Want To Know The 3 Laws Of Running A Business Experiment?
By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL
By Rob Wright
Vijay Govindarajan and Chris Trimble, authors of NY Times Bestseller Reverse Innovation: Create Far From Home, Win Everywhere recently sent me a copy of their latest business book How Stella Saved The Farm. Don’t let the title make you skeptical. One of the best business teaching techniques involves good storytelling. Ken Blanchard, who wrote such business classics as The One Minute Manager, Raving Fans, and Gung Ho, all in my library, utilized this style with great success. So perhaps there is a nugget to be had in Govindarajan and Trimble’s new work. For me it was the three laws of running a business experiment.
The First Law Of Running A Business Experiment
In the book, the authors tell the story of a farm in jeopardy of slowly going out of business. Though the farm had implemented a number of changes to improve efficiencies, cut costs, and better manage finances, there is only so much productivity which can be gained from implementing these types of activities, which seem to have diminishing returns. As a result, farm leadership decides to start a new business — manufacturing luxury wool made from alpaca.
An animal similar to a sheep in that their fur can be sheered to produce clothing, alpaca wool has several advantages to traditional wool. It’s light, silky, and has no lanolin, which makes it hypoallergenic. Though one of the farm’s core businesses involved producing wool made from sheep, the wool made from alpaca was very different. As a result, it required different manufacturing processes, machines, and an approach to marketing — essentially, a different business model. Unlike the farm’s core businesses which had standard business models based on experience with few unknowns, the alpaca opportunity needed to be treated as a business experiment because the outcome was uncertain. The components of a business experiment include the following: (1) a stated hypothesis, (2) a prediction of what will happen, (3) the measurement of results, and (4) an assessment of lessons learned by comparing your predictions to actual outcomes. By taking this approach you will better be able to follow through on the first rule of running a business experiment — put learning first and profits second. By putting learning first, through disciplined experimentation, you will make better decisions that will allow you to get to profitability sooner.
The Second Law Of Running Business Experiments
When conducting an experiment, it is important to try to control for moderating and mediating variables, which can impact the results. By doing so, you can state at the end of the experiment with a certain degree of confidence as to the accuracy of the experiment’s result. In the case of conducting a business experiment which is focused on learning and implementing those lessons quickly, the focus isn’t on controlling for moderating and mediating variables which could impact the outcome, but rather managing them as separate small experiments. For example, farm leadership believes that the use of social media may be important in promoting alpaca wool. As a result, the decision is made to treat this additional initiative as its own distinct experiment. Therefore, the second rule of running a business experiment is — inside a big experiment, there are little distinct experiments. In the case of the farm, implementing social media is a separate experiment from the alpaca wool experiment. The authors suggest that when implementing these separate experiments, you need to look for evidence that shows it is either working or not, so as to be able to validate each major expenditure.
The Third Law Of Running Business Experiments
One of the challenges when conducting a business experiment is how you assess the performance of the team you put in charge. Because the decision to implement a business experiment naturally involves innovation and risk, it is important to create a leadership structure which supports this behavior. Many business experiments succeed, but many more fail. When it comes time to assess the performance of the leader responsible for managing the business experiment, it is important to keep in mind the third law of running business experiments — the innovation leader’s job is to execute a disciplined experiment. In so doing, you learn quickly, make better decisions, and either win sooner or lose at the lowest possible cost. Therefore, be sure to evaluate the leader of the business experiment on whether or not they executed a disciplined experiment, not the success or failure of the experiment. There are many lessons which can be learned from failure. One of them shouldn’t be the loss of top talent through inappropriate assessment of performance.