When the head of a new venture sets sights on a fresh market opportunity, success is hardly guaranteed. But most entrepreneurs have thick skins, a strong belief in themselves and an overpowering vision.
The question is whether they can listen to reason and be talked out of moving into a market that they might have scarcely a chance of winning. The two key questions that entrepreneurs must ask themselves are the following:
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1. Does the company have a compelling way to beat the competition on the benefits of its product that matter most to the targeted customers?
2. Does the startup have the capabilities needed to keep delivering better value to customers as their needs change and new technologies come along?
While considering these key questions, leaders can be undermined by an underlying factor: confirmation bias. As I discussed with my 16 undergraduate students in "Strategic Problem Solving" at Babson College yesterday, confirmation bias occurs when a decision-maker laps up information that supports what she believes and ignores the rest.
If a person is aware of confirmation bias, he may be more apt to listen to information that's not consistent with the outcome he desires.
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And that is very important to a business case that I discussed with my students concerning HTC in 2009. This Taiwanese electronics manufacturer enjoyed profitable business growth during the mid-2000s by building smartphones to the specifications of telecommunications carriers outside the United States. The company was great at turning those designs into phones very fast and with high quality. Those phones helped the carriers encourage customers to use highly profitable data services.
But in 2006, HTC's new CEO decided that he wanted HTC to compete with Apple and Samsung as a player in the smartphone market. But HTC lacked the key capabilities to win. It had no app store, no proprietary operating system and no consumer marketing expertise.
When HTC announced its plans, the stock market wiped $1 billion from its market capitalization. HTC has not succeeded in being a winner on this initiative and squandered the goodwill it had built with some of its old customers by competing with them.
What HTC should have done is to conduct a study of the above two questions and shaped its strategy accordingly.
Here's what I would have advised HTC's leadership and I would say much the same to any entrepreneur considering whether to enter a new market:
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1. Know how the company will win the first time. If a business leader has any hope of having potential customers pay for a new product, this item should meet user needs better than anything else on the market. The businessperson should talk to potential customers and ask them what factors -- like price, quality, design, services -- would prompt them to buy a certain product over a competitor's.
Once the executive knows those factors, he or she should ask customers to rank the factors in order of importance and explain how the new product performs on them relative to competitors.
If HTC had done that, it would have known that it did not have the ability to beat Apple in the smartphone market. Instead when Apple announced the iPhone in 2007, HTC hailed it as great news because Apple would educate the market about the beauty of touch screens, which HTC was also preparing to launch.
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2. Know how the company can keep winning. There are no longer industries where an enterprising player can introduce a product, win customers and keep reaping profits without adapting. Customer needs change, new technologies emerge and upstart rivals are all seeking a share of a targeted profit pool.
To sustain an initial market victory, a business leader needs capabilities like product development, sales and the ability to hire and motivate great talent. I would have told HTC to assess whether its capabilities were better than those of Apple and Samsung.
I would have suggested that HTC list its capabilities, map how well they supported its ability to do a better job of meeting the ranked customer needs and assess how well HTC used its capabilities compared with the performance of rivals like Apple and Samsung.
That analysis would have revealed that HTC lacked critical capabilities and that it would be hard to outperform Apple, which had already demonstrated strong capabilities in developing the iPod.
Likewise, an entrepreneur contemplating taking on a new market should engage his or her team in gathering data to answer both questions. If the answer is yes to both, then it's fine to go ahead and attack. Otherwise, the entrepreneur should think again.