In a recent article, I explored some of the flaws in the outwardly healthy-looking startup ecosystem. With investment booming, it looks like things are in rude health, but failure rates remain incredibly high, and returns on R&D investment continue to diminish. This results in a growing amount of market power being concentrated in a small number of incumbents.

The deluge of easy money into the sector has prompted many would-be entrepreneurs to take their eye off the ball, and whereas Peter Drucker famously said that the only real purpose of a business is to create a customer, the current entrepreneurial landscape allows founders to get rich without worrying too much about that.

Make and sell

By taking one’s eyes off of the customer, it makes it easy to fall into the so-called solutions trap, which is when we become obsessed with our own idea to the point that we lose sight of the actual problem that we’re trying to solve.  It’s a problem I argued recently that many peddlers of metaverse technologies are falling foul of.

It’s a famous example of what Stephan Haeckel famously refers to as “make and sell” in his book The Adaptive Enterprise.  He suggested that the majority of organizations focus on the idea, the product, or the technology.  They then create this idea and attempt to sell it on the market.

Haeckel popularized the alternative approach of “sense and respond”, whereby organizations were constantly scanning their environment, and adopting a sufficiently agile approach to enable them to rapidly respond to changes in their environment. In explaining the distinction between this agile approach and that of traditional businesses, he used the example of a bus and a taxi.

Buses are good examples of what Haeckel referred to as “make and sell” organizations. They aim to expertly understand the type of journeys people want to take, the traffic patterns en route, and the various other aspects that might impact this journey. They then construct a route map, schedule a timetable of buses to run on that route at pre-prescribed times. It’s a rigid system whereby the bus drivers are largely judged not on the satisfaction of the passenger, but on their ability to complete the route as prescribed. Should circumstances change, they are largely hamstrung in their ability to respond.

Taxis, however, are completely different. They have no real route or schedule for their day, they spend their time constantly responding to the conditions they encounter. Their work is defined by the efficiency with which they can help their passenger complete their journey. This ability to ‘sense and respond’ has been improved still further by the introduction of new technologies, such as Uber, that further enhance the agility of the taxi network.

Understanding the customer

In an entrepreneurial context, becoming a “sense and respond” organization requires you to fully understand who your customer is, what problems they’re having, and how you might go about providing a sufficiently attractive solution to that problem to encourage them to pay to change their behaviors or choices.

In Corporate Explorers, Stanford’s Charles O’Reilly and colleagues describe five practices that can help entrepreneurs undertake this process of customer discovery:

1. Accept our biases – It’s natural when we approach matters from a “make and sell” perspective that we grow to love our idea.  This can result in our entire worldview revolving around that idea and block out vital bits of information about the market, our customers, and other key stakeholders.  The first step is to understand that this is probable so that we can focus our attention instead on the problem/s our customers are having.
2. Explore your conclusions – It’s no good believing your solution will find success in the market if you haven’t actually spoken to customers to find out.  O’Reilly et al highlight the PR/FAQ document that Jeff Bezos requires of anyone at Amazon proposing new ideas.  The document asks innovators to put themselves in the shoes of customers and other stakeholders, working backward from the customer problem.  The document outlines why customers will want the product, how they will use it, what benefits they’ll reap, and so on.
3. Make it immersive – The best way to achieve this is to actually immerse yourself in the world of your customer.  Talk with them about their problems.  Experience the challenges they face.  Do this with as many customers as it takes to truly understand the nature of their problem.
4. Be an observer – While a lot of the immersion process is a two-way interaction, there is also much that can be learned from simply observing customers in action.  This can help provide insights that customers may struggle to articulate.
5. Focus on outcomes – Last, but not least, is to focus on what Clayton Christensen would refer to as the job the customer is trying to do. He famously argued that customers rent your product in order to achieve a certain outcome, so it’s vital to hone in on just what that outcome is.  You should also consider just how much better your solution needs to be than the current solution in order to prompt customers to change.  Inertia usually means that this can be a lot higher than we think.

“A well-executed customer discovery process generates valuable data on customers, what they want to achieve, and the challenges they encounter,” O’Reilly et al explain.  Sadly, it’s a process that too many entrepreneurs, and indeed the organizations designed to support them, overlook.