Tortoises Do Not Win in Market
Date: Monday , August 02, 2010
Mine has been a relatively short journey as an entrepreneur so far. Itís been just over a decade since we started our company specializing as a niche information security player. One of my key learnings in this short span has been on the need to evolve business models with time. In my opinion, the relationship between business models and time is a less discussed subject in management studies. Fledgling entrepreneurs could do well by understanding the dynamism between the two. Almost all successful businesses alter the initial models created during their startup phases. And whatís more interesting is that they keep changing their models even as they succeed with the existing model, suggesting that firms should adopt a very active approach in pursuing business model changes. Young companies should constantly ask Ďhow do we innovate our business model, which is still contributing revenues and profitsí, since future effectiveness of this is likely to be undermined by changes in its external environment or competition?
We started out as a focused information security player and even today we call ourselves a focused information security player. Does that mean that we are the same company that we were 10 years back? On the contrary, looking back it will be difficult for me to find similarity between what we were even five years ago and where we are today. Ten years ago, when we started our company, we were ahead of the markets in our part of the world. Information security was in very nascent stages then. That gave us the initial momentum and business success as we could take a unique positioning of security specialists in the market. But soon many established IT players entered the domain along with a crowd of startups competing with us, and we quickly realized that to continue our success we will need to keep changing what we are doing and somehow stay ahead of the market. It helped that information security was a dynamic and fast evolving field and a company that can continuously evolve will get a premium in the market. Without going into specifics of what we did, I have tried to generalize the learnings we have had as a team.
Intuition is an important ally of entrepreneurs. I have already said that business models should be varying with time. The most common view is that it should adapt to environmental changes. But environmental changes are often ambiguous and young companies do not have the reach and resources to monitor such changes. Also young companies need to be ahead of changes so that they can compete with more established companies. In this scenario where lack of data is coupled with the need to be predictive, intuition often is the only thing going for an entrepreneur. By intuition, I donít mean an eureka moment or path-breaking idea but more sedate gut feel on what we should incrementally change or do differently for being ahead in market. Such intuition often comes from an entrepreneurís cognition of environmental threats and opportunities based on whatever limited interactions with market participants are there as well as from own internal beliefs and influences.
Trial and error experiments should back up the intuition based decisions. In my experience, itís very easy to fall in love with an idea if it is based on oneís own beliefs and concepts. Basing the change of business model on a narcissist devotion to own idea, without the backing of market data and analysis, will only decrease the firmís chances of survival. Not only can the market acceptance be a problem but also the inertial pressures within the firm to preserve status quo can defeat any new initiative. We are not talking of creating a new business model because the earlier model is a failure and company is struggling for survival, wherein any change is accepted internally as better than the status quo. Here we are talking of a scenario where the business model change is more proactive to ensure continued success and hence can face internal inertia in a firm. Again, young companies do not have the luxury of market research and consumer analysis to get data for backing the new model. This is where the most tried and true methods of problem solving lies, trial and error method comes in. Despite its lack of sophistication, sometimes itís the most efficient choice as it always guarantees a learning. I feel there are five stages for a young firm to carry out trial and error experiments. It obviously starts with idea formulation which may have been from intuition. Before falling in love with the idea, the idea needs to be validated from market. It is best done by trying out the idea on limited scale with few well wishing customers or prospects. If there is a validation that the idea is likely to appeal to a significant section of target market, only then the firm moves to next level of business model creation. This is where the details of how the offering will be delivered, pitched, and priced are drawn up. There may be multiple models around the same idea. Small experiments need to be carried out to again test each business model with few customers or prospects. Only after the business model that makes most sense is identified, the company moves to the final stage of scaling up. Very often young companies tend to go directly from idea to scaling up stage without carrying out small experiments on validation of business models.
Intuition works best when people have the mindset to follow through on their beliefs but still retain a good deal of skepticism on what they know, so that they are always looking for any contradictory evidence. The small trial and error experiments on idea validations and business models validations help in collecting evidences. Once a decision is made on changing the business model, the thing that matters the most is time. There should be single minded focus on scaling up. This is where the company can put all the resources at its disposal to push the business model forward. Running fast is the mantra at this stage.
It is obvious that the above process is iterative. Successful young companies will keep evolving new business models or tweaking existing models and execute them faster before others catch up. Itís not about only being faster but also about not being complacent with existing model, which may be successful today but may fade out tomorrow. Itís not the tortoise who wins that you have to look at but the hare that loses once it becomes complacent needs to be a lesson.
The author is CEO and Co-Founder, Paladion Networks