Turbulent markets create opportunities in three distinct ways: Churning markets introduce new resources into the economy, enable innovative combinations of existing resources, and stimulate novel consumer demands. New opportunities resemble the creation of a new dish in cooking, which arises from a new ingredient, a new recipe for combining familiar ingredients, or a shift in tastes.
Opportunities from new ingredients. In the sixteenth century, European explorers discovered unimagined ingredients in the New World, including the tomato. Italians initially thought tomatoes poisonous, and limited their use to decorative plants. Neapolitan chefs experimented with the new fruit, which thereafter became a staple of Italian cuisine. This new resource enabled previously inconceivable sauces, including Puttanesca, Bolognese, and Marinara.
The business analogue occurs when new resources enter the market. Resources include both hard assets (oil reserves or real estate, for example) and intangible assets (brand, technology, or expertise). Throughout the 1990s, politicians privatized money-losing steel mills, and the percentage of global steel production controlled by governments decreased from 70% to 30%, flooding the global steel market with previously unavailable “ingredients.” Lakshmi Mittal spotted the opportunity to build an empire from unwanted assets, and negotiated low prices for the mills. The government of Trinidad spent $500 million building a plant that it sold to Mittal seven years later for $70 million, while the Mexican government invested over $2 billion on a plant that it offloaded for $220 million less than a decade later.
Newly privatized plants were not the only resource that created opportunity for Mittal. In Trinidad, the government was paying $20 million a year for a team of sixty German technicians to manage the factory. Mittal replaced the expensive consultants with Indian managers and technical experts that earned one-tenth what the European advisers made. Mittal was among the first executives to tap emerging markets for labor. He identified Indian managers frustrated by the dearth of opportunities at home, and offered them a chance to make their career with his company.
Opportunities from novel combinations of resources. A new dish can emerge by combining existing ingredients in a new way. Consider the humble sandwich, named after John Montagu, the Fourth Earl of Sandwich. An inveterate gambler, Montagu ordered salted beef placed between two pieces of toasted bread so he could dine without interrupting his gambling. Bread and meat had existed for millennia, as had gambling, but Montagu combined familiar ingredients in a new way to fulfill a long-standing desire for fast-food.
Opportunities arising from novel combinations is linked to “innovation,” whose breathless fans have stretched the term so widely that it can cover anything new or good. A tight definition of innovation, however, entails a novel combination of existing resources, in the spirit of the sandwich. Innovations come in many flavors-they can reconfigure a technology, process, supply chain or business model; sustain or disrupt an existing trajectory; extend existing practices or break with the past. But all are examples of novelty from recombining existing resources. But innovation is not the only, or even most important, way to create value in a turbulent world. In later posts, I will argue that fanatical devotion to innovation so common in the business world today is not only misplaced, but often dangerous to the extent it distracts people from other types of opportunities.
Opportunities from shifting tastes. Opportunities also arise when consumer preferences shift, much as a change in diners’ tastes creates demand for new dishes. In 1963, Robert Atkins, a New York cardiologist read an article in the Journal of the American Medical Association describing a low carbohydrate diet, and adopted a modified version of the diet hoping to lose three pounds in a month. After Atkins lost twenty pounds, he abandoned his cardiology practice and founded an obesity clinic. Within five years, Atkin’s diet achieved wide publicity, earning him guest appearances on the “Tonight Show” and inclusion of his diet in Vogue magazine. Although the low carbohydrate diet is controversial (a 2003 issue of The Harvard Health Letter dubbed it “the bad boy of diets”), it attracted an estimated 30 million Americans to try it. The popularity of the Atkins diet created an opportunity for hundreds of new low-carbohydrate meals, including the oxymoronic low-carbohydrate pasta, which would have found a limited market had Atkins not shifted tastes.
The rising middle class in emerging markets is an example of changing tastes that creates an opportunity to provide goods and services. An aging population creates demand for drugs to alleviate the discomforts of old age, investment products to ensure a comfortable retirement, and concerts with “classic” rockers strutting across the stage, despite being old enough to collect social security. Growing concern about environmental sustainability stimulates demand for fuel-efficient cars, alternative technologies, and packaging made from recycled materials. These shifts create new consumer tastes, which like the Atkin’s diet, generate new opportunities.