using business objectives to drive product development

7/29/2019 USING BUSINESS OBJECTIVES TO DRIVE PRODUCT DEVELOPMENT

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USING BUSINESS OBJECTIVES TODRIVE PRODUCT DEVELOPM ENT

A LE AN-STARTUP STR ATEGY FOR BUSINE SS GROWTH U SING BUSINESSOBJECTIVES AS DRIVERS FOR MVP PRODUCT DEVELOPMENT

PREPARED BYWHITE FOREST CONSULT ING

9/13/2013


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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 3years in business. Although uncontrollable externalities such as macro economical playpart 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 ManagementSkills for Small Business published by Industry Canada in 2001, is unequivocal on thematter, concluding, the main reason for failure is inexperienced management.Managers of bankrupt firms do not have the experience, knowledge, or vision to runtheir 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 managementphilosophies and methodologies to increase the success rates of startups. They call theirmethodology Lean Startup. Since its inception, the Lean Startup methodology hasspawned a movement that has gained momentum among both tech innovators andentrepreneurs in other industries.

INTRODUCTION TO LEAN STARTUP CONCEPTS

The Lean Startup management style is inspired by the lean manufacturing productiontechniques popularized by Japanese automakers in the 1980s. By applying Lean Startupmethods, entrepreneurs seek to eliminate wasteful practices and focus on value duringthe development phase of the product. This focus gives startups a better chance ofsurviving the uncertainty inherent in entrepreneurship without significant externalfunding, elaborate business plans, or the perfect product. The key elements of the LeanStartup methodologyminimum viable product, continuous development and validatedlearningform 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 thedevelopment cycle of your product and lower your requirements for funding, businessplanning, 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 thedevelopment team to collect the maximum amount of validated learning aboutcustomers for the least amount of effort. Once the MVP is on the market, it will beembraced by early adopters. These early adopters will contribute to further R&D for theproduct. Following Lean Startup methodology, you would set up experiments to test your

business hypotheses. The results of these experiments will be measured by actionablemetrics. Such results allow you to make informed business decisions that can be rapidlytransformed into product updates, which can, in turn, be released immediately to thepublic for further testing and validation.

At White Forest Consulting, we believe that the MVP is an essential component ofyour product portfolio, and it must be carefully developed according to a set of businessgoals and objectives. While the uncertainty ofyour companys startup phase may meanthat youll be changing your target customer or the product during the developmentcycle, the initial MVP must be refined to an acceptable level, as defined by the objectiveof the product, before being released. However, it doesnt 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 objectivesand goals into the development cycle of the MVP. Remember: the MVP is developed tomeet business objective. Business objectives are not developed for the product. Byhaving 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 ofcustomersa segment of customers who will appreciate the added value of the MVP.

Our recommendations are based on our staffs experience consulting with newproduct development and R&D analysis in Fortune 500 companies, as well as throughour own analysis of failed Silicon Valley startups. Our findings suggest thatentrepreneurs will enhance their chances of success if they follow a more systematic,

business-oriented approach while developing and building their MVP. Based on thisknowledge, we believe that a significant number of failed startups failed because:

They did not thoroughly understand their customers They did not thoroughly study their competitors 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 byneglecting 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: theassumption 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 befluent in the languages of tech, customers are more likely to think that an Apache serveris an Aboriginal waiter. As tech visionaries, entrepreneurs dream big and often changethe way we behave and live by building interactive media, social and commercialplatforms. However, we have to realize that tech entrepreneurs are avant-gardists and, assuch, do not represent the mainstream of consumers.. For your business and product tosucceed, you need to provide an insightful solution to a real problem, not simply a flashydemonstration 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 knowdeveloped an MVP which serves as a platform to connect customers with off-shorecontent developers. His MVP has a very high customer satisfaction rate. From a techperspective, the MVP is simple, requiring a tech base of Excel spreadsheets and phone

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


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calls. But, despite providing customers with value, the entrepreneur laments that hisattempts to introduce an app to perform the task have failed.

According to Lean Startup principles, wed say that this entrepreneur is disconnectedfrom 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 appthe

customer service afforded by live chats. His business objective should be to develop aplatform 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&Dobjective is the difference between means and ends. Business objectives shoulddeprioritize technology, and focus on the development of the company through satisfiedcustomers. The entrepreneur may build an app, a message board, a chat room, or keepoperating on Excel and Skype. They are all legitimate platforms, and they may all serveget the business off the ground. When product R&D is prioritized at the expense ofmeeting a business objectivedeveloping an app for the sake of developing an app, forinstancethe 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 customers point of view, the app adds very little value over talking to a livecustomer service representative. The customers know the final product they want; theydont care about how its done. They have no preference for technology. They want

working solutions. In short, entrepreneurs need to learn to speak the language of theboardroom, not just that of the server room. They need to offer practical solutions, notjust incredible technology.

2. Failing to pay attention to risk behavior of customersA 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 yourcustomers risk tolerance to be a fundamental step in building a successful productaimed at more serious customers. To begin with, customers generally exhibit one ofthree risk behaviors:

FIGURE 2. RISK ATTITUDES OF CUSTOMERS

Lets 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 auditorto prevent errors from occurring. A risk-neutral manager would work with a competent

Risk-averses customerswould preferentially receive less value than the cost ratherthan accepting 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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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 automaticallyfiles taxes by scanning your emails for tax related keywords. To such a manager, the riskinherent in a new method like this is far outweighed by the time and money it mightsave.

Now, lets apply this to how an entrepreneur might think. Suppose you are an appdeveloper. Its important to know that the risk attitude of your customers will be verydifferent depending on whether you are developing a web-based game, educationalsoftware or corporate tax software. Your attitude to your MVP, release cycle, andcustomer adoption should differ correspondingly. The same logic applies if your startupis providing a service instead of a product: a customer, like the manager mentionedabove, may perceive a higher risk associated with an unknown online technologycompared to an established service.

The risk that your customer is taking is not simply money, but, perhaps moresignificantly, opportunity cost and reputation. If you fail to deliver a reasonable productto 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 haveachieved actual results with a less risky approach. Your customer may also getprofessionally ridiculed for trying a new approach to an orthodox problem. If thecustomer works for a major enterprise, there is a good possibility that their career mightsuffer too as a result for taking a dangerous risk that didnt pan out. To understand therisk-averse attitudes of many in the business world, consider this saying: No one evergets fired for buying IBM.

When developing an MVP, the entrepreneur must take human factors intoconsideration. It is important to understand the risk attitude of your customer, and keepthis tolerance in mind while building your MVP. While you may be able to get away witha less polished MVP for the risk-loving crowd, a higher level of sophistication will berequired to get the business of the more risk-averse consumers.

Failing to study competitors substitute products

Startup companies must always keep competitors substitute products in mind.

A substitute is simply a product or service that the customer may get from a competitorin place of the products or service that you are offering. Entrepreneurs frequently fallinto the trap of believing their product to be unique. They commit this often deadlyfallacy by thinking only ofperfect substitutes. But, in a business context, we ought to beconcerned with anyreasonable substitute for the product. For example, although anautomatic bread slicer may be considered a superior goodfor 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 ofyour immediate market. Think about it: for some customers, an e-book reader, an onlinemovie rental website, and an online social platform can be substitutes for one another.These services are all competing for the customers leisure disposable income and time,and for certain market demographics, the consumer may have little preference inchoosing between the above three.


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

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

other relevant attributesc. The ease with which customers can switch to substitutes

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

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

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

a. By incorporating product attributes and user features that lowers the customersoverall cost by using your product

b. By incorporating features that increase the ability of the product to meet thecustomers needs

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

d. By delivering competitive capabilities that rivals dont have or cant afford tomatch

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

The next step is to develop business situation awareness. In order to developbusiness situation awareness, you need to understand your customer, product, andcompetition. To that end, we introduce several useful tools in the next section through

whichyoull gain a strategic understanding ofthe basic factors necessary for the successof 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 anew 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 ofyour MVP by gaining a better business situational awareness. In particular, these toolswill help you to

a. Identify the key factors affecting your industry, competition, and customersb. Identify the key substitutes that are available to the customersc. Benchmark the substitutes based on your customers view of valued. Understand the premium of innovation and value

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

FRAMEWORKS

The first tool that we introduce is the Business Situation Awareness framework. Aframework is simply a structure that organizes your thoughts and analysis in a logicalmanner. 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 StructuredFramework for a more through treatment of the subject.

When working with a framework, you start with an objective and develop theissues 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 youto manage large, complex issues by breaking them into logical components. By skillfullylaying out the issues, you can manage large amounts of data without confusion orrepetition.

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 toaddress? 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 thelast: Whats the best platform for the software? How will you build the optimum user

interface?

The Business Situation Awareness framework (see Figure 3) gathers the keyinformation 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 alogical 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 strategymodel that offers good results when used to analyze the product and competition of astartup. Through the model, you will be able to better understand your MVP as well as

your competitors productsby comparing and contrasting products economy of scaleand differentiation.

Identify your customersWhat 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 entryIdentify 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 companysability to gain economy of scale.

Number of approaches/differentiation: the companys ability to differentiateitself from competitors.

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

Fragmented: these products gain advantages from product differentiation, butgain 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 thesecompanies/products.

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

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

VALUE BENCHMARKING

The benchmarking process is an advanced topic in business intelligence. The processinvolvesbreaking down a firms cost structure for performing specific activities. Thedisaggregated data is used to develop cross-company cost comparisons for narrowlydefined activities. The process of benchmarking can be tedious and imprecise, and suchhigh-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 customersees from products.

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

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

Heres a real world example of value benchmarking: its a survey of the cost andperformance (in lumens) of LED light bulbs that are available in the U.S. market throughHome Depot. The price we quoted were baseline prices, without discount. In this case, toincrease the perceived value of customers, we can either maintain the same cost butincrease 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 mightconjure up mentally. Philips leads the pack with the highest performing LED bulb at 830Lm and it commands the premium price for this performance. EcoSmart and Cree offerthe cheapest product, although at a much lower price point. In order for your LEDlightbulb to be competitive and deliver value against these established products, it musteither surpass Philips in terms of performance, or surpass Cree/EcoSmart in terms ofaffordability.


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CONCLUSION

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

1. Failure to understand customerseither through generalization of customers orfailing to understand risk from Customers point of view.

2. Failure to understand competition environmenteither through lack ofknowledge 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 andcompetitors, with the ultimate goal of developing an ideal MVP, we have introducedthree tools in this paper:

1. The Business Situation Frameworkapplied to understand customer, company,product, and competition.

2. The advantage matrixapplied to understand competition products vs. your ownproducts.

3. Benchmarkingan advanced tool applied to attempt to quantify value offered tocustomers.

We hope that these three tools combined will give you the tech entrepreneur betterbusiness situation awareness. This awareness translates into a more focused MVP andincreased 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, withexpertise in providing startup and business development consultation and managementservices.

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

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

If you would like consultation services on business startup & development, productdifferentiation, process R&D, or enterprise experimentation, please contact us by email

[email protected].
http://www.white-forest.ca/http://www.white-forest.ca/http://white-forest.freeforums.net/http://white-forest.freeforums.net/http://white-forest.freeforums.net/mailto:[email protected]:[email protected]:[email protected]:[email protected]://white-forest.freeforums.net/http://www.white-forest.ca/

using business objectives to drive product development

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