Be sure to follow me on Google+ at +Donald McMichael
It just seems that way because they have assimilated the art of experimentation into their DNA. And why have they adopted this mentality? To validate learning because what often seems like a no-brainer really isn’t. Intrigued?
Market penetration strategies; from my point of view – having been charged with determining the best path to follow – I can offer the following learning. Please note that unlike others, as someone who comes out of the finance realm my thinking is colored by a quantitative-bias.
Often times when you’re chasing business growth you have to man-up, or is it woman-up, human-up… let’s run with step-up, and pull the trigger on something that’s definitely hanging outside of your comfort zone.
First, it’s beneficial to understand why you believe it to be out of your comfort zone. If we step back and take an honest look it boils down to the fear of the unknown and how we as humans deal with a high level of uncertainty. Attempting something new has an inherent level of uncertainty and therefore is a source of stress and fear. In the professional environment trying something new never goes unnoticed. Stakeholder’s will have positive expectations and it is concern about the repercussions of not living up to their hopes that generates fear and often avoidance. Quite simply, in situations where the outcome is unknown and the repercussions are uncertain people view action as too risky.
Risky: the lack of complete certainty; the outcome is not known.
So what are we to do? Manage uncertainty by taking reasonable risk.
Um, but weren’t we avoiding risk? Not precisely, below is a definition of risk.
Risk: unlike risky, this is measurable; a probability can be assigned to the set of possibilities and thus the outcome can be ranged.
We should be willing to take risks because risk is quantifiable. This allows us to determine the overall impact of our actions, set expectations, and do a forensic analysis of the outcome. We gain a feeling of pseudo-control, which allows us to act.
Okay, so it’s all about controlled exposure. How do we achieve it?
The correct way to manage risk exposure is to flag the key variable(s) that can be structured to limit the hurt of an ‘oops’ and set them such that the all out consequences can be absorbed. This is where quant-centric individuals might have a slight advantage for we have been trained on the art of identifying the statistically most influential variables.
Notice I said might; the one mental hurdle that we have to overcome is an ingrained bias for accuracy. The best lesson I every learned was provided by one of my mentors, it took him about a half year but eventually he succeeded in having me realize that when projecting anything ‘magnitude and direction’ will carry you much further than a specific number. Your arguments for and against actions are much more convincing when it is composed of both here is where I believe it will take us if proven true and these are the variables (both controllable and uncontrollable) that influence our exposure.
The most widely utilized method of ranging outcomes and keying in on the important variables is ‘what-if analysis’. This is the heart of a business experiment, so lets take a little closer look then get back to the overall experimentation process.
What-If Analysis: a simulation analysis process in which key quantitative assumptions (variables) and computations (underlying a decision, estimate, or project) are changed systematically to assess their effect on the final outcome.
Today there are numerous readily available, easy to use tools that facilitate ‘what if’ analysis. In fact, one very useful toll is at the fingertips of almost every businessperson, Excel. The most powerful tool, however, is your understanding of the business model mechanics, which can be translated into a financial representation. Unlike the days of old – think early 2000’s – when financial planning & analysis types banged away for days, if not weeks, to craft a fully customized model many of these very same tools include numerous templates and calculators that allow you to focus on translating the business component relationships not technical spreadsheet mechanics.
A Market Analysis Process
In business and engineering the overall overarching process of what we have been discussing is typically referred to as new product development (NPD). NPD typically involves two parallel paths; one is idea generation; the other is market analysis. This post focuses more on the latter.
Here’s my framework for going about it.
– Determine what hypothesis assumption you want to validate
– Develop a test structure the can provide the right insights
– Determine who has to play with you to generate valid data and get them onboard
– Translate the proposed business model into a financial model
– Identify the key variables and determine their multiplier factor on the final outcome; in other words clearly communicate the risk profile
– Set control parameters (pricing, included market segment, time duration, etc.) on variables to insure a manageable outcome
Beta Testing and Market Testing
– Reach internal consensus on deliverables and commitments
– Produce a prototype, mock-up, or release a limited time offer to a market segment
– Test in typical usage/market situations
– Capture results
– Analyze the outcome and capture what you have learned
– Adjust or move on to the next, and repeat
We all must keep in mind that nearly every attempt at success will be met with failures along the way, and properly managing those failures can actually benefit an initiative. This is just one piece of the puzzle explained from my perspective. I encourage you to hone your skills on this and seek out wisdom on the others.
What say ye, yea or nay? What would you add, subtract, or amplify?
This post was inspired by Phil McKinney’s insights on JetBlue’s recent business model experiment.