Will the business idea work?

A business idea has to be viable to succeed. It has to pass both the logic test (does it make sense, add unique value?) and the economic test (can it work profitably?). If it passes the one test but fails the other test then the business is bound to fail. There are various quantitative and qualitative market research reports, focus group results etc. to aid the feasibility of a business model. There is also the narrative and the numbers test. However, until a business is set up in the market; it is very difficult to know if it will really succeed.

The real world lesson

On paper, it is very easy to formulate a business idea, estimate revenue and costs, write up profitability and future cash flow reports. However, actual market experience alone will give the correct picture. It may also take numerous iterations in the real world to find a business model that works. Therefore, does this mean that a detailed business plan is a waste of time and that businesses should just take the plunge right away? Certainly not. A good approach would be develop a unique idea, prototype quickly and then move to the market even faster. The key is to learn from failure and rapidly iterate to adapt the business model.
Testing your business model

Testing your business model

Many successful businesses have demonstrated how you can test your business model before you can take the plunge.

Apple specialty stores

Steve Jobs was not happy with the placement, sales support and customer service Apple products was receiving in the traditional consumer electronic retail channels. He realized that buying the product was an important element of the overall customer experience. He wanted to build Apple specialty stores that would improve the buying experience for the customers. However, Jobs did not go out and set up a store right away. In fact, the first store was a prototype (design studio) set up right inside the Apple campus to test the business model. A key learning for Steve Jobs here was that it was not about a layout with grouping products, but what the customer could do with Apple products. When Jobs was comfortable with the arrangement after several iterations, the company set up its first specialty store in the real world.

Microsoft’s Retail Experience Center

Microsoft is using a 20,000 square-foot facility called the Retail Experience Center (REC) to educate third party retailer partners like Best Buy and Wal-Mart on the New Microsoft experience and how it envisions people will be using its technology. Microsoft has also created a fictional store chain called Contoso, to demonstrate how its products can be displayed well online.

P&G – India tailored Business Model

Gillette developed a new razor for India after testing it on Indian men studying at MIT. Though the test was successful, the product was a failure when launched in India. To identify the cause of failure, P&G sent over a team to India to study the shopping and living habits of Indian customers. They found that lack of running water or a comfortable bathroom to shave in were the reasons Indian consumers avoided the P&G razor. P&G developed a low-cost, well-designed and affordable product with 80% less parts. The product was successful. However, P&G did not stop there; it developed an India-tailored business model with local manufacturing and distribution. P&G plans to introduce the product to other emerging countries and developed countries like the U.S. in the future.