Build a better mousetrap, and license it to a giant

'Things ain't fair in business, as in so many other walks of life'
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The Independent Online

The internet abounds with tales of "first-mover advantage" but actually commercial success seems usually to go to "second movers" - companies which grab a technology developed by someone else and exploit it better than the inventor.

The internet abounds with tales of "first-mover advantage" but actually commercial success seems usually to go to "second movers" - companies which grab a technology developed by someone else and exploit it better than the inventor.

The most obvious recent example is Microsoft. Windows is a copy of Apple's operating system and Explorer a copy of Netscape's browser. Commercial history abounds with similar examples. The US techie magazine Red Herring cites several, two of them British.

One was de Havilland's Comet, the first jet airliner in service (and BOAC used it to launch the first jet service across the Atlantic). The other was the EMI invention of the brain scanner, later developed into the body-scanner.

In both of these cases the benefits of the innovation were reaped by another company, Boeing for jet aircraft and General Electric for scanners.

There are other many famous examples. In Japan, Sony's Betamax video recorder was beaten by VHS. In the US, the pocket calculator developed by Bowmar lost to Texas Instruments, and Raytheon's microwave oven which went to Korea's Samsung.

Some innovators kept a lead: Polaroid's instant cameras and Corning's fibre-optic cables are good ones. Looking further back, we should remember the two key pioneers of the motor car were Gottlieb Daimler and Karl Benz, and the pioneer of the moving production line was Henry Ford. Sometimes innovators do fine.

But what distinguishes the innovators that succeed and the ones that don't? In some of the examples so far there was a problem with the innovating company. The early Comets failed because the designers did not understand metal fatigue at high altitude and the first Comets had large square windows which put particular stress on the airframe. EMI did not have the financial resources to develop and launch the scanner worldwide and failed to seek a partner early enough.

In the computer world, the relative failure of Apple vis-a-vis Microsoft is usually attributed to the latter's marketing savvy. But there was also a commercial error. Had Apple allowed other computer companies to use its operating system, it might now own the global standard rather than Microsoft. Certainly Microsoft has real genius in marketing: as every techie knows, it bought the company that had developed QDOS after it got the operating system contract from IBM.

But sometimes even successful, well-resourced companies with lots of marketing clout still fail. The Betamax example is a good one. And sometimes successful, well-resourced companies bring in a technical innovation that fails to create a market. My best candidate for that would be Honda introducing rear-wheel steering on cars.

What the are the rules governing whether a first-mover eventually succeeds or fails? Some ideas. First, the innovating company has to have the resources to develop the innovation properly. History is littered with companies that failed because they brought a product to market before it was fully developed. Clive Sinclair's genius at cutting electronic corners meant he could produce a computer or a calculator cheaper than anyone else at the time, but the products didn't really have the quality to succeed in the longer-term. His infamous battery-powered trike then showed one couldn't even cut corners in mechanical engineering as you could in electronics.

The company also has to have the financial firepower to market the idea. This is not just a matter of paying for the adverts, but also recognising different markets need to be approached in different ways. In some, you sell direct; in others, you use agents. In some, you are better off with a local partner; in others, it's fine to go it alone. And in some parts of the world you need considerable staying power to cope with the regulatory maze.

A third type of failure is when a small company with a bright idea attacks a powerful incumbent. Diet cola was invented by a small company called R.C. Cola. You might think this was not a particularly significant innovation, but someone had to recognise that Americans battling obesity might welcome a drink that didn't make you fat. The idea was picked up by Coca-Cola and Pepsi and the first-mover was beaten. I suppose it would be naive to think that giants such as Coke and Pepsi could be unseated-- until you ponder that this was what Virgin has sought, pretty unsuccessfully, to do.

So what should the company with a clever idea do? The rational answer would be that if it is a small company it should recognise that genius is not enough. Unless it is enormous, it should find a partner or partners who can help it develop the idea, selling licences to them. If that means being bought out by, say, Microsoft, so be it.

Giant companies are not generally very good at pure innovation so the question does not arise so often. Their innovation is usually of an incremental nature, so they are bolting new things onto existing structures. They may lose - witness Betamax - but they will be losing to similarly-sized companies than can, in some way or other, out-gun them.

The greatest dilemma is for the companies in the middle. A medium-sized corporation - EMI with its scanner - finds it has potentially world-beating technology. What does it do? Here I don't think there is any single answer applicable to all situations. A lot depends on the competition, the difficulty of copying the innovation, the protection supplied by patents and so on. But in considering their options, innovators should remember one clear message: historically the odds are stacked against them.

Innovation is wonderful for society, for it is the principal engine of economic growth. But the chances are that the greatest beneficiaries of a bright idea are likely to be consumers and competitors, not the people who think of the idea in the first place. Things ain't fair, in business, as in so many other walks of life.