hockey team in 1999, to one of his latest ventures, Revolution Money, a Web 2.0 payment platform and credit-card service. Leonsis' foray into entrepreneurship began while he was a student at Georgetown University. It was 1976, the Bicentennial summer, and he started a business selling red-white-and-blue snow cones. It was hardly the stuff of which millionaires are made, but Leonsis said the experience gave him a taste of what it's like to start and grow a business. quot;
I think that entrepreneurial spirit is really what drives this country and what drives the world economy,quot;
he said. Leonsis, who was born in Brooklyn in 1957, recognized early on the potential of computers and the Internet. He made his first bundle of money when, at the age of 24, he quit his job at Wang Laboratories, raised $1 million and started a company called LIST (for Leonsis Index to Software Technology). The venture soon led to an acquisition by another company and a $60 million buyout. quot;
I declared victory,quot;
Leonsis said, although now, with hindsight, he realizes it was quot;
a hollow victory because it was about starting a business, growing it and flipping it and making some money.... When I was young, I honestly thought that was the ultimate scorecard, the accumulation of wealth.quot;
 Inspired by this list, he founded Redgate Communications in 1987, which he said was the first new media marketing company. Leonsis joined America Online after the company acquired Redgate six years later. As AOL president, he oversaw its evolution from a dial-up Internet service provider to a web services business, launching or acquiring now-familiar names such as Travelocity, WebMD, MapQuest, Netscape and iVillage. More Purchasing Power, Less Leisure Time Today's online-savvy consumers quot;
want control of their applications, their content ... They want everything when and where they want it,quot;
Leonsis told his audience. Still, he added, today's consumers are often a study in contradictions. For example, they have a lot of purchasing power, but little leisure time. They have dual incomes, but fewer savings. They are real estate rich, with less cash. Family life is more fractured, and people are overscheduled and on the move. On the plus side, people are healthier and living longer. People are more sophisticated, but at the same time they are looking for help. They want to be self satisfied, but they aren't necessarily happy. They are watching less TV and living life online more and more. Their media choices are seemingly endless -- satellite TV, instant messaging, downloadable movies and music, and mobile phones, to name a few. quot;
China has more Internet connections than the U.S., and most of them are on their phones.... If you're building products and services just for the U.S. market, you're giving up 80% of the market,quot;
he told the audience. Even though the global potential for online services is huge, he doesn't see enough business plans that have quot;
an international vision of globalization.quot;
 Part of the appeal of the Internet, according to Leonsis, is that it brings people together and can create communities. Witness the popularity of social networking sites such as Facebook and MySpace and the proliferation of blogs, which reflect the desire to express one's self and also to connect with others. quot;
User-generated content really is not a flash-in-the-pan phenomenon,quot;
he said. Blogs are quot;
empowering a generation to believe that what they have to say, what they see with their own eyes, how they interpret that, is very, very important.quot;
Leonsis maintains a blog called quot;
Ted's Take.quot;
 For him at least, business is all about being in the quot;
happiness business.quot;
He said online businesses can cultivate people's desire to volunteer and give back. quot;
It's all about getting out of the I, I and I, and really seeing where you want to fit into the bigger world.quot;
The Internet has led to a whole new type of charitable giving -- online philanthropy, where quot;
micro-donationsquot;
by many donors can add up to a sizeable contribution. Being successful with an online business is all about being smart with math and algorithms, Leonsis noted. quot;
Marketing isn't just to people anymore. You have to market to algorithms.quot;
Also, quot;
the basic unit of life in this world is the pixel and every pixel matters on a page.quot;
The ability to cross promote is a powerful benefit of the Internet, he added, citing Amazon.com's algorithm-driven marketing effort that alerts customers who bought certain book titles to other titles they might also like. Leonsis, who stepped aside this year from day-to-day operations at AOL, said that quot;
while it's never been easier to launch a new world-class business,quot;
entrepreneurs need to know that the pace is dizzying. It used to be that investors wanted 40% annual rates of return, but now, quot;
if you can't grow 25% month over month, we don't think you know what you're doing.quot;
If a startup doesn't take off fast, quot;
you fall behind very, very quickly.quot;
 Leonsis ended his talk on entrepreneurship on a wistful note: quot;
I wish I was 25 again,quot;
he said. quot;
I think it's the greatest time to be an entrepreneur.quot;
 Finding That 'Sweet Spot': A New Way to Drive Innovation Larry Huston was vice president of knowledge and innovation for many years at Procter & Gamble. During that time, he was the architect of its Connect + Develop program, the creator of P&G's Brand Bootcamp operation, and innovation leader for the company's global fabric and homecare business, among other initiatives. He is now managing partner of 4INNO, and recently joined Wharton's Mack Center for Technological Innovation as a senior fellow. Knowledge@Wharton asked Huston to talk about innovation and its role in the global economy. Knowledge@Wharton: I'd like to start out by asking you, what is the Connect + Develop approach to innovation and why is it innovative? Huston: Terrific question. You've got to start with: What is innovation in most companies today? For most companies, it's all about inventing everything yourself. Yes, some companies do joint ventures. They mostly do that out of trying to fill in a weakness or a capability gap. But most companies invent everything. Procter & Gamble invented 90% of its innovations. Everything came from basically within the four walls of P&G. We had 9,000 R&D people at Procter & Gamble, but the world has about 1.8 million people who are equal in education and have access to first-class lab facilities, [like] P&G people.So basically, Connect + Develop is all about redefining our organization as 1,809,000 people -- that 1.8 million plus our 9,000 people -- and then leveraging the intellectual assets and capabilities of the world in a connected model to bring big innovations to our consumers. So it's about connecting, not just inventing. You can think about it as: You want to continue to invent, but you want to connect. It's what you know plus who you know on the outside, so that you can really create a lot of value for your customers or consumers.Knowledge@Wharton: What are some of the challenges, especially on the intellectual property front, that come up when you use that kind of model? Huston: I think, frankly, the biggest challenge is the mindset inside companies. Most people have the attitude that if we share our briefs with people on the outside, our competitors are going to read what we are going to do. It's really changing the inside culture to accept ideas. What you do in Connect + Develop is what companies always do. If someone comes and knocks on your door, you will ask them to share things with you non-confidentially, or you'll share things non-confidentially. If you think they have something, hopefully it's patented.So what you've got to do is put controls and vetting processes in place, so that the whole organization isn't sending confidential information to the outside. They're sharing non-confidential information. But the normal processes of confidential agreements still exist as if you were still small. It's a scale issue, for the most part.Frankly, in the entire time that we did this when I was at Procter & Gamble, I can't think of a single significant intellectual property issue where we tipped our hand to a competitor. Now there are ways to handle this. Briefs are very important, trying to define what you're looking for. Sometimes we just deliberately put our name on a brief and sent it to the world, because we'd get a much higher hit rate if we put our name on it. They want to be associated with a big company.In other cases, you may describe your problem in a very oblique way. You may not say what you're doing, or you can disguise it in some way. So there's a whole variety of mechanisms to deal with this. It will be the first reaction that people have, that this is going to be a barrier. But my experience and the experience of other companies who are doing this is that it's blown way out of proportion. Knowledge@Wharton: I think you're quite right that a number of companies are starting to hear the wake-up call. They want to be innovative, but very often they don't know how. What do you find are some of the main barriers to innovation within companies that want to be innovative? Huston: Well, I think, other than really having the will and walking the talk -- which I do think is a very significant barrier, by the way -- other than that, and assuming those things are in place, what's the next thing that you need to do? One of the things that you need to do is to be very clear on a very basic model, which is how do you combine what's needed with what's possible. At its core, at its essence, innovation is bringing together a really deep understanding of what's needed from the customer with what is possible technically. When those two things come together, there's a sweet spot that happens and you can create products that delight your customers.Often, a major issue is that companies just simply do not know the needs of their consumers or customers. They know obvious needs or top line needs, but often the reason the products fail in the marketplace is because the concept is wrong. This morning I had a conversation here with one of the faculty members about Segway. Look at Segway. The thing performs terrifically, right? Technically it is not a problem, but it is a poor concept. It solves a problem that doesn't really exist for people. It has all kinds of conceptual problems in terms of the benefit and how it improves consumer's lives at a price that they can afford.Getting very clear on the consumer need and really understanding that at a deep level, at a price consumers are willing to pay, is what I mean by the market concept and often many, many failures. I've looked at hundreds of products. Probably 60% to 70% of the time, the source of the failure is that they didn't understand the consumer. So just think of your product, things that have failed for you. Just go down your list and say, was this a technology failure or a concept failure? Often they are concept failures.All of those areas require innovations. It may not just be on a product feature but across solutions, experiences in building relationships. It partly deals with mindset as well. I keep coming back to the word mindset because people often just run to ... 'I need the stage gate model or I need a piece of technology and I'm innovating.' It's a lot more than that. It takes a lot of experience, but with commitment and discipline it's one that people can master. A number of companies are mastering it. Knowledge@Wharton: How can companies fail to understand what the consumer wants or needs when they spend millions of dollars in market research? Huston: Well that's the problem. Have you ever looked at the output? A [company rep] called me the other night [to ask] about my drive-thru experience at McDonald's. I proceeded to try to tell them, 'You are asking me the wrong question. You are asking my about my drive-thru experience when I don't like the food experience. I would like you to put my comment on your form,' at which point I knew that they had hung up.You tend to ask questions, number one, with pre-conceived notions, so you don't have a good discovery process. Consumers in focus groups often tell you what you want to hear. Focus groups are like the movie quot;
Groundhog Day.quot;
I've been involved with developing new products. On average, you have eight consumers in a focus group and each consumer gets 12 minutes of airtime and you proceed to do focus groups from city to city. It's like the movie quot;
Groundhog Dayquot;
-- over and over again. Consumers are very slick in either grandstanding with other consumers or telling you what you want to hear. They're very confusing.Now let's go to another consumer research technique, which is doing survey documents. Often people will say, quot;
Tell me a long list of questions and attitudes of usage and everything.quot;
By the time it is over then you might do 400 consumers and what do you get? Tabulations of statistical data. You cannot read one consumer's holistic experience, mind, body, soul and task of a product.So what if I said to you, quot;
I want to develop the ideal beer product.quot;
What I want to do with you is not focus groups; what I want to do is understand your mind, your logical experience. You're going to probably talk about high carbs and taste. Mind, body, the sensorial experience.... You're probably going to say you want it cold and all kinds of things about the sensory experience, soul, the emotional experience. So what we have done is we have created, for example, a studio process and we have learned that we can get as much information from five consumers, mapped in depth, mind, body, soul and task, as you can from 50 focus groups. Five consumers, 12 hours each, over a month versus 50 focus groups, over and over again, on average eight minutes per consumer in a focus group. Knowledge@Wharton: What do you do with these consumers for 12 hours? Huston: What you do is you start with a hypothesis of how you are going to create a huge business. This hypothesis feeds a very deliberate protocol that is designed to elicit logic and emotion. The emotion is gathered up and is often the most important aspect of what you need to get from consumers is the unconscious. Now the issue is that if I'm talking to you, if I do an interview with the two of you right now about this bottle of water sitting here on the table, you're going to give me some rational right-brain comments.However, if I gave you 12 photographs, none of them about water, out of the magazine and I said, quot;
Tell me your thoughts and feelings about how water can positively improve your life.quot;
I would ask you to look at a photograph. I would probe into your unconscious because as I'm speaking right now and as people are listening to this - what's going off in their minds are pictures. You're not processing a word; there are images and that is how the brain works.However, our consumer research methods are verbo-centric. They're words which get you into the conscious level. If I can interact with you on your thoughts and feelings about water through imagery, you won't believe the amount of stuff that would flow. It's unbelievable, and we understand, we unravel, we elicit the dream with consumers through these deep probing methods that get at the unconscious.So we have entire protocols that are designed to get at the logic, the emotion, the sensory experience and the task. It takes 12 hours to do that over multiple weeks with very detailed maps put together. The first consumer will give us 400 concepts, the second consumer will give us 400, but there will only be like 200 new, the third will give us 400, and there will be about a 100 new. By the time I get to the fifth consumer, I have elicited the entire experience domain of a targeted group of consumers.So let's say I am trying to get to Moms who have had their first baby and I am trying to elicit the ideal diapering experience. I only have to get the five moms because I build these maps and I pretty much elicit the domain space. But that doesn't necessarily say what one mom tells me is the most important. I've only elicited the experience space. I then have to develop concepts and product prototypes... Knowledge@Wharton: We were talking sometime ago in this very room to senior consultants from the Boston Consulting Group. They had written a book called Payback about innovation and their argument was that the problem that companies face is not so much that they lack for ideas. In fact, there are too many ideas. Their real challenge is taking those ideas and getting and implementing them in a way that you can make innovation pay for itself. Do you think that's right and how do you manage that in your process? Huston: Well, number one, I disagree with BCG.Knowledge@Wharton: Why? Huston: Well, number one, you never have enough great ideas, and if you have a better idea, you drop that idea off the bottom of the list. Look, companies have idea files, and they have quot;
submit an ideaquot;
systems. I would say that companies have file drawers of many meaningless ideas, that they certainly don't have file drawers of ideas that have the legs to drive business growth. I totally disagree with this, by the way, and I am interacting with CEOs all over the place right now. But let's set that aside for a minute. I feel so strongly about that.The question then is: Let's assume that you have a good idea. How do you get a good return on it? Well, the major thing that I think is important early on, is to do financial modeling and good pro-forma work and identify killer issues along with the ideation process. For example, this bottle of water. Let's assume that I've created a new concept in engineered water. Let's say I have a prototype here. I want to really understand immediately what the business plan looks like and to financially model that. What's going to be the trial rate? What's going to be the repeat rate and what are going to be the killer issues?To really have the concept process and the innovation process, [you should] be very informed by the financials on an innovation. Most companies go and invent things, and then at the end figure out, quot;
How am I going to price it?quot;
They find that it's priced too high; the consumers aren't going to pay for it. And so what you've really got to do is move way upfront the whole financial modeling and identification of killer issues so that you can be successful. That's one very important thing.The other important thing is you've got to get to a buying experience with your customer very early. You've got to find a way to make a little and sell a little. You can't rely on market forecasts, which are notoriously wrong. They're almost always wrong. You have to be informed by trying to find the way to sell this product, getting out into some sort of market situation and trying to sell it. [For example], you might go on QVC and try to sell it.The other day I had a company come to me and say: quot;
Well, that's great for consumer products. You can make a little and sell a little but we make enterprise software that sits on a computer.quot;
I said, quot;
Well, let's think about this. How would we change your decision on your process? Let's assume that you came to me, I am a big corporation, and you say, quot;
I've got this concept, are you going to buy it?quot;
Well, I could say, I'll always say, quot;
yes.quot;
Probably most companies will say quot;
yes.quot;
But if you came to me and said, quot;
Hey, This is really going to improve your business. We would like $50,000 to develop the concept further. We're going to give you a preferential position. You're going to get five times that back in terms of pricing that's going to save you all this,quot;
and if I say quot;
yes,quot;
that's going to be a big signal but if I say quot;
no,quot;
that's going to tell you that I really didn't believe in it.So you've got to find a way to invent into your process a real value exchange that forces the customer to put up something, to have some skin in the game when they give you advice on whether or not something is going to be successful. Most companies don't do it. So one of the most important things that any company can do is figure out early in the process how to run the test.Consumers will say, quot;
Oh, I am going to buy thisquot;
[when they are] in focus groups. So I've learned to go and knock on their door two months later and say: quot;
Oh, you said you would buy this. Could you just give us your credit card because we're ready to ship this to youquot;
, and they say: quot;
Well, I really don't want it.quot;
 So you have got to figure out these kinds of things, and not work in rote ways because frankly, I think so much of the advice out there is very rote. Everybody is implementing the same systems and they're not thinking through the human behavior issues, flaws and problems, and are not inventing around these. This is very much a thinking person's game in trying to figure out how to be successful. Knowledge@Wharton: In an earlier conversation you mentioned the discovery studio operation. What is that? Huston: Well, discovery studio is an idea that we've implemented at 4INNO: quot;
How do we create a really big business in one fifth of the time that it normally takes you to create a business? How can we create or conceptualize a half a billion or a billion dollar business in 16 to 20 weeks?quot;
What we do is really work against a major three-step process which is, number one, let's make sure on the front end that we're asking the right questions; second, once we're asking the right questions, how do we dig deep into the consumer, as I've just described to you; and then third, once we've dug deep into the consumer, how do we put together the concepts and technologies that are going to solve the problem?It's driven from the right questions, which is very hard to do. [That's because] it is very hard for you to ask a question that is out of your frame of experience. So if I say to you, quot;
Tell me what you would do to create a new beer business or a new brand, and what are the right questions to ask,quot;
you would have a hard time doing that.So what do we do? We look for analogies. What business has a situation that is similar to the beer business that is flat in sales? Coffee used to be that way. Think about coffee. You knew the coffee drinkers by how much grey hair they had, right? That wasn't too long ago. It's not that way now. But why did coffee go from declining sales to being a growth business?Well, there are all kinds of answers frankly, and it's more than Starbucks. For example, I just came from another building, and we had a terrific espresso. The reason we had the espresso is that they had terrific espresso machines. All of a sudden you have terrific machines that have been deployed all over the place. Devices became important. Could we use a device strategy in beer in some way? Maybe we could find a way to do draft beer at home.How do I begin to ask right questions? One of the most important parts of creating big growth is asking new questions, asking the right questions, because most people operate in very rote ways about how they do things. Think of it as an environment and studio where it's very inquiry driven, and you're building in-depth knowledge, and you have all the creative tools to quickly formulate these things. Instead of taking three years, you could do it in six months and in significantly less time. Having the freedom to create a studio kind of environment where that kind of inquiry and learning can go on is very important.Knowledge@Wharton: Can the consumer be a brand builder? Huston: I think that the consumer can be a brand builder.Knowledge@Wharton: How so? Huston: First of all, social communities are really important. The Internet's important. You see consumers being involved in brand building through things like YouTube, and creating advertising for companies. The key question is: In what ways can companies create benefits for consumers to build brands and to make a contribution to brand building at many more touch points?I think right now, there's the storytelling, the news out there, and the things like the YouTubes of the world. There is an emergent whole new world where consumers are much more motivated to be involved with building brands at different kinds of touch points. This is an area under rapid development and evolution right now. It's an area that we're documenting in terms of stories and the like. I do think the next wave of open innovation is around consumers as brand builders. Knowledge@Wharton: What are some of the challenges of launching new products in global markets? Huston: In global markets, I think probably the biggest challenge for most companies is that they take an idea from a western geography, let's say the U.S. or Europe, and just basically try to take the cost out -- to get the price down in order to sell it in India or China or Indonesia, or wherever it might be. That mentality has been proven to lead to a lot of failure.You have to start with a clean sheet of paper and say, quot;
What are the needs of these consumers?quot;
You have to respect the needs of these consumers as unique. You have to design a product at a price point that meets their needs under their local conditions. That is the biggest challenge that the companies face. They have to develop the local consumer research, technology and sourcing strategies in each region in order to create terrific products at a price that consumers find delightful.Knowledge@Wharton: What companies have been successful in doing this? Huston: I don't know. That's a hard one for me to answer, because I don't pay too much attention to products, and I don't have many stories on the tip of my tongue. But I think Procter & Gamble is driving the growth of its international business quite well, and is creating good value for consumers. I don't have enough of those details to give you a good answer.Knowledge@Wharton: You may have answered this question in different ways in our conversation so far. How would you sum up your innovation philosophy? Huston: I would say innovation philosophy, number one: It's all about superior insights and intellect. It's not all about money and scale. It's knowledge driven and connections driven. To me, creativity is about connecting things. People sometimes confuse creativity and innovation. It's really about having deep insights and connecting them: the consumer, the technology.I would say that current mental models are a big barrier. You have to learn to ask new questions. Setting big goals is big because it forces you outside the box. A discontinuous goal means an incremental answer is not going to be good. I'll give you a simple example. Let's say you are a high jumper, and you can get over a bar that is seven feet high. If I said, quot;
I want you to get over a bar that is seven feet two,quot;
what would you do? You would improve your kick or leg strength. If I said, quot;
I want you to get over a bar that is 10 feet high, and I don't care how you get over it,quot;
what would you do? You would get a ladder, jump over a trampoline, or pole vault. But notice, as soon as I gave you a discontinuous goal, your mind went to a totally different dataset.That's why discontinuous goals are important. If I give you an incremental goal, you will go to the dataset and the answers you already have in-house. If I give you a discontinuous goal, it will force you to immediately say, quot;
I can't solve this inside with what I know. I have to go outside.quot;
Discontinuous goals are very important -- the ability to ask the right questions, the ability to create deep knowledge and insights about consumers, and finally the idea that we can connect and create value rather than invent everything ourselves. Most people have the idea that if the consumer needs something we will run to our labs and invent it ourselves.The first question should be, do we already have it solved some place in our organization? Secondly, if not, has the world solved it? Most often, the world has solved it. Finally, if it's not

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