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April 09, 2010

Lab Work for Your Business Model

Catherine New
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Management professor Rita McGrath says experimentation must be an integral part of a company’s strategy in order to remain competitive in the future.

“The level of uncertainty and speed of change are touching sectors that used to be buffered from that,” McGrath says. “When you don’t know what’s going to happen, you don’t have much choice except to experiment.”

McGrath offers three rules for results-driven experimentation:

  1. Keep it cheap in the beginning: When some of your experiments fail — which they will — you don’t want to have all your eggs in the same basket. Limit the resources dedicated to any given experiment and focus on variety instead.
  2. Don’t sacrifice variety for efficiency: You want to have enough variety to cope with whatever comes your way. McGrath cautions that too many companies lose variety as they become overly focused on efficiency. “A typical company sets up a team with one person in charge, so in effect that’s one experiment,” she says. “If you have 10 little projects with each person looking at a slightly different angle, you’re much more likely to find success.”
  3. Design experiments as true experiments, not projects: Companies miss many of the insights that they can gain in experimentation because they are focused on completing a project, McGrath says. To learn, they must design each task as a true experiment.

Read more about Professor McGrath’s insights on the business model concept, published as “Business Models: A Discovery Driven Approach” in Long Range Planning: International Journal of Strategic Management (March 2010).

Photo credit: Flickr/Horia Varlan