Highlights from the conversation with InnoLead editor Scott Kirsner are below, along with a slide presentation from Blank. Blank is a co-founder of the innovation consulting firm and tools provider LaunchPad Central, based in San Francisco.
Scott Kirsner: Maybe just start by giving me your read on where we stand in 2015, in terms of big companies understanding the concept of lean startup methodology and practicing it. What would be your report card?
Steve Blank: Well I think the awareness has gone up a factor of 100 in the last year or two. One of the things that really surprised me was when the editors of Harvard Business Review asked me to write an article two years ago called “Why the Lean Start-Up Changes Everything.” When it appeared on the cover, I started getting phone calls from chief innovation officers, and I had never heard of the title. Large companies even two years ago were starting to struggle with how to deal with continuous disruption in the 21st century. And the reality is a number of them set up chief innovation offices to figure that out, and lean a new way to think of things. They were struggling with how do you apply this in corporations, ‘cause the naivete is that you would simply slap the same tool inside of a larger organization. And that’s the last thing you want to do, or else you end up with innovation theater, which you see a lot of.
So the short answer is I think awareness has gone from zero to over 50 percent.
Litmus Test: Have Your Ideas Been Adopted?
Scott Kirsner: So what’s your assessment though of these chief innovation officers? Many of them that we talk to have very small teams, very limited resources, but often they have the CEO’s ear. They have a mandate to move the needle and help explore new products, new services, new business models. What’s your assessment of the challenge of that? Maybe a second part of the question is that you also have traditional R&D groups that are thinking about lean startup, or innovating in a more nimble way. They’re realizing that geez, you know, the company is expecting more productivity, faster, with fewer resources.
Steve Blank: The first model is a board member or the CEO reads about this stuff and says, “Me too,” but doesn’t really want to make any substantive organizational or process changes and it ends up being window dressing. The next level is, you stand up a group in corporate, and the operating divisions or the functional units just simply ignore it. To me, the litmus test is when you ask those types of chief innovation officers, “So, how many of your [ideas] that came out of this group were adopted by divisions or functional units as new products,” they tend to look at their shoes and shuffle their feet. That’s the group I call innovation theater.
Then there’s a third model, where a CEO really does get it and understands that, in the executive staff meetings, we are changing some processes and procedures, and we’re gonna have a parallel set-up for innovation, and we’re gonna affect our entire corporate DNA. And by the way, I’m prepared to lose some people over this who are still in the execution mindset, and can’t embrace the fact that we need to chew gum and walk, be an ambidextrous organization.
It’s not that people haven’t been talking about ambidextrous organizations, that is being able to do innovations and execute…We’ve been talking about that for decades. It isn’t that people haven’t been talking about horizon one through three — immediate stuff, business model stuff, and then true disruptive stuff. We just never had tools and processes and even the language to understand what we needed to reengineer. So I think people have identified this decades ago; it’s just become more urgent. And I think we have more of a handle on what the solution is.
What confuses people is that when everybody talks about innovation they seem to be talking about horizon three, which is how do I do disruption — how do I do these new things that aren’t on the plate of the existing divisions? That’s what belongs in the corporate function, as a staff function. The insight that I think we have now is all three of these — horizons one, two, and three — ought to be managed culturally, and with the same tools, from the office of a chief innovation officer. That’s the big insight. And they need to occur in parallel with the execution activities that are concurrently going on and hopefully taking up 95 percent of the resources of the existing division.
Scott Kirsner: I’m not sure I can think of a lot of examples where you truly have a chief innovation officer that has authority for all three horizons —
Steve Blank: Yeah, let me be clear. I would never suggest that the chief innovation officer have the authority for the initiatives for horizon one and two, but that in fact they’re providing the tools and training and infrastructure. You know, “I’m using a typical stage-gate methodology for my existing products. Well now you want me to hold lean startup, fast 12-week cycles. What the hell is that? How do I do that inside my existing division?”
Scott Kirsner: Okay. So training and –
Steve Blank: Let me come in and teach you. And more importantly, a common language, a common methodology, and common incentives and common processes across the company that everybody gets. And by the way, common metrics of success. How do we measure success for innovative stuff? The worst thing that could happen is to have Finance use the same old P&L methodology to measure new things.
Two Classes of Companies
Scott Kirsner: So you got onto the topic of metrics, which I think we’ve been very focused on. It’s not just CFOs, but I think CEOs also really care about P&L metrics — are you doing something new that’s generating substantial revenue? Even if you buy into the lean methodology and you’re doing market tests, people still want to know, how much did people buy last quarter?
Steve Blank: Right. This is where we need to come up with a new set of metrics. I threw out one set of them, which I was stunned to find are actually being adopted in more companies than people are willing to admit, which is investment readiness level. Essentially what it says is look, we could use Osterwalder’s business model canvas as a rough guide to whether we want to continue to fund new initiatives, at least the horizon three initiatives, on something more than, “I don’t know, feels good to me.”
You would set up different metrics for horizon one through two, again, using the business model canvas and what we’ve actually validated or invalidated. These are all hypotheses, validated or invalidated after a number of iterations and pivots. That’s a very different language than customers or sales or users. We have to agree that we’re gonna come up with a different set of metrics, or else we shouldn’t even run an innovation process.
I really think on the highest possible level that we’re gonna are two classes of companies — one which executes the core business model, and they will go through the traditional life cycle doing product line extensions. But they’ll eventually be obsoleted by new technologies, markets, channels, etcetera. There’s a second type of company that will have a much longer life cycle, when they actually adopt something that allows them to reinvent themselves every couple years. I think that’s the difference between a company with a ten-year horizon and a company with a 30-year, maybe even infinite, horizon.
The classic company that people all point to that’s done continuous innovation is Apple, when Jobs ran the company. But another company I like to point to is Exxon, when fracking almost passed them by. They realized that there was an enormous business model change and technology shift, and they spent $30 billion to solve the problem. They bought into fracking. I think was it [XTO Energy] they bought for about $30 billion.
Most CEOs are Glorified CFOs
Scott Kirsner: Intuit is a great example there in the Valley, where they really do seem to buy into the lean startup methodology. They’ve created some ways both to train people in it, and to give them resources to go out and do tests with customers. But I would say most companies seem to get hung up in the challenge of even if you have customer data, the executives still want to make the go/no-go decision. How do you get away from the sort of bias of, we know what’s good for our business, or we know what the customer wants, which just seems like it’s such a powerful force in most companies? You don’t get to be a CEO or on the senior leadership team without having a strong opinion about things.
Steve Blank: Most CEOs in the last twenty years were essentially glorified CFOs with operating authority. Their job for public companies was to maximize the return on net assets, and so therefore they jettison R&D, they jettison manufacturing. It beat the crap out of any initiative and innovation inside a company.
For most companies, you simply don’t have the right management team, as politely or as impolitely as I could say it. They’re never gonna adopt this, until they run into a crisis. And if you look around our boards, and if they’re dominated by financial types and MBAs, you’re also not gonna do this. It requires people to truly understand in their gut that innovation is not building the same thing and doing product line extensions. It just doesn’t work that way. If it’s not urgent or important to you or your shareholders or board yet, then you’re gonna ignore this. But your successor, if there is one, is gonna be the one who does it.
Scott Kirsner: It’s hard for me to find the examples of people who really are saying, “We’re doing lots of market tests of small ideas, little fragments of ideas, minimum viable products, and then we’re really putting lots of wood behind that arrow.
Steve Blank: GE is the best example. I think Eric Ries has done a good job of rolling out the what’s called FastWorks at GE. Believe it or not, there are groups inside the Department of Defense who have embraced this with alacrity. Surprisingly, the National Science Foundation basically threw out 30 years of how to commercialize science and adopted this methodology.
Scott Kirsner: What I was getting at was that, you know, we’ve created these you know thousand-dollar, $5,000 micro-grants for running the first experiment, and then you still run into you the insanely tight filter of, “OK, now we need to go and persuade 38 people in the company that this deserves real funding.”
Steve Blank: You need to rewrite the processes, procedures, and incentives in large corporations to make this work, all the way down to the lowest possible level. There’s two ways you could do that. You can do that by you know simply bringing in McKinsey or somebody and redoing all the business processes, or you can do them one at a time from the ground up. That happens to be the way I look at the world. Why don’t we do that one at a time, and give the innovation teams the authority to create a parallel set of rules that don’t exist right now, and that’s actually kind of fun.
The Curse of the Five-Year Plan
Scott Kirsner: So the HBR article you wrote, I think it’s two years old now, I love the quote where you say, “No one besides venture capitalists and the late Soviet Union requires five-year plans to forecast complete unknowns.” And yet you know, that planning and forecasting process is so hard for companies to get away from, and it takes so many resources. I mean it seemed like you were saying a minute ago that you may have to you know step away from that stuff or break those kinds of processes down, which feels really hard.
Steve Blank: I wrote a blog post last week, titled, “Getting to Yes for Corporate Innovation.” And it’s how to do that in detail. It’s something I put in place for a company whose name you would be quite familiar with who actually was thought of as one of the leaders in innovation and had lost the formula. This worked quite well for them. Your core business, the 95 percent that you ought to be working on — of course you need processes and procedures and you need operating plans; that makes all the sense in the world. But we need to try something very different for this other stuff. We need to be looking at business models, not business plans. We need to be looking at new metrics like hypotheses tested and investment-readiness levels rather than just , “What’s our P&L in the first year,” or else we’re never gonna do any innovation at all. And this turned out to be a pretty successful method.
Scott Kirsner: The last question I want to touch on is the patience question. I see a lot of startups here in the Boston area where you almost feel like they have more patience waiting for something that is small and successful to get big and successful, and sticking with it and tweaking and listening and adapting it. They’ll do it until the money runs out, whereas in a lot of big companies, you talk about patience and it’s maybe one fiscal year. Then people start to evaluate with a sharp pencil, “Is this idea a big enough idea for our five-billion-dollar company, ten-billion-dollar company?” Patience feels like such an important characteristic when you are trying to work in new markets and trying to develop new technologies. It feels like public companies can be very short on it sometimes.
Steve Blank: This goes back to what I call the innovation portfolio. We’ve just been talking about innovation internally — building internally. But if you really think about it, the tools available to a company and to a chief innovation officer are [several.] You could build innovation. You could buy innovation, and if you buy, you could buy intellectual property, teams, product lines, P&Ls, or entire companies. Then the third type is you could do open innovation. So there really is a portfolio of things that you could do to acquire new revenue sources. Each one of those brings different horizons. If you’re gonna build, well you need a different time horizon that says we got three years. If you’re gonna buy, well that’s an immediate drop to your bottom line, if you’re buying a P&L. Number one is assessing what does your company culture have the stomach for? It might be you just don’t have the culture to build internally. It doesn’t mean you can’t be innovative, but it means you’re gonna take the risk of being able to integrate innovation externally.
The downside is when you buy, you know typically if you buy startups, almost all those fail because the large companies tend to want to impose their existing culture, processes, and procedures, and I can set my watch on why and how you’re gonna lose most of the assets. There are ways to kind of acquire innovation, but [it] requires understanding what motivates startups and entrepreneurs, versus a large company.
Historically, when people talk about building innovation internally, they were usually making one or two big bets rather than ten, twenty, or fifty lean startup bets. Those are very different types of innovation horizons. I would be thinking about an innovation pipeline. I think Y Combinator built us a pretty good model of what it looks like to start [a company, and provide early funding], but what large companies have to do is to figure out, well, what is the internal venture capital pipeline that follows? That’s where most corporate and divisional innovation/startup stuff fails inside of large companies. They don’t think about the life cycle. They don’t really do what I consider the hard work up front. When does a division say, “Yes I will adopt this. It has all this criteria, and I will fund it at this amount.” If you don’t do that hard work first, again, that’s innovation theater.