by: Geoff Ficke

You are an entrepreneurial inventor with marvelous ideas in your area of expertise. The ability to create models, prototypes and concepts flows easily from your fertile brain. Nevertheless, all you have to show for your creative efforts is a garage full of dead end stuff, despite all of your efforts.

Many creative people have an area of knowledge in which they excel. They are in their comfort zone there and can appear to be a master of this precise universe. However, taken just a bit outside the protective lines of this tight little planet, they are lost souls. They can not communicate their brilliance, demonstrate their value and commercialize their creativity.

This is all too often a loss for the economy and society at large. A great invention that does not arrive in a timely fashion to the marketplace is a huge loss on many levels. Innovation is the juice of life for a vibrant economy. To be deprived of any source of ingenuity, no matter the reason, is to limit the range of possibility so vital for discovering big, new ideas.

A relatively little used option, for inventors and entrepreneurs, with limited ability to fund or license their product, is the Strategic Alliance. A Strategic Alliance enables a product, invention or service to become absorbed within the structure of a going business. The business handles all aspects of production, sales, marketing and finance as if the item was invented in house. In return, the inventor receives an income stream for a defined share of the profits generated by the product, a consulting agreement or employment working in his area of expertise on the project.

Many successful Strategic Alliances occur when an inventor, recognizing his areas of weakness, is knowledgeable about industry conditions, patterns and networks within this universe. Software writers, engineers, chemists and technicians often utilize this narrow gauge form of networking. It is a strategy available to any inventor having specific industry experience with application to their novel product.

The Strategic Alliance approach minimizes the need to approach strangers from outside your area of expertise. You know your field, you know the players (good and bad), you know the industry trends and you, better than anyone, know the innovations craved within this area of business. Familiarity with these factors gives the creative mind a leg up in pursuing an alliance that will enable a successful commercialization of their invention. Many people are immensely more confident when speaking the language of their trade than communicating in any other arena. Take advantage of this inside baseball edge!

The successful Strategic Alliance usually occurs much quicker than funding or licensing. The parties to the alliance, typically coming from the same business category, communicate in terms that are direct, and short circuit the usual learning curve required when negotiating with outside, less than knowledgeable investors or bankers.

An added benefit to the partners is the minimization of investment funds required to ramp up a new project. The business side of the alliance usually has specific experience in the product category. Most, or all, of the infrastructure needed for successfully marketing the invention is already in-house. From secretarial help, to warehousing, to manufacture, to finance, this is a going business with a complete set of assets. The lead-time from agreement to actual shipment of the item is often greatly reduced.

Strategic Alliance can be a win/win for both parties, and in my experience is usually the result offering the best outcome for the acquirer of rights and the inventor when they come from the same business category. The shoe fits well here for both parties.

It is important for the creative, but inexperienced, inventor to seek professional assistance when negotiating terms and conditions of the Strategic Alliance Agreement. The excitement of making a deal, and working with people from within their specific industry, should not get in the way of prudence. Contracts are often complex, and it is important to circumvent disagreements later, so clearly define each parties full range of obligations and conveyance.

by: Geoff Ficke

Almost every person in the world takes a certain pride in being a reasonable person. They will make prudent choices based on their background and attitudes. The safe decision minimizes the chances of being wrong. No one likes to be wrong.

The safe decision, however, carries little upside reward benefits. You are expected to pay your bills. Pay your taxes. Drive responsibly. Not yell fire in a theatre. Doing these things nets you no special extras.

All of the great ideas or advances in history have evolved from unsafe, unconventional ideas. The non-conventional idea always offers the higher reward, as well as higher risk. It is not the norm to be unsafe. It takes vision and confidence in the face of the usual chorus of criticism, doubters and opponents.

George Bernard Shaw said:
“The reasonable man adapts to the world.
The unreasonable man adapts the world to him.
All progress depends on unreasonable man”.

I concur. We all know men that were unconventional thinkers before their time. Thomas Edison, Leonard Firestone, the Wright Brothers, Da Vinci, Machiavelli, Levi Strauss, William Wrigley, Colonel Sanders, Saint Augustine, Bill Gates and so many more: these are examples of visionary men that thought outside the box to the benefit of all humankind. Their products, philosophies and advances were considered of dubious value when created. They were considered small thinkers and creators of insignificance, until the world turned their little ideas into big ideas with great fame and/or riches to follow.

Think of the Baseball Hall of Fame. Tens of millions of little boys have played baseball since the game was invented in the mid-19th century. Only about 12,000 men have ever played in the Major Leagues. This is a great achievement. Nevertheless, only a few hundred of these 12,000 are enshrined in the Hall of Fame, the ultimate sign of success. This honor is reserved for greatness. These are the players that generations remember.

Unconventional, unsafe, unpopular ideas that lead to ultimate success are the concepts we remember. Christopher Columbus is a major figure in history for reasons we all know. The Royal Spanish court was inclined originally to have him interned for heresy for claiming the world was round. Ultimately he convinced Queen Isabella to let him prove his theory and bring riches to the court. His success against huge odds is an excellent example of unsafe thinking leading to great entrepreneurial success for him and Spain.

Amerigo Vespucci arrived in the new-world second and, even though America is a turn on his name, he is a footnote in history. Martin Luther is famous still for his organizing the Protestant Reformation in the 16th century. The Hugenots, another Protestant sect, followed later in France. Who founded the Hugenots? Who remembers? It does not pay to be a follower.

Throughout history there are examples such as these where a person went out on a limb and society ultimately enjoyed the benefits. Safe decisions and following the crowd do not create opportunity.

Abraham Lincoln was a leader willing to broach unsafe thought. The mere idea that the Union could be sundered by the idea of freeing men from bondage seems absurd today. That a civil war resulted was a terrible price to pay. But Lincoln knew that slavery was vile and unsustainable for a modern, moral growing country. He is revered ‘til this day for his honesty, courage and steadfastness.

Fred Smith founded FedEx, the overnight package delivery service, with a very unsafe, unconventional idea. He wanted to take on Big Brother, the Federal Government, the classic snail mail service subsidized and delivered by the United States Post Office. He faced unimaginable hurdles. Huge capital formation needs, access to commercial airports, hard fixed overheads, licensing, etc. were huge barriers to entry. The idea was panned. He started with one, very used plane.

Mr. Smith knew he had identified a niche that was completely under-served and corporations would stampede to utilize. The disruptive innovations FedEx created have severely smacked the USPO with a dose of reality. FedEx is so successful that it has emboldened competitors to enter the field (the highest form of flattery: copying). During the Katrina disaster in New Orleans the USPO was delivering mail after five weeks. FedEx was delivering needed medicines and supplies for the relief workers after three days.

Not many sports fans today remember the name Dick Fosbury. Entering the 1968 Olympic Games in Mexico City no one paid much attention to Mr. Fosbury’s chances. He was a high jumper that had never jumped very high. Nevertheless a competitive spirit brewed quietly inside him. He knew he could jump higher, be competitive and, maybe, win a medal. He was on nobody’s short list of favorites.

Mr. Fosbury decided to take an unusual approach. In a sport hidebound by ancient training techniques and approaches to performance enhancement, he went WAY OUT on a limb. Mr. Fosbury decided to approach and elevate toward the jump bar by gliding with his back to the ground. No one had ever seen such a flop as all prior jumpers approached and attempted to leap feet first. The Fosbury Flop was born.

People laughed, sportswriters had a field day and competitors snickered, for awhile. During practices, however, keen observers began to notice that Mr. Fosbury was jumping higher, much higher. It was too late for the competition to adjust and to everyone’s astonishment, the Fosbury Flop delivered the Gold Medal to Mr. Fosbury. To this day, this is the accepted jump style used to deliver the best results in the event. This is just another example of a person seizing an opportunity by thinking outside of the box.

There is no Hall of Fame for safe ideas or average people. We honor and reward people that advance civilization by implementing ideas and concepts that seemed unnecessary, even silly, at the time of invention. Bill Gate’s mother once said to him as she tried to convince him to return to Harvard, “but why would anyone need a computer in the home”? The risk takers become the reward makers when their weird, unfashionable ideas become the norm.

by: Geoff Ficke

The type of business structure you organize for your new enterprise is greatly determined by your personality, realities, needs and experience. Millions of people in the United States never enter into any type of formal business structure. This includes the bulk of the black or underground economy.

It is estimated that the underground economy consists of about 10% of all commercial activity in the United States. This includes legal and illegal activities. A kid cutting your grass for $20 is technically working black. The handyman that repairs your patio for cash might be working black. Drug dealers are definitely kingpins of the underground economy.

Entrepreneurs should not want to work black, but should seek to be totally transparent for many reasons. The reason a person typically seeks to become an entrepreneur is to maximize the opportunity our capitalist system offers each person willing to try. This means playing by the rules, competing and pursuing success utilizing every available legal tool. The opportunity to sell a successful entrepreneurial business is almost zero without complete books, records and tax returns, typically details that underground business works hard to avoid.

I recommend any new entrepreneur seek consultation with an attorney familiar with the laws and regulations of the state, county, city or township of your residence. Even if you are planning to run your enterprise as a sole proprietorship, there are local zoning laws, restrictions on business activity, public announcement requirements, DBA (Doing Business As), fictitious name ordinances, etc. Do not try to avoid the pesky forms and filings required in most localities. If compliance is a hurdle for you, then success prospects for you as an entrepreneur are probably slim.

Your investment in the attorney consultation will pay for itself. You can go online, or visit the business section of the local bookstore and find just enough information to get yourself in trouble in these areas. Occasionally, I meet an entrepreneur that did not consult professionals, and has everything in order. This is very rare. More often, I meet shortsighted dreamers trying to cut a corner and save a few dollars. Professional help will save you time, money and mistakes.

Here are the most common business structures that entrepreneurs have access to when formalizing their new venture.

Sole Proprietorship

This is the most commonly utilized structure for new, small, startup business ventures. Essentially, the proprietor, you, the entrepreneur, announces that you are working alone. The sole proprietor accounts for all income from sales as personal income and is responsible for all debts incurred by the enterprise. Personal and business funds are often commingled in this structure and need to be identifiable for tax purposes. There is no formal corporate entity, but you must adhere to all local laws and statutes. A Federal Identification Number is not needed (use Social Security Number) when filing taxes.

Partnership

When two or more people decide to enter a partnership, they basically agree to enter a form of marriage. We all know that marriages can get messy. Partners must minimize any possibility for a messy divorce by creating a partnership agreement that details what each partner brings to the opportunity (investment, sweat equity, intellectual property, etc.). Also, the partners responsibilities (silent, working, sales, marketing, production, etc.), and an agreed split of income, profits and harvest, as well as liabilities and losses.

I like, and often recommend, a partnership for young entrepreneurs with limited, narrow experience. Operations experience often does not translate to sales and marketing for instance. The only imperative is that there are no surprises after the enterprise succeeds, or fails. This when a cloudy division of liabilities or profits often becomes problematic.

Limited Liability Corporation (LLC)

Again, there are “do it yourself” methods of creating LLC’s. Use an attorney. I am no friend or fan of the legal profession. I am not a lawyer, either. I just know from experience that this is difficult: and often a contentious area of law that requires expertise.

An LLC limits the owner’s exposure to some losses. The LLC also enables the owner to treat income beneficially for tax purposes. Professional legal and accounting assistance is really important in establishing the LLC in a proper legal format.

Corporation

The Corporation offers the most comprehensive protection for the owners. Losses accrue to the Corporation, in most cases. The Corporation assumes the role of a person, even though abstract. A Corporation requires the filing of Articles of Incorporation in a state. Consult an attorney for advice on which state to file this document. Nevada offers secrecy. Delaware is most popular for large corporations. Each state has different fees and requirements. Get good help!

The Incorporation requires a fair amount of housekeeping. This includes appointing a board of directors, keeping meeting minutes, issuance of stock, etc. Many startups convert to corporate status after achieving some amount of success.

There are other intricate options, trusts and arcane structures available. However, for 99.9% of all entrepreneurs the four discussed here offer the best vehicles for properly structuring a new business. Approach each with the goal of maximizing your income and minimizing your time commitment to housekeeping the entity you choose. Remember: in order to be successful as an entrepreneur will require every scintilla of your thought, work and creativity to be concentrated on your project.

by: Geoff Ficke

Most inexperienced entrepreneurs are unaware of the many options and alternative strategies available to push a new idea or invention to market. The most common approach they seek to implement is a classic funding round. When this avenue fails, and with overwhelming frequency it does, the idea often is dropped.

Driven inventors attend invention trade fairs, venture capital conferences, small business incubators, and network at every possible opportunity in search of funding and working capital for their invention. It is commendable and a tribute to the pursuit of the American dream that such efforts are expended in this daunting effort. However, virtually all will come to a disappointing end with no funding and disappointment.

In 2005 over 500,000 new business incorporations were organized in the United States. This does not include the hundreds of thousands of sole proprietorships, partnerships, joint ventures and strategic alliances formed. From this sea on creative, new opportunities only about 1000 were funded by traditional venture capital sources. The odds are so long against a successful funding round: the wonder is that so many entrepreneurs, with so much creativity to offer, are chasing so few sources of funds.

There are other opportunities and strategies available for successfully getting a great idea to market. The bar for acquiring venture capital funding is so high, so difficult and so competitive, that it is unfortunate how many inventors quit the pursuit of their goal after receiving no traditional funding commitment. One of several alternatives to venture funding is a license campaign.

Licensing is the assignment of intellectual property or product rights to a licensee for consideration. The consideration may consist of a rights fee, royalty, options, personal service fees, minimum annual sales turnover and more. The licensee agrees to make good faith efforts to commercialize the product or intellectual property and the agreement is memorialized in a License Agreement.
There are many more companies interested in licensing a product or technology than there are conventional funding sources for startups. Having said this, there is really no difference in the requirements for success in either venue. You will just get more swings at the ball when seeking a license for your project.

Entrepreneurs read about Blackrock Capital, Harvard Capital Management or Kohlberb Kravis Roberts funding a new opportunity for $200 million dollars or more. This is exciting, motivating and for most, unrealistic. A fully fundable opportunity is a rare amalgam of huge upside, mitigated risk, unique, potentially disruptive product and REALLY strong, experienced management. Very few entrepreneurs can present such a comprehensive package.

In the world of licensing the product, upside, risk mitigation and disruption features are crucial. Management is irrelevant as the licensee presumably has the management in hand to drive the project to success. The same elements that excite venture capitalists also excite the licensee. They are keen on a strong Unique Selling Proposition detailing the niche the product will claim.
A powerful, well-structured sales model will quantify and support the sales universe available to the product or technology.

There are many successful approach strategies available when seeking to license an exciting new product. The following are some broad elements we have utilized in our consulting firm with success. Remember there is no linear, set in steel index to follow. Innovate, adapt and keep pushing and try everything necessary to get that appointment with the decision-maker.

Create a Working, Production Quality Prototype

Whether you have a new product, a service or a technology, you MUST be able to demonstrate the unique features and benefits of your offering. Some inventors have a facility to create, design and construct the necessary demonstration unit. The great majority of people do not. This is a simple hurdle to overcome.

In every city in America there are job shops, product design and development firms, engineers and software writers capable of providing professional guidance resulting in production of the prototype required.

A key by-product of this process will be the creation of 3-D, Computer Assisted Design art. This art is essential in the assembly of the product for production, in obtaining crucial and totally accurate cost of goods and filing patents.

Patent Filing – Intellectual Property Protection

Very few licensees are interested in investing significant monies in marketing a new product without the guarantee of some patent, copyright and/or trademark protection. See a Patent Attorney. Patent law is exceedingly specific and for this reason it is a legal specialty. A competent patent attorney will conduct a search and, using the results, advise the possibility of successfully receiving a utility patent (highly preferred), design patent (patent on art, easily overcome) or not being artful enough to receive any cover.

If an item has dicey patent prospects we like an alternative strategy. I have been a proponent for several of my clients of a strategy we call “patent pending forever”. Our goal is to keep a product in patent pending status for as long as possible by timing addendum to the application and art and filing these in order to keep having the filing reviewed again.

During patent pending a filing is essentially in limbo. The advantage for the inventor is that there is no publication of the details of the art, features and unique benefits of their product. Secrecy is an asset. Once a patent number is received two undesirable things happen: details of the patented product become public knowledge, and the clock starts ticking against the 20-year life of the patent.

For most entrepreneurs seeking a license, we do not push for international patent filing. International filing is very expensive and we let the licensee assume this expense.

Source of Production, Manufacturing

Depending on the product, service or technology offered for license, you MUST source production. The reason is simple: this will set you apart from the dreamer. It reflects your commitment to the opportunity. It reassures that the product can be built (we see a number of projects that are unrealistic from an assembly and economic standpoint).
Now, let’s discuss a touchy subject in the current economic climate. I love my country. America is the land of opportunity. However, I am a capitalist and the rules of capitalism are much bigger than any one individual: including you, the entrepreneur. If at all possible I prefer to assemble components, source, and manufacture here in the United States. However, it is becoming more and more difficult to be competitive here in America.

I have clients that are adamant they do not want their project assembled offshore. Do not be a Luddite. You really have two options: you can go with the flow, or you can be drowned by the overflow. In the past decade, we have not found a single project that could be produced in the United States as inexpensively as we could produce offshore, including the cost of freight, customs and duty. Not even close!

We search out four or five factories, or offshore resources, for submission of the 3-D CAD art and a Release Packet. The Release Packet contains all of the hard samples of components that will be parts of the finished product. After this is forwarded, we typically receive quotes in four to six weeks.

This quote should include all line item costs contained in the Bill of Materials for the product, plus outer packaging, costs of display (if any), shipping carton, inserts (directions for assembly, etc.), plus freight to United States port of arrival, customs, duty and inland freight to your warehousing/fulfillment point. This is a dead net cost of goods.

Use of Cost of Goods (COG)

Knowing the cost of goods is crucial! This number proves the viability of the products pricing model, confirms margin assumptions and the ability to construct an exciting sales model. If COG is too high, and there is no capacity to squeeze costs, the future license prospects for the product are not exciting. This number sets the parameters for the potential of your project and indicates to the potential licensee that they are dealing with a thoughtful, serious and skilled licensor.

Research

The licensee with an exciting opportunity on offer will want to know (not guess) everything possible about the market they are about to enter. This will include; customer demographics, size of market, growth of the category, competition, and potential licensors. Cite sources of research and assemble as a portion of the Opportunity to License document you will offer. This is the knowledge that will set you apart from run of the mill tire kickers hoping to make a deal.

Professional Endorsements

Nothing resonates with buyers more than professional endorsements. I am not necessarily talking about celebrity endorsement. They are great for certain products. A pediatrician endorsing a juvenile product, or a professional association giving a positive quote on a service, or an educator endorsing a toy, are simple examples of taking a product and brandishing it with the glow of an expert. This is invaluable and a technique we utilize regularly for our projects. Include these quotes in all collateral materials.

Test Market / Focus Group

If you only have one prototype it can be difficult to assemble a focus group or test market. What we recommend is to show the product to strangers sequentially in the field where the product would typically be used. Recently, with a single prototype of a baby stroller accessory, we spent an afternoon in Central Park in Manhattan, demonstrating the unit to mothers pushing strollers. We walked away with positive quotes for attribution from 26 of 29 mothers that used the prototype. These we included as an exhibit in our product folio.

Opportunity to License Document

With all of the above in hand, you have the data and resources to assemble an approach document. We all have heard stories about the inventor sidling up to a banker in a bar, uninvited, and successfully pitching his idea over a scotch and soda. Good Luck!

You get only one chance to make a great first impression. Do not shortcut on any aspect of the initial approach. With your patent, prototype, possible endorsement, research and costs well in hand, you are ready to assemble the written document that will detail the features and benefits of your project and quantify the opportunity.

As you are not seeking funding, and are not interested in self-marketing, a classic business plan is not required. However, you will need a written synopsis of your project, written along the lines of the business plan. We call this the Opportunity to License.

This document needs to be crisp, exciting and short, eight to 10 pages, plus exhibits. The exhibits should include; patent information, list of contributors to the project, CAD art, bill of materials, cost of goods, research data.

Selling the Opportunity

Successful completion of the above now places the opportunity in position to seriously, and professionally, approach licensee targets. Your research will have identified the obvious candidates. Networking, walking trade shows and scouring appropriate industry trade publications will increase familiarity with added possible homes for placement of the item.

The target list needs to be approached with care and diligence. Large, publicly traded Companies have different, but fairly stringent standards for accepting unsolicited submissions. I find this barrier crazy, as many great opportunities are never viewed for fear of litigation. Mid-size and small companies, the really fast growers, are more open to reviewing unsolicited submissions.

Prepare mailings with care. Be sure to know the exact name and title of the decision-maker at each targeted potential licensee. Personalize each letter and assemble the mailing in a folio. The cover letter should be on top in the right pocket with the Opportunity to License document directly behind. In the left pocket place any public relations, positive user endorsements, etc.

Follow up the mailing with a phone call in 7 to 10 business days. Now the ebb and flow of making a deal begins.

Negotiations

No two deals are alike. This not a cookie cutter, fill in the blanks process. Securing that face to face meeting with Mr. Decision-Maker is crucial, and the opportunity cannot be blown. We seek to maximize every potential income stream for our clients. These include:

Rights Fee

You must receive consideration in the form of a Rights Fee in exchange for turning over all aspects of your project to the licensee. This should be paid on signing the license documents and is not returnable. The licensee should perform all due diligence prior to signing. There are no make goods here. The size of the Rights Fee will be in direct proportion to the size of the opportunity you offer.

Royalty

This is the vast bulk of income any licensor receives from a successful product placement in a licensing deal. The variables in structuring percentages are never ending. Some royalties are built to sales growth and minimum sales promotion investment. Others are tied to achievement of tiered sales goals. Many contain buyout options that automatically kick in at certain trip points.

The term (length) of the license is crucial. The licensee will want a shorter term. The licensor will want as long as possible to maximize income.

The details of each license are unique and specific to that particular deal.

Production

Another reason we are aggressive about controlling the production sources, and knowing our costs is because this often becomes another income stream for the inventor. For instance, assume a dead net cost of goods of $1.92 per unit. Assuming we can maintain production control in negotiations, and this happens often enough, we will quote the licensor $2.00 per unit COG. The difference of $.08 (4%) goes right to the licensor when peeled from the Letter of Credit that is organized to pay for the offshore inventory production. $.08 might not seem like a lot of income per unit. However, apply this number to potentially hundreds of thousands of units per year, for seven, 10 or 15 years. Do the math!

Several points to make here.

Do not be a hog. Hog’s get slaughtered. A good deal is a deal where every party feels fairly treated! This is an area where we see too many deals go south. Every party should profit handsomely, according to their level of participation.

Second, do not attempt to license a product without undertaking the steps detailed above (or some variant of the process). I have mentioned this before. This is just an outline. There are endless variables that apply to different industries, styles and categories of offerings. Do your homework and do not attempt to take shortcuts. You will be wasting your time and resources.

Finally, do not, EVER; utilize the services of an invention mill. These firms typically advertise on late night infomercials and they prey on the inexperienced, naïve and desperate. These firms are little more than boiler rooms with a goal of separating the weak from their cash. Check with your Better Business Bureau and State Attorney General for history on one of these houses. Even then proceed with caution.

Licensing is a real, viable option for inventors having opportunities that offer fresh, definable features and benefits. The Unique Selling Proposition contained in these inventions may have real value to licensees, while venture capital may not be able to overcome one or more shortcomings inherent in the project. Funding sources are often seeking a different deal parameter. Licensees are simply seeking the opportunity to bring in house a product, service or invention that compliments their array of assets. This makes licensing the best choice for entrepreneurs hobbled in one area or another: they simply have a great product to offer.

by: Geoff Ficke

What does the following list of companies have in common?

A&P
Hudson Motor Car Co.
Montgomery Ward
TWA
Horn and Hardart
Studebaker
Indian Motorcycle
Bonwit Teller
Woolworth
Bethlehem Steel
Polaroid
LTV

These Companies were successful, recognizable brands in their respective categories. They were publicly traded and a number were in the Nifty Fifty in the 1970’s and/or the Dow Jones Industrial Average. The element they all have in common (and with hundreds of other equally recognizable names) is that they did not innovate. They created a static business model and did not anticipate that there were newer, better ways to implement new technology and strategies.

Let’s look at two old, established retail categories and how the ability to innovate has determined contemporary success or failure.

Music Stores
Recorded music retail has always been a competitive market. Tower Records followed the national chain concept, offering a broad range of music styles and competitive pricing. Mass marketers such as Target and Best Buy offer music as well, typically only the more popular artists, narrow and deep. Every city had a local shop, sometimes specializing in a specific area of musical taste. The underlying similarity was that a customer came into the store, made a selection and then purchased the CD or album.

Then along came the internet. The ability to protect trademarks and copyrights was believed to trump this technology. Artists and record companies believed that legal protections would enable them to continue as always: selling an album, with one or two hits, for $20 to $30. Software was written enabling the music consumer to cheaply, or for free, download specific hit songs while avoiding the filler cuts. The Napster effect has revolutionized the music industry.

Napster is a disruptive technology. The world of music retail was stood on its head. Legal fights and challenges are still being fought. However, chains like Tower Records are gone. The marketplace did not allow for a rigid system to thrive in the face of innovation. Tower did not stay flexible, anticipating technology advances and changing tastes. Trying to sell albums with 15 cuts, when the consumer only wants to hear and pay for two hit songs, is an obvious loser.

Airlines
Until the late 1970’s the airline industry was protected by Federal Government regulation. This enabled the airlines to artificially inflate fare pricing. Hub and spoke systems were created. Each major carrier had a geographic area of strength (Delta the southeast, USAir the middle Atlantic, American the mid-west and Latin America, etc.) that they dominated. Unions were aggressive and the carriers were profitable so the need to squeeze costs was not urgent.

When de-regulation occurred in 1978 the major carriers did not anticipate the radical disruptive innovation that was just around the corner. An aviation pioneer in San Antonio named Herb Kelleher did. He watched as fares plummeted without government regulation protection. Competition for gates, destinations and expansion resulted in many regional carriers (Republic, Piedmont, etc.) being gobbled up by the majors. Out of the changing landscape for air travel Mr. Kelleher saw opportunity.

Mr. Kelleher created and launched Southwest Airlines to address a gaping need. Southwest utilized a business model that reflected the changing landscape in providing air service. The major carriers utilize complex pricing models that try to maximize seat yield revenues per mile flown. Southwest posted one low price for every seat on a flight. The major airlines were totally union shops. Southwest was non-union. The major carriers flew a mix of plane models. Southwest flew only the Boeing 737 (this streamlined service and parts expense).

Very quickly the flying public recognized that a Dallas to Phoenix flight that was $579 on American, and $149 on Southwest, was a no-brainer. Southwest remains ahead of the curve with standardized policies, simple restrictions, a feel good fun loving staff, hedging contracts for jet fuel purchases and the promise of value for money on each flight.

Southwest capitalized on the changes it recognized was coming in the air travel universe. Today, there are a number of airlines utilizing some or/all of the Southwest model and virtually all are successful. Easy Jet, Jet Blue and Ryan Air in Europe are booming while the old-line giants all over the world are in desperate straits.

Proctor and Gamble is a wonderful example of an old alpha enterprise that is constantly re-inventing itself to reflect changing market conditions. Dell Computer, MicroSoft, Intel, Research in Motion, Nokia and many more are examples of businesses (all little more than 20 years old) that innovate, change, anticipate and succeed. They were all small startups only a few years ago.

For entrepreneurs, the ability to innovate and keep ahead of the field is crucial. When analyzing the potential for a successful market placement the ability to create a cutting edge business model is so important. If your goal is to open a male clothing shop and one already exists in the area you have chosen, you have a problem, unless you can differentiate your unique selling proposition. Maybe this can be accomplished by offering a tailoring operation for hand cut suits, or specializing in formal wear.

Whatever your product or service, define a business model that separates you from your head to head competition. Do not play the price game. Lowest price is almost always a temporary benefit, someone will come along that can produce cheaper, faster, better. Your goal should be the offer of a benefit that the customer will value, desire and not find immediately available. Then back up the benefit with superior service and the promise of continued new cutting edge innovation. Innovate or die!