ENG491 Technology Entrepreneurship

ENG491 Technology

Entrepreneurship

Building a Lean, Scalable StartupFall 2011 – Fall 2012

Emre Oto

www.eng491bu.orgFollow on Twitter: @eng491

http://www.eng491bu.org/

What is this course all about?#3 Customer Development

I wish we could be building products this semester, but it is not possible

So we will break the Lean Startup method into two and focus on the client facing part We will get out of the building and practice Customer

Development

We will study Agile Development in theory with examples

ENG491 Technology EntrepreneurshipWeek #2 «Disruptive Innovation»

3

IfStartups Fail from a Lack of customersnot Product Development Failure

Then Why Do we have: process to manage product development

no process to manage customer development


4

An Inexpensive FixFocus on Customers and

Markets from Day One

How?


5

Build a Customer Development Process

Customer Development

? ? ? ?

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development


CompanyBuilding

Customer Development

CustomerDiscovery

Customer Development is as important as Product Development

Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

CustomerValidation

Customer Creation


7

Customer Development: Big Ideas Parallel process to Product Development

Measurable Checkpoints

Notion of Market Types to represent reality

Emphasis is on learning & discovery before execution


8

Customer Development Heuristics There are no facts inside your building, so get

outside

Develop for the Few, not the Many

Earlyvangelists make your company

The goal for release 1 is the minimum feature set for earlyvangelists


9

Stop selling, start listening There are no facts inside your building, so get outside

Test your hypotheses Two are fundamental: problem and product concept

Customer Discovery: Step 1

CustomerDiscovery Customer

ValidationCompanyBuilding

CustomerCreation


10

Customer Discovery: Exit Criteria What are your customers top problems?

How much will they pay to solve them Does your product concept solve them?

Do customers agree? How much will they pay?

Draw a day-in-the-life of a customer before & after your product

Draw the org chart of users & buyers


Customer Validation: Step 2

CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• Develop a repeatable sales process• Only earlyvangelists are crazy enough to buy


12

Customer Validation: Exit Criteria Do you have a proven sales roadmap?

Org chart? Influence map?

Do you understand the sales cycle? ASP, LTV, ROI, etc.

Do you have a set of orders ($’s) validating the roadmap?

Does the financial model make sense?


13

Customer CreationStep 3

CustomerDiscovery

CustomerValidation Customer

CreationCompanyBuilding

• Creation comes after proof of sales• Creation is where you “cross the chasm”• It is a strategy not a tactic


14

Customer Creation Big Ideas

Big Idea 1: Grow customers from few to many

Big Idea 2: Four Customer Creation activities: Year One objectives Positioning Launch Demand creation

Big Idea 3: Creation is different for each of the three types of startups


15

New Product Conundrum New Product Introduction methodologies

sometimes work, yet sometimes fail Why? Is it the people that are different? Is it the product that are different?

Perhaps there are different “types” of startups?


16

Three Types of MarketsExisting Market Resegmented

MarketNew Market


17

Three Types of Markets

Who Cares? Type of Market changes EVERYTHING Sales, marketing and business development

differ radically by market type Details next week

Existing Market Resegmented Market

New Market


Type of MarketChanges Everything

Market Market Size Cost of Entry Launch Type Competitive

Barriers Positioning

Sales Sales Model Margins Sales Cycle Chasm Width


New Market

• Finance• Ongoing Capital• Time to Profitability

• Customers• Needs• Adoption


Definitions: Three Types of Markets

Existing Market Faster/Better = High end

Resegmented Market Niche = marketing/branding driven Cheaper = low end

New Market Cheaper/good enough can create a new

class of product/customer Innovative/never existed before


New Market


Company Building: Step 4CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• (Re)build your company’s organization & management

• Re look at your mission


21

Company Building: Big IdeasBig Idea 1: Management needs to change as the company grows

Founders are casualties Development centric Mission-centric Process-centric

Big Idea 2:

Sales Growth needs to match market type


Company Building: Exit Criteria Does sales growth plan match market type?

Does spending plan match market type?

Is your team right for the stage of company?

Have you built a mission-oriented culture?


23

Customer Development: Summary Parallel process to Product Development

Hypothesis Testing

Measurable Checkpoints

Not tied to FCS, but to customer milestones

Notion of Market Types to represent reality

Emphasis is on learning & discovery before execution


Idea Size of the Opportunity

Business Model(s)

Customer Discovery

Customer Validatio

n

What is this course all about?How to Build a Startup


Idea Size of the Opportunity

Business Model(s)

Customer Discovery

Customer Validatio

n

Theory Practice



IdeaSize of the Opportunit

yBusiness Model(s)

Customer Discovery

Customer Validatio

n



New Lanchester StrategyMarket Share Cost of

Entry (vs. Leader’s sales / Marketing Budget)

Appropriate Entry strategy

Monopoly > 75% 3x Resegment/newDuopoly > 75% 3x Resegment

/new Market Leader

> 41% 3x Resegment /new

Unstable Market

> 26% 1.7x Existing/resegment

Open Market < 26% 1.7x Existing/resegment


How should we, then, build startups? New markets

or hybrid strategy New Market / Resegmentation

Disruptive Innovation Primarily new market disruptions

Value Innovation + Blue Ocean Strategy Making the competition irrelevant


Sustaining Innovation May involve incremental refinements or radical

breakthroughs

Improve the performance of established products and services along the dimensions that mainstream customers in major markets historically have valued. (e.g. Moore’s Law)

Targets demanding, high-end customers with better performance than previously available Higher margins Greater motivation to fight Incumbents always win battles of sustaining innovation


Up-market movement Caused by the growth imperative

Companies must exceed the consensus forecast rate of growth to boost share price

Sustaining innovation to capture higher margin customers to sustain growth

Asymmetric motivation: Incumbents are always motivated to go up-market They are never motivated to defend the new or low-

end markets Fight vs. flight


Disruptive Innovation Doesn’t attempt to bring better products to

established customers in existing markets

They redefine the trajectory by introducing products and services that are not as good as currently available products

Offer other benefits: Simpler, more convenient, less expensive etc.

Appeal to new or less-demanding customers


Let us summarize with a video... http://www.vimeo.com/5729898


You can’t stand still!


Disruption is relative An innovation must be disruptive with

respect to all players in the target market to be called a true disruption


Examples of Disruptive Innovation

Digital photography vs chemical photography High speed CMOS video sensors vs photo. film

Downloadable digital media vs CD/DVD

Tablet vs Notebook

LED vs Incandescent light bulb

LCD vs CRT


Two Types of Disruption New market disruptions

Creates a new market by targeting non-consumers

Create a new value network

Low-end disruptions Attack the least-profitable and most

overserved customers at the low-end of an established market


Two Types of Disruption


The Value NetworkContext within which a firm establishes a coststructure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers

New valuenetworks


Disruptive Channels Disruptive innovations almost always require disruptive

distribution channels

Channels of the sustaining innovation are likely to make the disruptive innovation fail

There needs to be symmetry of motivation across the entire chain of entities that add value to the product

Disruptive products must enable the channel to disrupt its competitors

Channel must view the products as a fuel to move up-market


New-Market Disruptions Compete with non consumption

Much more affordable to own / simpler to use They enable a whole new population of people to begin owning

and using the product ..and possibly in a more convenient setting

New-market disruptions initially compete against nonconsumption in their unique value network

As their performance improves they become good enough to pull customers out of the original network into the new one, starting with the least demanding tier


New Market Disruptions They don’t invade the mainstream market

They rather pull out customers out of the mainstream value network in to the new one

Incumbent leaders feel no threat or pain until the disruption is in its final stages New Market Disruptions start stealing customers

from the lower end, so the incumbent doesn’t mind due to upmarket movement

Compare with the idea of “making the competition irrelevant” in Blue Ocean Strategy


Examples of New Market DisruptionsSony pioneered the useof transistors in consumer electronics

Its portable radios and portable TVs disrupted firms such as RCA that made large TVs and radios using vaccuum tube technology


Low-end Disruptions Disruptions that take root at the low-end of the

original or mainstream value network

They do not create new markets

Low-cost business models that grow by picking off the least attractive of the established firm’s customers

New market disruptions induce incumbents to ignore the attackers, low-end disruptions motivate the incumbents to flee


Most disruptions are hybrids


Litmus Test for New Market DisruptionsQuestion #1 Is there a large population of people who..

..historically have not had the money, equipment, or skill to do this thing for themselves,

..and as a result have gone without it altogether

..or have needed to pay someone with more expertise to do it for them?


Litmus Test for New Market DisruptionsQuestion #2

To use the product or service, do customers need to go to an inconvenient, centralized location?


Litmus Test for Low-end DisruptionsQuestion #1

Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price?


Litmus Test for Low-end DisruptionsQuestion #2

Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these overserved customers at the low end?


Litmus Test for Disruptive Innovation

Is the innovation disruptive to all of the significant incumbent firms in the industry?


How do we reveal Disruptions? The answer is “circumstance-based

segmentation” vs “attribute-based segmentation” (attributes of products and/or customers)

The critical unit of analysis should be circumstances rather than the customer Statistics, demographic data, psychographic

profiles etc. are people.

Essential for revealing new market disruptions (true competition is nonconsumption)


Circumstance-based Segmentation Customers have “jobs” that need to get done

When customers become aware of a job they need to get done, they look around for a product/service they can hire to get the job done

They set out to hire something/someone to do the job as effectively, conveniently, and inexpensively as possible

Functional, emotional, and social dimensions of the jobs that customers are trying to get done constitute the circumstances in which they buy


Circumstance based segmentation Position a disruptive product on a job that has been poorly

adressed in the past

Develop hypotheses by carefully observing what people seem to be trying to achieve for themselves and ask them about it Compare with the idea of Customer Discovery

Observation and questioning to determine what customers are trying to do, coupled with strategies of rapid development and fast feedback, greatly improve the probability that a product converges quickly upon a job that people are trying to get done.


Don’t Ask Customers to Change Jobs!‘cause they won’t.. “A business plan predicated upon asking

customers to adopt new priorities and behave differently from how they have in the past is an uphill death march through knee-deep mud.”


A quote from Clayton Christensen’s Innovators Solution

Don’t Ask Customers to Change Jobs!‘cause they won’t..

An idea stands little chance of success if it requires customers to prioritize jobs they haven’t cared about in the past

Customers don’t just change jobs because a new product becomes available

The new product will succeed to the extent it helps customers accomplish more effectively and conveniently what they are already trying to do.


Don’t Ask Customers to Change Jobs!‘cause they won’t.. The “jobs question” is a critical early test for a

viable new-market disruption.

A product that aims to help nonconsumers do something they weren’t already prioritizing in their lives is unlikely to succeed.


Extracting growth from nonconsumptionStep #1

Target customers are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach.



These customers will compare the disruptive product to having nothing at all.

As a result they are delighted to buy it even though it may not be as good as the other products available at high prices and/or to current users with deeper expertise in the original value network



Disruptors deploy the technology to make the purchase and the use of the product Simple Convenient Foolproof

The “foolproofedness” creates new growth by enabling people with less money and training to begin consuming



The disruptive innovation creates a whole new value network

The new consumers typically purchase the product through new channels and use the product in new venues


For more on Disruptive Innovation… Read the HBR paper by Clayton Christensen..

Read the Innovator’s Dilemma and the Innovator’s Solution by Clayton Christensen.. Read the Innovator’s Solution for more on New

Market/Low-end Disruptions, Circumstance-based segmentation, and great insights on creating and managing disruptive innovation


ENG491 Technology Entrepreneurship

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