But if starting a new organisation based on a distant, thriving model tends to succeed, starting a venture based on two successful ideas might be even better. The approach would be to form a weak link between two distant ideas that have both proved their worth in worlds isolated from each other. Then a new venture can be created, combining the two original concepts. Anita Roddick did precisely that. She took the Body Shop concept from the store in Berkeley, but she also combined it with one of the best ideas in the venture firmament–franchising.
In retail businesses, franchisees are given the founder’s brand and business formula, and sold the products sourced by the parent, in return for putting up the capital for new outlets and paying a royalty on their sales to the parent. If Anita had been forced to rely on her own cash flow to open new outlets, her business would never have grown so fast–initially at more than 50 per cent a year. Nor would it have reached sixty-one countries. An added advantage of using franchisees is that they know the business practices and traps in their own countries.
Of course, the owner of the original Body Shop could have done the same as Anita, but sometimes distance is necessary to recognise the value of something. It is often easier to appreciate a good idea when you come across it in a different world than to realise the universal value of something you created in your own back yard. Dick and Mac McDonald, for example, created a very successful business between 1948 and 1954–they opened eight restaurants in California that sold only hamburgers, cheeseburgers, fries and beverages. Unlike traditional coffee shops, theirs had no waiters or waitresses–customers had to line up, give their orders, pay and take away their food. By restricting the menu and using self-service, the McDonalds were able to shift enormous volumes of hamburgers and sell them at rock-bottom prices. The result was an extremely profitable business, but the brothers did not see the potential of their innovation. When Ray Kroc, a former travelling salesman, offered them $2.7 million for the business in 1961, they bit his hand off. McDonald’s is now worth around $48 billion, nearly 18,000 times what the brothers accepted. Kroc, incidentally, combined the idea of the hamburger restaurant with franchising.
It may also be easier to make fundamental improvements to something that is somebody else’s idea. Is extending a proven idea or combining it with another idea any less creative than having it in the first place? Perhaps, but it is also likely to be more valuable. Entrepreneurs do not need to invent anything. They just need to recognise an under-exploited idea when they see it–and then set up the organisation to realise its full potential.
Boston, Massachusetts, 1963
‘Strategy consulting’–advising big companies how they could make more money by concentrating on the areas where they are better than their rivals–did not exist prior to 1963. It was dreamed up in that year by Bruce Henderson, whom we met in Chapter Four. Bruce changed the behaviour of firms all over the world and created a totally new type of consulting firm, based on intellect rather than experience. Yet, Bruce and his colleagues found it quite easy to conceive strategy consulting. All they did was bring together two previously separate but powerful disciplines–marketing and finance–and let off all kinds of cerebral fireworks from this combustible mix.
There are myriad examples of entrepreneurs blending two good ideas. Betfair combined betting between individuals with the electronic market. The motorbike linked the bicycle and the internal combustion engine. The school of ‘positive psychology’ took off by combining clinical psychology–previously reserved for treating people in poor mental health–with the mainstream self-help movement. The Sony Walkman merged the tape recorder with the portable radio; and, in turn, the iPod has linked the Walkman with Internet downloads.
Other combinations could be equally successful. All they need is someone to spot them and merge them together.
But as we have seen, the best ideas, like most opportunities, derive from weak links. Moreover, ideas can spread only through their own dedicated hubs. To succeed, the group needs to be well organised, and it must broadcast the benefits of the idea as simply as possible.
Ideas, then, are effective when they follow network rules; and are organised through hubs and bridging weak links. Like these structures, creative ideas help make the world smaller and richer. The numbers of weak links and hubs proliferate. By linking two or more ideas, or by applying them in a new milieu, the world is brought closer together. Good ideas unite us, yet they also increase our differences. They encourage further ideas, advances and replacements. They are an answer. They are never the answer. Voltaire said that the best is the enemy of the good. Jim Collins, the author of Good to Great70, inverted that aphorism to say that the good is the enemy of the great. But when it comes to developing fresh ideas, there are no enemies. Good ideas point the way to better ones, and better ones to great ones. The only thing that will elude us is the perfect idea, because all ideas, happily, can be improved.
There is a structure to the way information is found in nature, in a library or on the Web. The structure is embedded, universal and follows mathematical rules. There is also a structure–a network structure–for the way excellent ideas are discovered and disseminated. Once this has been grasped, anyone can innovate with confidence.
CHAPTER TEN
NETWORK STARS
Discovering the best type of business
The future is already here–it’s just not equally distributed.
Science-fiction writer William Gibson
London, England, 2001
Greg and I first met in a brutal fight to the death. Each of us had invested and joined the board of a ‘betting exchange’. Greg had supported Flutter, a UK company run by Americans; I had put money into Betfair, a British venture. In providing person-to-person betting websites, both companies were attempting to do something that had never been done before, and both had chosen the same means to achieving it. They started within a few months of each other. Betfair was bigger, growing fast, and had a crucial hold on betting for horse racing. But Flutter was threatening to catch up, having captured a third of the market through more stable software and deeper pockets. Everyone in both companies sensed that there could be only one winner, and that the loser would be left with almost nothing.
The traditional view of markets is that they can sustain several profitable competitors. But our situation was unfolding differently for one very specific reason. A betting exchange’s product–the facility to place a bet against someone who takes the opposite view–improves every time the exchange adds a new customer. The key competitive advantage–the appeal to customers–is having more customers to bet against than can be offered by any other exchange. This is an inherently unstable system, and inevitably one firm will eventually command nearly the whole market, causing the other to collapse. Coexistence simply cannot work. We were in a game of Russian roulette and one of us would die. The odds were about fifty–fifty. Not appealing for any gambler.
So the board members of each company, after heated debate and some soul searching, eventually came to the same solution–merge the two exchanges. That would make one bigger and more liquid market, which would please our customers and dramatically expand the business–more people would bet, in bigger amounts, if the market were deeper. We’d each have a share in a much larger hub that would grow faster than before; the product would be even stronger with scale; and the new firm would dwarf its rivals.