How and Why Market Anomalies and Incongruities Can Reveal 10 Clues to Business Opportunity

Illustration by Stefanie Augustine

Here is an excerpt from another outstanding article that appears in strategy+business magazine, published by Booz & Company. In it, Donald Sull shares his insights concerning how and why market anomalies and incongruities may point the way to the next breakthrough strategy, thence to a wealth of business opportunities. To check out a wealth of free online resources and obtain more information about this magazine, please click here.

Here are the first four “clues.” To read the complete article, please click here.

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During their heyday in the late 19th and early 20th centuries, transatlantic cruise lines such as the Hamburg America Line and the White Star Line transported tens of millions of passengers between Europe and the United States. By the 1960s, however, their business was being threatened by the rise of a disruptive new enterprise, namely, nonstop transatlantic flights. As it happened, the cruise ship lines had one potential strategy with which to save their business: vacation cruises. Starting in the 1930s, some of these lines had sailed to the Caribbean during the winter, thus using their boats when rough seas made the Atlantic impassable. And in 1964, when a new port was opened in Miami, Fla., the pleasure cruise business began to boom.

But the great cruise lines missed this breakthrough opportunity. They saw their profitability fall while dozens of startups, including Royal Caribbean and Carnival, retrofitted existing ships to offer pleasure cruises and built an entirely new travel and leisure category that continues to grow today.

Managers and entrepreneurs walk past lucrative opportunities all the time, and later kick themselves when someone else exploits the strategy they overlooked. Why does this happen? It’s often because of the natural human tendency known to psychologists as confirmation bias: People tend to notice data that confirms their existing attitudes and beliefs, and ignore or discredit information that challenges them.

Although it is difficult to overcome confirmation bias, it is not impossible. Managers can increase their skill at spotting hidden opportunities by learning to pay attention to the subtle clues all around them. These are often contradictions, incongruities, and anomalies that don’t jibe with most of the prevailing assumptions about what should happen. Here is my own “top 10” field guide to clues for hidden breakthrough opportunities, observed in a wide variety of industries, countries, and markets. If you find yourself noticing one or more of them, a major opportunity for growth could be lurking behind it.

1.    This product should already exist (but it doesn’t). As the accessories editor for Mademoiselle magazine in the early 1990s, Kate Brosnahan spotted a gap in the handbag market between functional bags that lacked style and extremely expensive but impractical designer bags from Hermès or Gucci. Brosnahan quit her job, and with her partner Andy Spade, founded Kate Spade LLC, which produced fabric handbags combining functionality and fashion. These attracted the attention of celebrities such as Gwyneth Paltrow and Julia Roberts. Many well-known product innovations — including the airplane, the mobile phone, and the tablet computer — began similarly, as products that people felt should already exist.

2.    This customer experience doesn’t have to be time-consuming, arduous, expensive, or annoying (but it is). Consumer irritation is a reliable indicator of a potential opportunity, because people will typically pay to make it go away. Reed Hastings, for example, founded Netflix Inc. after receiving a US$40 late fee for a rented videocassette of Apollo 13 that he had misplaced. Charles Schwab created the largest low-cost brokerage house because he was fed up with paying the commissions of conventional stockbrokers. Scott Cook got the idea for Quicken after watching his wife grow frustrated tracking their finances by hand.

3.    This resource could be worth something (but it is still priced low). Sometimes an asset is underpriced because only a few people recognize its potential. When a low-cost airline such as easyJet or Ryanair announces its intention to fly to a new airport, real estate investors often leap to buy vacation property nearby. They rightfully expect a jump in real estate values. Similarly, the founders of Infosys Technologies Ltd., India’s pioneering provider of outsourced information technology services, were among the first to recognize that Indian engineers, working for very low salaries, could provide great value to multinational clients. The company earned high profits on the spread between what they charged clients and what they paid local engineers.

4.    This discovery must be good for something (but it’s not clear what that is). Researchers sometimes recognize that they have stumbled on a promising resource or technology without knowing the best uses for it right away. The resulting search for a problem to solve can lead to great profitability. One example was the founding of the ArthroCare Corporation, a $355 million producer of medical devices based on a process called coblation, which uses radio frequency energy to dissolve damaged tissue with minimal effect on surrounding parts of the body. Medical scientist Hira Thapliyal, who codiscovered this process, founded a company to offer it for cardiac surgery, but that market turned out to be too small and competitive to support a new venture. Undeterred, he looked for other potential uses, and found one in orthopedics, where there are more than 2 million arthroscopic surgeries per year.

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Incongruities like these can offer a critical clue about where your assumptions no longer match reality. From there, you are more likely to uncover the kinds of opportunities that you might otherwise have missed — and that your competitors still don’t recognize. Start by asking yourself, What are the most unexpected things happening in our business right now? Which competitors are doing better than expected? Which customers are behaving in ways we hadn’t anticipated? Take yourself through the list of top 10 clues. Leaders who consistently notice and explore anomalies increase the odds of spotting emerging opportunities before their rivals.
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To read the complete article, please click here.

Donald Sull is a professor of strategic and international management at the London Business School, where he is also the faculty director for executive education. His books include Why Good Companies Go Bad, Revival of the Fittest, and most recently, The Upside of Turbulence: Seizing Opportunity in an Uncertain World.

The power of “flash foresight”

Daniel Burrus

In Flash Foresight: How to See the Invisible and Do the Impossible co-authored with John David Mann and published by Harper Business, Daniel Burrus discusses a skill that uses “the data of your five sense, as well as that intuitive sixth sense we all have that some call a gut feeling or hunch. But flash foresight goes further, because in using it you synthesize those sensory and intuitive faculties and project them forward through the dimensions of time. A flash foresight is a blinding flash of the future obvious. It is an intuitive grasp of the foreseeable future that, once you see it, it reveals hidden opportunities and allows you to solve your biggest problems – before they happen. Flash foresight will allow anyone to both see and shape his or her future.”

How valuable would someone be to an organization if she or he mastered that skill? How valuable would a team be if all of its members had mastered that skill? How to do that? Burrus explains the process in his book.

As he explains, there are seven “triggers,” any one or several of which can produce a flash foresight:

1. Start with Certainty (i.e. identify and verify hard trends)
2. Anticipate (i.e. determine degree of probability of relevant contingencies)
3. Transform (i.e. leverage technology-driven change)
4. Skip what you think is your biggest problem (in fact, it isn’t…and never was)
5. Go opposite (e.g. look where no one else does, see what no one else sees, do what no one else does)
6. Redefine and reinvent (i.e. leverage your unique strengths in new and better ways)
7. Direct your future (or have someone else will do it for you)

Zappos offers an excellent example. Its leaders were certain that online sales would continue to increase and that it was probable that the process of purchasing commodities would be more important to the consumer than the products themselves would be. They concluded that the most efficient operations (e.g. order processing) would be driven by high technology and that returns rather than sizing was its biggest problem. They defied conventional wisdom that that selling shoes online could not be profit. Until Zappos, that was true.

As for #6, consider these comments by CEO Tony Hsieh: “We hope that ten years from now, people won’t even realize that we started out selling shoes online, and that when you say ‘Zappos,’ they’ll think, ‘Oh, that’s the place with the absolute best service.’ And that doesn’t even have to be limited to being an online experience. We’ve had customers email us and ask if we would please start an airline or run the IRS.”

FYI, I’ll have a separate post on #7.

Meanwhile, I think that Flash Foresight may well prove to be the best business book published in 2011. Is it that good? Yes.

How Companies Win: A book review by Bob Morris

How Companies Win: Profiting from the Demand-Driven Business Models No Matter What Business You’re In
Rick Kash and David Calhoun
Harper Business (2010)

In today’s global business world, companies “win” if everyone associated with them throughout their value chain also “win.” The title of this review refers to a question that Rick Kash and David Calhoun ask their reader: “Do you have a proprietary understanding of unsatisfied demand in your marketplace?” Those who gain that understanding have a significant, perhaps decisive competitive advantage. They will thrive but only to the extent that they can sustain that advantage. I agree with Kash and Calhoun that there are valuable lessons to be learned from the exemplar companies they discuss such as Allstate, Anheuser-Busch, Apple, Ball Park Franks, Best Buy, Hershey’s, and Hewlett-Packard, to name but seven and listed in alpha order.

For example, Kash and Calhoun assert that what the leaders at Hershey’s learned is what leaders in any other company must also learn, whatever the size and nature of their company may be:

• Know who your customers are (e.g. their demographics and motivations)
• Why they buy (i.e. their demand by profit pool and the need states they experience)
• What they buy (i.e. a detailed understanding of the brands, packs, tastes, and textures most customers prefer)
• Where and how they buy (i.e. shopper missions and channel preferences)
• When customers consume (i.e. the key usage occasions and locations)

Credit Kash and Calhoun with providing a cohesive, comprehensive, and cost-effective game plan and operations manual to design, introduce, implement, and then strengthen an appropriate demand chain; that is, “a collaborative network composed of manufacturer, retailers, and media companies [or their equivalent entities] that enable each participant to better understand – and more completely and precisely fulfill – customer demand.”

Jeffrey Pfeffer’s Power: A Book Review by Bob Morris

Power: Why Some People Have It – and Others Don’t
Jeffrey Pfeffer
Harper Business (2010)

Although Pfeffer does not invoke the core metaphor from Plato’s “Allegory of the Cave” in The Republic, I think it is especially relevant to the various misconceptions about power that Pfeffer refutes. The situation in Plato’s allegory is that people are located in a darkened cave watching shadows dance on a wall. (The source of light is outside the cave.) They think they are watching ultimate realities. Rather, what they observe are images, yes, but also distortions. The same is true of the “just world hypothesis” that the world is predictable, comprehensible, and therefore potentially controllable. Worse yet, it implies that “people get what they deserve; that is, that the good people are likely to be rewarded and the bad to be punished. Most important,” Pfeffer adds, “the phenomenon works in reverse: if someone is seen to prosper, there is a social psychological tendency for observers to decide that the lucky person must have done something to deserve his good fortune.”

Pfeffer insists that the world is neither just nor unjust: it is. He also challenges “leadership literature” (including his contributions to it) because celebrity CEOs who tout their own careers as models tend to “gloss over power plays they actually used to get to the top” whereas authors such as Pfeffer offer “prescriptions about how people wish the world and the powerful behaved.” Pfeffer also suggests that those aspiring to power “are often their own worst enemy, and not just in the arena of building power” because of self-handicapping, a reluctance (perhaps even a refusal) to take initiatives that may fail and thereby diminish one’s self-image. “I have come to believe that the biggest single effect I can have is to get people to try to become powerful.” Pfeffer wrote this book as an operations manual for the acquisition and retention of power. Of even greater importance, in my opinion, he reveals the ultimate realities of what power is…and isn’t…and thereby eliminates the shadows of illusion and self-deception that most people now observe in the “caves” of their own current circumstances.

As is his SOP in all of the other books he has authored or co-authored, Pfeffer cites an abundance of research studies to support what are therefore evidence-driven observations, insights, and recommendations. For example, consider this passage that appears near the end of his book: “Michael Marmot’s study of 18,000 British civil servants – all people working in office jobs – in the same society – uncovered that people at the bottom of the hierarchy had four times the risk of death as those at the top. [Check out Marmot's The Status Syndrome: How Social Standing Affects Our Health, published by Times Books.] Controlling for risk factors such as smoking or obesity did not make the social gradient in health disappear, nor did statistically controlling for longevity of one’s parents. As Marmot concludes, `Social circumstances in life predict health.’ So seek power as if your life depends on it. Because it does.” (Page 236)

Much of great value has been written about how to establish and then sustain a “healthy” organization. The fact remains, that cannot be achieved without enough people who possess sufficient power. In my opinion, Jeffrey Pfeffer is determined (obsessed?) to increase the number of such people, one reader at a time. Hopefully those who read this book will help others to acquire the power they need to be successful, influential, and most important of all healthy.

Crossing the Chasm: A Book Review by Bob Morris

Crossing the Chasm
Geoffrey A. Moore
Harper Business (1991)

In my opinion, Crossing the Chasm (1991) and Inside the Tornado (1995) are most valuable when read in combination. In fact, I strongly recommend that they be read at least once a year, in combination, because Moore’s insights in both will become even more relevant as a global marketplace that both exands in terms of scope and depth and contracts in its of terms of engagement, especially focus on localities, niches, and analytics. Moreover, the relevance includes but is not limited to the high tech community.

Chasm “is unabashedly about and for marketing within high-tech enterprises.” It was written initialky for  he entire high tech community “to open up the marketing decision making during this [crossing] period so that everyone on the management team can participate in the marketing process.” In Chasm, Moore isolates and then corrects what he describes as a “fundamental flaw in the prevailing high-tech marketing model”: the notion that rapid mainstream growth could follow continuously on the heels of early market success.

Moore defines a market as a set of actual or potential customers for a given set of products or services who have a common set of needs or wants, and who reference each other when making a buying decision. The final point may be the least intuitive, but Moore says, “the notion that part of what defines a high-tech market is the tendency of its members to reference each other when making buying decisions– is absolutely key to successful high-tech marketing.”

Many business plans are based on a traditional Technology Adoption Life Cycle, a smooth bell curve of high tech customers, progressing from Innovators, Early Adopters, Early Majority, Late Majority, and finally Laggards. In turn, this model becomes the foundation for a high-tech marketing model which says the way to develop a market is to work the curve from left to right, progressively winning each group of users, using each “captured” group as a reference for the next. Moore demonstrates that in fact, there are cracks in the curve, between each phase of the cycle, representing a disassociation between any two groups; that is, “the difficulty any group will have in accepting a new product if it is presented the same way as it was to the group to its immediate left.” The largest crack, so large it can be considered a chasm, is between the Early Adopters and the Early Majority. Many (most) high tech ventures fail trying to make it across this chasm.

Early Adopters are the rare breed of visionaries “who have the insight to match an emerging technology to a strategic opportunity driven by a ‘dream’. The core dream is a business goal, not a technology goal, and it involves taking a quantum leap forward in how business is conducted in their industry or by their customers…Visionaries drive the high-tech industry because they see the potential for an ‘order-of-magnitude’ return on investment and willingly take high risks to pursue that goal. They will work with vendors who have little or not funding… As a buying group, visionaries are easy to sell but very hard to please… because they are buying a dream…They want to start out with a pilot project, which makes sense because they are ‘going where no man has gone before’ and you are going with them. This is followed by more project work, conducted in phases with milestones, and the like.”

According to Moore, “You can succeed with the visionaries, and you can thereby get a reputation for being a high flyer with a hot product, but that is not ultimately where the dollars are. Instead, those funds are in the hands of more prudent souls who do not want to be pioneers”

The Early Majority are pragmatists who “care about the company they are buying from, the quality of the product they are buying, the infrastructure of supporting products and system interfaces, and the reliability of the service they are going to get… Pragmatists tend to be ‘vertically’ oriented, meaning that they communicate more with others like themselves within their own industry than do technology enthusiasts and early adopters… It is very difficult to break into a new industry selling to pragmatists. References and relationships are very important…Pragmatists won’t buy from you until you are established, yet you can’t get established until they buy from you….”

Moore notes that, “On the other hand, once a startup has earned its spurs with the pragmatist buyers within a given vertical market, they tend to be very loyal to it, and even go out of their way to help it succeed. When this happens, the cost of sales goes way down, and the leverage on incremental R&D to support any given customer goes way up. That’s one of the reasons pragmatists make such a great market: “They like to see competition… Pragmatists want to buy from proven market leaders because they know third parties will design supporting products around a market- leading products… aftermarket…

“Overall, to market to pragmatists, you must be patient. You need to be conversant with the issues that dominate their particular business. You need to show up at the industry-specific conferences and trade shows they attend. You need to be mentioned in articles that run in magazines they read. You need to be installed in other companies in their industry. You need to have developed applications that are specific to their industry. You need to have partnerships and alliances with the other vendors who serve their industry. You need to have earned a reputation for quality and service.

In my opinion, the best sources for those with a special interest in disruptive technologies are the books that Clayton Christensen has authored or co-authored, notably The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, The Innovator’s Solution: Creating and Sustaining Successful Growth, and Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change.

Orchestrate the right fight and fight it right

In The Right Fight, published by Harper Business (February-2010), Saj-nicole Joni and Damon Beyer explain how great leaders use healthy conflict to drive performance, innovation, and value. “What it really takes to lead people and organizations is this: if you want to succeed at an ever-increasing complexity you have to establish clear vision, set strategy, and build alignment. Then you need to systematically orchestrate right fights – and fight them right.”

They identify three major benefits:

1. Right fights lower risk. “Effective systems of checks and balances always depend on vigorous dissent.”

2. Right fights create value. “They live at the heart of innovation, breakthrough, and real change.”

3. Right fights grow better leaders. “They are surest way to develop the leadership skills and strategic thinking necessary for the twenty-first century.

“You can learn to create healthy conflict and positive change by choosing the right fights. Of course, you have to be careful. You’ve probably seen right fights fought wrong that failed to produce [desired] results, and of course wrong fights, even of fought right are worthless.”

Recommended Readings

The Opposable Mind
Roger Martin

Crucial Conversations and
Crucial Confrontations
Joseph Grenny, Ron McMillan, and Al Switzler

Transparency
Warren Bennis, Daniel Goleman, and James O’Toole

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Saj-nicole Joni is an internationally known business strategist and advisor to CEOs and other top executives across the globe. A frequent speaker with a regular Forbes.com column, she has also appeared on numerous television programs and published several articles. She has taught at MIT, Carnegie Mellon, and Wellesley. Joni is the founder and CEO of the Cambridge International Group. Damon Beyer is a senior executive advisor with Booz and Company and a founding member of the Katzenbach Center for organizational innovation. He is a former partner with McKinsey & Company and has also published several articles in major business journals, including Harvard Business Review.

They invite you to visit these Web sites:

http://rightfightbook.com/

http://www.cambridgeinternationalgroup.com/about_sajnicolejoni.html

You may also want to check out this pdj:

www.booz.com/media/uploads/Right_Fight.pdf