Why retro innovation is the most lucrative kind

April 21, 2008 | Brent Frei | Comments | |

I have a very counterintuitive — and perhaps unfashionable — approach to innovation. But it works.

Instead of focusing on hot new waves of technology that may or may not flood the market with success, I concentrate on the oceans of opportunity that currently exist in staid and mature IT. There are five reasons why this Retro Innovation is the most lucrative innovation:

1. Old markets are huge. They’re also established and well understood by customers. So, if you can insert a better mousetrap that addresses the nagging customer pains that still exist in these well-developed arenas, you’ve got immediate gold. The market doesn’t have to grow from $20 million to $1 billion over time for your product to achieve scale, traction and acceptance; and customers don’t have to discover how and why your product matters and fits into their lives.

2. Venture capitalists and inventors are fixated on what’s new, next and on the horizon – the semantic Web, grid networking or social networking, for example. There isn’t a lot of interest in the tools and applications of the past, especially given the dominance of the market leaders in these categories, so innovation in this area faces less competition.

3. Old markets are often populated with executives and entrepreneurs who are victims of their own bias and stasis. So where you are competing, it’s with the “establishment,” which usually means dogmatic developers who have been left behind as the aggressive and truly creative players seek the next big thing. Clayton Christiansen tells us in “The Innovator’s Dilemma” that established products are inertially bound from obsoleting themselves.

4. Old markets actually lend themselves to seismic change if the right technology solutions are brought to bear. Conventional wisdom says that big markets with “good enough” technology are sometimes not worth pursuing because the customer’s pain and priorities simply aren’t high enough on the list for them to care about your better mouse trap. But I believe you can be a game-changer in these situations by offering a new technology paradigm. This doesn’t mean leveraging state-of-the-art technology to improve on the existing product; it means combining many fresh technologies to create a unique product that addresses old needs in an innovative way. For example, take what Pampers did to the cloth diaper in the 1960s, or what Post-It Notes did to the notepad in the 1980s, or what iPod did to MP3 Player in the 2000s.

Consider the surprising success of Zimbra, which offers an open-source email platform product, for instance. We all know that the email product market has been won and done many times over with the heaviest of heavyweights — Microsoft, IBM, Yahoo, Google and every telco and cable company on the planet — throwing their considerable weight around. And yet, Zimbra provided email in a different and essential enough way that one of the heavies, Yahoo, found the need to pay $350 million to bring the upstart into the fold, despite already having an email service. Zimbra’s killer twist was that it was open source and white label-able for large companies that wanted to provide email services to their clients. As a result, it enabled Yahoo to add business-class email to its consumer email services.

5. In old-market innovation there’s far less visibility, fewer spotlights, and much more room to truly experiment with the best solution before launching. Everybody is watching the social networking market like a hawk today, for example, but Zimbra almost snuck up on people because email is considered such a mature application. The bottom line is that you can quietly and efficiently learn a lot about what users like and don’t like in an old technology market, and then design your product accordingly. You can also test your solution more openly (with some disguise, of course) in these well-established and somewhat neglected arenas.

Innovation — as we all know — requires inspiration, creativity, discipline and luck. And to be successful at it, you have to pick your opportunities carefully. My view is that if you take your inspiration and creativity and pour them into meticulously selected markets that have established track records over time, you’ll eliminate the need for luck. Retro is definitely the way to go!

[Photo above: Flickr/strange wax]

Brent Frei is founder of Bellevue, Wash.-based Smartsheet.com, a privately-held Software as a Service (SaaS) provider.

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About the Author, Brent Frei

  • For a fairly simple way to systematically look at innovating in established markets and the products/companies that are "inertially bound from obsoleting themselves", I think of innovating in at least one of four key business areas:
    1. Business model - for instance recurring monthly pricing instead of an upfront license fee model.
    2. Product - some technology driven innovation or something as simple as really focusing on ease of use, which is Apple's strength in so many areas.
    3. Channel - cost of sales can be radically reduced today by selling over the internet, using web-based demos instead of sending sales people on planes, etc.
    4. Distribution mechanism - the difference in simplicity between downloading photos or music as opposed to picking up a CD or photos at RiteAid.
  • The newest innovations tend to find the United States (and more specifically often California) to be their fertile ground, while the older markets are more diversified both in terms of countries and currencies.

    This matters in 2008 because the U. S. is suffering a systemic crisis of confidence in financial markets. The dollar has been sliding against other currencies, and I expect this will continue. Moreover, recessionary circumstances do not bode well for domestic absorbtion of "cutting-edge" innovation in near term.

    The U. S. corporate earnings story in 2008 will be best for companies with significant sales into non-domestic markets that grant them both growth and currency advantages. Because the addressable markets for retro-innovation are globally diversified, include faster growing economies, and focus on countries whose currencies are strengthening against the US dollar -- this could make retro-innovation the hottest U. S. export since derivative securities.
  • Brent points out key characteristics of old markets that are primed for innovation. One of them warrants further exploration: Generalized pain in the status quo.

    We all get used to doing things a certain way. And whether or not there are new or better ways, the familiarity of the old way puts up significant resistance to change. Worse yet, if the habit is pervasive within an enterprise, the points of resistance are numerous.

    A great example is the different ways people use spreadsheets. If there ever were an application that fit the saying “If you’ve got a hammer…”, this is the one. In fact, the condition is so well recognized that this pain has earned its own name: Spreadsheet Hell. But try and take away the spreadsheet and you’re in for a battle.

    Like Brent’s company, ours addresses a segment of the old market that struggles with spreadsheets. In our case it’s financial reporting. However, both offer a lesson in overcoming the resistance to change that’s important to companies innovating in the old market.

    The term “change” is not binary. It’s a continuum that directly affects “resistance”. The more change you require of the user or company, the higher will be their resistance. However, the opposite is also true.

    Successful innovations in the old market often are the ones that embrace aspects of the status quo that people are most attached to and extend them in ways that diminish the pain of doing that way.

    Sales force automation is a great example. While many SFA software vendors built solutions to re-engineer the sales force, the ones who were most successful simply embraced basic contact management and extended it in subtle ways to give the company some visibility into the pipeline.

    We are finding the same holds true in the area of financial reporting. Embrace Excel as the application of choice for financial professionals and extend it with capabilities that address its deficiencies as an enterprise and compliance reporting tool.

    If you’re looking to become a catalyst for seismic shifts in an old market, consider innovating through technologies the old market holds dear. This kind of flanking move can be much more effective for entrepreneurs than a frontal assault and all the resistance that goes with it.
  • Pete Strom
    A metaphor: Discovering the New World vs. innovating in the Old. Waves of explorers threw themselves into the quest for the New World, seeking fame and wealth. We hear about the successful ones (Erikson, Columbus, Magellean, De Gama, etc.) who returned great wealth for their benefactors. However, the majority were failures, returning (if at all) empty handed. In the mean time, many, many more stayed home and became very successful and gained tremendous wealth through innovating in the Old World.

    Now this metaphor cannot be taken too far, but the point is that the quest for the New World, while exciting and tantalizing, can also have a disproportionately high ratio of risk to reward. To Brent’s point, the key to success in the Known is to find the pain point in an existing process and successfully innovate a significant resolution. With the point about diapers, I grew up in an era when my mother always had a bucket of my younger siblings “used” diapers in the washroom, awaiting the laundry cycle or the diaper service. Everyone accepted the unpleasant situation until the disposable diaper appeared. It eased a parent’s burden and mostly eliminated an entire industry!
  • Brent is spot on and this type of innovation has become an axiom courtesy of his neighbors in Redmond. Microsoft galvanized this path to gold years ago. Consider the following: Excel - VisiCalc; Word - WordPerfect; SQL Server - Sybase; Internet Explorer - Netscape. Need I say more? For Smartsheet.com the additional dimension will be delivery as a SaaS application. This twist of innovation puts it on an uneven playing field against the competition.