Effectuation and Design Thinking to Turbo-boost your Business

 

When I first returned to Germany after having lived in Australia for over 10 years, I noticed some striking differences in terms of the approach to innovation between the two countries. In Germany even smaller companies often seemed to apply a top down (consultative) approach to generating new business and product ideas. So, we would analyse the market, look at the competition in different regions and industries and then formulate a PowerPoint-based strategy. This would subsequently be broken down into sizeable (mostly linear) chunks of work (milestones) and we would write a detailed business case which would then be presented to the senior executive team.

If you ask me, this is an insane approach. Why insane? To start with you are spending an awful lot of time on intellectual debates, going back and forth in terms of what the right product might be. Because it is an intellectual exercise you are not injecting energy into the system, you don’t get your hands dirty and you certainly don’t speak to the people who are most likely to know where their real pain is.

The alternative which I have observed in Australia and America a lot was to treat this as a bottom up exercise. You speak to clients about their pains, you dive into the problem and you then iteratively build your ideas based on those pain points. This is a bit like learning to ride a bike. You don’t read manuals and analyze the physical laws which foster your bike balance, but you rather dive into it, learn from experience and track your progress. In this article we will look at two methodologies used by entrepreneurs and innovation managers to jump-start their businesses.

For those of you who have studied statistics, these bottom-up strategies work like Bayesian updating: Begin with an estimate of the probability that any hypothesis is true (i.e. your gamification approach in your app to entice users to quit smoking will increase the chances of users quitting long-term). Then you look at any new data from experiments with smokers and update the probability given the results. This constant iterative process will then zig-zag you to your intended goal. Or if not, at least you have not burnt millions of dollars and taken a considerate and lean approach to test your idea instead.

It is important to emphasize how this rather inductive approach can make all the difference. So, let’s look at why it works and then dive into two well-proven methodologies as well as how to translate this into action:

  1. Your innovation system will constantly be injected with energy. Instead of endlessly analysing the markets and stay on an abstract level, your team will speak to potential users/ customers, build prototypes and measure your progress. This will help your Startup team to feel like you are making real progress and drive energy into your business.
  2. If applied correctly, it is free from dogmatic world views and cognitive bias, because your approach fosters a rigorously data-driven and scientific mindset. In other words, you only confirm your hypothesis once you find evidence in your data and do not try to focus on just confirming your existing world view (confirmation bias)
  3. It aligns with the way the brain works: we learn by accumulating experiences and our brain is constantly adjusting to these new experiences. So, our neurons may fire when something does not align with our world view anymore, thus updating our approach to fit the new data/ experiences
  4. You avoid the fallacy of going full speed ahead with an unproven idea and instead spend as little resources as possible just on testing different product features one by one
  5. If you are part of an innovation team in a large company, you might be tempted to get one of the top consultancy firms to create a PowerPoint pack and design a top down approach. After all, this is what they are paid to do. I cannot tell you how many clients I spoke to who all confirmed that often these decks end up in the bin never to be looked at again. So, instead you run a Google Design-Sprint, which may cost a lot less and provide you with a much more intuitive understanding of what moves your customers.

Just to avoid misunderstanding here, I am not propagating that it is not a good idea to analyse your market and customers top down, however this is rather an input into some of the bottom-up strategies (i.e. you could use this research in a design thinking challenge when trying to understand the pain points) rather than being the approach itself.

Instead of listing a myriad of bottom-up approaches, let me instead focus on two which I found to be the most pragmatic and effective ones when working with clients or within our own business: Effectuation and Design Thinking. Unlike top-down methodologies such as market research their implicit paradigm is a bias for action. Both are rapid methods to get results quickly. So, let’s dissect them.

Design Thinking: Design Thinking is a non-linear process which is being used to understand users, challenge beliefs, redefine problems and create innovative solutions to prototype and test. There are five phases: Empathize, Define, Ideate, Prototype and Test. It is most useful to tackle problems that are not clear or unknown. In the Google Sprint variation this is a five-day sequence where in the finale the team tests their prototype with potential users.

Effectuation: is an approach to making decisions in an entrepreneurial environment, where you look at the participants available resources (people, skills, technology, network, etc.) and identify the next, logical step. Effectuation differs from Design Thinking in that it is resource-oriented as opposed to needs-oriented.

In my own experience the two methodologies complement each other. Sometimes, especially at an early stage of your innovation process/ venture you may want to look at your existing strengths and resources in order to derive a quick-to-market next step (i.e. in a new business partnership you would look at each other’s existing network, people skills and experiences). At other times, however, you are completely in the dark and would like to simply use Design Thinking to conduct a deep dive into the pain points of your users to derive new products and processes. Figure 1 categorises different innovation methodologies.

So, where do you start? Below are my top 4 tips to use innovation techniques and execute with passion:

  1. Start with effectuation: If you are in an early phase, this is where you start. Sit down with your peers and use Post-it notes and let everyone find answers to the following questions (in that order):
    – Who am I: What are my values, my pains and why do I exist?
    – What do I know: What are my skills? What resources do I have?
    – Who do I know: Who is in my network?
    – Once you have collected this data, now look at it and try to derive the
    logical next step. Is there anything you could be doing to take advantage
    of these combined resources?
  2. You have an idea: great, pretend it already exists! A couple of years ago I was on the phone with a client and as we were talking an idea for a new workshop popped into my head. I decided to pitch it to the client on the spot (pretending this workshop already existed) in order to get some initial feedback. You can do this with any idea, really. Just be bold enough to make something up! And if you have ethical concerns: you are just testing an idea with a potential client. Rather than investing a lot of money and time to develop a new product you conduct some authentic research upfront.
  3. Selling B2B in a lean manner: Especially, in business-to-business-settings it is crucially important to collect some upfront feedback from prospective customers if you are in the process of developing a new product. Your meeting will also be a really good sales meeting in disguise. Even though you contacted the client to ask questions about a potential product, you can use it to pitch the product and your company to them. There is a really good book, with a stack of useful practical tips on how to create a flourishing B2B business applying lean Startup principles: Lean B2B: Build Products Businesses want.
  4. The covid-19 tip: if you are like many other people and you feel like your business model is going down the toilet because of covid-19, then it may be time to do a 5 day Design Sprint à la Google and develop an updated and intuitive understanding of your market and customers. Now maybe a good time to use your resources and develop user-centric ideas. If you don’t know where to start, this book can provide you with very practical tips on how to do.

 

In summary, there are several innovation methodologies which you can apply to execute with passion and power. We have focused on two, namely Effectuation and Design Thinking and given you some insights as to where you might be able to use them within your own innovation cycle.

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