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Avoiding Bad Assumptions

Posted by Seth Elliott On February - 10 - 2010

Bad AssumptionsThere’s no doubt that entrepreneurs, and business people in general, often make quick decisions that rely on gut feel. In of itself, there’s nothing at all wrong with this. A strong intuitive capability is, in fact, a key trait of many successful entrepreneurs. Nevertheless, running a business “on the fly” isn’t always the best approach.

This becomes readily apparent when assumptions lead to poor decisions. Decisions based on invalid assumptions can have disastrous results, particularly in regards to customers and markets. Unfortunately, we are usually blind to the assumptions until after the terrible results have surfaced.

There are countless examples, large and small, of invalid assumptions leading to poor decisions. Here are three that I see most often from entrepreneurs and their teams:

If I Build It They Will Come. This fallacy is avoided by many experienced entrepreneurs, but new entrants often fall victim to it. The simple fact is, most products and services need to be SOLD. It’s not as simple as setting up shop and waiting to be noticed. I know that sounds obvious, but be aware that this assumption may still be nestled deep within your perspective. You need to have a plan for getting your product in front of prospective customers along with a call to action that will stimulate purchases.

The Market Needs This Product. This one is a bit more subtle. Presumably, you’ve decided to sell your product and service because of a demonstrated demand (you have, right?). But what does that really mean? Have you actually surveyed prospective customers to determine if there is demand for your particular product or service (and at what price point)? Have you engaged in substantive market research and testing to demonstrate that you have a viable offering? By the way, pointing to competitive offerings, total number of Google searches, etc. does not qualify as substantive market research.

By the way, there is a converse assumption that often prevents entrepreneurs from even getting started. There is already too much competition in the field. Competition isn’t necessarily a bad thing. Lots of competition could simply be a sign of significant demand. Don’t assume that a crowded field means that an entrepreneurial venture is a bad idea (of course, don’t assume you can enter such a field under “business as usual” rules, either).

Market Standard Requires It. Not long ago, I worked with a medical testing business. During the course of our analysis, it became clear that it wasn’t necessary for the company to maintain several of its local facilities. When questioned about this, the answer was “well, our customers expect that we will have a local presence.” In fact, further research revealed that more than 70% of those customers were prepared to continue using their testing products regardless of physical location. This example occurs every day in countless ways. Entrepreneurs and executives assume some variation of industry standard – “all our competitors do it, so we must”; “our customers expect it”; “everyone must have a show room”; “you can’t manufacture in country”; etc. Sometimes these assumptions prove true. More often, they prove to be factors that inhibit business growth and success.

Bear in mind, assumptions aren’t necessarily evil. As I’ve noted, successful entrepreneurs are adept at creating value in environments where there is imperfect or uncertain information. As such, we understandably draw rapid conclusions in our rush to judgment in the business environment. Those conclusions are based off of a set of premises and assumptions of which we are confident – at least at the time. Unfortunately, quite often we discover, retrospectively, that such assumptions were incorrect. As we’ve seen, assumptions, while a necessary process for entrepreneurs, can be dangerous to long term business success. What’s to be done?

Institutionalize Fail-Safes

By formalizing procedures to protect against incorrect assumptions, you can minimize their danger. The most effective mechanism for this is to institutionalize a procedure of inquiry. Seek out second (and third and fourth) opinions about key assumptions for your critical decisions.

Develop an advisory board that has expertise in various arenas. Make clear that your intention is to use them as a sounding board for your decision making process – not merely as window dressing. Reach out to them to solicit opinions – starting with “does this make sense?” Pay attention to their responses and use them to generate additional specific questions.

Create a Questioning Environment

The more people you interact with who are able to offer information about the challenges, the better your chances of successfully overcoming them. As such, foster an environment in which your people are encouraged to question assumptions. “Why” should be rewarded, not discouraged.

Promote risk taking and fault tolerance. Strictly speaking, this is a separate subject in itself. Nonetheless, a business environment in which employees are encouraged to take managed risk and mistakes are used as learning experiences is likely to be one where employees feel comfortable with inquiry.

Suspend judgment. In a related fashion, it’s important to foster the expression of ideas by deferring immediate judgment. If employees are forced to defend and justify their commentary immediately upon voicing it, they will quickly learn not to speak out.

Formalize Analysis.

Once you’ve determined on a course of action, step back and question it. If possible, have personnel that were not directly involved in the information gathering and decision making phases review the data and recommended course of action. You want to have the decision stripped down and questioned – particularly assumptions. Encourage a “devils advocate” approach to the process. If you can’t readily answer questions raised, perhaps you’ve made too many unwarranted assumptions or rushed too quickly to judgment.

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About the Author

I have spent the last 15 years advising entrepreneurs on starting and growing their businesses, as well as assisting in financing those growth efforts. I have also been an entrepreneur on several occasions myself. By writing this blog, I hope to provide actionable advice on how to achieve your goals and become more successful.
  • http://www.summitsoftware.biz/ Laurie

    After going after several “build it and they will come” and assuming it was so easy to even build it for “them”. My assumptions that it was easy to build and market industry specific software was way wrong. I started before SaaS was even thought about. Listen, learn, listen, learn, listen, learn. Take your time – don't build it unless you know they will come and how they will come and what they will pay. etc. Always have legal contracts with everyone. Don't trust your beta customer – “oh, if you build it for us FOR FREE, we will help you market it to others – – ha. They will claim ownership and make your life miserable, they probably have more money than you – so forget suing. Be smart, diligent and listen, learn. Everyone that you talk to things they have a claim to the idea. Be smart, diligent and listen, learn.

  • Marco Scanu

    Great article Seth! I would add the importance of having a flexible strategy…or being strategically flexible. Lack of flexibility can traslate into missed opportunities.

  • http://www.unchained-entrepreneur.com Seth Elliott

    Laurie,

    Thanks for sharing your experiences. You point out another good example regarding bad assumptions: know who you're dealing with. If you don't already have a long relationship history and ironclad trust (and often, even if you do) get terms and agreements in writing.

  • http://www.unchained-entrepreneur.com Seth Elliott

    Marco,

    Absolutely! Flexibility is an extension of this process. If you take steps to confirm your assumptions and the results suggest you need to reevaluate, it's critical to have the flexibility to adjust your decisions accordingly!

  • http://www.unchained-entrepreneur.com Seth Elliott

    Laurie,

    Thanks for sharing your experiences. You point out another good example regarding bad assumptions: know who you're dealing with. If you don't already have a long relationship history and ironclad trust (and often, even if you do) get terms and agreements in writing.

  • http://www.unchained-entrepreneur.com Seth Elliott

    Marco,

    Absolutely! Flexibility is an extension of this process. If you take steps to confirm your assumptions and the results suggest you need to reevaluate, it's critical to have the flexibility to adjust your decisions accordingly!