How to use business experimentation to grow your company

Innovation is the basis for how new business strategy is developed and implemented. Seeking ways to be more innovative is nothing new - senior managers have been seeking this Holy Grail for years. What is different today is the increased use of controlled experimentation, both inside companies and with external partners. Executives, including CIOs, are beginning to understand the power of a well-defined business experimentation process as a way to increase the pace of organizational learning and thereby accelerate the development of new or extended products, services and processes.

Companies such as Capital One have been able to invent entirely new business models using experimentation. Much of Wal-Mart's success over the past 30 years can be traced to its well-honed competency at business experimentation. And General Electric has publicly committed to 8 percent organic growth (a very high number for a large, mature company, translating into $US13 billion in new revenue per year, on average), which depends on an experimental approach that it calls "imagination breakthroughs". Learning how to innovate quickly and cost-effectively in the areas of services, processes and products is the core concept of business experimentation.

As CIO, you can lay the groundwork for successful business experimentation. Experiments rely on information systems. But your responsibility goes beyond lending support; experimentation can also become a part of how you run the IT department.

How Business Experimentation Works

Business experimentation is both a process and a discipline, and it's used to create systematic innovation and improvement, which in turn support organic growth. We define business experimentation as a controlled, cost-effective and iterative approach to learning about the potential success or failure of a new product, service or process.

Much of Wal-Mart's incredible success can be attributed to its willingness to experiment. Initially, the small town of Bentonville, Arkansas, Wal-Mart's headquarters since 1970, provided a well-defined business model for success in other small towns. But to expand beyond small towns, Wal-Mart had to modify its strategy in ways that would allow it to be successful in Miami, Houston, Denver and other urban settings.

For example, as part of its low pricing strategy, Wal-Mart wanted to ensure that shoplifting was kept to a minimum. Managers built a series of experiments around the use of greeters in their stores to learn what characteristics reduced shrinkage. They found that elderly greeters who personally welcomed customers kept shrinkage low. Thieves were less inclined to steal from someone who looked like their grandparents. But it took several iterations and a willingness to "fail" with some of the experiments to learn exactly what type of person would make a good greeter.

More recently, Wal-Mart has been experimenting with offering in-store financial services. The chain's approach this time is to build alliances with successful financial services companies such as SunTrust Banks. The two companies have launched a set of 45 in-store bank branches called "Wal-Mart Money Centres by SunTrust" to test the new strategy. Business experimentation has become a core competency at Wal-Mart and is deeply embedded in its executives' strategy formulation process.