FOR ENTREPRENEURS
“Test your business model as quickly and cheaply as possible. The answers will tell you whether Plan A will work or whether you need to move to Plan B,” says
Why initial entrepreneurship models don’t work is an area John Mullins, an associate professor of management practice at London Business School has explored for a long time now. It’s also the topic for his new book
Getting to Plan B: Breaking Through to a Better Business Model, co-authored with Randy Komisar of Kleiner Perkins.
According to Mullins, most start-ups fail because they tend not to be very receptive to market reactions. The most common excuse — cash running out — is simply a symptom of the business model not being viable, and not the reason for the failure of the model, he says.
At what point does an entrepreneur need to step back and evaluate whether Plan A is working?
I think the way you realise Plan A isn’t working is by subjecting it to the marketplace. At the end of the day, only the market will tell you whether Plan A works or not. Our advice is to get as quickly as you can to real market settings where you can get real data from real customers rather than sitting behind a computer screen and trying to fine tune your business model based on what could be naïve or unsound assumptions.
What is the process you recommend for moving from Plan A to Plan B?
The idea is this: there are companies before you who have done something like you want to do that you can copy from, and others who have also done something similar, but that you choose not to copy from. These are your analogs and antilogs respectively. The process of going from Plan A to a plan that will work is to begin with these. For instance, when Steve Jobs of Apple decided to get into the music business that eventually completely changed Apple as a company, he had a whole range of analogs and antilogs he could refer to. Sony Walkman had sold over 300 million portable music players, so he knew there was a demand for portable music. Also, people were (illegally) downloading music from Napster, so he knew that they were open to downloading music online (as opposed to buying CDs). Jobs also had a key antilog, which was Rio, the first mp3 player that had a terrible interface and was rather clunky.
The next step is what we call a ‘leap of faith’; essentially something you believe is true but don’t have any evidence to support. It is a gap in evidence that you need to find an answer to, as the answer determines whether or not your model will be a success.
In Apple’s case, the leaps of faith were whether consumers would be willing to pay for music online, and whether music companies would sell them the rights to their tunes.
Once you have these answers, you are ready to go. But you have to get real feedback from the marketplace, and not just focus groups.
Apple was a fairly established company when it decided to enter the portable music market. How different is it for a fledgling startup venture?
The challenges for a start-up would be very different as an established company would already have its cash flow and resources in place. But the process would still remain the same. You still look at the analogs and antilogs before moving ahead and developing your own model. Google was not the world’s first search engine, but the consumers were flocking to Google because the results were far more relevant. As a result, the company had to keep adding more servers
to deal with the increased traffic.
Now Google was wonderful for consumers as it was free, but the founders weren’t making any money out of it. So they looked around and found Overture, another search engine. This company did not have the best technology, but it had a feasible model. Overture would display objective results on one side, and the paid results on the other side of the page. So Google basically borrowed this analog and the cash started coming in.
With Google, and many other instances, Plan B was essentially a modification of the existing model. What about instances when you move into a different business altogether?
There’s a great example of that from India — Kishore Biyani’s Pantaloon. He started out manufacturing men’s pants, and realised during his interactions with the retailers that retail in India wasn’t being run well. So he figured, why not do it himself? Again, he had analogs like Walmart and Marks & Spencer to learn from and he finally put together his own format based on his learnings which is unique to the Indian market. Today, Pantaloon (Future Group) is a huge success, but it doesn’t look much like making men’s pants.
With the leaps of faith tested, what is the next step?
The final step we suggest is building a dashboard. A dashboard is a tool for planning and focusing your hypothesis and examining the leaps of faith in a structured and rigorous way. Then essentially, you use these either to take the risks out of the business once you know it is true, or change course if you find your hypotheses don’t quite hold water.
So then should companies start out with a back-up plan?
No, we do not recommend an entrepreneur starting out with a contingency plan in his back pocket. Time, energy and passion in the entrepreneurial venture are so scarce that you have to put all you have into what you believe will work. And you do believe that that Plan A will work or else you wouldn’t be doing this. However, what you need to do is take your leaps of faith and test them in the market as quickly and cheaply as possible. The answers will tell you whether Plan A is good or whether you need to move to Plan B or C to make it work.
Do you see entrepreneurs falling in love with their business model and not wanting to modify it?
Yes that is exactly what happens and it’s very sad, because as a result, they will fail. Unfortunately, failure is the most common outcome with new start-ups and it’s a waste of entrepreneurial time and talent. In effect, the book argues it’s a matter of mindset — it’s not about thinking that I have a brilliant idea and how can I make it successful, but saying that here is a customer problem that I am going to resolve. And if you go into the business with the mindset that you are solving a customer problem, there is a lesser chance that you’ll get hung up on your solution.
(John Mullins to PRIYANKA SANGANI ETCD 090116)
No comments:
Post a Comment