What’s the Small Idea?

Trying to be strategic? You may not be thinking small enough, says Joe Fox, whose businesses have disrupted both the securities and real estate industries.

Fox, along with his brother, pioneered the online brokerage Web Street, which E-Trade Group acquired in 2001 for $50 million. In 2006, the two launched BuySide Reality, an online discount real estate brokerage that rebates 75% of its commissions to home buyers. And last year they started Iggys House Realty, which allows sellers to list their homes for free in multiple listings services. Fox took the time to talk with Sloan Management Review about his idea that the best innovations are often the smallest ones.

SMR: What do you see in an industry that convinces you that there is room for grand-scale innovation?

Fox: I really believe you can’t force innovation; it’s not something that happens in a vacuum. You have to observe the world with a fresh eye. … If I am going to innovate, I like to start with the desired result, that base idea. You have to think about what it is you want to do. I keep asking, what else could we do to be different — and better?

That’s when I look for “mini-innovations” – smaller steps that will get us there, like giving away free NASDAQ trades at Web Street, which is what we did. These ideas are not just from me, but from my whole team. I’m not the end-all of ideas.

SMR: Is there a “due diligence” phase when you are intensely studying an industry and identifying potentially profitable gaps – or do you just trust your own personal experience?

Fox: You have to be willing to spend the time to do the research and to investigate… You know what a lot of people do? They say to themselves, if it could have been changed, it would have been changed. But you know what? That’s just not how life works. I don’t come from real estate and I don’t come from a brokerage house — and sometimes it’s better to come from outside of the industry. You know there’s an opportunity there if people tell you they would use your service. This isn’t about nuclear science; it’s about obvious needs. You know you are on to something successful when somebody says, “Why didn’t I think of that?” If you split the atom, the next guy isn’t going to wonder why he didn’t think of that.

SMR: So what made you decide that real estate was ready for your brand of innovation?

Fox: You can’t just sit down and decide that you are going to figure out how to innovate a gas station. You could create efficiencies and find all kinds of processes that you might be able to improve upon, but you are not going to innovate. What I saw in the real estate industry was a basic injustice, and I began questioning the establishment. That led us to start BuySide in 2006 and then IggysHouse.com.

SMR: You entered an industry that was sinking fast. Did your common sense let you down?

Fox: We took a risk. You can’t let a little thing like the perfect storm of market gyrations stop you, it just slows you down. We’re seeing more and more activity. I can gain a ton of share even if the market is stagnant, as long as we keep adding things. Besides, while the media wants everyone to believe that no one is buying a home, five million homes will be bought and sold in 2008.

SMR: Isn’t it dangerous to rely on your ability to keep innovating as your competitive edge?

Fox: I’m not the end-all in terms of coming up with ideas. I have a good inside team and a good outside team. When I was looking for an outside lawyer, I used to hear all the time, “Joe, you can’t do that.” And then I found one who said, “Joe, that has never been done before, but let’s see how we can make it happen.” I said “Bingo!” I love the guy. I have the support I need to figure out how we can make ideas work.

This article is adapted from “The Incrementalist (or, What’s the Small Idea?)” by Josh Hyatt, which appeared in the Summer 2008 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.