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U S I N G B U S I N E S S O BJ E C T I V E S T O D R I V E P R O D U C T D E V E L O P M E N T

A LEAN -S TAR TU P S TR A T EGY F OR BU S INE S S GR O WT H U S IN G BU S IN ES S OB JEC T IV ES A S DR IV ER S FOR M VP P R OD U CT D EV EL OP ME N T

P R EP AR ED BY

WH I TE FOR E S T CO NSU L T ING

H TTP : //W WW .W H IT E - FO R ES T. CA

9 / 1 5 /2 0 1 3

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CONTENTS

Introduction .............................................................................................................................................. 3

Introduction to Lean Startup Concepts ....................................................................................... 3

The Minimum Viable Product ........................................................................................................ 4

Business Development vs. Product Development .................................................................. 5

Understanding your Business and Products ................................................................................. 9

Frameworks.......................................................................................................................................... 9

BCG Advantage Matrix ................................................................................................................... 10

Value Benchmarking ...................................................................................................................... 11

Conclusion ............................................................................................................................................... 13

About White Forest Consulting and Author ................................................................................ 14

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INTRODUCTION

According to Industry Canada, only about 50% of all SMB startups survive their first 3 years in business. Although uncontrollable externalities such as macro economical play part in the success and failure of companies, the dominant factors that contribute to the failure of half of all startups are well categorized and studied. The report “Management Skills for Small Business” published by Industry Canada in 2001, is unequivocal on the matter, concluding, “the main reason for failure is inexperienced management. Managers of bankrupt firms do not have the experience, knowledge, or vision to run their business.”

Around 2008, as if responding to the call for better entrepreneurial management, a group of Silicon Valley entrepreneurs, led by Eric Ries, developed a set of management philosophies and methodologies to increase the success rates of startups. They call their methodology Lean Startup. Since its inception, the Lean Startup methodology has spawned a movement that has gained momentum among both tech innovators and entrepreneurs in other industries.

INTRODUCTION TO LEAN STARTUP CONCEPTS

The Lean Startup management style is inspired by the lean manufacturing production techniques popularized by Japanese automakers in the 1980s. By applying Lean Startup methods, entrepreneurs seek to eliminate wasteful practices and focus on value during the development phase of the product. This focus gives startups a better chance of surviving the uncertainty inherent in entrepreneurship without significant external funding, elaborate business plans, or the “perfect” product. The key elements of the Lean Startup methodology—minimum viable product, continuous development and validated learning—form what is known as a Build, Measure, Learn Cycle (see Figure 1). In theory, this shortens development cycles and tests hypotheses early in the development cycle, limiting risks and uncertainties faced by the entrepreneur.

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FIGURE 1: THE BUILD, MEASURE, LEARN CYCLE

Proper application of Lean Startup principles may significantly speed up the development cycle of your product and lower your requirements for funding, business planning, and product management.

THE MINIMUM VIABLE PRODUCT

The minimum viable product, or MVP, is central to the Lean Startup. It is the start of the learning process, and, as such, must be designed with the goal of allowing the development team to collect the maximum amount of validated learning about customers for the least amount of effort. Once the MVP is on the market, it will be embraced by early adopters. These early adopters will contribute to further R&D for the product. Following Lean Startup methodology, you would set up experiments to test your business hypotheses. The results of these experiments will be measured by actionable metrics. Such results allow you to make informed business decisions that can be rapidly transformed into product updates, which can, in turn, be released immediately to the public for further testing and validation.

At White Forest Consulting, we believe that the MVP is an essential component of your product portfolio, and it must be carefully developed according to a set of business goals and objectives. While the uncertainty of your company’s startup phase may mean that you’ll be changing your target customer or the product during the development cycle, the initial MVP must be refined to an acceptable level, as defined by the objective of the product, before being released. However, it doesn’t need to be the perfect product. We stress: the MVP is built to develop the business, not the other way around.

Learn

Ideas

Build

Code

Measure

Data

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BUSINESS DEVELOPMENT VS. PRODUCT DEVELOPMENT

White Forest Consulting recommends that entrepreneurs integrate business objectives and goals into the development cycle of the MVP. Remember: the MVP is developed to meet business objective. Business objectives are not developed for the product. By having a clearly defined target market for which the MVP is deliberately built, startups are more likely to offer a competitive product earlier and to a more selective segment of customers—a segment of customers who will appreciate the added value of the MVP.

Our recommendations are based on our staff’s experience consulting with new product development and R&D analysis in Fortune 500 companies, as well as through our own analysis of failed Silicon Valley startups. Our findings suggest that entrepreneurs will enhance their chances of success if they follow a more systematic, business-oriented approach while developing and building their MVP. Based on this knowledge, we believe that a significant number of failed startups failed because:

They did not thoroughly understand their customers

They did not thoroughly study their competitor’s substitute products

They did not bring value to their customers

Failing to understand your customers

We have identified two ways in which entrepreneurs fail to understand their customers: by assuming that customers have the same perspective as the entrepreneur and by neglecting to pay attention to customer risk behavior.

1. Assuming that customers share the perspective of the entrepreneur.

Tech entrepreneurs sometimes suffer from what we call “San Francisco Syndrome1”: the assumption that everyone in the world spends their time on an iPad or iPhone, fidgeting with apps.

While developers may spend their days coding in PHP or .net and are likely to be fluent in the languages of tech, customers are more likely to think that an Apache server is an Aboriginal waiter. As tech visionaries, entrepreneurs dream big and often change the way we behave and live by building interactive media, social and commercial platforms. However, we have to realize that tech entrepreneurs are avant-gardists and, as such, do not represent the mainstream of consumers.. For your business and product to succeed, you need to provide an insightful solution to a real problem, not simply a flashy demonstration of your capabilities as an innovator and designer.

Your MVP needs to be designed with the needs of your customers in mind rather than the dreams of the entrepreneur. Consider an example: an entrepreneur we know developed an MVP which serves as a platform to connect customers with off-shore content developers. His MVP has a very high customer satisfaction rate. From a tech perspective, the MVP is

1 The phrase comes from the high concentration of tech startups and innovation centers that is located in and around the Silicon Valley, directly south of San Francisco.

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simple, requiring a tech base of Excel spreadsheets and phone calls. But, despite providing customers with value, the entrepreneur laments that his attempts to introduce an app to perform the task have failed.

According to Lean Startup principles, we’d say that this entrepreneur is disconnected from the needs of his business. His current MVP has a very high satisfaction rate, probably from the very element he hopes to automate via a flashy new app—the customer service afforded by live chats. His business objective should be to develop a platform that maintains the high level of customer satisfaction, whatever it may look like. Instead, he had a product objective: to build an app.

The profound difference between having a business objective and a product R&D objective is the difference between means and ends. Business objectives should deprioritize technology, and focus on the development of the company through satisfied customers. The entrepreneur may build an app, a message board, a chat room, or keep operating on Excel and Skype. They are all legitimate platforms, and they may all serve get the business off the ground. When product R&D is prioritized at the expense of meeting a business objective—developing an app for the sake of developing an app, for instance—the startup decreases its chance of success. In the rush to be on the cutting edge, other valid, cheaper, and easier-to-implement tech solutions may be overlooked.

From a customer’s point of view, the app adds very little value over talking to a live customer service representative. The customers know the final product they want; they don’t care about how it’s done. They have no preference for technology. They want working solutions. In short, entrepreneurs need to learn to speak the language of the boardroom, not just that of the server room. They need to offer practical solutions, not just incredible technology.

2. Failing to pay attention to risk behavior of customers

A major blind spot that we identified in existing Lean Startup literature is the concept of customer risk attitude. We at White Forest Consulting view the understanding of your customer’s risk tolerance to be a fundamental step in building a successful product aimed at more serious customers. To begin with, customers generally exhibit one of three risk behaviors:

FIGURE 2. RISK ATTITUDES OF CUSTOMERS

Risk-averses customers preferentially receive less value than the cost rather than the possibility of receiving no return or negative return.

Risk-neutral customers seek to receive full value for their cost.

Risk-loving customers are willing to gamble to receive more value than the cost, even at the risk of receiving no return or negative return.

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Let’s use corporate taxes as an example to model different risk behaviors. A risk-averse manager may hire an internal accountant, and hire an additional external auditor to prevent errors from occurring. A risk-neutral manager would work with a competent internal accountant and a proven software package, trusting that a good job will be done. A risk-loving manager would jump on the latest cloud based software that automatically files taxes by scanning your emails for tax related keywords. To such a manager, the risk inherent in a new method like this is far outweighed by the time and money it might save.

Now, let’s apply this to how an entrepreneur might think. Suppose you are an app developer. It’s important to know that the risk attitude of your customers will be very different depending on whether you are developing a web-based game, educational software or corporate tax software. Your attitude to your MVP, release cycle, and customer adoption should differ correspondingly. The same logic applies if your startup is providing a service instead of a product: a customer, like the manager mentioned above, may perceive a higher risk associated with an unknown online technology compared to an established service.

The risk that your customer is taking is not simply money, but, perhaps more significantly, opportunity cost and reputation. If you fail to deliver a reasonable product to a customer after working for a month, you may well decide to issue a full refund. However, the customer still lost a month of time, during which he or she could have achieved actual results with a less risky approach. Your customer may also get professionally ridiculed for trying a new approach to an orthodox problem. If the customer works for a major enterprise, there is a good possibility that their career might suffer too as a result for taking a dangerous risk that didn’t pan out. To understand the risk-averse attitudes of many in the business world, consider this saying: “No one ever gets fired for buying IBM.”

When developing an MVP, the entrepreneur must understand the risk attitude of your customer, and keep this tolerance in mind while building your MVP. While you may be able to get away with a less polished MVP for the risk-loving crowd, a higher level of sophistication will be required to get the business of the more risk-averse consumers.

Failing to study competitor’s substitute products

Startup companies must always keep competitor’s substitute products in mind.

A substitute is simply a product or service that the customer may get from a competitor in place of the products or service that you are offering. Entrepreneurs frequently fall into the trap of believing their product to be unique. They commit this often deadly fallacy by thinking only of perfect substitutes. But, in a business context, we ought to be concerned with any reasonable substitute for the product. For example, although an automatic bread slicer may be considered a superior good for cutting bread, a bread knife is far more popular for its simplicity, versatility, and low cost.

While thinking of substitutes, it is absolutely critical to think strategically and outside of your immediate market. Think about it: for some customers, an e-book reader, an online movie rental website, and an online social platform can be substitutes for one another. These services are all competing for the customer’s leisure disposable income and time, and

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for certain market demographics, the consumer may have little preference in choosing between the above three.

Three factors determine the success of a substitute against your product:

a. Whether attractively priced substitutes are available b. How satisfactory the substitutes are in terms of quality, performance, and other

relevant attributes c. The ease with which customers can switch to substitutes

Awareness of substitutes and competition allows you to realistically look at the product you are attempting to offer and gauge its marketability. Within your industry, what is the product that has the highest penetration? What is the product that is generating the greatest amount of cash for your competitors? What is the development trend of the major competitors? What is the best way to develop so that you come out ahead of the product R&D cycle?

You should find ways to align the product development with your business objectives. By identifying the key value drivers for your customers, you can specifically tailor your MVP for your customers.

Failing to deliver value to customers

At the end of the day, your MVP must bring clearly demonstrable value to your customer. The cornerstone of a successful startup is to create customer value that is unrivaled by competitors.

Remember: innovation by incorporation of technology does not create value. Releasing apps with stable code or a streamlined interface does not create value. Using a modular approach (or Agile development, or cloud service) does not create value. Of course, the previous elements can contribute, but value, in the eyes of the customer, is created in four ways:

a. By incorporating product attributes and user features that lowers the customer’s overall cost by using your product

b. By incorporating features that increase the ability of the product to meet the customer’s needs

c. By incorporating features that enhance buyer satisfaction in noneconomic or intangible ways

d. By delivering competitive capabilities that rivals don’t have or can’t afford to match

The MVP must be developed to provide a solution that is better than whatever exists already. With the MVP, you must show that the value you bring to the customer is proportionally greater than the risk that is undertaken. If this basic tenet is not met, your product will not succeed.

The next step is to develop business situation awareness by understanding your customer, product, and competition. To that end, we introduce several useful tools in the next section through which you’ll gain a strategic understanding of the basic factors necessary for the success of your product and company.

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UNDERSTANDING YOUR BUSINESS AND PRODUCTS

It is important that you constantly examine the relationship between your product, business, customer and competition. As you are developing a startup company with a new product, this exercise needs be performed on a regular basis until your brand and product consolidates past the development stage.

In this section, we will introduce tools that will help you to narrow down the focus of your MVP by gaining a better business situational awareness. In particular, these tools will help you to

a. Identify the key factors affecting your industry, competition, and customers b. Identify the key substitutes that are available to the customers c. Benchmark the substitutes based on your customer’s view of value d. Understand the premium of innovation and value

If you identify the customer and the feature for which they are willing to pay for, then your MVP and your startup have a better chance to succeed.

FRAMEWORKS

The first tool that we introduce is the Business Situation Awareness framework. A framework is simply a structure that organizes your thoughts and analysis in a logical manner. Using frameworks effectively is a topic in itself. If you are interested, we invite you to read our whitepaper “Anchoring Your Business Plans with a Structured Framework” for a more through treatment of the subject.

When working with a framework, you start with an objective and develop the issues in a non-committed manner, until you have developed a complete issue tree that thoroughly and concisely solves the objective that you laid out. A framework allows you to manage large, complex issues by breaking them into logical components. By skillfully laying out the issues, you can manage large amounts of data without confusion or repetition.

Frameworks are a way to organize your thoughts in a consistent and logical way. To make the most out of the structure of frameworks, you need to start with the big, high-level questions: What are your missions and business objectives? What expertise do you have to bring values to customers? What inefficiency in the market are you trying to address? Gradually, work your way to more detailed-oriented questions: What is the best way to reach customers? How will you retain customers? Leave these questions to the last: What’s the best platform for the software? How will you build the optimum user interface?

The Business Situation Awareness framework (see Figure 3) gathers the key information regarding your startup and the market it exists in. Using frameworks, you will be forced to think about your company, customer, product, and competition in a logical and non-emotional way.

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FIGURE 3. THE BUSINESS SITUATION AWARENESS FRAMEWORK

BCG ADVANTAGE MATRIX

The advantage matrix, also known as the competitive advantage matrix, is a strategy model that offers good results when used to analyze the product and competition of a startup. Through the model, you will be able to better understand your MVP as well as your competitors’ products by comparing and contrasting products’ economy of scale and differentiation.

•Identify your customers

•What does each customer segment want?

•What price is each segment willing to pay?

•Are you serving another business or customers?

•What distribution channels do your customers prefer?

•How are customers concentrated?

Customer

•What is your product/service?

•Is it commodity goods or differentiable goods?

•What are the complementary and substitute goods?

•At what stage of its life cycle is the product?

Product and services

•What are your expertises and capabilities?

•What distribution channels do you plan to use?

•What are your intangibles?

•How is your financial situation?

Company

•Identify your competitor's behaviours and best practices.

•Identify your competition's concentration and barriers to entry

•Identify all relevant regulatory policies

Competition

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FIGURE 4. BCG ADVANTAGE MATRIX

In order to place your products onto the matrix, you need to, with as much objectivity as possible, give the products in question a ranking along these two axes:

Size of advantage/economy of scale: the size of advantage describes a company’s ability to gain economy of scale.

Number of approaches/differentiation: the company’s ability to differentiate itself from competitors.

Products from your startup and its competitors are divided into four categories depending on the above two factors.

Fragmented: these products gain advantages from product differentiation, but gain little from economy of scale. Service differentiation will minimize competition.

Specialization: these products gains advantage from both differentiation and economy of scale. Gaining market leadership should be the goal of these companies/products.

Stalemate: these are the products or services that will benefit neither from economy of scale nor product differentiation. For products in this segment, the main way to compete is to reduce costs.

Volume: these are the products that have considerable economy of sale, but have little chance to differentiate. Consumer electronics fall under this category. The key to competition is to become the volume leader of the segment.

VALUE BENCHMARKING

The benchmarking process is an advanced topic in business intelligence. The process involves breaking down a firm’s cost structure for performing specific activities. The disaggregated data is used to develop cross-company cost comparisons for narrowly defined activities. The process of benchmarking can be tedious and imprecise, and such high-level activity is unlikely to yield actionable conclusions for a startup. Nonetheless, it

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can offer some insight. Here, we are benchmarking the perceived value that a customer sees from products.

Value benchmarking has the capability to strategically and qualitatively analyze the market. The process often pays itself off by exposing the value and weaknesses of particular products offered by you and your competitors.

The objective of benchmarking is to understand the strengths and weaknesses of your product in relation to the market. When weaknesses are revealed, actions can be taken to increase the competitiveness of your product in delivering value to your customers in proportion to the cost and risk.

Here’s a real world example of value benchmarking: it’s a survey of the cost and performance (in lumens) of LED light bulbs that are available in the U.S. market through Home Depot. The price we quoted were baseline prices, without discount. In this case, to increase the perceived value of customers, we can either maintain the same cost but increase performance or maintain performance and decrease the cost.

FIGURE 5. LUMEN / COST BENCHMARK OF LED LIGHTBULBS

When the customers are purchasing the LED light bulbs, this is the chart that they might conjure up mentally. Philips leads the pack with the highest performing LED bulb at 830 Lm and it commands the premium price for this performance. EcoSmart and Cree offer the cheapest product, although at a much lower price point. In order for your LED lightbulb to be competitive and deliver value against these established products, it must either surpass Philips in terms of performance, or surpass Cree/EcoSmart in terms of affordability.

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CONCLUSION

Above, we have described frequent mistakes that tech startups make while building and developing their MVP. These oversights generally take these forms:

1. Failure to understand customers—either through generalization of customers or failing to understand risk from Customer’s point of view.

2. Failure to understand competition environment—either through lack of knowledge of substitutes, or ignorance of market conditions.

3. Failure to deliver value to customer due to eagerness to apply technology.

In order for you as an entrepreneur to better understand your customers and competitors, with the ultimate goal of developing an ideal MVP, we have introduced three tools in this paper:

1. The Business Situation Framework—applied to understand customer, company, product, and competition.

2. The advantage matrix—applied to understand competition products vs. your own products.

3. Benchmarking—an advanced tool applied to attempt to quantify value offered to customers.

We hope that these three tools combined will give you the tech entrepreneur better business situation awareness. This awareness translates into a more focused MVP and increased appeal to sophisticated, risk-averse customers.

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ABOUT WHITE FOREST CONSULTING AND AUTHOR

White Forest Consulting Ltd. is a Vancouver, BC based boutique consulting firm, with expertise in providing startup and business development consultation and management services.

We welcome you to browse through our publications library located at http://www.white-forest.ca for additional publications that might be of interest. You may also post questions and comments regarding the contents of this whitepaper on our message board, located at http://white-forest.freeforums.net/.

This paper was prepared by Mo Zhang. Mo has a B. Sci in Engineering from Cornell University as well as extensive background working in Fortune 500 Companies, consulting in Business Development, Process and Product R&D, Management Consulting, Statistical Consulting, and R&D Consulting.

If you would like consultation services on business startup & development, product differentiation, process R&D, or enterprise experimentation, please contact us by email at contact@white-forest.ca.