Tuesday, January 19, 2010

The Scientific Method

The Scientific Method applied to Business:
1. Observation Entrepreneurs are always asking questions. Most small business are started because someone observed a need for a product/service that was not being met. Within a business, constantly look for problems/bottlenecks. Example: Sales are lower than they should be based on the business plan.
2. Hypothesis or Theory Make a guess why this is so. Example: People are unaware of the company's products. Therefore we need to do more marketing. The best marketing method is to hire a blimp.
3. Experimentation Increase marketing and observe the results carefully. If sales do not increase then you need to determine if the hypothesis is wrong or if the experiment is flawed. There might be a considerable lag between the marketing and a customer's decision to buy. Marketing may not be the bottleneck. It might be shipping, customer service, or an inferior product. Monitor the results over time. Don't assume an increase in sales volume is a long-term trend. In other words using a blimp for marketing might only cause a blip in sales.
Both the business and scientific worlds move fast. Constantly reevaluate your hypothesis as you get more observations and test results. Einstein came up with an entirely different theory to explain gravity. It turned out that Newton's was wrong. Both theories predict the same results in the everyday world. The difference comes at the extremes. At very fast speeds such as near the speed of light or near high-density objects such as the sun, objects don't match the predictions of Newton. If both theories make the same predictions in the everyday world what difference does it make? Many of the technology changes that occurred in the twentieth century were due to the greater understanding of the universe that Einstein provided. In any competitive business, you need to have an edge. A greater understanding of how the parts of your business are interrelated and how they might change at the 'extremes' will give you that micro edge that might separate success from also-ran.
Other aspects of the scientific method can be applied to the business world. Two that I find useful are peer review and Ockham's Razor. Having another pair of eyes review both the hypothesis and the experimental result dramatically increase the likelihood of success. Ockham's Razor is the principle proposed by William of Ockham in the fourteenth century: ``Pluralitas non est ponenda sine neccesitate'', which translates as "entities should not be multiplied unnecessarily". In other words if you have two hypothesis that make the same predictions choose the simpler one.
In order to grow a business you need to know why you are successful. Thinking that your clients like your product because it is blue is not a firm basis for increasing sales. The scientific method should help you establish how you can improve your business.