Business Models and the Scientific Method

In many respects, creating a business model is like creating a scientific theory and performing experiments to prove or disprove the theory. If our theories are correct, the experiment will turn out as we expect, and the business will prosper. If not, then the theory has to be adjusted to reflect the results of the experiments. The scientific approach can therefore yield real benefits and results when creating a business, as opposed to a trial and error approach based on luck.

For example, let's say that we think customers will be willing to pay a lot more for 'green' hybrid cars. This is the bet that Toyota is making with the Prius. To verify that we are right, we would need to figure out what channels to use, who to sell to, how to market the vehicle, how to price it, etc. There are a lot of things that we could do, and only through disciplined experimentation, can we really be sure what will work.

In many ways we see an explosion of experimentation in business models today. It's not just Web 2.0 companies, but companies such as Walmart, Southwest Airlines, Netflix, Costco and many others which have experimented with their business models and come up with winning formulas. This trend is likely to continue, since globalization is creating both more opportunities and more players. The real work of innovation is to find, create and adopt winning business models and adjust them continuously so that they continue to deliver results.