Sunday, October 19, 2003

Small innovators: Must they inevitably get swallowed? I've taken the liberty of extending a cogent reaction from a reader (and friend) Steve Schaffran, who is a California business consultant involves in start-ups. Coke buys Odwalla (and Fresh Samantha), Nestle buys PowerBar, Unilever buys Ben & Jerry's, Cadbury Schweppes buys up Nantucket Nectars, Dean Foods buys up White Wave, Pepsico buys up SoBe, and so on and so on - and that's just the food and beverage sector. Similar small comapnies are acquired in other segments almost very day. Why? Well, the place to start is by comparing the profit on a single PowerBar (or bottle of Odwalla juice) to the average profit on the thousands of Nestle products (or Coca Cola products), and, at the same time,  remembering the retailing dynamics (shelf space, mind share, shelf life). Since the profitability of a PowerBar (or bottle of Odwalla juice) is so much greater than the average on the products from the giant who competes in the same product segment, the giant has to attack the market share of the innovator. That profitability can be high because when a product concept is new, buyers don't have clear value estimates, and (to some extent) price is not as important as with a commodity item. And, in the long run, the innovator is too small to fight back. It cannot do all the bundling tricks, it cannot threaten to withdraw products. It cannot distribute into all the nooks and crannies efficiently. It cannot set up regional production facilities. It cannot buy advertising at competitive rates. Most important, it can't easily gain leverage, or even an audience, with some retailers. If the innovator doesn't sell out, it will see it's profitability diminish over time towards the average. That happens first because the innovative product is not as new anymore, and second because imitators come on the market. At that point it won't be worth as much as it is when the profitability is still high. So, sell now. The old business model was, create a new product, and reinvest the profits into building up an empire. For more and more entrepreneurs, the idea is to create a product, make a noise with the brand, and sell out to a large multinational.   Feedback requested Oligopoly Watch has been in operation for six months. My readership is growing and I've gotten some great responses from regular readers. I'd like to hear from you about topics you think I should cover or issues you think I am hopelessly wrong about.  Send comments to Steve Hannaford at hannaford@comcast.net.   1:22:43 PM

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