Confidence: The New Competitive Advantage

With the growth of Lean Start-up thinking there has come a corresponding growth of lean methods applied to scaled businesses. While the attraction is clear, the execution is often difficult and conflicts with what makes the business successful in the first place.

Experimentation is potentially the most exciting of the lean methods in how it can supercharge a business’ innovation efforts. And yet while experimentation is comparatively simple and effective when applied to a start-up, it must confront very different challenges within the world of scaled businesses – both as a tool for strategic decision-making and as a way to increase the efficiency and success rate of their innovation efforts.

Increasing the success rate from innovation has always been central to the Fahrenheit 212 model, so we’ve partnered with Imperial College London on a piece of research to dig into the role of experimentation within innovation of scaled businesses – to understand the effects, the drivers of success and the principles for making it work.

In the past few years we have used experimentation to crack open numerous different innovation challenges, now it feels like the right time to step back and reflect. In partnering with this world-leading Science, Innovation and Business university, we hope to better understand the end-to-end benefits of experimentation, and how it contributes to successful strategy-making and execution.

From unlocking new markets, to growing into new categories, to building new business models, we have hunted for insights as to the role and effectiveness of experimentation – to distill what works best, when and how it should be deployed, and what the true value of experimentation is to the business.

What is emerging is a compelling argument not just for the immediate results within innovation projects. But also in the people and organisational behaviours of the core business.

In short, we believe that the overarching benefit of experimentation is in building confidence with a business – both within specific innovation projects, and in businesses’ broader approach to innovation: the way it confronts or embraces the changes in the external environment.

We believe that this confidence is a critical factor in enabling businesses to successfully navigate the waves of change that are disrupting categories, creating threats and opportunities for growth.

Volatility, risk and the role of confidence

Business environments today are more volatile than ever. The emergence of new technologies, coupled with rapidly evolving customer behaviors have driven an increased rate of change and diversity in the competitor landscape, as well as in the products, services and business models that are possible.

As any investor would tell you, high volatility is not necessarily a bad thing, after all a high beta equates to high potential gains, as long as you’re comfortable with the equivalent high potential losses.

Thus from a purely financial point of view, the volatility in the market will affect your appetite for risk in where you invest your innovation efforts.

From a growth and performance perspective, this opportunity for spectacular gains and catastrophic losses is exciting but daunting in equal measure – it’s Schumpeter’s creative destruction made real: “the stick of destitution and the carrot of spectacular reward”.

The dilemma of choice

For businesses, this creates a dilemma – on the upside, the possibilities can be abundant, especially when as a scaled business you have access to capital, assets, existing customer bases, supply chains and value chains that can be leveraged or reconfigured. On the downside, this plethora of potential opportunities increases the risk of pursuing the wrong opportunity.

Amazon offers good examples of both the downside and upside of pursuing opportunities within this volatile world.

On the downside: who remembers the doomed Amazon Fire Phone – discontinued after 1 year, with a $170m write down, the phone made perfect sense from the point of view of the business, but failed in the value proposition to customers. As wired journalist Marcus Wohlson put it “the only one who really needs an Amazon phone is Amazon”.

And yet on the upside, the Amazon leadership realised in 2003 that the set of internal services they had built to help them develop software could become ‘an operating system of sorts for the internet’ – using its emerging capability in software development environments to  launch Amazon Web Services.

Experimentation as a means to navigate volatility

Against the backdrop of these volatile times and associated risk, we see the rise of experimentation within corporate futures and innovation teams as a phenomenon that can help to navigate this volatility: the tensions of action vs inaction, of balancing upside and downside risk, and to do so at a pace that matches the pace of change in the market.

Our initial research, focusing on innovation projects within global brands and FTSE100 businesses has revealed marked benefits to using this approach. They include:

• Clearer strategic rationale
• Better mitigation of risk
• Increased speed of decision making
• Greater belief and buy-in from the core business

Taken together, we believe these lead to a higher level of confidence within the business, both in the strategic direction of the innovation efforts and in the behavior of the people tasked with navigating these volatile times.

A key strength of the experimentation method is that it is designed to progressively increase confidence in a set of assumptions about the future. This increased confidence can be correlated with lower risk and is a key driver of strategic decision-making.

With this in mind, our research suggests that in this new paradigm for businesses, confidence represents a key competitive advantage.

Confident businesses are able to better identify the right opportunities to target

We worked with a large energy network to identify the right way for them to respond to changes in customer expectations of a utility company – with a new proposition and business for business customers. While they had identified many different ideas for what the answer might be, they were paralysed by the choice.

By running a series of hypothesis-led experiments we could quickly land on the right value proposition that would not only resonate with customers, but would also be deliverable by the business.

Confident businesses can increase their speed of decision-making

Strategy is as much about what you choose not to do as what you do. We worked with a global CPG business to help them determine whether an existing idea as to a new platform business would be worth pursuing.

Although market trends and financial projections suggested it would be a valuable business, there was nagging doubt within the business, resulting in the initiative dragging through committees and innovation boards.

Through a series of sprints we helped to isolate the critical assumptions within the idea, then ran rapid experiments to validate. Our experiments quickly revealed the weaknesses within the idea enabling the business to make a ‘no-go’ decision, while also articulating a more promising idea to take forward.

Confident businesses can increase their speed of response to market changes, at a lower cost

We worked with the Diageo Futures team to identify the right approach to unlocking the potential of a mass customization business for whiskey. Through a series of experiments we not only isolated the core elements of the business model, we also effectively built the first version of the business – from customer engagement channel through to operations and fulfillment. As a result, the business could roll swiftly from experimentation into pilot, generating real revenue before completion of the full build.

While these are initial findings, we are excited to dig into the measurable commercial impacts of this increased confidence, and the halo effects that this added confidence can bring to the broader business