Monday, June 25, 2007

Gems on the Cutting Room Floor

Back during World War II, there was a shortage of rubber. Scientists in the United States were trying to quickly come up with a viable synthetic substitute. James Wright was one such scientist, working at one of GE’s laboratories under a government contract.

While working on the project, he accidentally dropped some boric acid into silicone oil. The combination produced a goo which had many rubber-like properties. When GE tried to get interest in this compound around the world, there were no takers, not even the US War Production Board. It was seen as no better than the synthetic rubbers already in use.

Well, at least the scientists had fun with it. They would roll it in a ball and bounce it, or stretch it flat and use it to lift a copy of a newspaper article. In 1949, Peter Hodgson, an unemployed ad man, was at a party where the scientists were playing with their invention. Hodgson saw potential in this failed experiment, so he borrowed $147 and bought the production rights from GE. He started producing the product under the name of “Silly Putty.” When he died in 1976, the success of Silly Putty caused Hodgson’s estate to be worth $140 million.

In the process of creating a strategy, one can go through a lot of ideas. Most of the ideas will be awful. A handful will be very good. Many ideas may be interesting, but really “off strategy.” In other words, they may have some business potential, but they do not fit the strategic direction of the company.

In the story above, the strategy was to help the war effort by designing a high quality synthetic rubber. Silly Putty, tried, but failed in that strategic effort. Since it was useless towards fulfilling the synthetic rubber strategy and well outside the core competencies of GE to be in the toy business, the silly putty idea was essentially thrown away.

Peter Hodgson was able to get the rights to the product from GE for practically nothing. He was basically allowed to sweep up a gem off the waste that GE had tossed onto the floor. Just because an idea does not fit one’s strategy does not mean that one should just toss it away. It may be a wonderful fit in someone else’s strategy.

The principle here is that good ideas have value, even if they have no real value to you with regards to your current strategy. If the idea is really, really fantastic, it may be worth your while to change your strategy. It can be a wiser move to abandon what you originally wanted to do and switch to building a strategy around that gem you threw away onto the floor. There is no harm in abandoning a path if a far better path comes along.

A second approach would be to diversify into continuing your current strategy as well as the new strategy. Although this can sometimes make sense, there is a risk that by trying to do two entirely different things, one can lose focus and end up doing neither well.

A third approach would be to “sell” the idea to someone else. This can often be a wise move, because the idea may be more valuable to someone else’s strategy than your own. There are a number of ways to sell an idea.

One can license the idea and get royalties. Once can invest in setting up someone else in the business and get a share of the profits. One can sell the idea for shares in the other company. Or one can just sell all rights for a fee. In general, I would think that the best way to sell the idea is one where you get a higher share of any upside potential.

After all, it was most likely going to end up on your cutting room floor with no value. Therefore, little is lost if you do not get much for the idea up-front. However, if you negotiate to get a piece of the action, either through royalties or shares in the company, then you can really rake in some easy profits.

This approach may also make more sense to a potential buyer, who may not have a lot of up-front money to pay you and who, at the time, has little to lose by giving you a piece of future action which may never occur.

One of the worst things to do is just hand it over for virtually nothing. GE got practically nothing out of the Silly Putty deal, even though their invention was worth hundreds of millions of dollars to Hodgson.

Xerox’s famous Palo Alto research facility came up with a whole slew of great inventions which others made millions off of while Xerox got practically nothing. If Xerox had gotten out of its core business and gotten into the full-time business of selling their great ideas at a fair price, they probably would have been better off.

Getting into the Venture Capital business full-time may not be right for you, but getting profit out of a great idea which does not fit your core strategy should always be considered. Perhaps you can set up some of your employees who discovered the idea into a separate company (for a share of the profits). Perhaps you can spend a little time figuring out who the idea might be most useful to and then spend a little time pitching it to them.

Sometimes you can have your cake and eat it too. Let’s suppose for a minute that Silly Putty had also been a great synthetic rubber. Just because that would fit the strategy and make lots of money for GE, it does not stop them from also selling the idea as a toy to someone else. Why not use it internally for your purposes and still sell it to others for different purposes. You may have many great areas in your business that could be redeployed elsewhere.

HEB supermarkets in Texas was so good at deploying technology in their stores that they set up a separate profit center to consult with other retailers in how to use technology. They figured that so many people were asking to tour their operations, they may as well charge for the privilege.

Ideas can have great value, even if they are not useful in helping your strategy. Their worth may be more valuable in the hands of others. It may be worthwhile to spend a little time to see if you can get these ideas into a place where they can be more valuable (and share in that value, especially for a piece of the upside). Even ideas that are useful to you may also be useful to others, so that you can get your return on that idea twice. It sure beats just throwing the idea away.

Of course, this type of discussion implies that your company spends lots of time coming up with ideas. Unfortunately, I know a lot of places that see strategy very narrowly in terms of “more, cheaper.” In other words strategy doesn’t get much further than setting targets to get more (sales, earnings, production, etc.) while spending less (cutting budgets). If that’s your version of strategy, then this blog has little application to you.

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