Experimentation in the entrepreneurial venture

Unit 4
What are Business Experiments?
What are Business Experiments?

As a manager, but also as an entrepreneur, coming up with new ideas and

executing them is a matter of course. Creating new, innovative ideas and ways
to improve is essential for stimulating success within a company. Having or
lacking success is not only beneficial or negative for the organisation itself, but
could also have far-reaching positive or negative consequences for society.

For example, think of the development of the smartphone, cars, and

aeroplanes. To some extent, these innovations were all the product of
extensive testing and experimenting. It is therefore not enough to merely have
ideas. The question is whether these ideas will yield results.

That’s why evidence is needed that these ideas and methods are actually
effective. This evidence lies in the data obtained during Business Experiments.
It should be clear that business experiments are necessary. First of all, to test
and validate the ideas and methods, but also to determine the right method of
implementation.
Different Forms of Business Experiments

A business experiment, then, is a process in which different strategies,

designs, and configurations are tested using a structured test-and-learn
approach. Business experiments and testing revolutionary ideas are often
linked to innovation. The exact goal of the experiment depends on the type of
experiment.
In each type of experiment, however, data is obtained that is analysed and
used in decision making. A distinction is made between, among others, the
following types of experiments:
1) A/B Tests
A/B testing is a testing method that is also based on a hypothesis. This
experiment often makes use of two configurations of a certain set-up, such as
a website. The old situation is compared to the situation after the experiment.
The terms “control group” and “treatment group” are also used.
It’s a popular test method among website developers, who use it to test
certain content and configurations. Using such an experiment, certain
statistics such as conversion ratios and click-through rates can be optimised.
Different Forms of Business Experiments

2) Prototype Tests
Another form of business experiment is developing a prototype. In the case of a
prototype, a certain hypothesis about a product or service is tested by actually
developing it. Based on the results after analysis of the prototype, it is then decided
whether or not to continue developing the end product.
Two kinds of prototypes are usually distinguished. An evolutionary prototype is a
prototype that is constantly adjusted and improved in order to realise a change to a
product or a future product. Evolutionary prototypes are often expensive and are
used in sectors that require products to be tested extremely thoroughly before they are
introduced to the market. Examples include the automotive and aerospace industries.
In addition, throwaway prototypes are also development and used. These are cheap
and quickly designed to demonstrate a certain idea or feature. Throwaway prototypes
are used in early phases of a product’s design.
3) Concept Testing
Concept testing is essentially a marketing experiment in which input from the
potential customer is used in early phases of the design of a product or prototype. An
important aspect in concept testing is gathering customer feedback through
interviews, focus groups, or market research.
Different Forms of Business Experiments

4) Mock-up
Mock-ups are used in production and design units within a company, and are often scale or full-
size models of a design or device. The mock-up is used for promotion, design evaluation,
knowledge transfer, and other ends. A mock-up can be seen as a prototype in which at least part
of the original design is functional. Mock-ups are mainly used to gather feedback from users.
5) Thought Experiments
In a thought experiment, the consequences and effects of a certain hypothesis, procedure, or idea
are evaluated. Thought experiments are developed in order to research ideas that don’t require
physical experiments. Concrete thought experiments can be carried out using logic and
arguments.
Abstract thought experiments often concern ideas about the future and go hand in hand with
speculations.
With thought experiments, various problems and hypothesis can easily be approached from
various perspectives, especially when the experiment is carried out by multiple people.
6) Pilots
A pilot, also known as feasibility study or experimental test, is a relatively small-scale
experiment that tests whether a large project could also work well in practice. It provides
organisations with a platform for testing certain projects, proving their worth, and uncovering
shortcomings. It’s important that this be done in advance, before a considerable amount of
money, energy, and time is spent on a large project.
Overview of business experimentation
Doing Business Experiments Yourself (Step-by-step Plan)
Doing Business Experiments Yourself (Step-by-step Plan)

1) Step 1: Formulating a Hypothesis

The process of an experiment or test always starts with formulating a verifiable,
measurable hypothesis. Verifiable means it is possible to make the test or the
experiment succeed or fail based on the objectives specified in the hypothesis. The
details of the test are then designed, and it is determined which of the above methods,
or an alternative, is suitable for the test or experiment.
2) Step 2: Designing the Experiment
If the hypothesis is verifiable and has been approved, the next step in the process is
designing the experiment itself. This step concerns, among other things, identifying
the objects, locations, or units to be tested; selecting control groups and treatment
groups (the A/B tests discussed above); and defining testing and control mechanisms.
Determining which experiment is suitable for which hypothesis may be difficult. An
example. The customer service department at a large multinational would like to
improve their customer service.
To this end, they decide to conduct an experiment in which part of the customer
service staff is taught a new approach (the treatment group), while another part (the
control group) continues to do what they were doing before. By investigating the
results of both groups over time, it can be determined whether the method used in the
Doing Business Experiments Yourself (Step-by-step Plan)

3) Step 3: Data Analysis

After the experiment finishes, the data and results are analysed. In the experiment with the
customer service, that means analysing the difference between the performances of the control
group and the treatment group. Does the difference match our hypothesis? Has the quality of
customer service actually increased? Have profit margins gone up? Is the outcome surprising?
Are any additional experiments needed?
4) Step 4: Completion
After the test has been performed within the determined period at the determined location,
the data obtained is analysed in order to determine the results. These results are ideally stored
in a company library, and may lead to a broader roll-out of the experiment, or testing a
revised hypothesis.
5) Step 5: Re-testing
A difficult aspect when setting up a testing method or experiment is deciding when to re-test.
It’s difficult to determine when a test is outdated. This requires an experienced analyst to
judge whether enough environmental factors have changed to make previous results obsolete.
For example, Netflix decided in 2006 that it was time to perform customer tests again. After
five years, their user base had evolved from nothing but internet pioneers to members from all
layers of society. Retailers and producers may also want to re-test pricing, for example
because the prices of resources go up fast.
What is Entrepreneurial
experimentation?
What is Entrepreneurial
experimentation?
Entrepreneurial experimentation is a system-wide function
that ensures creation, selection, and scaling up (commercial
exploitation) of new technologies and innovations.
Individuals, organizations, and institutions interact in the
exploration, creation, discovery, and exploitation of
opportunities and new ideas. A key issue is that the system
is effective in fulfilling all three activities, rather than
separate individuals (researchers, entrepreneurs),
organizations (research institutes, universities, small and
large firms), and institutions (intellectual property rights,
incentive structures in the form of, e.g., taxes and
regulations, culture) being excellent in fulfilling only one or
a few of the activities.
The Importance of Experimentation in Business

Owners of businesses -- even those who have many years’

experience -- recognize that many factors outside of their
control affect the company’s growth rate and profitability.
Customers, competitors and the direction of the economy
are each in their own way unpredictable. Business owners
also realize that they don’t know everything -- learning and
growing are part of the entrepreneurial process. Sometimes
they decide to try something new and just see what
happens. In other words, they experiment.
The Importance of Experimentation in Business

Why Experiment
Business owners do everything they can to meet the needs of their customers. Companies
introduce new products and services that they believe are an improvement over what they
offered before. But consumer reaction to new things, including new marketing campaigns,
can be a big surprise -- upside or downside -- to a company owner. Experimentation on a
small scale allows them to predict the outcome on a larger scale, almost like sample
precincts in an election. Companies don’t have complete knowledge of the business
environment. Experimentation allows them to obtain more real-world data about their
environment. For example they might test the response of competitors to the company
raising its prices in a given area.
Benefits
Experimentation allows the company to save money. Instead of plunging into a new market
with a large expenditure of resources, the company can limit its financial exposure in the
event the strategy does not work. Experimentation allows a company to pursue more than
one opportunity to discover which one has the most potential. Again, because the financial
exposure is limited, it allows a company to try a strategy that is completely different than
anything it has done before and find out the reaction of their target customers. A clothing
store that caters to women, for instance, might experiment with stocking a few children’s
items as a result of observing many of their customers shopping with their kids.
Challenges of experimentation
Interpreting the results of a business experiment can be
difficult.
A business owner may not know when to declare the
experiment a failure and pull the plug on any further
expenditures.
Conversely, it can be hard to decide whether the results are
sufficiently positive to give the green light to a company-
wide commitment of resources to the new strategy.
There may be a question of whether the test market chosen
was representative of the market as a whole.
In any case, experimentation provided the owner with
more information than she previously had.
References
1) Kerr, W. R., Nanda, R., & Rhodes-Kropf, M. (2014).
Entrepreneurship as experimentation. Journal of
Economic Perspectives, 28(3), 25–48.
2) Radosevic, S., & Yoruk, E. (2013). Entrepreneurial
propensity of innovation systems: theory, methodology
and evidence. Research Policy, 42(5), 1015–1038.