The Idea Filter
Posted on: 1/6/2011
Ideas are plentiful and we are awash in them; it’s just that there are just as many—or more—bad ones as there are good. What are needed are idea filters that don’t take weeks and months or reams of data to compile. One tool that I learned early in my professional life for judging any business improvement idea is called “MS3“; it is as simple as it is powerful. I learned this from Peter Marks of Design Insight (designinsight.com), a product development consultant who, like a master of a martial art, has a gift for un-complicating business concepts that often stump and befuddle. He calls this his “MBA in a box”.
MS3 stands for the equation:
Market Size x Market Share x Margin on Sales
Peter says that these are the three areas that compartmentalize everything that makes your business successful, and therefore makes the best starting point for filtering ideas. Any idea you come up with needs to optimize at least one of these business variables. Let’s break them down and you’ll see how simple this is.
Market Size: Does your idea increase the size of your market, i.e., does it open your offering up to many more customers? A great example of this is the HUMMER line of vehicles. Even though this was only a short-term success, GM took a niche, military-only transport product (and one with a highly vanity-based value proposition), and successfully offered it to the deep-pocketed nouveau riche Internet millionaires and similar testosterone-fueled demographic groups. It not only expanded a market, it created one, as temporary as it was.
Market Share: Does your idea capture your competition’s share of the product market? The Android smart phone platform is doing this to Apple’s iOS , and some think the new Windows phone will, as well. It is very interesting to see this very public battle take place, and the choices these companies are making to differentiate, such as open source software vs. closed and Flash vs. HTML5. The competitive nature of this can make innovations bolder and also riskier, as companies jockey to one up each other and retain customers. A standard business tenet is that it is exponentially more valuable to keep and sell more to existing customers than it is to acquire new ones, and we see this play out often with such aggressive product positioning and attempts at differentiation. One thing you do need to watch out for is losing your loyal user base at the cost of new customers, like Coke once did.
Margin on Sales: Does your idea lower your operating and/or product costs therefore increasing your profit on units sold? This one is much more nuts-and-bolts than the other two, as it has a lot more to do with product design and production. Design for Manufacturability and Assembly (DFM/A) has helped many companies turn sinkholes into money makers, but overall, this filter can be a bit of a trap. Consider the many times in your company a proposal has been put forth under the guise of continuous improvement or tremendous cost savings, only to have unintended consequences or management blindspots that enable the opposite of the intent. Things like MRP systems, complicated metrics collection, or even engineers filling out time cards often have hidden costs that you find out about too late.
These three things are in a specific order of impact. Increasing market size has no limit, but the other two are finite environments. You can always find more customers, but market share and margins have borders and upper limits. Certainly, this is not perfect or foolproof, but provides a clarifying lens at its base that can quickly help you identify valuable innovations as it relates to your business results.