Friday, 16 June 2017 03:21

Creating a New Market:

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A Problem, An Example, A Successful New Business

Do you want to create and dominate a new market? Are there still opportunities for you to do that? The good news is that as long as there are problems, you have an opportunity to create a new market. For an example let's look at a well established and even boring market that engendered a new high revenue business.

New markets are not reserved for emerging niches like the internet of things or cell phone handsets. They're available to businesses that have little romance. They can be started wherever there are important problems that customers really feel.

The successful new markets start with problems, not with solutions. The example? What might seem a prosaic business — selling transistors — and how a former purchasing specialist built a whole new market. His name is Mike Wood, and he started with a problem.

First: The Problem
Transistors and other semiconductor components are unexciting but they sell well. Most of them are very application specific. At any one time there are perhaps 100 million different semiconductors being manufactured. This generates around $300B (U.S.) in revenue.

"Once (an expensive manufacturing) facility gets up to capacity, the owners are wary of investing another $2 Billion to build another facility." This is Mike describing the dynamic. Most chip companies manage fluctuating demand by juggling lead times as orders come in.

Since the individual products are highly specialized and the fabrication facilities are expensive to build and run, manufacturers often juggle several customers at once. That juggling is hard on customers. Sometimes very hard.

The result is that some customers get the wrong kind of surprise — their expected delivery dates change dramatically. Mike's team will get a call saying: "I always buy it from (the same supplier) and they always deliver it 8 weeks after order. (Today) I call 'and say: 'here I am again, and I need 100,000 of these transistors in 8 weeks.' (The supplier) says: one 'small problem, this time the delivery is 20 weeks.'"

Suddenly adding 12 weeks to an order cycle is a big deal. It leaves the customer in trouble because these products are so specific that it is hard for other manufacturers to fill in. It's potentially a disaster for their customer.

For a company that makes something as simple as a toaster, delaying production is not an option. The appliance company cannot assume that Best Buy and Wal-Mart will cheerfully wait an additional three months while a transistor delivery problem gets sorted out. The retailers will order from someone else for this and probably future quarters. For most toaster companies, this is unacceptable.

This supply issue happens every day. Transistor manufacturers can't build room in their schedule for sudden requirements. Most distributors cannot afford to stock enough transistors to fill an unexpected spike. When this happens the toaster company cannot replace the components with something else. Then urgent calls go out to transistor suppliers: "Does anyone have access to the product I need in less than 20 weeks?" The answer is usually: 'No.'

If that wasn't complex enough, the trend to outsource manufacturing has added a second problem. The toaster has a brand name on the front, but that toaster may be made by a contract manufacturer. The contract manufacturer buys transistors and other components for dozens or hundreds of different products on their lines. To manage that business, the manufacturer keeps an inventory based on forecasts from the appliance company and many others. The contract manufacturer does not keep excess parts around.

You know how this falls apart. Sales frequently varies from forecast. The companies involved wind up with excess inventory that pools in unpredictable places around the world. These gaps or excesses are very challenging.

There are now two problems:
— 1 - A gap in inventory on one side and
— 2 - An excess in components sitting around somewhere else.
The stakes are high. Missing a delivery of kitchen appliances to Wal-Mart or Best Buy can be fatal to the supplier.

Ideally, this should never happen. We have predictive computer modeling and collect a lot of data. However, the world is dynamic. When someone in a small country in Europe makes a series of bad loans, consumer product sales across all of Europe might be dramatically lower. The threat of a terrorist attack may mean that communication product sales are no longer predictable in a major city. When a dry summer combines with lightning strikes a part of the California economy might change for months.

Any of those scenarios can disrupt a company that buys components month to month. Too few or too many of even an inexpensive chip is unacceptable.

In other words, the problem is real. To the consumer who buys the toaster, it may only be an inconvenience. For the companies involved, it can be fatal.

The solution seems obvious on the surface — use brokers who buy from companies with excess inventory and sell to companies with sudden need. This doesn't work. Person-to-person selling can't scale up to match the need. No one company can afford to buy a large chunk of the worldwide excess inventory on a speculative basis and post it on their web site.

Mike had been buying semiconductors for Siemens. He knew the imbalance problem and how serious companies found it to be. What Mike wanted to do was to build a solution that would actually solve the problem.

Next: Crafting The Solution
When Mike left Siemens he took a role working for what is now HPI AG, a speculative broker in Germany that buys and sells excess electronic components. As good as that company is, no speculative broker can handle enough volume to solve this problem. So he started to build a solution that would provide a way to directly connect the contract manufacturer with excess inventory to the toaster manufacturer with a sudden and urgent need.

As he did this, Mike was building an online chip exchange that would clearly compete with his employer's main business. Each transaction on the exchange might take revenue away from the parent company. Even with the obvious risk, HPI supported Mike. He developed a web site that would allow the owners of excess chips to connect to the companies with sudden needs. He named the new company Virtual Chip Exchange or VCE. It worked, and it worked in a big way.

It worked because the problem mattered. Mike had a solution, one that changed the game for the semiconductor industry. The VCE model works on a larger scale than any broker or distributor can support. VCE makes it much easier to solve supply and demand issues. Mike says that: "We have $2 Billion worth of excess inventory to sell on our site. The largest (stocking) distributors might have up to $1 Billion worth of inventory. The total available-to-sell inventory at (the largest worldwide distributor) is actually lower than the total available inventory at Virtual Chip." In other words, VCE has become an industry giant by solving a problem that customers feel intensely.

Summary: Start with the Problem
The problem? A series of expensive and time-critical mismatches between the supply and demand of transistor style chips. This means that products are not delivered when promised.

The solution? A new market where Mike and his team can dominate by solving a real problem.

The result? A new market where none existed before, a large company of which Mike is the CEO, solutions for sellers and customers, and profit for Virtual Chip Exchange's owners.

The lesson? Even in prosaic industries, new markets can be created with easily built technologies, and they can become dominant and profitable in a matter of months. They do it by finding a problem, sexy or not, that people will pay to solve. Because the problem is important to the customers, revenues can immediately grow and the solution can be profitable.

Can you create and then dominate a brand new market? Yes. You do it by starting with an old but important problem.


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Peter Meyer

Owner/Founder of TMG

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