Steve Blank on Enacting Lean Startup Inside Big Companies

December 18, 2015

InnoLead: Steve, we’re seeing a huge amount of interest from big companies in, “How can we apply lean startup methodology?” I know you’ve been seeing the same thing.

Are there some examples you can talk about of companies doing it intelligently and effectively, versus companies that get tangled up in their shoelaces?

Blank: Sure. The best one that has been talking about some of their successes has been W.L. Gore. I think they’ve done a pretty good job, from the board level down, of being able to chew gum and walk while deploying lean methodologies across an innovation portfolio, across multiple divisions.

Eric Ries’ work at GE has been talked about pretty widely, and I think successful. Those are the ones we can talk about publicly. I’ve been doing work with some major federal agencies, as well as several other companies. The results have been interesting, to say the least.

Continuous Disruption can Only be Addressed with Continuous Innovation

InnoLead: What do you see as the key benefits of training people on, and deploying, lean startup in a large organization?

Blank: The challenges in the 21st century are much different than those of … the 20th. Companies today, almost in every segment, they’re facing continuous disruption — from China, from new competitors, from incredibly well-funded new entrants, to changes in markets and pricing, et cetera.

This continuous disruption … can only be addressed with continuous innovation. Yet most large companies, at their core, are focused on execution of Horizon 1 activities.I think McKinsey nailed it pretty well 20 years ago: companies focus on Horizon 1 projects, which are existing business models, Horizon 2, [which is] extending business models, and some Horizon 3, [which is] radically new or disruptive innovation or new business models. Corporations are traditionally managed for Horizon 1 and maybe 2 exploration, and trying to paste on innovation is incredibly difficult.

Lean startup [gives us] the language and some tools to go do that. That’s what we’re trying to do, while, at the same time, trying to avoid what I call innovation theater, which looks good to management and the board, but after three years, you go, “Never really moved the dial, but we got some neat posters out of it.”

Incentives Matter

InnoLead: I love the term “innovation theater.” In a way, I feel like companies get drawn to innovation theater, as I see it, because the CEO says, “Hey, we need to have more of a culture of innovation, so go do some events. Go do some training sessions.” At a big company, you could do that for two years, three years before you’ve reached all of the employees and all the offices, and you don’t have a lot of results to show for it, right?

Blank: That’s when you update your résumé or hand [the program over] to someone else and get promoted.

The real test is, “Did anything move the top or bottom line for any of these activities?” We’re now in the phase where we’re actually starting to see people shut down their innovation centers and incubators. The root cause is that most companies never had the hard conversations first, which are, on the executive staff and board level, “What do we want to accomplish, and how are we going to go about that? How are these innovations – let’s say we start the canonical corporate incubator. What’s the role of the P&L divisions and operating divisions? How do we transition this stuff? Do we spin them out if they don’t get adopted? What’s our strategy?”Those are usually the painful, hard conversations. Usually the P&L operators are more than happy to hand [innovation responsibility] to some corporate staff and say, “See you later. Call me if there’s anything interesting.”

What we find is, in hindsight, we actually did the easy stuff and never did the hard stuff. When I get called in for one of these failed innovation incubators, the first thing I ask is, “Well, did you guys change any incentives for the exec staff for innovation?” “No.” “Was there any training for mid-level managers on what innovation means?” “No.” “Were there any cultural changes?” “No.” “Well, what did you expect?” “We just threw up something, put up posters, and nothing happened.”

How P&L Divisions Should be Involved

InnoLead: There’s a lot in that answer to dig into, but let me dig into one thing… It seems like, at a lot of companies, things get lost between when they’ve done an initial market test or pilot test and when it feels stable enough or mature enough to get handed over to a business unit. Can we talk about that a little bit, the awkward adolescence of some of these ideas that maybe had successful pilots, but the business team looks at it and says, “We’re not yet convinced that that’s going to be a big growth driver for us.”

Blank: Some of the tactics we suggest is having those P&L divisions be part of and mentoring those initial teams and being facilitators to resources in the company, and two is figuring out whether they want to buy in or help spin out these new initiatives.

By the way, innovation is not only this new stuff. Innovation should be going on for all three horizons. Typically, it does [well] in terms of lower costs or product-line extensions, but we can move much faster using lean startup tools than we traditionally have using product management and phase-gate techniques, even for existing products.Back to answering your question, these things spin out because we’ve never deeply integrated innovation into the existing management structure. It was always someone else’s problem. I think that has to go away. You can’t have a bucket over here that says “Advanced R&D,” and we’ll sit here and come up with new stuff that may or not be interesting. This stuff just has to be top-to-bottom integrated throughout the company.

Get Out of the Building

InnoLead: You have this great quote, which I think speaks to a lot of aspects of corporate culture. Your quote is “All the facts reside outside the building.” You see so many times in corporate cultures where nobody ever gets outside the building.

Blank: The phrase is, “There are no facts inside the building, so get the hell out.” What it refers to is, not that you don’t have smart people in your company, and not that you might not be inventing some great technology in the labs, but the people you’re selling to are not inside your building, nor are your competitors, nor the economic climate, et cetera.

The default, typically, is, “Well, that’s what our salespeople do, or that’s what product management does.” That’s, in fact, the antithesis of what building a startup is.We’ve put together teams that actually take invented technology and get out and try to find customers and markets as a team early on. They’re talking to 10 to 16 customers a week. By the time this eight-week process is over, they’ve talked to over a hundred customers.

And if, in fact, we have known customers and [we are] looking for products to fit them, we do the same with a different process, the same result. [We use] Alexander Osterwalder’s business model canvas — what’s the value proposition for the customer segment? What’s the right channel? How do we get and grow customers, et cetera?

Just getting out of the building dramatically changes this, “We built stuff and no one cared when we launched the product,” or, “We piloted something and we didn’t find out until we spent half a million or five million or even more in discovering that no one wanted it.”

Organization Structures that Work

InnoLead: Do you find that there are some organizational structures that either work really well or don’t work really well when you’re setting up a team that’s trying to do these kinds of tests and explorations?

Blank: Small.

InnoLead: OK, so small, but where should it sit in the organization? That’s a question we see a lot of people wrestling with.

Blank: There’s no magic about putting something in a corporate incubator. I have the belief that says, “You want to run these lean processes down to the lowest possible level in an organization.” That is, if we’re just testing, let’s say we have a division with existing customers, existing markets, but we want to try new products — for god’s sake, we ought to be running lean teams inside that division.

If we want to try something radically new that doesn’t fit in an existing business unit, then that makes all the sense in the world to physically isolate that away from the day-to-day budget pressures and time pressures of P&L.Does that make sense? The answer is, it depends whether we’re doing something that fits into our existing product line. I’ll contend, in an existing product line, you could stand up at 10X the number of initiatives in a fifth the amount of time. It’s a big idea…

Opening an “Innovation Outpost”

InnoLead: I guess I’m seeing a little less activity when it comes to that more insulated, separated group that’s supposed to discover new kinds of customers for the company or develop new products or services. Maybe you see something different, since you’re based out in the Valley…

Blank: For large corporations, here in Silicon Valley, it’s been pretty amazing. The last five years, there’s over 200 companies with what we call “

innovation outposts” in Silicon Valley, and that is the number of companies that decided that a good chunk of what used to be traditional advanced R&D needs to be close to where the innovation is.

Unfortunately, I think most corporations and your listeners have discovered that the role of corporate innovation labs, which used to be the standard in the 20th century, has diminished, because you can no longer own all that expertise, even if you are the market leader in your industry. You need to be able to tap into the innovation that’s being fueled by this enormous pool of venture capital money that exceeds almost any company’s R&D budget.Therefore, we see innovation outposts that do two things. They sense, meaning take a look at all this stuff that’s out there that could either be a threat or an asset, and then they respond. They could respond by investing, by partnering, by purchasing, or acquiring, et cetera. I think this is a major transformation of how a good chunk of corporate R&D is happening.

InnoLead: You wrote a blog post recently on innovation outposts. How do you recommend setting up goals for those, beyond just put three staffers out there and take a lot of meetings? How can you create some objectives that are realistic and achievable and the home office will feel like, “Hey, there’s some benefit to us being here”?

Blank: Actually, it’s funny you ask, because I just wrote a post today on on the six decisions that execs need to make before setting up an innovation outpost. The six steps are, one, we should all agree, on the exec staff, [that we want] startup-driven innovation that comes from external, early-stage companies as part of [our innovation] portfolio.

If yes, you get to go to step two, which is asking, what’s the time line and ROI, and what’s the amount of risk we’re willing to assume? For example, if you’re being disrupted right now, investing in an innovation outpost to do partnerships is kind of silly. You need to be buying something, or else you’re going to be going out of business. If you have [sufficient] time [to respond to competitive threats], an outpost might make sense.Then the third step is, what would be the charter for the outpost? What are the one or two big strategic problems that you could solve with a day-to-day presence in an outpost? Number four is, the exec staff, or the CEO, needs to get out of their building and explore and validate the ecosystem. Silicon Valley is almost always the right choice, but there are other choices. John Hancock has opened its lab in Boston. Thomson Reuters kicked off in Waterloo, and has a cybersecurity lab in Tel Aviv. There are other places as well that might make sense.

Then five is “What’s the strategy for successfully integrating the outpost?” No company wants to be known as Xerox PARC again, meaning … you invented, essentially, the Macintosh and Microsoft Windows and then never exploited its innovations. What’s the strategy for integrating those innovations that your outpost might come up with into the corporate mainstream?Unfortunately, I’ve seen a lot of this turning, again, into innovation theater. “Oh, we have a presence in Silicon Valley.” What does it do? “Well, we have a presence in Silicon Valley.” Opening the building and having the press announcement and then forgetting it, or not having it integrated in, is an enormous waste of time and talent.

Why Startups are Leery of Large Companies

InnoLead: A quick point that I would make: companies that have an innovation outpost expect that startups will line up at the door to meet with them. For a lot of startups, partnering with big companies is not on their priority list.

They want to go it alone because of the perceived, “Hey, we’re going to have to deal with legal, and risk, and compliance, and contracts, and we can burn up two years of our seed money and our time trying to do a partnership with a particular Fortune 500 company.”Blank: For me what always used to happen is, we’d partner with a great exec at a large company, and of course they’re no longer there 18 months later. They’ve either been promoted, or moved on, or gone somewhere else, and you’re now dealing with a whole other relationship. Startups just can’t afford to do that.

Three Failure Modes

InnoLead: Let’s take the first question from Ken Durand at Ericsson: What is the biggest point of failure you have seen with enterprises succeeding at lean methods?

Blank: I’ll give you a few. One is that the CEO or chairman of the board declares, “We’re going lean,” like it’s like the big bang theory, and then you put the posters up and nothing happens.

Everybody was going to change everything they were doing, but we never quite figured out how to do that. I just want to put as number one, the big bang theory of lean is typically just a warning sign. The other one is, well, we started the corporate innovation center. That’s nice. What does that mean for the rest of the company? How is this going to change our bottom line or top line? As I alluded to earlier, if there is no change in the incentives, or culture, or ties to operating divisions, or plans to spin out…that’s a major failure mode.

Failure mode #3 is, the top of the company gets it, the CEO and exec staff have completely bought in. You’ve got a bunch of innovators, as most companies do. Ericsson probably has a million of them on the bottom of the organization, raising their hands, cheering, and middle management just kills it.Not consciously, sometimes consciously, mostly unconsciously, but middle management just becomes the bottleneck. A good number of the causes can be articulated. You didn’t change their incentives. You didn’t change their job spec. You didn’t train them. They have no idea what it means to them, and you end up with a frustrated set of innovators at the bottom of the organization, and the execs going, “I guess this doesn’t work.”

Those are the top three, but the list goes on.

InnoLead: The next question is from AGCO. Can you explain more about your statement that innovation needs to be integrated in your organization, i.e., not in a standalone group or lab? I don’t think you said it has to be one and not the other, right?

Blank: That’s correct. If you take a look at, again, McKinsey’s three horizons of innovation, the same product which we now translate to the existing business model and extending business models, which tend to be in an existing P&L, and coming up with new business models, which is typically new, disruptive stuff.

I believe that innovation needs to occur in all three horizons, and we can do it at lean speed. The problem is that the product management tools we have, and product management itself, isn’t designed to do that. It’s designed to do innovation that’s serial, step-by-step, stage-gate processes, and that’s the antithesis of innovation.That’s, in fact, the world-class example of execution, which, by the way, we need to do to keep in business, but we could be integrating lean methodologies into our existing P&Ls, at the same time we’re doing crazy stuff, which should be part of our budgeting process — somewhere between 5 and 15 percent [of our investment] should be Horizon 3. The majority of our investment should be in Horizon 1 and Horizon 2, but the same processes could be working from end to end. InnoLead: There is a second part of the question, which is, how do we estimate revenue potential for Horizon 3 projects, is that something that you think is important?

Blank: Of course it’s important, or else R&D ends up just uncontrolled and unfettered. There’s a whole discussion of corporate moon shots, versus the disruptive innovation set that I don’t think we have time for, but the short answer is yes, you do want to estimate them. There are lots of techniques to do that, [but] not enough time to discuss those here.

Running Lean Tests in a Regulated Environment

InnoLead: An anonymous question: We’re in a very regulated corner of the financial services industry. How can we talk to our CEO and senior management who don’t believe we can or should use lean startup approaches?

Blank: A good number of companies have started these approaches without senior buy-in. Another place lean can start is just by small groups proving that getting out of the building, talking to customers, and coming up with minimum viable products, in short amounts of time, provides a pretty effective way to be more effective with dollars and resources. I guess what I’m advocating is that, if possible, a small group should actually be trying this without breaking any glass, and then just showing the results rather than pitching the religion. …Rather than pitching the religion, I would pitch the results.

Internal Innovation vs. Innovating by Acquisition

InnoLead: A last question is about scaling up, and you talked a little bit about this earlier, but there are a couple of listener questions that I’m trying to weave into one. You obviously advocate starting small, with minimum viable products and just a few initial customers. How do you keep the business units invested over time — keeping the business units and senior management bought in as something is growing, and scaling, and turning into a real business.

Blank: This goes back to the corporate goals and the KPIs, the key performance indicators of how people are measured. [Those may mean that] your company actually can’t do innovation internally, and might have to grow by acquisition. Maybe you don’t have the patience for two-to-four year growth for early-stage ventures.

Maybe your innovation portfolio might be to acquire companies, obviously at higher prices, but that’s just our culture, or it might be a mix. [It may be that your] culture allows you to run 5 or 10 of these [new projects] per division, but you also acquire things at a later stage. This goes back to an innovation portfolio strategy that really needs to be matched to incentive programs, KPIs, and what revenue results we want to see.I’ve just got to remind everybody, and of course you all know this: venture capitalists don’t invest in one startup. They invest in a portfolio of early-stage startups. If we’re going to do that internally, that’s how these things need to be run as well. Most of them will fail, and if your culture doesn’t [support] that kind of, “OK, we’re going to do innovation from scratch,” then you might want to acquire things on the outside that might actually have more signs of success.

Another litmus test for me, when I get a call from the board of a large corporation, the first thing I ask is, “What does the CEO’s contract look like?” If it’s a short-term incentive contract — that is, to get my stock price quarter-to-quarter to look like X and Y — I can tell you with the investment in innovation is going to be.

Innovation Requires Long-Term Investment — and Leadership

InnoLead: I do think that it’s a really interesting corollary between CEO and senior management upheaval, and not just low levels of investment, but low levels of success with any kind of innovation efforts. That longitudinal investment in a portfolio over time isn’t something that you see in a majority of companies…

Blank: Yes, and I think that’s why founder-driven technology companies have, obviously, a much longer and clearer track record of making long-term investments in technology. Jeff Bezos at Amazon is probably the canonical example.

InnoLead: We’re out of time for this call, so I want to say thanks to Steve for joining us. You’ve covered a lot of ground. This was really interesting stuff.

Blank: Thank you for having me. I think that lean start up is really going to be transforming corporations, and I appreciate you for having me on.