The Liquidity of Ideas: Part II

Once again, the core concept of this blog series is trying to reach commercialization faster, thereby increasing the “liquidity” of the innovation you plan to establish. One key resource for determining liquidity is Porter’s Five Forces model, which analyzes the various impacts on a business: buyer power, supplier power, threat of entrants, threat of substitutes, and competitors. Whatever the product or service, the greater the magnitude of any of Porter’s Five Forces, the less liquid the idea is.

Simply put, supplier power and buyer power both require touchy negotiations and extensive contracting that significantly affect the commercialization timeline. Additionally, potential entrants, substitutes, and competitors all filter into one theme: competitive advantage. Your competitive advantage and your resultant positioning are all highly affected by these three factors. With stiff competition, there is a greater need for either a niche position or an overwhelming gamechanger. The niche requires greater craftiness from your sales and marketing forces, while also influencing the power of your buyers. This “needle in the haystack” equals smaller volume, and smaller volume means greater influence from individual buyers…requiring you to finagle with group purchasing power if they band together, or individual separate contracts if they don’t.

The gamechanger, of course, means that your R&D timeline will likely increase in order to produce a viable earthquake in the industry, with additional time spent on IP to limit quick market substitutes. Whether niche or gamechanger, liquidity is reduced in accelerated fashion.

Obviously, the industry and sector you plan to compete in will significantly affect the liquidity of your idea and the Five Forces involved. Physical products require lengthier battles with buyers and suppliers, for which the sheer existence of the product is dependent on. The nature of the product affects liquidity as well – are you competing as a commodity or a superior good? Commodities command lesser supplier power (interchangeable components) but higher buyer power (larger choice of undifferentiated goods to buyers). Superior goods are even more treacherous, with more intricate components raising supplier power and higher price points affecting buyer power. However, with risk comes reward, and superior goods always possess larger margins than commodities…so long as they don’t become commoditized.

The mere physicality of the innovation raises liquidity, as shown with products above, but direct services retain the same risks. Personally handling clients is a time-drain. So what products/services drive liquidity down?

Consider the virtual realm. Yes, building a Web presence requires huge marketing efforts, but the time expense to reach the market is relatively low, and supplier power is essentially non-existent (hundreds of domain services like GoDaddy charge relatively nominal fees). Just take this blog, for example. One day, I decided to share information. Within hours, I published material and created a product. Finisimo.

Many inventors don’t have the luxury of choosing their industry or sector. An invigorating, infectious idea came to them, and they ran with it. But for those who simply desire to innovate, consider where you plan to compete, and how many of the Five Forces will affect you. Their ability to influence your key decisions correlates precisely with the liquidity of your concept.

With the macro-scale analysis of industry variables now established, the next piece of this series will analyze intracompany variables affecting idea liquidity. This portion will host far more controllable variables that the aspiring entrepreneur can adhere to.