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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
#1 Amazon Bestseller in Lean Management Discover the methods of lean startups that can revolutionize large organizations and their products Even in a tough economic climate, the startup business community has found a way to create innovative, game-changing products in shockingly short timeframes. So why should larger, more established companies take notice? Because they have everything to gain when they examine and adopt the strategies, tools, and attitudes of these smaller competitors. The Lean Enterprise presents a groundbreaking design for revolutionizing larger organizations, one that draws on the ingenious tenets and practices espoused by the startup community. The guidelines in this book will help companies shake the lethargy, bureaucracy, and power struggles that plague large organizations and hold them back from true innovation. At the heart of this resource is a comprehensive, practical approach based on methods, timetables, compensation, financial investment, and case studies that reveal the startup mentality. Respected thought leaders in lean startup methodologies, the authors cover successful enterprise development, development innovation labs, corporate venture arms, and acquisition and integration of startups. * Essential reading for entrepreneurs, product managers, executives and directors in Forbes 2000 organizations, and board members * Presents the tools and methodologies large businesses need to compete with a new generation of highly-empowered entrepreneurs * Covers lean startup culture and principles and identifies the behaviors that arestunting growth at large enterprises * Offers a comprehensive, practical approach for developing exciting products and services and opening vast new markets Don't be mystified by the success of startups. Master the methods of this new generation of entrepreneurs and compete on a level playing field.
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Seitenzahl: 394
Veröffentlichungsjahr: 2014
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Contents
Introduction
Chapter 1: Roadmap
The Innovation Colony
The Lean Startup Method
Three Strategies
Chapter 2: Strategy
A Framework for Action
Fringe Benefits
Chapter 3: Corporate Structure
From Skunkworks Onward
Enter the Innovation Colony
Chapter 4: Compensation
The Power of the Upside
Chapter 5: Vision
Know the Market
Formulate an Innovation Thesis
Execute on the Thesis
Chapter 6: Lean Enterprise Process
Roots of the Lean Startup
Experimental Process: A Quick Overview
Experimental Process: Step-by-Step
Javelin Board
Chapter 7: Experimental Methods
Where to Find Customers
Chapter 8: Innovation Accounting
Vanity Metrics versus Actionable Metrics
Building a Metrics Model
Chapter 9: Incubate Internally
Low Momentum, High Control
Benefits
Financing Internal Startups
How to Incubate
Chapter 10: Acquire Early
Who Are You Looking For?
Choosing Acquisition Targets
Structuring the Deal
Pitfalls
Chapter 11: Invest When You Can’t Acquire
Low Control, High Momentum
Benefits of Investing
Investment Mechanics
Investment Vehicles
Enterprise Investment Psychology
Choosing Investments
Chapter 12: Innovation Flow
Conclusion
About the Author
Index
End User License Agreement
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Guide
Cover
Table of Contents
Begin Reading
The Lean Enterprise
How Corporations Can Innovate Like Startups
Trevor Owens
Obie Fernandez
Cover image: Rayz Ong/Lemongraphic
Cover design: Rayz Ong/Lemongraphic
Copyright © 2014 by Trevor Owens and Obie Fernandez. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
The Lean Startup is a trademarked term owned by Eric Ries, along with several other copyrighted and trademarked terms that are used throughout the text. The use of all trademarked or copyrighted terms is by permission of Eric Ries.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
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Library of Congress Cataloging-in-Publication Data:
ISBN 978-1-118-85217-0 (Hardcover)
ISBN 978-1-118-85206-4 (ePDF)
ISBN 978-1-118-85218-7 (ePub)
Introduction
Google has a stratospheric market capitalization, but the company that organizes the world’s information could easily have been tens of billions of dollars richer. In October 2004, Ev Williams, who had joined the company when it acquired his startup, Blogger, left after a year of chafing under corporate bureaucracy. Blogger product manager Biz Stone departed 11 months later. The pair went on to found Twitter. The new venture went public in November 2013, and was worth $36.7 billion as the new year began.
Losing Williams and Stone was an expensive mistake, but Google didn’t learn the lesson. Ben Silbermann joined the company in 2006 after a stint as an IT consultant. He spent nearly two years working on display advertising products but felt out of place as a nonengineer in an engineering-centric culture. He resigned and cofounded Pinterest, the online pinboard service that was valued at $3.8 billion as of January 2014.
Google still didn’t get the message, and Kevin Systrom left the company in 2009 after two years of feeling stifled by organizational politics. Not long afterward, he cofounded Instagram, which he sold to Facebook for $1 billion in April 2012.
Williams, Stone, Silbermann, and Systrom—not to mention founders of Asana, Cloudera, Foursquare, Ooyala, and dozens of other young companies—quit because they were unable to exercise their entrepreneurial talents within a large enterprise. We’re huge fans of Google. Still, if the iconic Silicon Valley success story, which regularly shows up on lists of the world’s most innovative companies, had the potential to keep these brilliant innovators aboard, they left at least $40.5 billion (the combined values of Twitter, Pinterest, and Instagram as of January 2014) on the table.
That’s bad news for a paragon of innovation. But it’s good news for large, established companies that wish to foster innovation within their own walls. It means that even the most innovative operations are passing up billion-dollar ideas that any enterprise could pick up and run with. It also means that, among the thousands of people working in diverse corporate business units and far-flung offices, there are likely to be scores who have ideas that could create tremendous value. Even the oldest, least savvy companies don’t need to repeat Google’s mistakes. Enterprises seeking to build new high-growth businesses can unlock and retain latent entrepreneurial talent. They can create an organization that innovates successfully, predictably, and repeatedly—not by chance, but by design.
Enterprises in Peril
The need for enterprises to innovate has never been more acute. Many established brands are on the ropes. American Airlines was valued at just $5.5 billion at the time it merged with US Airways in 2013. Kodak, a name synonymous with photography for more than a century, retreated into bankruptcy in 2012, with its arch competitor Olympus close behind. Suzuki’s automotive division fled the United States the same year, and Volvo appears to be approaching the off ramp. Two cornerstones of the PC industry, HP and Dell (which sold itself for $24 billion in early 2013), are struggling to build a bridge to the post-PC future. BlackBerry’s worth has slid to a few billion since it tripped over the very smartphone market it pioneered. Blockbuster has shut down its storefronts and DVD-by-mail services. The death rattles of Radio Shack and JCPenney speak volumes about the challenges in retailing.
This calamity isn’t confined to an unfortunate few companies or a particular selection of industries. The threat to established firms is pervasive. Of the names listed in the Fortune 500 in 1955, nearly 87 percent have either gone bankrupt, merged, reverted to private ownership, or lost enough gross revenue to fall off the list. A study of the S&P 500, which ranks companies by market capitalization, found that its constituents averaged 61 years on the list in 1958 but only 18 years in 2012.
Contrast the turmoil in the enterprise world with value creation among the world’s most valuable companies as of January 2014. Apple is worth $436.55 billion after three and a half decades in business, a beacon of market-disrupting prowess. Google, less than half that age, is valued at $395.42 billion. Amazon has a market cap of $165.79 billion. Facebook’s initial public offering (IPO) was a notorious fiasco, but the 10-year-old company is still worth $164.00 billion and rising. Twitter, founded eight years ago, is already worth $29.60 billion.
Alternatively, consider the fastest-growing companies coming out of the startup crucibles of Silicon Valley and New York. Dropbox, Pinterest, Snapchat, and Uber have accrued valuations approaching $14 billion in a few short years. Newer arrivals such as Airbnb, Evernote, MobileIron, PureStorage, Marketo, Spotify, SurveyMonkey, Violin Memory, and Zscaler are worth more than $1 billion each. In fact, the number of billion-dollar startups is estimated to be as high as 40. These companies are creating value at an unprecedented rate and on a historic scale.
The difference between stagnant enterprises and their fast-growing counterparts is no secret: These emblems of growth have an uncanny ability to bring to market exciting products and services and open vast new markets. High-flying corporations like Amazon and Facebook have proven that big companies can do it. But for lessons in how, the best place to look is startups.
Startups Ascendant
If the present is a dark time for established companies, it’s a golden age for new ventures. Entrepreneurs number 380 million worldwide, according to foundersandfunders.com, a number that’s expected to grow exponentially. Superstar entrepreneurs like Steve Jobs and Mark Zuckerberg have become cultural icons, spawning best-selling books and blockbuster movies. The Social Network, Hollywood’s treatment of the Facebook story, has grossed nearly $300 million worldwide. Hit television show Shark Tank features business pitches from aspiring entrepreneurs to a panel of potential investors. The Bravo network even took a chance on a reality TV show, Start-Ups: Silicon Valley, which followed a handsome pair of would-be moguls through their efforts to form a business plan and pitch venture capitalists (VCs).
All of which has dulled the appeal of even the biggest enterprise brand names. For bright business- and technology-minded college grads, it’s no longer cool to work for a blue-chip corporation. In general, millennials reject the traditional comforts of management hierarchy, financial stability, risk aversion, and buttoned-down culture. They want to work at Airbnb, Dropbox, FourSquare, or Tumblr—or launch their own bid to rule the infosphere.
And, for the first time, it’s clear how to do it. Over the past decade, what was a wilderness trail to starting a high-growth business has become a well-worn path. Students can study entrepreneurship in school, read up on the scene in TechCrunch, VentureBeat, or Xconomy, attend meetups for like-minded aspirants, get a job at a hot startup, draw up a business plan, and start pitching VCs.
More important, the cost of starting a company has fallen through the floor. Many fixed costs have evaporated, replaced by variable costs. For instance, Amazon Web Services gives aspiring entrepreneurs access to data center infrastructure, and it costs nothing until customers start showing up en masse. Freelance communities such as Crowdspring, Mechanical Turk, Odesk, and Elance can handle odd jobs from programming to design to writing press releases. Coworking spaces provide cost-effective offices where startup founders can congregate and support one another until they have sufficient revenue to rent a proper office. Capital has become more accessible as well, thanks to crowdfunding sites such as Kickstarter, seed-funding communities like AngelList, and new laws that allow almost anyone to buy and sell equity.
All these trends boost the level of competition with an enterprise’s established business units as well as the possibility that they’ll be blindsided by unforeseen market shifts. A new generation of highly empowered entrepreneurs is coming up fast. They have the means, motive, and opportunity to disrupt your business, and they’re out to do just that.
The Enterprise’s Dilemma
Hidebound enterprises don’t start out that way. As Clayton Christensen pointed out in his classic 1997 business manual, The Innovator’s Dilemma, most large companies begin as innovators who unseat powerful incumbents by leveraging cheap technology to deliver good-enough capabilities at a lower price. The dilemma arises once they’ve ascended to dominance. At this point, they have a market to protect, and their original focus on disruptive innovation shifts to sustaining innovation that bolsters their legacy business. Now exploiting a mature market, they can look forward to decreasing growth. Ultimately, a new competitor emerges that undermines their business with a cheaper alternative. By failing to develop disruptive technologies first, they leave themselves vulnerable.
Indeed, overcoming inertia has become a do-or-die priority for large organizations. Enterprise CEOs must fend off ever more rapid technological shifts and ever more aggressive competitors. Christensen’s manual was the first of what has become a flood of books, conferences, workshops, and blogs devoted to the topic, and executives have embraced them in search of a solution. Corporate innovation has become a rallying cry and a budget line item. Intrapreneurship programs have become commonplace. Internal incubators and accelerators are de rigueur. Corporate development funds invest millions in emerging markets. Yet few enterprises escape the innovator’s dilemma. Instead, they remain mired in the swamp of inertia, lassitude, bureaucracy, and misaligned incentives that afflict virtually every large company.
The key challenge is resource dependence: the fact that organizations rely on external parties for their survival. Securing these resources implicitly becomes the enterprise’s highest priority, regardless of explicit mandates handed down by management. (In the strongest version of this theory, upper-level management has no real control over the company’s priorities; external forces determine its direction.) In other words, enterprises aren’t free to do what they want. Their suppliers, investors, and especially customers exert a magnetic pull toward established lines of business. This tendency to stay on familiar territory is a strong barrier to innovation.
Overcoming resource dependence is possible but doubtful. Clayton Christensen tells an enlightening story in The Innovator’s Dilemma. In 1982, Stuart Mabon, CEO of the hard disk manufacturer Micropolis, recognized the need to shift from making 8-inch drives to next-generation 5.25-inch units. Initially he thought he could keep his current customers happy while he made the transition, but he gave up within two years. “It took 100 percent of my time and energy for 18 months,” he said, to keep the company dedicated to serving customers for 8-inch drives, as he focused on the new initiative. Ultimately Micropolis made the transition, but Mabon reported the experience to have been the most exhausting and difficult of his life.
We see the influence of resource dependence frequently in our work. Would-be enterprise innovators are staring a substantial opportunity in the face but feel compelled to ask themselves, “How does this fit into our business model? Does it suit our brand? Are we good at it?” These questions are deadly to innovation. The company’s values, competencies, and processes are huge advantages in continuing to do what it already does, but they make it nearly impossible to open new territory.
Unleashing the Enterprise
We’ve helped numerous enterprises get past these roadblocks. Lean Startup Machine has trained 25,000 entrepreneurs and employees in the Lean Startup method since Trevor Owens founded the company in 2010. Where other trainers teach lean startup methods through lectures and workshops, Lean Startup Machine participants engage hands-on in experimentation, customer development, innovation accounting, and other techniques to bring their business ideas from concept to product, even generating real revenue from real customers. Over an intensive three-day course, participants form hypotheses, test assumptions, interview customers, design products, and validate demand. They leave with practical innovation skills that they can apply immediately.
Working with employees of American Express, Deloitte, ESPN, GE, Google, Intuit, News Corp, Salesforce, Samsung, Time, and thousands of other companies, we’ve witnessed the obstacles to innovation at large corporations. We’ve seen the impact of functional silos, quarterly budgeting, salary-based compensation, and corporate politics on entrepreneurial spirit and creative thinking. And we’ve seen the severe limitations of typical skunkworks, intrapreneur programs, and innovation labs. We’ve developed an alternative approach that has overcome these challenges, activating latent entrepreneurial talents and skills to transform timid, stodgy organizations into energetic factories of fresh, marketable products and services.
Moreover, we’ve built a lean startup ourselves. Lean Startup Machine began as a crazy idea born of frustration with previous failed ventures. In three and a half years, it has grown into a worldwide organization that stages 300 boot camps a year in 500 cities, on six continents, funded by Upfront Ventures, Techstars, 500 Startups, and Eric Ries. Now we’re developing software that helps innovation teams keep their execution on track. We built Javelin, our software-as-a-service innovation engine, according to the method described in this book, from initial hypothesis through prototype. Since then, we’ve deployed the tool at scale with Lockheed Martin and News Corp and expect to launch worldwide in early 2014.
We didn’t invent the lean startup. Credit for that goes to Eric Ries, Steve Blank, David Kelley, John Krafcik, the 17 writers of the Agile Software Manifesto, and others too numerous to mention. In particular, we owe a huge debt of gratitude to Eric Ries. His book The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses was a landmark achievement. It coalesced Eric’s years of research and writings into an easily digestible format that allowed us to take our work to a mainstream business audience, consisting of startups and large companies alike. Notwithstanding, watching many enterprise employees struggle with Lean Startup tenets and practices has led us to extend Eric’s work into what we believe is a comprehensive, practical approach that can give established organizations the innovative prowess that’s normally thought to be the sole province of startups.
Why Intrapreneurship Fails
Many enterprise executives try to build an internal culture of innovation. They adorn their offices with ping-pong tables and bowls filled with sugary snacks. They move their best and brightest employees into the role of intrapreneur, an internal entrepreneur accorded the freedom to take risks that ordinarily would be frowned on in the interest of bringing radical new products to market. But most of these efforts come to naught. Intrapreneurs are stymied by politics or sidetracked into low-growth activities. Their most ambitious projects often are wildly misdirected, wasting huge budgets and leaving sterling brands tarnished. Worse, their energy is channeled into slow-moving, me-too products that fail to make a dent in the market. Acquisitions intended to snatch up strategically important technologies or talent suffer from poor integration with the parent company. Bold hires aimed at infusing moribund business units with fresh blood have little effect but to stall promising careers.
In our view, the word intrapreneur is an oxymoron. The roles of employee and entrepreneur are mutually incompatible. Executives who expect salaried workers transplanted into an innovation department to come up with great ideas, invest the company’s capital in them, and shepherd them to market success are fooling themselves.
Intrapreneurship programs tend to fail for three reasons. First, intrapreneurs are forced to address incremental innovations that lead only to marginal growth. They’re not free to focus on high-growth opportunities. Second, they’re paid a salary. This removes the motivation that drives real entrepreneurs: the risk of losing everything and the chance of winning a huge payoff. Third, intrapreneurs lack the financial structure to let their projects blossom. Instead, they compete for funding or become mired in departmental backwaters. Let’s take a closer look at each of these factors.
Autonomy
The corporate legacy stifles innovative thinking. Sustaining a mature business demands a tight focus on current customers and existing products. Once employees adopt this mind-set, it’s nearly impossible to shake. They internalize the company’s values and competencies, which blinds them to potentially industry-changing, high-ROI (return on investment) opportunities that don’t fit the established pattern.
Entrepreneurs, on the other hand, think broadly about how to solve customer problems. They spend a lot of time studying the market, playing with products, consulting with other entrepreneurs, sounding out potential customers, and generally looking for ways to get ahead of the market. They need to be located outside the company’s offices and given freedom to do whatever is necessary to create an independent business.
Incentive
Workers don’t take big risks without big incentives, which intrapreneurship programs seldom provide. Employees execute well-defined responsibilities in return for agreed-on wages. It’s a classic arrangement that satisfies the need for certainty on the part of both employer and employee, but it severely dampens the motivation to dream big and act boldly. The downside of championing a failure far outweighs the upside of creating a success.
Entrepreneurship is about taking big risks in return for the possibility of outsized rewards. This combination of high risk and high reward is immensely motivating. It keeps entrepreneurs going when they encounter seemingly insurmountable obstacles, as they routinely do if they confront market uncertainty head-on. They need to have a personal financial stake in their startups and share in the upside when they succeed, and any enterprise that hopes to benefit from their efforts had better structure their compensation to this effect.
Financial Structure
Enterprise innovation departments usually have to fight for their budget just like any other business unit. It takes years to build a successful business, so intrapreneurs are likely to have nothing to show on a semiannual or annual timeline and are forced to play politics. This state of affairs reflects a fundamental misunderstanding of the forces that drive innovation.
Entrepreneurs need a limited runway that keeps them focused and disciplined. At the same time, they need the financial independence to trade equity for funding if they’re working on something that shows definite promise even as it’s running out of road. Startups don’t need to appeal to corporate executives to keep funding a product that might be years away from substantial income. They rely on market forces to confirm their sense of what their startup is worth. Internal innovation efforts require the same constraints and the same freedom.
Most executives who seek to foster an innovative culture fail to recognize that culture is an outgrowth of organizational structure, incentives, and precedents. A culture can’t be altered in isolation. Changing culture means changing the organization itself and developing a history around the renewed firm. People are inherently creative and entrepreneurial if they’re put in an environment that organizes and incentivizes those qualities.
Until recently, designing such an environment was a tall order. The appropriate structures and processes for innovating in an enterprise context were theoretical, and the theory didn’t bear out in real life. Over the past few years, however, the elements have emerged that make it possible to create an enterprise environment in which innovation is not a doomed prospect but an automatic outcome.
Enter the Lean Startup
Most failed startups die not because they can’t build what they set out to build but because customers don’t buy it. The fundamental point of the lean startup method is to avoid wasting resources by making products that no one wants.
For instance, a publisher of bike repair manuals aiming to enter the mobile market must choose whether to build products for Android, iOS, Windows Phone, or—dare we say it?—BlackBerry. Which one will its customers want most? It could decide on iOS because that operating system has the largest user base—but perhaps the company’s most profitable customers tend to use Android. If the company makes an iOS app and the most profitable customers use Android, the time, expense, and effort of building the product largely will have been wasted.
Successful startups thrive because they have the capacity to learn and adapt to what customers want. Rather than slavishly executing their original plan, they change course based on what they learn and eventually discover a product that customers will pay for and scale it to large numbers of people.
The lean startup method is a set of techniques for accomplishing this product/market validation. If the publisher can determine not only which mobile OS its most profitable customers use, but also whether they would buy a mobile bike manual, through a particular distribution channel, and for what purposes, it can eliminate much of the risk of building the product and create a much higher likelihood of a profitable outcome.
The lean startup movement has proven effective at building viable early-stage ventures at low cost and high speed. Enterprises can adapt lean startup practices to achieve the same results. The discipline of the build-measure-learn loop—iteratively building a minimum viable product, experimenting on real-world customers, and making a decision to pivot or persevere—offers a process of unprecedented efficiency for building sustainable new businesses.
All the arrows in the lean enterprise quiver are essential, but the tactic known as innovation accounting is especially relevant to established companies. This technique is the key to driving transformation in old-line companies that ordinarily find innovation beyond their grasp. Let’s take a look at how.
New Tools for CFOs
The constraints that suffocate innovation in an enterprise setting, from resource dependence to issues of autonomy, incentive, and financial independence, are largely tied up in the methods that enterprises use to contain costs. This makes good sense: Data accumulated over a long operating history makes it possible to fine-tune margins and squeeze the highest return on investment out of slow-growing and even contracting markets. However, conventional tools of financial analysis are deadly to innovation. Applying methods designed to deal with predictable economics to situations governed by high uncertainty is counterproductive.
For instance, corporate finance officers are familiar with discounted cash flow (DCF) analysis, a technique that discounts future cash flow based on an interest rate to determine the net present value of a business unit. Early-stage companies lack substantial revenue, and it may be unclear how they may monetize and how their initial revenue strategy may evolve over time. Consequently, DCF isn’t appropriate to a startup environment. Instead, early-stage companies are valued based on currently invested capital, demand for equity, and intangible factors that might be characterized as buzz. This method is clearly incompatible with what CFOs have been doing for decades.
Innovation accounting is an alternative that makes it possible to measure a startup’s progress toward becoming a sustainable business. Conceived by Eric Ries and introduced in his 2011 book, The Lean Startup, this technique involves identifying the user behaviors that have the greatest bearing on growth and building a model that reflects their impact on the business. Entrepreneurs can begin tracking startup performance literally on day one by entering into the model fictitious numbers that represent an ideal case. Then, as customers arrive, they can plug in real-world numbers and start tuning the business to generate growth. Moreover, as the product changes, they can add numbers that reflect behaviors around new capabilities to see how they affect the business. The build-measure-learn loop ensures that they validate what they’ve learned and apply it the next time around.
The metrics model fits well with traditional enterprise practices because it’s similar to a DCF. The major difference is that the model is based on user behavior rather than revenue. User behavior may sound like a soft measure compared to cash flow, but for many innovative products, it’s the most important. This is because innovative products often require users to adopt a new behavior. Before Facebook, nobody checked their friends’ status online; before Twitter, no one wrote public messages in 140 characters. The revenue model for both companies—advertising—is conventional, but the customer behaviors that drive it are unprecedented. If user behavior around this sort of business demonstrates growth, that’s the beginning of a viable business.
In this way, innovation accounting allows enterprises to account for the formerly unaccountable. It provides an invaluable tool for enterprise CFOs who need to present the results of innovation efforts to stakeholders. Traditionally, such presentations involve a lot of what Ries calls success theater. This method replaces that with accountability and transparency. CFOs can report growth as reflected in the model, and they can propose valuations based on funding levels of early-stage companies of comparable size and focus gleaned from information sources such as AngelList and CrunchBase. This is a powerful way for CEOs to communicate an innovation portfolio’s progress and what it means to the company. It provides a rational case for innovation within the enterprise.
Dawn of the Lean Enterprise
Enterprises are in a tough bind, but our lean enterprise approach offers powerful new tools that can turn companies focused on protecting old markets into masters of discovering and mining new ones.
Innovative companies gain fringe benefits as well. Being perceived as a leader generates a halo effect that can raise the company’s public profile and internal morale. This can be a boon to employee retention and recruiting. Establishing an entrepreneurial path within the enterprise attracts not only internal candidates who have ambitions beyond their current job but also outside talent that appreciates the strengths an established company can bring to a new venture; they can live the dream in a more comfortable and stable environment. And developing contacts in the world of startups and seed-stage investors gives the company early warning of emerging trends and business models.
And the impact extends well beyond the company’s walls. Today, people who feel an entrepreneurial urge must choose between holding a conventional job and putting their livelihood on the line, subsisting on ramen, and sleeping on the couches of indulgent friends. The lean enterprise offers a third way: They can share the risk with an organization that has been architected to maximize their chance of success. This approach provides a path for would-be entrepreneurs who don’t have the means or personality to found a startup on their own, but who may have valuable ideas, talents, and skills. It makes far more efficient use of the entrepreneurial spirit that permeates society at large.
Every company must face the reality that the departure of a single employee can cost the company billions in lost opportunity. There’s a better way: Recognize the new rules that govern innovation in this era of pervasive networks, develop a strategy that respects those rules, and build an organization that can execute the strategy in a way that enables the autonomy, incentive, and focus required to innovate. Put entrepreneurs in a special environment that enables the autonomy, incentive, and focus required to innovate. The remainder of this book illuminates the path.
Chapter 1Roadmap:Introducing the Lean Enterprise
The root of the enterprise’s innovation troubles are the internal failures to address issues of autonomy, incentive, and financial structure. But the overwhelming need to innovate is driven by changes in the outside world. Ubiquitous access to the Internet, mobile networks, and cloud computing re-sculpt the business landscape at ever faster rates. Those forces bring forth new markets and stimulate new products, while building and destroying companies with unsettling speed.
Enterprises need to understand this new environment and its implications for their innovation efforts, and they need to build new structures and strategies that take advantage of these forces rather than being overwhelmed by them. In the chapter entitled Strategy (Chapter 2), we take a closer look at the forces at play and their implications for innovation organizations and strategies.
The Innovation Colony
Overall, this book explains how to generate a profusion of product or service ideas and figure out which ones are likely to make viable businesses, predictably and repeatedly, within a large organization. The key is a new corporate structure that we call an innovation colony. Like the economic and political colonies of previous centuries, an innovation colony is a settlement staffed by employees of the mother company, but it’s distant enough that the company’s traditional management practices are not in full effect. It’s funded by the enterprise, but its main concern is sustaining itself by all possible means, just like a normal startup does. Colonies have single, critical functions to perform on behalf of their enterprise masters: to foster disruptive innovations.
Unlike conventional corporate departments, an innovation colony needs a unique degree of independence and autonomy. It’s a company within a company, and it spins out startups at a great rate and fosters the ones that show promise. The chapter entitled Corporate Structure (Chapter 3) covers the colony’s organization in detail.
An innovation colony won’t produce fresh, market-ready businesses, though, unless the people working in it are properly incentivized. Most entrepreneurs are motivated by a risk/reward profile that would terrify ordinary enterprise employees, and typical compensation structures drive them away. However, in order to succeed, your innovation colony will need people that think like entrepreneurs. The key to hiring them is to create jackpot opportunities. In the chapter entitled Compensation (Chapter 4) we argue that enterprises must be willing to surrender a large share of equity in the ventures they develop. Our rationale is that even if the colony produces a handful of market-leading products, everyone concerned will still make enough money to justify the undertaking.
Innovation colonies pursue large numbers of worthy ideas in alignment with an innovation thesis based on prevailing trends in technology, investment, and consumer behavior. We take a closer look at this vision and how to formulate it in Vision: The Innovation Thesis (Chapter 5).
Investing in unproven ideas still entails huge risks. What if none of them hit it big? That risk is the reason why the way you select ideas is as important as the number you pursue. Teams within the innovation colony must test each idea to make sure it has a ready market before committing substantial resources to developing it. The Lean Startup method enables them do exactly that.
The Lean Startup Method
Fred Wilson, founder of Union Square Ventures, says he likes to invest in startups that “grow like weeds.” Why? A weed doesn’t need carefully prepared soil, regular watering, or full sunlight. It busts open its seed, sends down roots, and pushes upward without need for a controlled environment. Likewise, ventures built according to lean startup principles don’t require the certainty of ideal conditions to thrive. They thrive in conditions of extreme uncertainty—the very conditions that bring the highest returns on investment.
To build a lean enterprise, you must create structures and processes within the company that seek out conditions of high uncertainty, discover promising business possibilities, and nurture the ones that show potential to grow like weeds. Do it right, and you have a shot at harvesting a 10,000-times return.
Doing it right is difficult because corporate people are accustomed to shunning uncertainty. We ended up writing this book because we’ve been teaching corporations to do lean startup for the past few years, since before Eric’s book was even published. In our book, we teach you the step-by-step process to changing your risk-averse corporate mind-set in Lean Enterprise Process (Chapter 6).
Lean startup principles are fundamentally an application of the scientific method—especially experimentation. In conditions of extreme uncertainty, the logical approach is to experiment. Everything we do is pretty much an experiment, but seldom do we apply disciplined procedures to make sure we consistently learn from our experiments. The lean startup method is a framework, complete with terminology, best practices, and a worldwide community of enthusiastic practitioners. It allows you to run experiments at minimum cost while yielding maximum learning. An innovation colony simply aggregates lean startup experiments on a grand scale. It is designed to repeatedly discover innovative new businesses that can generate exponential returns.
Build, Measure, Learn
In general, the experimental process is an iterative approach divided into three phases: build, measure, and learn. It starts with an inspiration or intuition that customers have a problem and a particular product or service will solve it. The product is never elaborated more than absolutely necessary to complete the current experiment. The point is to build, as quickly and cheaply as possible, an interaction with potential customers that generates measurable results that lead to learning. In this way, you accrue a growing body of real-world knowledge that guides product development, engineering, and marketing efforts. These techniques are the subject of Experimental Methods (Chapter 7).
As you hone your product ideas to appeal to a real-world audience, you need to make sure it can generate a fast-growing business. The lean startup technique known as innovation accounting tells you which variables have a decisive impact on factors such as customer acquisition and retention. By building a spreadsheet metrics model of the business and tracking real-world metrics, you can isolate the variables most critical to growth and allocate resources efficiently to optimize them. This is the subject of Innovation Accounting (Chapter 8).
Product/Market Fit
The ultimate goal of all this experimentation is to achieve product/market fit, the point at which an idea delivers enough value that it can scale quickly to a large customer base. Whether a product or service has achieved product/market fit is largely a subjective judgment. The only proof is an exponentially growing business.
That said, there are two helpful indicators. One is the must-have test. Sean Ellis, the founding head of marketing at Dropbox who is now CEO of Qualaroo, devised this technique while working as a consultant. He used a lightweight tool called survey.io to ask a company’s customers a single question: “How disappointed would you be if you didn’t have access to this product?” After surveying customers of 100 companies, he noticed a pattern. Customers of companies that were struggling to gain traction answered “very disappointed” less than 40 percent of the time. On the other hand, customers of companies that had significant traction answered “very disappointed” at a higher rate. In other words, the company’s offering was a must-have for these customers.
Tip
The must-have indicator can be misleading. For instance, Acceptly, an online service designed to help high school students apply to colleges, garnered a high must-have score, but customers didn’t use the site frequently enough to make a sustainable business. In such a situation, trying to scale up can be challenging. You can use further survey questions to test for flaws like this.
The other indicator of product/market fit comes from the innovation accounting. An important part of building a metrics model is to enter a set of fictional measures that represent a successful business. When the real-world metrics match or exceed this ideal case, it’s a good sign that the business has reached product/market fit.
Three Strategies
The lean startup techniques of experimentation and innovation accounting form the basis for three strategies designed to enable enterprises to create groundbreaking new products. The first is to incubate internally. This is the subject of Incubate Internally (Chapter 9).
Occasionally, a compelling idea will be already in development by an independent startup. The second strategy then comes into play: acquire early. A well-timed acquisition can bring valuable resources into the enterprise and jumpstart innovation efforts that can continue alongside internal startups. In Acquire Early (Chapter 10) we take a look at how to accomplish this.
The third strategy is to invest in outside startups. There are several reasons to do this. A startup may be too risky to acquire or simply may not be up for sale. In situations like this, an enterprise can purchase a stake that may have enormous upside potential without having to make the commitment of incubating or acquiring. Investing is the subject of Invest When You Can’t Acquire (Chapter 11).
Some enterprises won’t want to dive head-first into the waters of high risk and high reward, preferring to wade into the depths in small steps. But even a small innovation colony can vet enough ideas to generate a hit. The chapter entitled Innovation Flow (Chapter 12) explains how to scale a colony from a limited trial run to a massive operation.
These structures, methods, techniques, and strategies add up to a powerful toolkit that’s available to any enterprise with the ambition and commitment to take destiny into its own hands. There’s no need to lumber along in a rut of sustaining innovation. The path to breakthrough products and exponential growth is wide open. Enterprises can compete with startups on their own turf—and win. Let’s see how.
Case Study: GE, Stephen Liguori, Executive Director, Global Innovation
General Electric (GE) ranked ninth on Bloomberg Businessweek’s 2013 list of the world’s most innovative companies. Not bad for a business that rated number eight in the same year’s Fortune 500 list of the world’s largest enterprises—and positively astounding for a company that was founded in 1892 and now boasts more than 300,000 employees and nearly $150 billion in revenue (fiscal 2012). Much of the credit goes to their CEO Jeff Immelt and GE leaders such as Stephen Liguori. As GE’s executive director of global innovation, Liguori and a dedicated team are pioneering the use of lean startup techniques in the arena of industrial hardware. His FastWorks program was developed through working with Eric Ries and is driving lean startup practices throughout the company to stimulate breakthrough products and open new markets. Liguori and his colleagues are solving the most intractable challenges of enterprise innovation through bold leadership. He spoke with us about the path he’s taking to get there.
How Are Your Innovation Efforts Structured? Do You Have a Special Innovation Division?
We don’t have a special division. There are two halves to the innovation equation at GE. The first is technical innovation, inventing new machines. We have seven Global Research centers worldwide, including a new one with 700 software engineers in Silicon Valley, who work with every GE division. The other half is commercial innovation. Beth Comstock, our CMO, heads a small hit squad doing that. I’m the executive director for global innovation. Sue Segal is president of GE Ventures, and there’s a licensing team that looks for ways to take advantage of the thousands of patents we have.
How Do You Keep Innovation Efforts Free of Interdepartmental Politics, Budgeting Cycles, and Other Corporate Roadblocks?
It’s the heart of the issue. When you combine the bureaucracy that builds up in a large organization with the highly technical nature of the things we make—jet engines, power turbines, CAT scan machines—you could say it’s daunting. Our solution is FastWorks, a program built on lean startup principles. If you don’t recognize that the culture is the enemy, you’ll lose. You’ve got to go top and bottom. At the top, you have to get not only sponsorship but also buy-in and understanding. We’re putting executives through training in lean startup principles, telling them, “You have to know how to do it because if you’re not going to change your behavior”—that’s literally what we’re talking about—“we’ll die.” The flip side is giving the teams tools and training. They say, “I want to be an entrepreneur, but I get choked to death by the functions. The finance guys say prove it, the legal guys say it’s too risky, the compliance guy says the regulatory people will have problems with it.”
How Would You Answer Them?
One of the ways you get the buy-in with the bureaucracy and the culture is by telling everyone, “We’re not betting the ranch.” We’re not going to build a factory to roll out thousands or millions of new, innovative machines. We might make a million refrigerators a year, but we’re making only 60 of the conceptually disruptive refrigerator we’ve been working on. It’s not the old, “Give it to engineering and come back three years later”—and, in our case, $30 million later. It’s like, “How about we give you $30,000 and 30 days and you come back with a prototype.” Then the engineers say, “Do you know how much money it will cost me to set up to make a prototype? My yield will go down, my waste will go up, my metrics will go in the toilet and I’ll get screwed at my annual review.” It’s not that the incentives are set up wrong; they’re set up great for running the mother ship. This is not the mother ship. We’re telling the teams that the “minimum” in a minimum viable product is not just in terms of the features; it’s also the smallest number of customers who need to use it to get real learning. You might make five prototypes of a locomotive and give one to each of the big north American railroads—just 1, not 50, not 500, not 5,000—and that contains the risk to the system. We’re doing it to discover a need in the marketplace, not to scale yet, not to make money yet. That opens the window to get people to listen to these radically different ideas. “We don’t know if it’s a big idea yet, so we’re not looking to blow up the world. We just are looking to do a small test.”
