Separating Technology Wheat from the Chaff

New ideas, technologies, and products come down the pike rapidly in software and hardware businesses. Many fail immediately and some muddle along before finally fizzling out. Some meet with modest success. Only a very select few turn into long-run, big-time hits. How can you tell which products will become hits out of a sea of mediocrity? How do you separate tech industry winners and losers?

Few people can differentiate between these new ideas, technologies, and products. At least not an early enough stage to profit massively from it. It’s important to remember I’m not talking about small successes, but the huge ones. The ability to pick out big winners early is a rare, valuable skill set. Yet one that is applicable across a wide swath of function areas including general management, product planning/management, inventors, venture investing, stock analysis/selection, and many more.

Short of having a brilliant mind, multidisciplinary worldview, and the ability to see the future, how do you maximize bets on what will hit it big and what won’t? Here are some questions that may be useful to ask when making your evaluation:

Solve a fundamental issue, bend a cost curve, create a new playing field?

Not every new product is based upon a fundamental technical breakthrough. But it sure helps! After all, innovation is still the basis of the technology business. This is where you look first when seeking big ideas from which you can profit massively. Look for something that fundamentally changes the game in a particular marketplace. A spectacular example of a breakthrough that met all three of these criteria is the personal computer. It solved some of the fundamental problems of the time associated with mainframe computing. And it certainly bent the cost curve of computing downward and created an entirely new ecosystem with broad societal implications. Meeting all three criteria is a tall order that doesn’t happen often. But passing one of these three tests is almost essential for a big-time winner with staying power.

Where does this breakthrough fit in the marketplace?

There are many great stories of fundamental research breakthroughs without immediately obvious market applications. Some of these breakthroughs ultimately found a market and became a great hit. The problem occurs when the second step—finding a market — is given short shrift. Or, skipped completely. This can happen when there is too much pure excitement and the folks funding the project have a rigidly technical viewpoint. The number of big successes without expert market vetting is pretty rare. There have been some spectacular exceptions, of course.

We’ve all heard of the invention of superglue by accident. Thomas Watson Senior, Chairman of the IBM Corporation in 1943 was quoted: “I think there is a world market for about five computers.” Five units do not make a commercial market, but IBM invested anyway. Look how that turned out. But in reality, the number of fundamental breakthroughs in the research lab dwarfs the number of truly successful, innovative new commercial products. So it’s important not to get TOO excited about these breakthroughs until a commercial application becomes obvious and realistic. Avoid the proverbial “cure looking for a disease.” Regardless of the almost mythical stories of a few massive winners which were borne from purely technical circumstances.

Comparison to alternative solutions, both current and forecast?

After deciding the breakthrough isn’t a cure looking for a disease and establishing which market segment it fits in, it’s also important to evaluate how it stacks up vs. rival technologies and products. And not just concerning a current market snapshot, but also looking forward. Forecasting comes into play here; which technical platform has the longest runway? An example is satellite TV vs. Cable TV. When Satellite TV came into play it took a lot of market share quickly by providing innovative new services which the utility-like Cable TV companies were slow to match. But in the long run, the massive wired infrastructure of the Cable Companies provides a strategic technical advantage in that long-running battle by enabling a more advanced and diverse product set with greater available bandwidth.

Tech Industry Winners: Do the owners have what it takes to bring it to market?

This question applies not only when evaluating another party’s product or technology, but also your own. Realistic self-reflection is important in identifying tech industry winners. Some great innovations have been wasted due to bad marketing, lack of financial resources, or just ignorance and incompetence. These weaknesses often lead to the “ arrows in the back of the pioneer” phenomenon. That’s where the folks who initially bring out the “next big thing” fail or are quickly overtaken by a more tactically skilled competitor. One who improves on the idea and/or out-executes them in the market. The software spreadsheet market is instructive here, conjuring up images of several bigger fish progressively swallowing smaller ones. VisiCalc was the original spreadsheet innovator overtaken by Lotus who was then in turn overtaken by MS Excel. The resources and capabilities of the innovation’s owner matter greatly in the long run.

Is this technology or product defensible?

This is what often separates the “flash in the pan” from a true long-term winner. Defensibility can be defined by the traditional technology means of patents, copyrights, and trade secrets. But there are more subtle ways of defense that can be very successful in the long run: branding, entrenched distribution channels, strategic partnerships, and cost advantages.

Especially in the software and hardware businesses there are tons of fast followers. Those lying in wait for an emerging trend or new market segment, where they can apply deep resources or tactical skills to out-execute the pioneers. In hardware markets, the major Japanese manufacturers first mastered this model by taking US inventions and productizing them to be cheaper and better. The large Korean manufacturers then found success with this same model and most recently it’s been replicated by the Chinese. In the software business, Microsoft and other large software companies have grown by mimicking or buying up technology leaders who have pioneered a new market segment. However it’s done, be sure the next big thing is truly defensible before betting on it becoming a big-time, long-term winner.

Tech Industry Winners: Does the idea, technology, or product pass muster from every angle?

As stated earlier, it helps to be a “renaissance man” with a multidisciplinary worldview. But people meeting that description are in very short supply. So it’s important to employ experts across key disciplines such as technology, finance, manufacturing, and marketing when evaluating market potential and possible weaknesses. In the tech business marketing and technology are usually the key differentiating factors for tech industry winners. So at a minimum make sure that area of expertise is brought to bear during your evaluation.

There you have it – my view on how best to separate the wheat from the chaff (winners from the losers). Post a comment with your view of this very debatable topic.

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