Explore Uncertainty to Detect Opportunities

Editor’s Note: Lean and agile principles are crucial elements for any organization looking to optimize performance and innovate at scale. As foremost experts on business innovation, Joanne Molesky, Jez Humble, and Barry O’Reilly take an in-depth look at exploring opportunities in conditions of extreme uncertainty, as it relates to new business models and products. We’d love to hear from you about what you think about this piece.

“It was darkness which produced the lamp. It was fog that produced the compass. It was hunger that drove us to exploration.”

- Victor Hugo

In this piece we will cover practices to support the principles of exploring opportunities in conditions of extreme uncertainty, especially when considering new business models or products. We introduce the concept of Discovery to show how to quickly map out a business hypothesis to create a shared understanding of a problem and engage stakeholders from across the organization to buy in and align to our vision.

Discovery

Discovery is a rapid, time-boxed, iterative set of activities that integrates the practices and principles of design thinking and Lean Startup. We use it intensively at the beginning of the explore phase of a new initiative.

In Lean UX: Applying Lean Principles to Improve User Experience, Jeff Gothelf and Josh Seiden state, “Design thinking takes a solution-focused approach to problem solving, working collaboratively to iterate an endless, shifting path toward perfection. It works towards product goals via specific ideation, prototyping, implementation, and learning steps to bring the appropriate solution to light.”¹

By combining the principles of design thinking with Lean Startup practices, we can build a continuous feedback loop with real users and customers into our development cycle. The principle is to invest the minimum amount of effort to get the maximum amount of learning, and to use the outcomes of our experiments as the base for our decision to pivot, persevere, or stop.

During Discovery, we create a collaborative and inclusive environment for a small cross-functional, multidisciplinary team to explore a business, product, or improvement opportunity. The team should be fully dedicated and co-located to maximize the speed of learning and the effectiveness of real-time decision making. It must assume ownership of delivery and be empowered to make the necessary decisions to meet the objectives of the initiative.

When forming a team, it is key to keep the group small, including only the competencies required to explore the problem domain. Large teams are ill-equipped for rapid exploration and cannot learn at the speed required to be successful. The group must know their limitations and boundaries, taking responsibility to reach out and engage others outside the group for input and collaboration when appropriate.

The final — and too often forgotten — members of the team are customers and users. It is easy to fall into the trap of seeing them as simply a consumer of the solution we have created. In fact, they are critical stakeholders. Their input is the key ingredient and the most objective measure of how valuable our solution is or can be. Through the feedback they provide, customers and users are co-creators of value for any solution. Their needs must always be the focal point for everything we do.

Creating a Shared Understanding

When you want to build a ship, do not begin by gathering wood, cutting boards, and distributing work, but awaken within the heart of man the desire for the vast and endless sea.

- Attributed to Antoine de Saint-Exupéry

When starting a new piece of work, it is imperative that the group creates an environment maximizing the potential of everyone involved. Based on the new information they are discovering, people learn, change, and improve when they are involved in a process that is energizing, interactive, and adaptive.

As Dan Pink argues in Drive,² there are three key elements to consider when building an engaged and highly motivated team. First, success requires a shared sense of purpose in the entire team. The vision needs to be challenging enough for the group to have something to aspire to, but clear enough so that everyone can understand what they need to do. Second, people must be empowered by their leaders to work autonomously to achieve the team objectives. Finally, people need the space and opportunity to master their discipline, not just to learn how to achieve “good enough.”

The process of shaping the vision begins by clearly articulating the problem that the team will try to solve. This essential step is often overlooked, or we assume everyone knows what the problem is. The quality of a problem statement increases our team’s ability to focus on what really matters — and, more importantly, ignore what does not. By developing our team’s shared understanding of our goals and what we aim to accomplish, we improve our ability to generate better solutions.

One of the fundamental techniques of Discovery is the use of visual artefacts, models, and information radiators to communicate and capture group learnings. Using graphical templates and exercises to externalize ideas helps our team to articulate, debate, and evolve concepts and ideas to form consensus. It also helps to depersonalize and anonymize thoughts so we can safely debate ideas, not individuals — minimizing egos, HiPPOs (highest paid person’s opinions), and extroverts’ attempts to run the show.

Structured Exploration of Uncertainty

If you want to have good ideas you must have many ideas.

- Linus Pauling

When exploring uncertainty, it is important to start broad — to generate as many ideas as possible to cycle through before narrowing our focus on where we will start.

lastminute.com is a travel retailer in Europe, operating in a highly competitive industry with major players and new startups trying to disrupt the travel marketplace every day. In order to stay relevant, the company needs to innovate faster and smarter than their competitors. They invited their customers to become part of the innovation process. For two days, they ran co-creation workshops that generated over 80 new ideas for online products aligned to their business goals. The team then set up an innovation lab in a hotel lobby for a week, rapidly experimenting with each idea to discard it or validate it as a viable customer problem to implement. Within days, the team identified three winning ideas to invest further effort in developing — resulting in an over 100 percent increase in conversion for their product.

Divergent thinking is the ability to offer different, unique, or variant ideas adherent to one theme; convergent thinking is the ability to identify a potential solution for a given problem. We start exploration with divergent thinking exercises designed to generate multiple ideas for discussion and debate. We then use convergent thinking to identify a possible solution to the problem. From here, we are ready to formulate an experiment to test it.

What Business Are We In?

Business models are transient and prone to disruption by changes in the competitive environment, advances in design and technology, and wider social and economic change.

Organizations that misjudge their purpose, or cannot sense and adapt to these changes, will perish.

Organizations can be rendered obsolete by competitors that solve the same problem with an alternate or superior offering for their customers. Business definition and identification of future opportunities must be continually challenged and ever evolving. Allowing complacency to sneak in due to current success is the quickest path to failure for tomorrow. We only need to cite examples such as Blockbuster versus Netflix or HMV and Tower Records versus iTunes, YouTube, and Spotify to illustrate the point that no business model or competitive advantage is indefinitely sustainable.

Winning organizations continually experiment and test theories to learn what works and what does not, recognizing that the ones that do could have a massive impact on the business’ future fortunes.

Understanding Our Business Problem to Inform Our Business Plan

As Steve Blank, author of The Four Steps to the Epiphany³ and The Startup Owner’s Manual (K & S Ranch), says:

A business plan is the execution document that existing companies write when planning product-line extensions where customer, market, and product features are known. The plan is an operating document and describes the execution strategy for addressing these “knowns.”

The primary objective of a new business initiative is to validate its business model hypotheses (and iterate and pivot until it does). Search versus execution is what differentiates a new venture from an existing business unit. Once a business model is validated, then it should move into execution mode. It’s at this point the business needs an operating plan, financial forecasts, and other well-understood management tools.⁴

It is critical to consider many different business models in the early stages of a new initiative. We don’t want to commit to a plan until we test the business model hypothesis and have evidence that we are on the correct path. The team must identify the riskiest assumptions of our hypothesis, devise experiments to test those assumptions, and increase the information we can gain to reduce uncertainty. The only assumption that always holds true is that no business plan survives first contact with customers.

The Business Model Canvas was created by Alex Osterwalder and Yves Pigneur along with 470 co-creators as a simple, visual business model design generator. It is a strategic management and entrepreneurial tool that enables teams to describe, design, challenge, invent, and pivot business models. Instead of writing a business plan, which can become a lengthy process, we outline multiple possible models — each time-boxed to 30 minutes — on a canvas.

The Business Model Canvas, freely available at http://www.businessmodelgeneration.com/canvas, outlines nine essential components of an organization’s conceptual business model:

Customer segment
Who are we targeting to create value for? Who are our customers?

Value proposition
What problems are we going to solve to create value for our customers?

Channels
Through what channels are we aiming to reach out to our target customers?

Customer relationships
What type of relationship does each of our customers expect us to create and maintain with them?

Activities
What activities will be required to support our value propositions?

Resources
What resources, people, technology, and support will be needed for the business to operate?

Partnerships
Who do we need to build partnerships with? Who are our key suppliers or who could be needed to provide support resources or activities for our value proposition?

Cost
What are the most important inherent costs with our business?

Revenue
For what value are our customers willing to pay? How much and how often?

By populating the individual elements of the template, we are prompted to consider any potential idea in terms of the entire business’ component building blocks. By populating the entire template, we are encouraged to think in a holistic manner about how these pieces fit together to support the greater opportunity. It is key to remember that each component of the canvas represents a set of hypotheses and associated assumptions that require validation to prove that our business model is sound.

Beyond the template itself, Osterwalder also came up with four levels of strategic mastery of competing on business models to reflect the strategic intent of an organization:

Level 0 Strategy
The Oblivious focus on product/value propositions alone rather than the value proposition and the business model.

Level 1 Strategy
The Beginners use the Business Model Canvas as a checklist.

Level 2 Strategy
The Masters outcompete others with a superior business model where all building blocks reinforce each other (e.g., Toyota, Walmart, Dell).

Level 3 Strategy
The Invincible continuously self-disrupt while their business models are still successful (e.g., Apple, Amazon).

Our ability to recognize what strategy we are pursuing when creating business models is the first step towards creating a shared understanding of what innovation approach will be most effective in helping us achieve our goals.

The primary objective of the Business Model Canvas is to externalize the business hypothesis and make its assumptions clear so we can identify and validate the main risks. The canvas provides a framework for understanding of each business model, in terms that are understood by all, thus building a shared sense of ownership and enabling collaboration throughout the organization. The Business Model Canvas differs from other canvases in that it doesn’t assume that product/market fit is the riskiest hypothesis that must be tested first.

There are a number of canvas created by others that focus on product development.

Understanding Our Customers and Users

The single most important thing to remember about any enterprise is that there are no results inside its walls. The result of a business is a satisfied customer.

- Peter Drucker

In order for any product or solution to be successful, people must want to use it, and indeed pay money for it. For a team to build a solution that addresses a real problem or need, it is essential to understand who we are trying to reach and why we are targeting them.

Having empathy for customers and users is a powerful force. When we empathize, we enhance our ability to receive and process information.⁵ Empathy in design requires deliberate practice. We must design experiments and interaction opportunities to connect with our customers and users in meaningful ways and challenge our assumptions, preconceptions, and prejudices. We need to assume the role of an interested inquirer, trying to understand the challenges they experience.

Creating a balance between empathizing with an experience and analyzing the situation allows us to understand our customers’ and users’ feelings and perspectives. We can then use that understanding to guide our identification of solution hypotheses and commence the experimentation process.

Turning Insights and Data into Unfair Advantage

The ability to discover and leverage critical insights is essential to high-performing organizations. We used to live in a relatively small data universe with high costs associated with collection, storage, and processing of data. The big data movement has provided technologies and techniques for reviewing, processing, and correlating large existing data sets. Organizations can gain additional value from insights into how and why their customers are interacting with their products and solutions. We can detect weak signals that tell us what is working well — or not so well — and use that information to improve existing services or create new offerings. When combined, software, analytics, and data form a key pillar of our organization’s intellectual capital.

Access to, and understanding of, existing customers is a significant competitive advantage that established organizations have over startups. Startups face the challenge of gaining market reach and traction due to the lack of access to known customer data. On the other hand, established organizations have existing market and customer data that can be reused and leveraged to unearth new opportunities.

Organizations are now able to ask questions such as, “Why are customers canceling their memberships?” or “How are customers related to one another?”, and run quick and inexpensive experiments to test their hypotheses based on existing data. This is a powerful technique to remove decision bias from our prioritization process and enable data-driven decisions.

Data analytics enables us to invert the discovery process — to look at how customers are using existing services and to do forward projections for new business model, product, or service opportunities.

Big data is a tool, not a solution. Crucially, it does not replace empathy. We still need human intuition and innovation to improve the problem definition and identify customer and user needs and problems, so as to form hypotheses that can be tested against the data. Cross-functional teams, personas, and user interviews are all powerful tools that enable us to design experiments more effectively and rapidly. We need to learn how to listen and learn from data through unbiased analysis — otherwise our data is useless: “Data, like a flashlight, is only as useful as the person wielding it and the person interpreting what it shows.”⁶

Using Insight to Inform Hypotheses and Experiments

During Discovery, numerous members of the cross-functional team will have — and should be encouraged to share — interesting and valuable insights into the organization, customers, business, channels, or markets. By sharing these insights with the team, we can generate new perspectives and inspiration for new products or solutions.

Ask those involved in Discovery to share whatever interesting insights and data they have to inform, create, or challenge problem statements based on a number of perspectives. For example:

Customer
What specific information does the group have about existing customers? What are their usage and engagement behaviors? How can those insights help to shape future opportunities within existing product offers?

Market trends
Industry trends of the market we are attempting to enter are key to understanding how and where opportunities exist — for example, mobile technologies, location-based services, mobile payments. What are the market trends for the product we are creating? How do we measure against them?

Organization
What specific information does the group have about our organization? Where is the organization focusing its efforts? What is the impact of those efforts? How much of the wider competitive landscape does it cover? Where is the organization most effective?

You will not believe!
Every company has individuals that are willing to share interesting and astounding facts about the business or its customer base. How can we test if they are true and/or offer opportunities to create new value propositions as a result?

By making this information visible and discussing it, we can attempt to identify new business models and value propositions appropriate for the business, given its current constraints and identified problem statements.

1. Gothelf, J. and Seiden, J. (2013). Lean UX: Applying Lean Principles to Improve User Experience. O’Reilly.
2. Pink, D. H. (2009). Drive: The Surprising Truth About What Motivates Us. Penguin Group.
3. Blank, S. (2005). The Four Steps to the Epiphany: Successful Strategies for Products That Win. K&S Ranch Press.
4. Steve Blank, http://steveblank.com/2012/03/05/search-versus-execute
5. IDEO: Empathy on the Edge, http://bit.ly/1v6ZlPI
6. Scott Berkun, http://scottberkun.com/2013/danger-of-faith-in-data

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Joanne Molesky served as a Principal Consultant with ThoughtWorks, where she worked on internal IT Risk and Compliance, and provided consulting services to clients in the area of continuous delivery and process improvement, particularly as it applies to controls, risk, and compliance. She holds CISA and CRISC certifications from ISACA. Jez Humble is co-author of Continuous Delivery, the Jolt Award-winning book in Martin Fowler’s signature series, and Lean Enterprise, in Eric Ries Lean series. He began his career at a startup, and then spent 10 years at ThoughtWorks, building products and consulting. He is currently a developer advocate at Google Cloud, and teaches at UC Berkeley. Barry O’Reilly is a business advisor, entrepreneur, and author who has pioneered the intersection of business model innovation, product development, organizational design, and culture transformation. Barry works with business leaders and teams from global organizations that seek to invent the future, not fear it. Every day, Barry helps with many of the world’s leading companies, from disruptive startups to Fortune 500 behemoths, break the vicious cycles that spiral businesses toward death by enabling culture of experimentation and learning to unlock the insights required for better decision making, higher performance and results.