When it comes to innovation, the lean startup method popularized by Eric Ries has become gospel in the startup world. But what about in long-established entities — can it work?
In his forthcoming book “Lean Startup in Large Organizations,” former Goodyear and Pitney Bowes VP Jim Euchner contends that lean startup can and should be part of the corporate innovator’s toolkit.
“I don’t know anything that works better,” he says. “It lets you systematically move from sort of an idea to a clear customer need and customer value proposition through a business model. But inside large companies, each of the things that you need to do as part of the lean startup induces antibodies.”
Euchner sat down with InnoLead to discuss the new book, slated to be released in late February; how game theory applies in corporate innovation; dealing with corporate antibodies; and how Amazon is a model for executing new ideas within a large organization.
Euchner is a scientific advisor to Nissan’s autonomous vehicle program, founder of Outside Insight Consulting, and editor of the peer-reviewed journal Research-Technology Management.
…
What are some of the conflicts of applying the lean startup method in a more established organization?
There are six that I identified in my book. Each of them is associated with practices from the lean startup. What I would like to say is that the lean startup works if what you’re trying to do is build a new business in a world that has a lot of uncertainty. I don’t know anything that works better. It lets you systematically move from sort of an idea to a clear customer need and customer value proposition through a business model.
But inside large companies, each of the things that you need to do as part of the lean startup induces antibodies. For example, at the core of the lean startup is what they call “lean learning loops,” or business experiments is another term for it. It’s where you identify an uncertainty, you build a prototype and you test it in the real world. Then you learn from the experience and to use Eric Ries’ term, you either persist with your current plan or you pivot to another one. Inside a large company that is used to stage gates, for example, and to planning the development of a product, it can seem very chaotic. It can seem uncontrolled. I would recommend that you do things that make an impedance match between the expectations of the company and the startup method.
Inside a large company that is used to stage gates, and to planning the development of a product, it can seem very chaotic. It can seem uncontrolled.
An innovation stage gate is what I propose. The agile part, the experimentation, the part that looks very messy, is contained inside gates. Now, that’s not exactly like the Lean Startup. The lean startup is doing everything at once. You’re understanding customer needs, you’re building a minimum viable product, you’re putting it in the market, you’re trying to learn about the business model, and you’re doing all those things at once. In a large company, it’s often better to stage it. Start out understanding the customer and building the customer value proposition. Then define the business model, then incubate and figure out how you’re going to grow. There could be a lot of chaos in each of the phases. But for the corporate setting, it permits places at which you can make decisions about go or no-go decisions. The people in the organization can learn about the new domain, and it’s more contained.
In other words, although the innovative techniques are the same, the process is quite different.
I use the difference as being between successive refinement, which is usually what happens during a stage gate as you move from concept to high-level design to architectural design to detail design to implementation. The contrary to that is successive elaboration. You discover in interaction with customers what the customer value proposition will be, and then you move to the next step and discover what the business model will be. Then you discover what you need to do to scale it. There, they look the same on paper, but the gates are very different. In the case of a typical stage gate…the concept is simply the same concept getting better refined, and if it doesn’t meet needs, at some point, it falls out of the stage gate. In this case, you’re elaborating it over time.
The lean startup works if what you’re trying to do is build a new business in a world that has a lot of uncertainty. I don’t know anything that works better.
I find interesting the analogy of the company producing ‘antibodies’ in order to resist innovation.
The antibodies basically are the reactions of the culture, and the way we [the business] do things around here… In particular, when you’re trying to do these things, you’re building minimum viable products. You’re doing lean learning loops, you’re pivoting the organization. The functions that are supporting you — whether they’re in legal, IT, engineering, or procurement – they’re reacting to that. They’re reacting on one level in a very reasonable way. They’re doing what you would do if you were in their role. They’re seeking to make sure that they don’t screw up the core business. [Their] fears are that I’ll make a mistake and that will come back to haunt me. There are fears that I’ll miss a deadline for the core business because I’m working on an innovation. There’s a combination of an emotional and very reasonable, practical reaction.
Your book mentions the use of game theory, and how organizations can use it to calculate risk in innovation. Could you go more into detail about that?
Game theory comes into it because if you, as an innovator, put yourself into the shoes of someone in IT, you start to see how they’re seeing the world. If I’m in IT, and you as an innovator want to use something that’s not part of our standard operating environment — maybe it’s just emerging, from their perspective — if they say, “Go ahead with that,” what could happen is [they have] to manage [that aditional complexity.] They haven’t got the wherewithal to manage it. It could cause other people to say, “Maybe I should just do whatever I want to do as well.” They lose control of the world that they’re operating in. One of their key goals as a function is to maintain control, so they can deliver against their core responsibilities.
[It’s] the same if you’re in the legal function, and it’s a new kind of contract. It’s probably small in the early stages. Do you want to just sign off on the contract? What don’t you understand about liabilities [in] this new world? What do you not understand about revenue models and risks associated with them?
There’s a tendency to say, “Wait a second, let me take time. Let me step back. Maybe I won’t say no, but I’m not going to make it my first priority.” There’s a resistance, and it appears to be antibodies — to be people resisting innovation. In fact, it’s people looking rationally at the world, and deciding that they’re going to slow things down until they can figure it out. At one company, I waited six months for the IT department to do [an] evaluation of cloud computing… It was a necessary part of what we were trying to implement. These six months are a boatload of time in the innovation world.
So in order to mitigate that resistance, there needs to be a change in the business model that rewards innovative behavior?
On the simplest [projects,] there can just be air cover. The CEO can say, “Please do this.” He can enforce that through his organization. That tends to work in a muted way, because it’s always the case that meeting the numbers for the current quarter is going to dominate people’s agenda. You can have some of your staff, supplement the staff [in a particular business unit or function,] or provide funding so that they have additional people who can support innovation without impeding their own goals.
One of the overarching things you can do is to not see the functions as your enemy. Understand that they’re acting in the way you would act, try to understand their perspective, and then build bridges over time.
I had an issue with an organization once about a pilot we were trying to do, and there was a liability risk. We disagreed about how significant it was. They could not sign off on it, but there was an exception process where they highlighted it and I had to sign off and say, “I understand the risk. Here’s how we’re doing our best to mitigate it.” You go through things like that.
One of the overarching things you can do is to not see the functions as your enemy. Understand that they’re acting in the way you would act, try to understand their perspective, and then build bridges over time.
I use the term “graduated engagement.” In the early stages, you make them aware that you’re not fearful that they’re going to stomp on your parade. You make them aware so that they’re not surprised later, down the road. What we did was to say, “When we get to incubation, all these issues that you’re raising now, we will assure you we will address [them] if it’s going to be the maintainability, or the cost of a function, or the con to the long-term contract with a partner. Those things will be addressed during incubation.” But in the early stages, we’re not going to worry about trying to optimize all that; we’ll only do that when we get into incubation. People are weird early, they’re engaged in the middle, and then their issues are addressed during incubation.
You mention Amazon as a successful example of a large organization that applies innovation techniques successfully. What’s their case like?
I think they developed a culture that’s kind of unique to Amazon. It’s not simply a matter of tools that they use and practices that they implement at Amazon. One of the things that they do is they pivot from their current assets to move into new spaces. They move from selling books online to selling CDs online to selling anything they could ship online. They move from that to opening up their whole business to competitors and others to sell through them. They move from reading books on paper, to you’ll read them online. Then from that into music. They move from having a great infrastructure to selling it to other people. Now, one of their biggest businesses is cloud services…
Amazon has built a culture where innovation is everybody’s business, where if you’re a leader, you have to both execute and innovate.
Right now when I look at Amazon, I see them looking at health care, which they’re providing to their own employees. They have online universities around AI. Eventually, I think that will be opened up more broadly. One of the things they do which I think is critical to their success is that they use their assets a lot. That’s the reason large companies have to win. Your right to win comes from the fact that you have assets — whether they’re customers, engineering, talent, brand — that enable you to win over more agile, faster, nimbler startups. That’s one thing [Amazon] does. They all experiment all the time. I don’t know if they use the term lean startup or business experiments, but they experiment all the time in local areas. They get it right. Once they’ve made it operationally efficient, they scale it. They invest whatever it takes to scale, and that’s why they win. I think that Amazon has built a culture where innovation is everybody’s business, where if you’re a leader, you have to both execute and innovate. That, and they understand deeply how to leverage their own assets, even when it’s controversial inside the company to do so.
When you think of innovation, you generally think of the more nimble startups, but these large organizations have the resources, customer base, and funding to innovate, too. Is it just a matter of overcoming that resistance?
The small companies in the last 15 years have a much greater ability to get funding. In fact, it’s easier for a small company sometimes to get the kind of funding necessary to scale quickly [than it is] for a startup inside a large company, because the large company has this additional stakeholder, which is Wall Street investors who are wary about taking earnings and throwing it in a big way to new areas. The other thing is, [the large company] becomes an execution machine. An execution machine doesn’t want variants; it wants to deliver, and you have to manage inside that world. Vijay Govindarajan, who’s a professor at Dartmouth, says that for a large company to win these days, it has to leverage 40 percent of the assets it needs to succeed from the core business, otherwise a startup will just outrun it. A lot of companies are very reluctant to repurpose an asset, because that will make it less efficient in its core function. That’s where that dilemma comes from.
I guess with larger companies, they have to think more short term, but innovation can be a more drawn-out process. I can see why they’re skittish about that.
Amazon, first of all, they don’t care what the Wall Street says. They’re ready to take a dip [in stock price.] They know people will buy it, because they know Amazon’s gonna keep growing. Then, the second thing is, they compensate people on longer-term incentives.
The lean startup tools work as a system, and you need to be thinking about applying the tools as the system.
What do you think are the biggest takeaways from your book?
The first is, I think the tools [of the lean startup] work. The second is that they work as a system. You can’t take a piece, like, “I’ll just do a minimum viable prototype, and that’ll be my lean startup approach.” They work as a system, and you need to be thinking about applying the tools as the system. The third is that they have to be adapted. I give in the book some examples of ways that you can adapt, but I hope what people get out of it is, here are the concerns, here are the issues, and then you adapt the tools that you’ll use. You may borrow some, you may adapt some, you may invent your own in order to overcome the big concerns.
The two things people tend to do that I think are less likely to work are to just pick and choose pieces of it. And then the second is to just isolate the whole lean startup and venture completely from the core business. You miss that connection back to the assets.
(Featured image by Danka & Peter on Unsplash.)
Document Download
Click filename(s) to download and view.
