Business Model Innovation by Experimentation

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Business Model Innovation by ExperimentationYoav AviramEnergized Work@yobo


IT Projects60% don’t meet schedule, budget or quality goals - IBM

50% failed to achieve what they set out to achieve - KPMG

17% go so badly that they can threaten the very existence of the

company - Calleam Consulting


Innovative IT Projects (startups) 95% of technology startups fail - Allmand Law

93% of Angel investments never achieve expected ROI - University of

Washington

80% of VC investments never achieve expected ROI - National VC

Association


WHY?


Software, the Tip of the Iceberg

Too late

Poor quality

Missing functionality


Agile

An iterative and incremental approach to development, where

requirements and solutions evolve through collaboration between self-

organizing, cross-functional teams

- Wikipedia


Who is the customer?

How do we acquire new users?

How do we convert users to paying customers?

How should the product look and behave?

How is our product used?

What problems does the product attempt to solve?

What features provide the greatest value?

...the Product Iceberg


Lean Startup

A combination of business-hypothesis-driven experimentation, iterative

product releases, and "validated learning"

- The Lean Startup, Eric Ries


...the Business Model IcebergWho are our customers?

Who is the competition?

How do we reach our customers?

What are the revenue streams?

What is the investment needed?

What is the operational cost?

What is our unique selling point?

What team members to recruit?

What are our business goals?


Business Model

A plan for the successful operation of a business, identifying sources of

revenue, the intended customer base, products, and details of

financing

- Oxford Dictionary


Business Model Innovation

- Business Model Generation, Alexander Osterwalder


Product-Market Fit

There is a poorly met need a reachable market faces

There is a solution people are happy to pay for

There is a way to package and deliver the solution in a cost effective

manner


Think About Risk


Uncertainty

The lack of complete certainty, that is, the existence of more than one

possibility. The "true" outcome/state/result/value is not known.

- How to Measure Anything, Douglas Hubbard


Quantifying Uncertainty

A set of probabilities assigned to a set of possibilities

“There is a 60% chance this market will double in five years”


Risk

A state of uncertainty where some of the possibilities involve a loss,

catastrophe, or other undesirable outcome.

- How to Measure Anything, Douglas Hubbard


Quantifying Risk

A set of possibilities each with quantified probabilities and quantified

losses

“There is a 40% chance the proposed oil well will be dry, with a loss of

$12 million in exploratory drilling costs”


The Problem with RiskTechnology is used to solve complex problems

Our mind is wired to oversimplify complexity (we are not very good at

understanding probabilities)

We are solution oriented

We are optimistic (overconfident) by nature

People (grossly) underestimate risk & uncertainty


Compound Risk

Combination of two or more related risks

Compound probabilities are (very) counter intuitive


Monty Hall

A contestant on a game show is given the choice of three doors.

Behind one door is a new car, behind the others, goats.

After a contestant picks a door, the host, who knows what's behind all

the doors, opens an unchosen door, which reveals a goat.

He then asks the contestant, "Do you want to switch doors?"


Should the contestant switch doors?


Yes!The odds of winning are 2 out of 3 if you

switch


Compound Probabilities

This answer is so counter intuitive, most people get it wrong

It’s why they made a game show off of it: the trick works every time

The lesson:

We need to give serious consideration to risk

We must not rely on our intuition when considering risk & uncertainty


Risk Management 101Avoid by eliminating the situation or activity that presents it

Transfer through insurance or through other types of contracts

Reduce by hedging your bets or reducing uncertainty

Retain: because some risks are worth assuming


Risk Reduction


The Investor Mindset

Spread your bets on a portfolio of investments instead of one

Decide on an investment strategy

Split the investment into small incremental bets: abort bad products

quickly and ramp up investment in the good ones


Uncertainty Reduction


Value of InformationInformation reduces uncertainty

Reduced uncertainty improves decisions

Improved decisions have observable consequences with measurable

value

- Information Theory (1948)


Sources of InformationExisting within the company

Other’s research

Experiments

Live product


A scientific procedure undertaken to make a discovery, test

a hypothesis, or demonstrate a known fact- Wikipedia

Experiment


Experimental Discovery


Prioritising Assumptions Uncertainty around making a decision is high (little existing information)

The value of the opportunity, or the cost of a mistake, is high

Experimentation is least expensive in terms of cost and time


Designing Good Experiments

Attempt to falsify a hypothesis

Are objective, measurable and repeatable

Are controlled (variables tested in isolation)

Are cost effective

Influence a decision

Experiments aren't free

It's an investment decision

Information may be cheaper elsewhere


Measurement

A measurement is an observation that results in information (reduction

of uncertainty) about a quantity


Qualitative Measurements

The soft stuff

Subjective, messy and hard to quantify

Customer surveys, focus groups, interviews

But … provide insights about Perceived Value


Good Qualitative QuestionsAvoid leading phrases such as "do you agree that..."

Make customers part with money or sign up, rather than asking them whether they would

Use follow up questions to get to the ‘why?’


Quantitative Measurements

Start by decide on the right Metric (what to measure)

Then set lines in the sand: what success and failure look like

Always validate results with qualitative data


Good MetricInfluences a decision

Comparative

Rates and Ratios are easier to compare and act upon

Measure what’s important to your customers


Putting it all TogetherThe key to the success of IT Projects is better risk management

Information reduces uncertainty & risk

Experiments are the most effective way to obtain new information

Experiments have the biggest impact in a high value, high uncertainty

and little data situations

Hedge your bets by making small incremental investments

Challenge the distinction between business people and techies


Reading List

The Lean Startup by Eric Ries

Business Model Generation by Alexander Osterwalder

How To Measure Anything by Douglas W. Hubbard

Lean Analytics by Alistair Croll and Benjamin Yoskovitz


Questions?

Yoav AviramEnergized Work

[email protected]@yobo

Business Model Innovation by Experimentation

Business

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