How Entrepreneurs Value New Business Ideas

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How Valuable Are New Business Ideas?

Imagine that an entrepreneur decides to start a roofing business. She looks in the phone book and notices that there are already over a hundred roofers competing in the market. In fact, the market is so saturated with competitors that profits are low and switching costs of the consumers are virtually zero. Now imagine the same entrepreneur who has developed a new technique for nailing shingles onto roofs that reduces the time it takes to complete a roofing job to about half. This new technique allows a job to be completed more quickly than conventional methods thereby saving the customer labor costs and allowing the entrepreneur to complete more jobs in the same amount of time. The new idea is valuable to the entrepreneur.

New ideas are most commonly found in the physical asset markets where new products create value to customers and therefore create value for the owners of the new idea. A new fuel injection system for cars that requires less fuel and a new razor that eliminates razor burn are examples of new ideas that have been brought to market by their owners. However, new ideas can also be in the form of processes.

The McDonald’s Corporation brought the idea of standardization to restaurants thus changing the fast food industry forever. Some firms create value by convincing markets that their products are better than competitors’ even when few differences truly exist. The Pepsi Challenge in the 1980s is an example of a company trying to gain favor in the market by showing that people prefer the taste of Pepsi over Coke regardless of the relatively little difference in their flavor. Pepsi created value for itself by convincing consumers to be repeat customers.

Many countries recognize the value of new ideas to firms and have enacted copyright and patent laws to protect rival companies from stealing new ideas without having spent the time, money, and effort to develop them. In fact, new ideas are not only valuable to companies, but the copyrights and patents are valuable too. Selling a new idea to another company is a matter of selling the rights (copyright or patent) to the idea. Even so, copyrights and patents do not protect a company from making mistakes with the new idea. When SONY marketed the first home videocassette tape recording format Betamax, they jealously guarded their new idea. JVC, through tactical use of economies and scale, marketed the VHS format and forced the Betamax into obscurity. By the mid-1980s, SONY gave up the Betamax and began producing the VHS themselves.

Regardless of the assets owned by a company, it is new ideas that have the potential to produce unusually large value. Without new ideas, companies are incapable of growth and change. Since new ideas are developed by people, one could argue that people are the most value asset a company has.

This post is part of the series: Principles of Value and Economic Efficiency

The main purpose of a firm is to create value and only part of creating value involves making money. The four principles of value and economic efficiency illustrate that making money is an outcome of creating value.

  1. The Value of New Business Ideas
  2. How Valuable is Comparative Advantage to a Company?
  3. Understanding the Value of Options in Financial Markets
  4. The Principle of Incremental Benefits in Corporate Financial Planning