Testing Business Ideas - by David Bland & Alex Osterwalder

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This is a practical guide that contains a library of hands-on techniques for rapidly testing new business ideas. 'Testing Business Ideas' explains how to use experimentation to transform your bright idea into a profitable business venture. It will help you to save precious time and money by testing how feasible, desirable, and viable your plans are. It will help you to dramatically reduce the risk and increase the likelihood of success for any new business venture. This book shows leaders how to encourage an experimentation mindset within their organisation and make experimentation a continuous, repeatable process.

This is written by David Bland and Alex Osterwalder. David J. Bland is an author and founder based in Silicon Valley who helps companies find growth using “Lean Startup” methods, design thinking, and business model innovation. Alex Osterwalder is a lead author of the international bestsellers Business Model Generation and Value Proposition Design; #7 on the “Thinkers 50” list; passionate entrepreneur; and in-demand speaker.



Key Learnings

In the world of business, a good idea isn't enough. Instead, you'll need lots of good ideas. Then, you can carefully select the most promising concept to take forward. Once you've decided on a direction, it's time to test your chosen ideas and concepts by using reliable, cost-effective experiments. This is the best way of finding out whether your idea works in practice as well as in theory. It's important to know your hypotheses. When you formulate a hypothesis, it's useful to know what kind of questions you're asking. There are three different types of hypotheses that broadly address three questions. Feasibility hypotheses concern questions surrounding whether it is possible for you to get a venture up and running with the resources and constraints you have. Viability hypotheses will answer questions about the profitability of your idea. Finally, desirability hypotheses will address questions around whether your target audience actually wants your product or service.


Table of Contents

Design
  • Design the team (p. 3)
  • Shape the idea (p. 15)
Test
  • Hypothesize (p. 27)
  • Experiment (p. 41)
  • Learn (p. 49)
  • Decide (p. 59)
  • Manage (p. 65)
Experiments
  • Select an Experiment (p. 91)
  • Discovery (p. 101)
  • Validation (p. 231)
Mindset
  • Avoid Experiment Pitfalls (p. 313)
  • Lead Through Experimentation (p. 317)
  • Organize for Experiments (p.323)


Design

Design the team - The best teams are diverse, open-minded, and entrepreneurial

If you're going to test your business ideas, you'll need a great team in place. Creating a great team starts with great design, and the best entrepreneurs proactively design their teams. They think carefully about bringing together people who have cross-functional skill set that encompasses all or most of the competencies that a fledgling business needs.

Cross-Functional Skillset
A cross-functional team has all core abilities needed to ship the product and learn from customers. A common basic example of a cross-functional team consists of design, product and engineering.

Commonly Required Skills to Test Business Ideas
  • Design
  • Product
  • Tech
  • Legal
  • Data
  • Sales
  • Marketing
  • Research
  • Finance

Entrepreneurial Experience
It's not a coincidence that successful businesses benefit from those who already have entrepreneurial experience.

Diversity
The best teams tend to be diverse. They are filled with people from a range of backgrounds - of different genders, ethnicities, ages, and careers. Diversity is so important because a successful business has an impact on people's lives and on society as a whole - and society is made up of people from all walks of life. If the business team doesn't reflect this reality, then their decision-making and their testing will contain inherent biases.



Team Behaviour

Team behavior can be unpacked into six categories that are leading indicators of team success.

Successful Teams Exhibit Six Behaviours
  1. Data Influenced - You don't have to be data driven, but you need to be data influenced. Teams no longer have the luxury of burning down a product backlog of features. The insights generated from data shape the backlog and strategy.
  2. Experiment Driven - Teams are willing to be wrong and experiment. 
  3. Customer Centric - To create new businesses today, teams have to know "the why" behind the work. This begins with being constantly connected to the customer. 
  4. Entrepreneurial - Move fast and validate things. Teams have a sense of urgency and create momentum toward a viable outcome. This includes creative problem-solving at speed.
  5. Iterative Approach - Teams aim for a desired result by means of a repeated cycle of operations. The iterative approach assumes you may not know the solution, so you iterate through different tactics to achieve the outcome.
  6. Question Assumptions - Teams have to be willing to challenge the status quo and business as usual. They aren't afraid to test out a disruptive business model that will lead to big results, as compared to always playing it safe. 



Team Environment

Teams needs a supportive environment to explore new business opportunities. They cannot be held to a standard where failure is not an option. Failure will occur and the goal is to learn faster than the competition and put that learning into action. Leaders need to intentionally design an environment where this can occur. 

The Team Needs to be:
  • Dedicated - teams need an environment in which they can be dedicated to work. Multi-tasking across several projects will silently kill any progress and preferably a small team.
  • Funded - It's unrealistic to expect these teams to function without a budget or funding. Experiments cost money. Incrementally fund the teams using a venture-capital style approach, based on the learnings they share during stakeholder reviews.
  • Autonomous - Teams need to be given space to own the work. Do not micromanage them to the extent where it slows down their progress. Instead, give them space to give on accounting of how they are making progress towards the goal. 

The Company Needs to Provide:
Support
  • Leadership - Teams need an environment that has the right type of leadership. support. A facilitative leadership style is ideal here because you do not know the solution. Lead with questions, not answers, and be mindful that the bottleneck is always at the top of the bottle.
  • Coaching - Teams need coaching, especially if this is their first journey together. Coaches, either internal or external, can help guide the teams when they are stuck trying to find the next experiment to run. Teams that have only used interviews and surveys can benefit from coaches who've seen a wide range of experiments.

Access
  • Customers - Teams need access to customers. The trend over the years has been to isolate teams from the customer, but in order to solve customer problems, this can no longer be the case. If teams keep getting pushback on customer access, they'll eventually just guess and build it anyway.
  • Resources - Teams need access to resources in order to be successful. Constraints are good, but starving a team will not yield results. They need enough resources to make progress and generate evidence. Resources can be physical or digital in nature, depending on the new business idea.

Direction
  • Strategy - Teams need a direction and strategy, or it'll be very difficult to make informed pivot, persevere, or kill decisions on the new business idea. Without a clear coherent strategy, you'll mistake being busy with making progress,
  • Guidance - Teams need constraints to focus their experimentation. Whether it's an adjacent market or creating a new one, to unlock new revenue teams need direction on where they will play. 
  • KPIs - Teams need key performance indicators (KPIs) to help everyone understand whether they are making progress toward a goal. Without signposts along the way, it may be challenging to know if you should invest in the new business.



Team Alignment

Teams often lack a shared goal, context, and language when being formed. This can be devastating later on, if not resolved during the team formation and kickoff. The 'Team Alignment Map', created by Stefano Mastrogiacomo, is a visual tool that allows participants to prepare for action: hold more productive meetings and structure the content of their conversations. It can help teams have more productive kickoffs, with better engagement and increased business success. 






Shape the Idea


Business Design

In the design loop you shape and reshape your business idea to turn it into the best possible value proposition and business model. Your first iterations are based on your intuition and starting point (product idea, technology, market opportunity, etc.). Subsequent iterations are based on evidence and insights from the testing loop. 

The design loop has 3 steps:
  1. Ideate - You try to come up with as many alternative ways as possible to use your initial intuition or insights from testing your idea into a strong business. Don't fall in love with your first ideas.
  2. Business Prototype - Narrow down the alternatives from ideation with business prototypes. When you start out, use rough prototypes. Subsequently, use the Value Proposition Canvas and Business Model Canvas to make your ideas clear and tangible. 
  3. Assess - In the last step of the design loop you assess the design of your business prototypes. Ask questions like "Is this the best way to address our customer's jobs, pains, and gains?" or "Is this the best way to monetise our idea?" or Does this best take into account what we have learned from testing?" Once you are satisfied with the design of your business prototypes you start testing in the field or go back to testing, if you are working on subsequent iterations. 
 

The Business Model Canvas

Use the Business Model Canvas to shape ideas into a business model so you can define, test, and manage risk. I helps define the Desirability, Feasibility, and Viability of an idea. 



Customer Segments
Describe the different groups of people of organisations you aim to reach and serve.

Value Propositions
Describe the bundle of products and services that create value for a specific customer segment.

Channels
Describe how a company communicates with and reaches its customer segments to deliver a value proposition.

Customer Relationships
Describe the types of relationships a company establishes with specific customer segments.

Revenue Streams
Describe the cash a company generates from each customer segment.

Key Resources
Describe the most important assets required to make a business model work.

Key Activities
Describe the most important things a company must do to make its business model work. 

Key Partners
Describe the network of suppliers and partners that make the business model work. 

Cost Structure
Describe all costs incurred to operate a business model.


The Value Proposition Canvas

Much like the Business Model Canvas, the same goes for the Value Proposition Canvas. This is another tool to help understand the customer and how your products and services create value. 



Value Map (Left side of the map)
Describes the features of a specific value proposition in your business model in a structured and detailed way.
  • Products and Services - List the products and services your value proposition is built around.
  • Gain Creators - Describe how your products and services create customer gains.
  • Pain Relievers - Describe how your products and services alleviate customer pains.

Customer Profile (Right side of the map)
Describes a specific customer segment in your business in a structured and detailed way.
  • Customer Jobs - Describe what customers are trying to get done in their work and in their lives.
  • Gains - Describe the outcomes customers want to achieve or the concrete benefits they are seeking.
  • Pains - Describe the bad outcomes, risk, and obstacles related to customer jobs.


Test

Hypothesise 

  1. Identify the Hypotheses Underlying Your Idea - To test a business idea you first have to make explicit all the risks that your idea won't work. You need to turn the assumptions underlying your idea into clear hypotheses that you can test. 
  2. Prioritise Most Important Hypotheses - To identify the most important hypotheses to test first, you need to ask 2 questions. First, "What is the most important hypothesis that needs to be true for my idea to work?" Second, "For which hypotheses do I lack concrete evidence from the field?"

Business hypothesis is defined as:
  • An assumption that your value proposition, business model, or strategy builds on.
  • What you need to learn about to understand if your business idea might work.

Creating a good hypothesis
When creating hypotheses you believe to be true for your business idea, begin by writing the phrase "We believe that..."

e.g. "We believe that millennial parents will subscribe to monthly educational science projects for their kids."

Be mindful that if you create all of your hypotheses in the "We believe that..." format, you can fall into a confirmation bias trap. You'll be constantly trying to prove what you believe, instead of trying to refute it. In order to prevent this from occurring create a few hypotheses that try to disprove your assumptions.  

e.g. "We believe that millennial parents won't subscribe to monthly educational science projects for their kids."

You can even test these competing hypotheses at the same time. This is especially helpful when team members cannot agree on which hypothesis to test. 

Characteristics of a good hypothesis
A well-formed business hypothesis describes a testable, precise, and discrete thing you want to investigate.
  • Testable - when it can be shown true (validated) or false (invalidated), based on evidence (and guided by experience).
  • Precise - when you know what success looks like. Ideally, it describes the precise what, who, and when of your assumptions.
  • Discrete - when it describes only one distinct, testable, and precise thing you want to investigate.



Types of Hypotheses
  • Desirable - "Do they want this?" The risk is that the market a business is targeting is too small; that too few customers want the value proposition, or that the company can't reach, acquire, and retain targeted customers.
  • Feasible - "Can we do this?" The risk is that a business can't manage, scale, or get access to key resources (technology, IP, brand, etc.), key activities or key partners.
  • Viable - "Should we do this?" The risk that a business revenue cannot generate more revenue than costs (revenue stream and cost structure).
Both the Value Proposition Canvas and the Business Model Canvas help identify the desirable, feasible and viable hypotheses.











To be continued...


Image source: Strategyzer Testing Business Ideas 


About Post Author

Hi, my name is Christine Calo and I'm a designer by trade who has an engineering background. I have an interest in design, technology and science which I like to read, watch and write about from time to time. This blog contains random ramblings of these topics and may tangent off to other topics. Want to say hello, you can contact me on: calo.christine@gmail.com

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