Idea Validation
Introduction:-
There is nothing more powerful than an idea whose time has come. Without the idea for the product or service, neither business model nor customer discovery can begin. It is this first step of defining the idea that the Idea Validation aims to fulfill. Part of the challenge of being an entrepreneur, if you’re going for a really huge opportunity, is trying to find problems that aren’t quite on the radar yet and try to solve those. Successful entrepreneurs introduce a product or service that satisfies customer needs in a better way than competitors and at a price that is greater than the cost of creating and delivering that product or service.
To understand how to fulfill customer needs at an attractive price, six areas are critical to assess: industry condition, industry status, macroeconomic change,competition, value innovation and opportunity identification.
Industry Conditions:
Understanding the knowledge conditions and demand conditions within an industry provides insights into the attractiveness of an industry for new entrants. With this understanding, aspiring entrepreneurs can determine if, and how, to compete effectively within their chosen industry.
Knowledge Conditions:
Knowledge conditions address the amount and type of knowledge that is required to create and deliver the industry’s products or services. Within a specific industry, do you need expertise, or is success based more on financial capabilities, location, and relationships? Industries where knowledge is a key success factor favor new ventures. Alternatively, if the industry can be led by any company that has the financial resources to enter and scale, beware competing in that industry.
Demand Conditions:
To create a successful new company, you need to introduce a product or service that satisfies customer needs in a better way than competitors,and at a price that is greater than the cost of creating and delivering that product or service. It is much easier to find a new way to solve a known problem than speculate on unknown problems. Study current products and customers to see needs and wants. For a real need to exist, the new product or service must be significantly better than existing alternatives. Entrepreneurs should develop and deliver exceptionally better value to their target customers.
Tips:
By considering new venture ideas that build on your existing knowledge, you can create favorable knowledge conditions for yourself.Explore ideas that align with your educational or work experiences. Seek ideas that intersect your know-how, your interests, and your social capital. This provides you with a head start versus existing and new competitors as you’re able to use your existing knowledge and resources faster and better than competitors.
To capitalize on demand conditions, focus on three aspects: (1) the magnitude of customer demand for products and services, as this quantifies your number of prospective customers; (2) the rate of growth of that demand, in that you should enter a growing market; and (3) the consistency of that demand across customer segments. These three focuses ensure that you are pursuing a sufficiently large and growing market with a similar set of needs and wants.
Segment your market into smaller sub-groups based on needs and wants, location, demographics, etc. This is valuable to prioritizing your resources and aligning your focus. How can you, as the entrepreneur, carve out a niche that is sizeable enough to reach your goals, yet small enough to be unattractive to large companies? Segmentation also presents an opportunity for entrepreneurs to specialize. As you build a reputation and a brand for doing one thing well, you can leverage that into new segments later in your venture’s lifetime.
Industry Status:
Industry status addresses industry lifecycle and structure with an emphasis on growth opportunities and industry evolution. By studying industry status, aspiring entrepreneurs can assess the industry’s timeliness for new entrepreneurial entrants.
Industry Life Cycle:
Industry lifecycle examines the stages of development of an industry. While lifecycle exists on a continuum, three broad areas of categorization are (1) young and emerging, (2) middle-aged, level, and predictable, or (3) old and declining. The lifecycle of the industry significantly affects a new venture’s performance in the market. Depending on the maturity of the industry, the costs to enter and compete effectively differ dramatically. Early lifecycle industries are typically easier and more cost effective for entrepreneurs to compete within. Alternatively, middle and late-stage industries may be dominated by large, established competitors.
Industry Structure:
Industry structure refers to the nature of barriers to entry and competitive dynamics within the industry, with an emphasis on capital intensity, advertising intensity, company concentration, and average company size. Capital intensity is the amount of money required to enter and compete in the industry. An industry that is expensive to enter has high capital intensity (i.e., automotive manufacturing). Industries that are inexpensive to enter have low capital intensity (i.e., a website providing movie reviews). Advertising intensity addresses the importance of advertising and branding to the success of competitors in a specific industry. If customers in this industry prefer to buy from companies with which they have had successful transactions in the past, or companies that offer their preferred products or brands, the advertising intensity is high.
Established companies may have a reputation for success with customers, while new ventures do not. In industries with high advertising intensity, new ventures find it harder to attract customers. Alternatively, if the advertising intensity is low due to customers’ willingness to try new brands and new products, this is the preferred scenario for new ventures.
Company concentration refers to the number of competitors in the industry, while average company size refers to the level of resources (money, employees, etc.) of competitors. Industries with a small number of small-sized competitors present the preferred scenario for new ventures. Competing with a few small competitors is more advantageous for entrepreneurs versus competing with many large competitors.
Tips:
New ventures perform better in younger industries with immature industry structures. In young industries, there is substantially less competition versus established industries. If there are competing companies, they are often small and thereby operating on a more level playing field with new entrants. Capital intensity and advertising intensity are often low in young industries, and it is affordable for new entrants to enter and compete effectively. Young industries also offer a common learning curve amongst all competitors. In young industries, there are no old competitors. All competitors are new and small in young industries, and no one is yet an established leader.
Macroeconomic Changes:
Macroeconomics deals with the performance of a large economy and its vast number of influencing factors. For entrepreneurs, it’s valuable to understand how the needs and wants of your target audience are influenced by the world around them.
Demographic Change:
Demographic changes can create a host of entrepreneurial opportunities. Examples in the India include an aging population, increasing ethnic diversity, and a society challenged by obesity. Each trend offers new opportunities for products and services to serve these customers. Sample solutions are assisted living centers for the elderly, foreign language radio, and weight control programs.
Shift in perception or demand opens entrepreneurial opportunities as well. For example, as Indians become more health conscious, restaurants that specialize in vegetarian or low calorie options are increasingly in demand relative to traditional fast food options.
Psychographic Change:
Psychographic change examines shifts in attitudes, values, opinions, interests, and related personal factors of markets. These are contrasted with demographic variables in that psychographics involve how people think and feel.
Technical Change:
Technical change is one of the most important triggers of change, because new technology allows for the expansion of new innovations. For example, portable cassette players…leads to portable compact discs players…leads to the development of portable MP3 players…leads to the capability to play songs on mobile phones.
The magnitude of technical change is important. Significant change can create entirely new markets. The larger the technical change, the greater the opportunity for new businesses to be created. These larger magnitude changes affect more uses for technology, allowing the use of new technology in more things. The effect of the technical change on industry dynamics alters how firms compete with one another. This can open new markets for new ventures.
While there are many approaches and resources for the exploration of technical change, blogs and websites that focus on industry news are a valuable and accessible tool for entrepreneurs. For example, for entrepreneurs interested in mobile electronics, Engadget.com, Gizmodo.com, and Mashable.com are rich source of current and predicted changes within their industries of focus.
Societal Change:
Societal change opens up opportunities for new businesses by altering people’s preferences and creating demand for things where demand had not existed before. This may include new interests, changing priorities, different moralities or ethics, and related societal shifts.
Political Change:
Political changes can introduce opportunities or challenges for entrepreneurial ventures. It’s valuable to consider how local, state, or national government decisions may change policies. These can challenge existing companies and open new opportunities for new companies.
Be aware of the political shifts that will influence business policy, taxation, corporate social responsibility, environmental issues, or consumer protection with your venture.
Regulatory Change:
Governmental regulations affect entrepreneurial ventures in a variety of ways. Managerial regulations govern what the owners and operators of companies can and cannot do. Technology regulations influence standards, interoperability, safety, and a host of related areas. Price regulations often dictate pricing strategies that support fair competition, which along with competitive regulations are designed to protect consumer interests.
Deregulation creates opportunities because it allows more ideas to be put forward by entrepreneurs who might have been barred from entry under a regulated market. Deregulation may reduce bureaucratic barriers and obstacles to creating new businesses.
Tips:
As a first step to exploring new venture ideas, search for sources of pain or aggravation for customers, as these are prime opportunities for new products. The best clue that a new product or service is needed are customer complaints about existing products and services.
Identifying the need is only the start. After a real need is identified, you must develop a product or service that meets the need both now and in the future. Gathering information about customer preferences is the next step. Evaluate preferences for new products and services using interviews, focus groups, and surveys. Examine trends and adoption patterns to learn about future customer preferences. Recognize that when the product is truly new, the customer may not initially understand the product.
You do not need to meet every customer need imaginable. To prioritize customer needs, separate and rank preferences and costs for product attributes. Fulfill the preferences that are necessities before considering added features. Focus on the products and services you can create and launch successfully.
Competition:
Assessing industry conditions and status provides a starting point to understanding competition. The successful entrepreneur must recognize opportunities and out-compete existing companies. To compete effectively, it’s valuable to understand the influences of the learning curve, complementary assets, and reputation effects on entrepreneurial companies.
Learning Curve:
The learning curve refers to the speed of learning something new. This is depicted graphically as the relationship between the number of times something has been done on one axis versus the level of proficiency demonstrated on the other axis. Learning curves are influenced by what you know today, as well your interests, commitment, and resources to learn new things in the future.
The learning curve allows companies to use their experience operating in an industry to improve their efforts for success.You are unlikely as a novice entrepreneur to start at the same point on the learning curve as an established company, which has through its past operations and moved up the learning curve through trial and error.
Complementory Assets:
Complementary assets include both tangible resources such as money, equipment, and real estate, and intangible assets such as knowledge and relationships. Patents or brands may sit between the tangible and intangible categories. Entrepreneurs may have an advantage over competitors when their knowledge, relationships, or financial capital is significant.
Reputation Effect:
Reputation effects are similar to the advertising intensity discussed in the industry structure chapter. Customers often prefer to buy from companies with which they have had a successful transaction in the past, or companies they know well via friends, family, or branding efforts of the company. If the reputation of competitors is positive, be sure that you invest in branding your company and its products.
Tips:
To climb the learning curve quickly, it’s advantageous to pursue entrepreneurial ideas in new industries and/or new markets to minimize the gap between your knowledge and your competitors’ knowledge.
To leverage your assets, beware of starting a company in an area where the company with the most money wins. It’s likely that large companies with more money will enter a space later and dominate that market. Instead, compete where knowledge and relationships are key sources of competitive advantage.
Reputation effects are best aligned with new ventures when new industries and/or new markets are being pursued. Focus on serving new customers in new ways to make the reputation of existing competitors irrelevant.
Value Innovation:
With big ideas and scarce resources, entrepreneurs must be both efficient in their decisions and discerning in their time and financial management. The concept of value innovation is well suited to evaluating how to compete and where to invest.
Eliminate:
A first step in determining what value innovation is best for a new venture is to identify opportunities to eliminate factors. Are there factors offered by competitors that are not valuable for your target customers? How can you develop and deliver the best product or service for customers? Do you have a faster, better, and/or cheaper solution that makes competitors’ features, relationships, locations, etc. less valuable?
If you are able to identify factors to eliminate, you can save the expenses of money and time. You can then redirect these resources into the factors that are truly valuable to customers.
Reduce:
While select factors may be eliminated, others may be preserved, albeit reduced. These reductions present an opportunity to be more efficient and effective than competitors. Deprioritizing these less essential factors enables you to focus on the high value factors.
Raise:
Once the elimination and reduction of factors are made, attention can turn to raising select factors. What factors can elevate the values that truly matter for customers? Work to exceed customer desires in these areas. Raising these high-value factors differentiates you from competitors and improves your competitive advantage.
Create:
Lastly, are there opportunities to create new factors that will satisfy customers in new ways? If entirely new features or benefits can be delivered by your product or service, and you are unique in this way, you are highly valuable to customers.
Tips:
To develop an innovative value curve, explore the benefits that matter most to customers. Understanding your customers’ values enables you to focus on what matters to them, and empowers you to eliminate or reduce less valuable factors. With these customer insights, your solution to the customers’ problem, or fulfilling their desires, enhances the value of your offering and elevates your competitiveness.
Opportunity Identification:
Entrepreneurial opportunities become real when you have a solution that leverages your advantages to solve an important problem for others. The key elements of opportunity identification are defining the problem, crafting a competitive solution, building your advantage, and forming the right team.
Problem:
Who is your customer? This is the first step to defining your market and understanding the problem or desire. With this knowledge, you can focus on assessing their needs. Focus on customer value first. Why do they need your product? What benefits will they gain? Can they make money or save money with your product? These are all questions to consider in understanding the problem that you aim to solve.
Once this first round of problem-related questions are answered, the next questions are: How many people experience these problems now? In the future? How many buyers are there? Are there enough people who care about this problem for you to be financially successful by solving the problem?
Solutioin:
Based on the identified problem, what are the fundamentals of your solution? What are the key values realized by customers? This requires an understanding of the customers’ perceptions of value. Solutions are not about the technology or the features. Solutions focus on customer value. Features, functions, and technologies are simply vehicles for value creation.
Beyond measuring solutions in terms of customer value, it’s necessary to assess the competitive environment as well. How are these customer values met by current and expected competitors? Study direct competitors, those who provide a comparable solution in a similar way. Also examine indirect competitors who provide similar value, but in a different way. For example, airlines directly compete with other airlines, but they also compete indirectly with trains, driving, and other modes of transportation.
Recognize that anything that keeps a customer from buying your solution is competition for you. While studying the competition, also consider your key market segments. Based on the customer that you identified in your problem statement, how can you segment this group of customers into smaller sub-groups?
By segmenting your market based on their needs, geography, demographics, psychographics, and other factors, you can determine who is most desirable to serve first. Identifying key market segments allows you to focus your limited time and resources rather than diluting yourself across multiple segments and spreading yourself too thin.
Avoid exclusive focus on the “served” market. Excessive focus on serving your competitors’ customers presents the challenge of converting customers. Consider serving a market that is not well served by existing competitors. You may be able to acquire those customers faster and at a lower cost of acquisition.
Advantage:
To understand your advantage versus competitors, consider the degree of the advantage and the sustainability of that advantage. To the question of degree, consider the superiority of your advantage versus others. This is influenced by: (1) a product or service with better features or functions; (2) a lower price for the customer based on the value created for them (due to your operations or other cost control strategies); and (3) a rareness factor, meaning that competitors cannot offer the same set of values to this customer.
The sustainability of the advantage determines the likelihood of competitors replicating or surpassing your venture. How easily can a competitor copy or exceed your resources, know-how, operations, and relationships?
Team:
Which is best? The talented individual acting alone or a well-comprised team? This depends on the goals and skills of the individual and the team. As an individual founder, you can keep all of the profits, have all of the glory, make fast decisions, and focus on your needs and interests. As long as your customers and investors agree, you can do exactly what you want, when you want, and how you want.
A complementary team brings increased competencies and greater knowledge than a single individual. A team offers an expanded network of potential investors, partners, advisors, and customers. A team also delivers improved legitimacy as a company, and allows for continuity in the event of one person’s absence due to illness, vacation, or unforeseen events.
In selecting who to join your team, as a co-founder, advisor, or collaborator, ask the questions that investors ask when evaluating the team. Beyond the choice of individual versus team, there is the question of your preferred role within a team. Your role or roles may include focusing the team on its objectives, giving and seeking information, cultivating and expanding ideas, defining and coordinating activities, and summarizing the discussion or analyzing results.
Tips:
To validate your ideas about the problem and candidate solutions, talk with prospective customers very early in the product development process. Engaging with customers before you have a prototype provides you with insights on what features and values are most important to customers. Interacting with customers early is also critical to understanding what they are willing to pay for the product that you envision.
With a clear, customer-validated perspective on the problem for your planned solution, you can invest time and resources into developing a superior and sustainable advantage. One key advantage to build is your team.While the team may exist among the co-founders and executive management of the new venture, there should also be an extended team. The extended team may include the board of directors or board of advisors, attorneys, accountants, and other service providers.
The use of virtual, temporary teams is also gaining momentum with startups. Through tools like elance.com and odesk.com, among others, entrepreneurs can find specific talents from individuals and small companies worldwide. This can introduce a new level of affordability and access to entrepreneurs with limited budgets who need to hire skilled professionals.
With a strong team working to solve a real problem, your venture is well positioned for success.
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