Chapter 1
Roadmap: Introducing the Lean Enterprise
The root of the enterpriseâs 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 itâs distant enough that the companyâs traditional management practices are not in full effect. Itâs 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. Itâs 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 colonyâs organization in detail.
An innovation colony wonât 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 âgrow like weeds.â Why? A weed doesnât 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 donât require the certainty of ideal conditions to thrive. They thrive in conditions of extreme uncertaintyâthe 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 weâve been teaching corporations to do lean startup for the past few years, since before Ericâs 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 methodâespecially 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 companyâs customers a single question: âHow disappointed would you be if you didnât have access to this product?â After surveying customers of 100 companies, he noticed a pattern. Customers of companies that were struggling to gain traction answered âvery disappointedâ less than 40 percent of the time. On the other hand, customers of companies that had significant traction answered âvery disappointedâ at a higher rate. In other words, the companyâs 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 didnât 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, itâs 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 Canât Acquire (Chapter 11).
Some enterprises wonât 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 thatâs available to any enterprise with the ambition and commitment to take destiny into its own hands. Thereâs 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 turfâand win. Letâs see how.
Case Study: GE, Stephen Liguori, Executive Director, Global Innovation
General Electric (GE) ranked ninth on Bloomberg Businessweekâs 2013 list of the worldâs most innovative companies. Not bad for a business that rated number eight in the same yearâs Fortune 500 list of the worldâs largest enterprisesâand 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 GEâs 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 ...
