Books for startup strategist, Part Three: Customer Development

3. Steve Blank : The four steps to the Epiphany

Who is that guy ?

Steve Blank participated directly to several startups in his entrepreneur life, and is now a professor at Standford. and advisor to many startups. He built his theory by looking backward at his past experiences and what failed/succeeded.

Theory Sum-up

Steve Blank’s theory is called customer development. It is designed specifically for start-ups. Customer development is a process that can be opposed to the product development process. Product development can be seen as the classic way of building a business, that is to say rush until the product is finished and then test it on the market with real customers.

Customer development is built to put the product (or idea or concept whatever you want to call it) in front of customer’s eyes before it is even built and listening to him. Steve recommends doing it as much as it is necessary in the early life of the product for the founder to be sure that he has found a market for the product he is going to build. Indeed this process is cyclic and sometimes cycles must be done in a step before being able to go to further step.

Goal of this theory

The goal is to mitigate risk and be able to "pivot" (change strategy) if necessary.

Indeed:

- the product is not built yet so if customers do not like it or need it, it can be  changed or even cancelled

- The company does not ramp up on expenses (particularly about human resources : sales, marketing or development teams) before being sure a viable strategy on a viable market has been found.

Main concepts

- Product development
Product development is the traditional way to build a product, it consists in 4 steps:
 Concept/Seed => Product Development => Alpha/Beta test => Launch/1st ship

However there are several drawbacks :

 1. Where are the customers ?
Actually there is no reference to the customers in Product Development. When the product ships, nobody can tell how much the customers will like it or if they are going to buy it...

 2. Emphasis on execution instead of learning and discovery.
The concept is decided once, and then implemented as quickly as possible...  There is no time to think about customers or market and adapt the product to them...

 3. Focus on first customer ship date/Use of product development  methodology to measure marketing.
Marketing and sales team get feedback from customers only when engineers think they finished their job and  ship product. Investors thinks the startup is ready to earn some money but depending on the market type this might not be true...


 4. Lack of meaningful milestones for sales, marketing, and business.
Although there is a well defined roadmap for technical matters, there are no clear objectives concerning sales and marketing.

 5. Premature Scaling.
Getting full staffed marketing and sales team, or expensive warehouse at product launch without even knowing how many customers will be willing to buy can lead to disaster...

 6. Death spiral: the cost of getting product launch wrong.
High costs caused by premature scaling generates expectatons on sales that a company which does not know its market will probably not fullfil... When the company misses numbers, the VP of sales is then fired, next one is the VP of marketing. If the company still does not meet expectations, the CEO is changed... All this changes are not good at all for the company and it may not get funded in the next round and have to close down...

  7. Not all startups are alike.
A startup s strategy needs to vary depending on its market type (see below for description of market type).

  8. Unrealistic expectations.
"Build it and the customers will come". By focusing entirely on product development, many startups follow this strategy, but it proved to be wrong many times.
  


- Synchronization points
Customer development is parallel to product development. Synchronisation points are needed in order to ensure that the two processes go in the  same direction and that the usual clivage between sales and engineering does not happen... A step cannot be crossed until customer development and product team agreed on all hypotheses and facts. These synchronisation points particularly focus on features and spec of the products. Customer development team should only add new features IF customers expressed an urgent need AND they validated this with VP of engineering.


- Earlyvangelists
A startup cannot develop a product that will please ALL customers, because that would take years to develop. Instead it needs to find visionary customers, that would be happy to pay for even an incomplete and buggy product. These type of customers are really valuable because they will be a source of fresh money but also because they will help you to drive product development in the good direction.

Earlyvangelists can be recognized at the following attributes :
  * Has a problem
  * Is aware of having a problem
  * Has been actively looking for a solution
  * Has put together a solution out of piece parts
  * Has or can acquire a budget

This type of customers is very very rare, but once you found them your understanding of your customer is going to be decupled !


- Market Type

There are 4 categories your start up could be classified into. The strategy and timing you need to adapt greatly depends on the market type you are in.

  Existing Market (Steve Blank associates it himself to sustaining innovation):
The market and customers are known, so are the competitors. You will sell your product by differenciating on performances or features..

  New Market (Steve Blank associates it to disruptive innovation):
a new market is created when you create a large customer base who could not do something before. The base of the competition is not performances or product features and you have few competitors (other than startups). Market and users are undefined and unknown, so the problem is to find them and to educate users to buy your product. This also means that you need to be patient because it is difficult to know when you will be able to convice new customers.

 Resegmenting a market as a low cost entrant (this could be associated to disruptive innovation on low cost):
you can find a segment in the existing market that will be satisfied with good enough performances and lower cost.

 Resegmenting a market as a niche entrant:
you can find a segment in the existing market that would buy a product designed specifically for their needs even if the price is higher or performances are worse in an aspect of the product unimportant to this niche.

All these types of market are defined precisely in the innovator's solution, which is Part 1 of this post series (see here).

Market type characteristics

- The four steps of customer development

Each step of customer development is a circle, this means that it leaves room for trial and error. It is ok to change your plan if you learnt from your errors.

Customer discovery

The goal is to find out who the customers are, and if you solve an important problem for them.

Get outside the building and turn your hypotheses about your customers and users into facts.

  It consists in 4 steps :

• State your hypotheses (about customer's problem and your product):
  You think that you know everything there is to know, but the simple fact of writing hypotheses about customers and their problem, pricing, market type, competition, product features and benefits... will prove you that there are more assumptions than facts in what you know...

• Test problem hypotheses:
  go meet potential customers and listen to their problem. If you are lucky they fit your problem hypotheses, else correct them, and update your product hypotheses accordingly

• Test product hypotheses:present products hypotheses to customers and listen to them to see if the product you plan to build (and should already being builing) solve their problem and if your business model is valid. Meet product development for reality check, and visit the customers you visited before as well as new potential customers to verify your product presentation

• Verify:verify that you know everything there is to know, and decide whether you are going to the next customer development step or if you need to iterate.

Customer validation

Customer validation consists in building a repeatable sales roadmap and validating it with a few sales (at full price !). The goal is to answer important questions involved in selling the product :
  - Who influence a sale ?
  - Who recommends a sale ?
  - Who is the decision maker ?
  - Who is the economic buyer ?
  - Who is the saboteur ?
  - Where is the budget to buy your product?
  - What is the selling strategy ?
  - What type of sale is it ? Solution sale (?), commodity ?
  - What is the profile of your earlyvangelist ?

  This is the CEO's job to answer all these questions before putting sales responsibilities in the hands of VP of sales. Customer validation consists in 4 steps:

• Get ready to sell:
  write your value proposition, prepare sales material, plan distribution channel and sales road map... You may need to prepare various sales material depending of the type of people you are going to meet. (it is difficult to sell IT people a software by telling them that it will enable to cut  headcount by 2 in their department... However it is a very good point for the person who manage IT budget)

• Sell to earlyvangelists:Try to sell your unfinished product to visionary customers and think about failures and successes and why they happens. Meet potential partners for service or distribution. This is when you are going to test various strategy to close a sale... Should you start by gaining sponsoring from an executive ? by talking to users ? IT ? ...

• Create positioning:
  write an initial positioning and validate it with industry experts (you know which one you should talk with, because you asked that to your potential customers during customer discovery!). Of course this product will depend on the type of market you are in... It should be obvious by now if you read the whole series, but let's repeat it :
    - existing market : insist on better performances
    - new market: insist on benefits, new possible usage... evangelize customers about the new market
    - resegmented market: insist on better cost or attributes that target your niche

• Verify: Did you closed enough sales ? Are the sales and business models profitable ? Does your product miss some features ?  Are some features really important compared to others ? Are your delivery schedules ok ? what about your pricing ?

At the end of this step, a repeatable and scalable sales road map has been found. It is now time to scale up and execute !

Customer creation

Now that we have a validated plan, it is time for scaling up, marketing, PR... It is time to create user demand and drive it in the company's sales channel. 

• Get ready to launch: Even more than the previous ones, this step is highly dependant of the type of market you are in. So the first phase consists in choosing a market type, hence a customer creation strategy and first year objectives. You will define market size, available market and customer budgets and the budget you want to use for customer creation
  
• Position the company and product: Select a PR agency, perform a positioning audit both internally and extenally (in order to position yourself, you need to know what people think about you) and position your company and product according to your market type.

• Launch company and product: Choose audience and messengers, craft your message and measure results (by number of leads, inquiries and audits)
• Create demand: this means creating end-user demand and driving it to the sales funnel and/or educating customers about your market and product benefits. Then, measure success against previously set goals, and decide to return, iterate or (hopefully not) exit...

Customer Creation Strategy by market type

Company building

This step has 3 main objectives : Performing transition from informal startup to formal company, from early user to mainstream customer, and keeping the discovery and learning attitude.

• Reach mainstream customer: matching sales growth by hiring, spending and relentless execution
• Review management: Is the team in charge capable of scaling the company ? This is the board's job.

• Create mission centric culture: Start by creating a mission centric culture. It does not mean writing beautiful sentences to hang on the wall, but crafting a short and understanble text that will tell employees why they come to work (the vision), what they need to do (the practice) and how they will know they succeed (numbers). It will be useful to guide everyday small and big decisions and management should ensure this mission is shared by all team members.

• Transition to Functional Departments:transform the customer development team to departments. Give each department a mission statement, but keep your market type in mind when building it. That is to say that only teams in an existing market should turn to relentless execution, and the others should keep evangelizing and recruiting "beachhead" customers.

• Build Fast-Response Departments:Maximize low level initiatives (Trust and verify), Maximize trust and communication (in particular, share good AND bad news), do synchronization meetings peerwise and cross department, adopt a good enough decision making policy (it's often better to make a less optimal decision right now, than a better one three weeks later...)

Growth curve by market type

The growth curve differ greatly depending on the market type because the size of the gap to fill between early customers and mainstream ones is much larger for a new market than for an existing market. In an existing marker, the growth will be very linear. For a new market, there will be no growth until the tipping point is reached. As usual resegmented market is a mix of new and existing.

Additional information

• you can buy it here
• read the first 3 chapters here
• read Steve Blank website for ideas from his books & others here
• Eric Ries blog here
• Steve Blank on slideshare here

Books for startup strategist, Part Two : Marketing Warfare

2. Jack Trout and Al Ries : Marketing Warfare

Who are these guys?

They are living legend of marketing. They invented and described the concept of positioning in their book : "Positioning : The Battle for Your Mind". The book we are talking about, "Marketing Warfare", was written in 1980. In 2000, it was still in print and benefited from a reedition including authors' annotations.

Theory Sum-up

Trout and Ries do a powerful analogy that links marketing to war. They derive their principles from Clausewitz’s (a Russian general that fought against Napoleon) book on warfare. They assume that a company should market its products differently wether it is a leader, 2nd or 3rd, or new entrant in a market.

Main concepts

Their message is so clear that they could sum it up in the first 5 pages and it is instantly understandable by anyone. This is great work !

First comes the strategic square, this square is divided in 4 parts representing 4 different types of marketing warfare:

• Defensive: for market leaders
• Offensive: for No. 2 companies
• Flanking: for smaller companies
• Guerilla: for local, regional, or niche companies

Then 3 principles are given for each type of marketing warfare:

Defensive Warfare (for market leaders)

1. Only the market leader should consider playing defense.
2. The best defensive strategy is to attack (disrupt) yourself.
3. Strong competitive moves should always be blocked.

Offensive Warfare (for No 2)

1. The main consideration is the strength of the leader's position.
2. Find a weakness in the leader's strength and attack that point. (this ensure you will get a weaker response to that attack, because it is difficult for a leader to pivot around its greatest strength). This point is really an important one to understand and you should read Avis, and Coke/Pepsi examples in the summary link I recommend at the bottom of this post.
3. Launch the attack on as narrow a front as possible. (concentrate your resources)

Flanking Warfare (for smaller companies)

1. A good flanking move must be made into an unconstested area.
2. Tactical surprise ought to be an important element of the plan.
3. The pursuit is as critical as the attack itself. (do not throw all your resources in the first attack)

Guerilla Warfare (for local, regional or niche companies)

1. Find a segment of the market small enough to defend.
2. No matter how successful you become never act like a leader. (imitating your competition will only result in failure)
3. Be prepared to bugout at a moment's notice.

Be Competition Oriented:

The authors strongly believe that your strategy should not be "Customer Oriented" but "Competitor Oriented". In other words, you just don't care what customers think, anyway 12 other companies are already trying to serve their needs... You have to adapt your strategy to your  rank  on the market and to your competitors (this does not mean being a copycat !)

Additional information

• you can buy it here

I did not do an extended description of the book because you can find a really good summary of the book here. You should read it in order to have more details about each of the marketing warfare principles

Read part one on the Innovator's Solution here !

Books for startup strategist, Part One : The innovator's solution

I read a lot of books recently and I found 3 really interesting theories that I would like to share. I will do a 4 post series on this blog. I will try to sum-up these theories and give pointers to learn more about them + link each one to the others in the last post.

1. Clayton M. Christensen & Michael E. Raynor : The innovator's solution

Who are these guys?

Clayton Christensen is a professor at Harvard Business School, and was a cofounder of a ceramics material startup together with MIT professors. Michael Raynor is a consultant at Deloitte Consulting.

Theory Sum-up

Only companies practicing disruptive innovation can solve the innovator's dilemma: innovate successfully in order to deliver value to the shareholders when the initial growth period is over... Their theory is not specifically designed for startup but for companies which want to sustain growth and not stall like many others after some successful years. However to keep growing, they suggest launching disruptive businesses that can be assimilated to startups.

One very important point the authors make is that a good theory should always be based on circumstances instead of attributes. They try to apply this to every stage of their reflexion.

Main concepts

Disruptive innovation / Sustaining innovation

Disruptive innovation is here opposed to sustaining innovation. A disruptive innovation offers at first lower performances than existing products or processes. But on the other hand, it offers the benefits of better cost, delays, or is more convenient ...

Sustaining innovation, on the other hand, try to improve a product or process to generate better margins and move up-market.

When should disruption be used or not depends on how much customers can use existing products. If customers are not yet over-satisfied, the race between concurrents is based on performances and disruption will probably fail. The major actors on the market have a huge unfair advantage and it will be difficult to compete with them for a new entrant.

However, the postulate is that after successive rounds of sustaining innovation, customers are over-satisfied and will not use all the possibilities offered. In this circumstances, the race is not anymore based on performances and the advantage offered in cost or convenience can enable the disruptor to compete and surpass established actors. Established actors in their race to go up-market will be very pleased to abandon low-end market which generate small margins, and disruptor will face very little competition.

The authors identificated two types of disruption :

low end disruption : this is the lowest arrow on the chart, performances traded for simplicity, price...

new market disruption : competing with non-consumption. This could be imagined as building a new chart with different metrics for performance. By making a product simpler or cheaper, you can target people that would not even have thought of using your product (think Kodak and the personal camera which was a huge disruption compared to the old camera than only professional could possess and use...)

How to shape ideas to become disruptive ? Litmus tests

1. Can the idea become a new market disruption ?

If yes, both questions should be answered affirmatively

• Is there a large population of people who historically have not had the money, equipment, or skill to do things for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them ?
• To use the product or service, do customers need to go to an inconvenient, centralized location ?

2. Can the idea become a low-end disruption ?

If yes, both questions should be answered affirmatively

• Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price ?
• Can we create a business model that enable us to earn attractive profits at the discount prices required to win the business of these overserved customers at the low end ?

3. The last critical question for both disruption :

• Is the innovation disruptive to all of the significant incumbent firms in the industry ? If it appears to be sustaining to one or more significant players in the industry, then the odds will be stacked in that firm's favor, and the entrant is unlikely to win.

Job to be done / Segmentation based on circumstances

All products should be marketed based on the job (circumstances) people try to get done when they "hire" the product and not on the attribute of these people. A good example does better than long words, and so I encourage you to read this famous post by Christensen about milkshakes. It demonstrates that the same people can have, along the day, totally different needs for the same product, and that segmenting based on these people attributes can lead to average answer which will be good for none of them.

They apply this approach to what could be RIM's (Blackberry's manufacturer) strategy based of how they see their place on the market.

Modular / interlocked strategy

The last part of the book has more to do with execution. First of all, should a company follow :

• an interdependant/integrated strategy : do everything proprietary and keep all competencies in the company. This enables the company to achieve better performances by controlling every part of the product.

OR

• a modular/non-integrated strategy : open architecture that let others interface their products with your product, focus only on core competency and externalize others. This enables more flexibility when the customer wants a product adapted to his needs, and lower overhead costs.

So as you can see on the graph below, there is a time for modular/nonintegrated and a time for interdependant/integrated. As it enables better performances, interdependant architecture is better suited when the customer is not over-satisfied and the race is still about performance (left of the diagram).

However when the customer becomes oversatisfied, the race is about adapting products to his other (changing) needs. Modular architecture (right of the diagram) better suits this needs.

As the customer's needs are always changing, it is highly probable that after reaching the right of the diagram, the race on performances is back again and this induce a cycle involving alternatively modular and interdependant architecture.

Ressources allocation, filtering emergent and deliberate strategy

Deliberate strategy: it can be seen as what you first think at when you hear "strategy". Top down approach (from top management to all employees). It is often built as a project which leads to results and decisions that are then implemented. However, it is difficult to achieve such a level of understanding among employees that they can implement it when facing day to day decisions.

Emergent strategy: the way the company adapt itself to unattended opportunities or problems. 

Both deliberate and emergent strategies are at work when allocating resources and deciding on funding new projects, aquisitions, new process to put in place... the actual strategy is the result of the filtering of emergent and deliberate strategies through ressources allocation. Depending on the way resource allocation is done, the actual strategy can differe severely from the deliberate strategy... Understanding and controlling this is therefore extremely important ! It is however extremely complex as this process is highly diffused in all the company, all the time.

For example, it can be the way middle managers choose how they are going to choose between employees ideas and carry them to upper management. It is influenced by cost structure and size threshold for a project, as well as by other practices in the company (moving executives every 2/3 years, sales incentive)... But it can also be the way all employees prioritize their work or usage of resources on a day-to-day basis,...

Example of controlling the resources allocation process: Intel

Intel was originally a manufacturer of memories and developped DRAM chips. However one of Intel engineers invented the microprocessor. The sales of microprocessors grew gradually...

The limiting resource of a semiconductor manufacturer is the production capacity of its factories. Every month, production resources were allocated based on gross margin per wafer start. The highest-margin product would then be allocated the full ressources needed, and the lowest one would get resources only if there was some left... Business went were the money was, and this without any explicit management decision. Finally Intel had become a microprocessor company. Once this fact became clear, the management shifted fully to deliberate strategy... and achieve the success we know today.

Usually, a company first follows an emergent strategy (this is Steve Blank's search for a repeatable business), when they find this repeatable business, they shift to a deliberate strategy. However, they must be ready to adapt this strategy to evolving circumstances, and also be able to use emergent strategy again when they need to provide growth with new businesses or markets.

The authors give 3 points that can give leverage on the strategy process:

1. Create a cost structure that finds the right customers attractive .

If you need to fill a 1M gap, a 10K project may seems insignificant to you, whereas it could be a huge opportunities for a one man company with a 100K turnover... So if your typical customer's project size is 10K and you can make about 10 projects a year, you'd better size your costs accordingly, or you will become trying to sell more expensive projects which do not correspond to your product or strategy.

2. Discovery driven method for managing emergent strategy process (look like Steve Blank's customer validation)

  a. Make the targeted financial projections

  b. What assumptions must prove true in order for these projections to materialize ?
  c. Implement a plan to learn - to test wether the critical assumptions are reasonable
  d. Invest to implement the strategy

3. Manage the mix of deliberate and emergent strategy:

  - do not miss the point where to shift to deliberate strategy
 - do not forget to shift back to emergent strategy when launching new businesses.



Good money/ bad money
The kind of money (expectations of people who give it to you) you are going to take to develop your project can lead you to big success or lead to miserable failure. Indeed, accepting that disruptive markets are going to be small for some time is difficult for someone who is impatient for growth... (as a VC that need to liquidate his fund in two years could be...).

Good money is patient for profit, and impatient for growth
Bad money is patient for growth, and impatient for profit 

On the other hand, being impatient for profit will accelerate the emergent strategy process. Management must test all assumption as soon as possible to find the cashflows building profits and will try to keep costs low. If they do not need money, they may be tempted to postpone this work.


Additional information
- you can buy it here
- you can find some articles by one the author here (which includes examples that I did not included here for space stake and which will help you to understand better)

read part two about "Marketing Warfare" here