Dealing With Disruption: How to Think Like a Start-Up Leader

in a Large Organization

Steve Blank steveblank.com

@sgblank

Startups Are Not Smaller Versions of

Large Companies

Startups Are Not Smaller Versions of Large Companies

Large Companies Execute Known Business Models

Startups Are Not Smaller Versions of Large Companies

Startups Search for Unknown Business Models

What’s A Startup?

A Startup is a temporary organization used to search for a repeatable and

scalable business model

Startup Large CompanyTransition

BuildSearch Execute

ScalableStartup

Large CompanyTransition

The Search for the Business Model

Startups Search and Pivot

ScalableStartup

Large CompanyTransition

Search for a Business Model- customer needs/product features i.e. Product/Market fit- Found by founders, not employees- Repeatable sales model

The Search for the Business Model

Startups Search and Pivot

ScalableStartup

Large CompanyTransition

The Search for the Business Model The Execution of the Business Model

Startups Search, Companies Execute

ScalableStartup

Large CompanyTransition

Execution- Profitable- Repeatable- Scale- Job spec’s- Process

The Search for the Business Model The Execution of the Business Model

Startups Search, Companies Execute

ScalableStartup

LargeCompanyTransition

The Execution of the Business Model

Learning Metrics Vs Accounting/KPI’s

ScalableStartup

LargeCompanyTransition

Accounting/KPI’s- Balance Sheet- Cash Flow Statement- Income Statement- Return on Net Assets- Return on Capital

The Execution of the Business Model

Learning Metrics Vs Accounting/KPI’s

ScalableStartup

LargeCompanyTransition

Startup Metrics- Customer Acquisition Cost- Viral coefficient- Customer Lifetime Value- Average Selling Price/Order Size- Monthly burn rate- etc.

The Search for the Business Model

Learning Metrics Vs Accounting/KPI’s

ScalableStartup

LargeCompanyTransition

Sales- Sales Organization- Scalable- Price List/Data Sheets- Revenue Plan

The Execution of the Business Model

Customer Validation Versus Sales

ScalableStartup

LargeCompanyTransition

Customer Validation- Early Adopters- Pricing/Feature unstable- Not yet repeatable-“One-off’s”- Done by founders

The Search for the Business Model

Customer Validation Versus Sales

ScalableStartup

Large CompanyTransition

Product Management- Delivers MRD’s- Feature Spec’s- Competitive Analysis- Prod Mgmt driven

The Execution of the Business Model

Customer Development VersusProduct Management

ScalableStartup

Large CompanyTransition

Customer Development- Hypothesis Testing- Minimum Feature Set- Pivots - Founder-driven

The Search for the Business Model

Customer Development Versus Product Management

ScalableStartup

Large CompanyTransition

The Execution of the Business Model

Engineering Versus Agile Development

Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs

ScalableStartup

Large CompanyTransition

Agile Development- Continuous Deployment- Continuous Learning- Self Organizing Teams- Minimum Feature Set- Pivots

The Search for the Business Model The Execution of the Business Model

Engineering Versus Agile Development

Engineering- Requirements Docs.- Waterfall Development- QA - Tech Pubs

ScalableStartup

Large CompanyTransition

Business Plan- Plan describes “knowns”- Known features for line extensions- Known customers/markets- Known business model

The Execution of the Business Model

Startups Model, Companies Plan

ScalableStartup

Large CompanyTransition

Business Model- Unknown customer needs- Unknown feature set- Unknown business model- Model found by iteration

The Search for the Business Model

Startups Model, Companies Plan

The Execution of the Business Model

ScalableStartup

Large CompanyTransition

- Pains in the butt- Always looking at something different- Doesn’t get with the program

Startups Protect Mavericks, Companies Fire Mavericks

The Execution of the Business Model

ScalableStartup

Large CompanyTransition

The Search for the Business Model

Startups Protect Mavericks, Companies Fire Mavericks

- CEO of your company- Finds your next market

Strategy and Structure

Apologies to Alfred Chandler

• Problem Companies going from local to regional to national. Specialized skills needed

• Strategy Separate ownership from professional management

• Structure Organize into functions: Sales, Mfg, Finance, Marketing

• Tools Organization Chart

• Leaders U.S. Steel, Standard Oil, Pennsylvania Railroad

1870’s: Organize by Functions

CEO

Sales Marketing

Organize by Functions

Engineering Finance

…

…

…

…

…

…

…

…

…

…

…

…

Mfg

…

…

…

• Problem Companies have dissimilar products and/or national

geography - functional organization not efficient

• Strategy Group similar products together by regions or channels

• Structure Organize companies into self-contained divisions. Add corporate staff for shared functions

• Tools Distributed Accounting, Bus School, Consulting Firms

• Leaders DuPont, General Motors, Sears, Standard Oil

1920’s: Organize by Divisions

CEO

Bus Div A Bus Div B

Organize by Divisions

Bus Div C Bus Div C

…

…

…

…

…

…

…

…

…

Replicate functions inside separate divisions

CEO

Bus Div A Bus Div B

Organize by DivisionsAdd Corporate Staff

Bus Div C Bus Div C

CFO LegalCIO CMOAdv R&D M&A

• Problem Companies have complex, short term projects

• Strategy Temporary organization driven by project

• Structure Project mgmt across functions as needed by project

• Tools Gantt Charts, Project Management

•Leaders NASA, Lockheed, Northrup, Boeing,…

1960’s: Organize by Matrix

CEO

Projects Engineering

Organize by Project(Matrix)

Q/A Finance

Project Mgr Eng 1

Eng 2

Eng 3

…

…

…

…

…

…

Mfg

…

…

…Project Mgr

Project Mgr

Functional Mgmt Functional Mgmt Functional Mgmt Functional Mgmt

21st Century Corporate Issues

• Continuous and unrelenting disruption– China– Globalization– Transparent pricing– Plummeting cost of entry– Internet, mobile…

21st Century Corporate Structure Issues

• Current forms of corporate organizations are designed for execution

• Attempts to “add” innovation break these structures– KPI’s, Processes, financials, HR, Bus Units, etc

Continuous disruption requires continuous innovation

Types of Corporate Innovation

Process Innovation

Disruptive Innovation

Continuous Innovation

Types of Corporate InnovationTypes of Corporate Innovation

Process Innovation

• Improve part of an existing business model– Cost, revenue, service, etc

• Can be done by an individual part time• Domain of the general manager

Business Model (Continuous) Innovation

• Requires existing business unit resources• Uses internal business unit incubator and Investment

Readiness Level• Domain of the general manager

Example: Pepsi buying Frito Lay/Quaker Oats, Exxon buying XTO ($41B)

Disruptive Innovation

• Requires new & existing business unit resources• Uses corporate incubator or Skunk Works• Domain of the CEO and board

Example: Amazon and AWS, Apple and iPod, iPhone

Corporate Innovation Portfolio

• To run these innovation projects:– corporation’s innovation is a portfolio of projects– occurs inside Bus Units and Functional Org– As well as outside

Innovation Portfolio

Process Innovation

Disruptive Innovation

Continuous Innovation

• Build

• Buy

• Partner

• Open

Types of Corporate InnovationInnovation Portfolio

What Can You Acquire?

Process Innovation

Disruptive Innovation

Continuous Innovation

• Intellectual Property

• Teams

• Product Line

• Product Line + Users

• Revenue

Why Acquire?

Innovation Portfolio

• Build

• Buy

• Partner

Buying Innovation

Where Do You Build It?

Process Innovation

Disruptive Innovation

Continuous Innovation

• Intellectual Property

• Divisional Engineering

• Functional Org

• Advanced R&D

• Skunk Works

Type of Innovation

Innovation Portfolio

• Build

• Buy

• Partner

Building Innovation

Structure and Tools for Execution are not

Structure and Tools for Innovation

Issues

Current Corporate Metrics Focus on Execution

• Finance focus – Return on Net Assets, Return on Capital and Internal

Rate of Return– minimum rate of return on a project or investment

• Execution focus– Customer acquisition cost, sales per rep, etc

Christensen HBR 6/13

CEO

Bus Div A Bus Div B Bus Div C Bus Div C

Finance Legal CMOCTO/R&D M&A/StrategyHR

• Hiring policies• Promotion Policies• Termination Policies• Bonus/Incentives• …

• Return on Net Assets• IRR• Hurdle Rates• Net/Gross Margin• operating income• …

•market share•quote to close ratio•sales per rep•customer acquisition/activation cost

•average selling price• customer lifetime value• churn/retention• sales per square foot• inventory turns • …

• Contracts• Compliance• Governance…

• Strategic/Operational fit• Accretion/Dilution• Total Shareholder Return• Economic Margin• Market Value Added•…

• Tech Strategy• Future Direction• Chief Architect•…

• …

Corporate Innovation Quandary

• Tools to manage execution are destructive for innovation

• Innovation metrics are different• How do we manage to do both without killing the

core business?

Even Elephants Can Dance

Implementing Innovation in Large Companies

Start With Lots of Small Wins

• Develop an experimentation and prototyping culture• Use Lean Startup methodology

– Early Market Testing– Fast Iterations– Fast Go/No Go Decisions

Operate with Speed and Urgency

Corporate Innovation By Design

• Start Small• Aim High• Iterate Fast• Fail fast, learning• Innovation as incremental but permanent change

All require cultural change

CEO/Exec Staff buy-in

The Lean Startup

A much better way to build innovation

1. Frame Hypotheses

• Frame Hypotheses

1. Frame Hypotheses

• Frame Hypotheses Business Model Canvas

Customers

Revenue

PartnersActivities

Resources

Costs

Channel

Get/Keep/GrowProduct /

Service

2. Test Hypotheses

• Frame Hypotheses• Test Hypotheses

Business Model Canvas

2. Test Hypotheses

• Frame Hypotheses• Test Hypotheses

Business Model

Customer Development

Turning Hypotheses Into Facts

There Are No Facts Inside The Building, So Get the Heck Outside

3. Build Incrementally & Iteratively

• Frame Hypotheses• Test Hypotheses• Build the product

incrementally & Iteratively

Business Model

Customer Development

Agile Engineering

Encourage Multi-Disciplinary Teams

• Pure tech teams lack customer perspective– Tend to push the product rather than understand the

problem

• Pure business teams lack tech reality/judgment

Core Team of Innovation Managers

• Office of Chief Innovation Officer• They manage the Innovation Cycle

– Logistics– Administration– Assessment– Training

CEO

Bus Div A Bus Div B Bus Div C Bus Div C

Finance Legal CMOChief

Innovation Officer

M&A/StrategyHR

Add Corp Innovation Staff

Chief Innovation Officer

• Training– Integral to the projects– Lean LaunchPad/I-Corps Curriculum

• Mentors– Integral to the projects– Corporate and divisions

• Open Innovation– Integral to the projects

Core Business + Disruptive Projects

• Run Process & Business Model innovation in Business Units/Functional Organization

• Run Disruptive projects in corporate• Bottoms up + Top Down innovation

CEO

Bus Div A Bus Div B Bus Div C Bus Div C

Finance Legal CMOChief

Innovation Officer

M&A/StrategyHR

• …

Add Divisional Lean Innovation Projects

Lean Project 1

Lean Project 2

Lean Project n

Lean Project 1

Lean Project 2

Lean Project n

Lean Project 1

Lean Project 2

Lean Project n

Lean Project 1

Lean Project 2

Lean Project n

CEO

Bus Div A Bus Div B Bus Div C Bus Div C

Finance Legal CMOChief

Innovation Officer

M&A/StrategyHR

• …

Add Corporate Lean Innovation Projects - Disruption

Lean Project 1

Lean Project 2

Lean Project n

Lean Project 1

Lean Project 2

Lean Project n

Lean Project 1

Lean Project 2

Lean Project n

Lean Project 1

Lean Project 2

Lean Project n

Lean Project 1

Lean Project 2

Lean Project n

CEO

Bus Div A Bus Div B Bus Div C Bus Div C

Finance Legal CMOCTO/R&D M&A/StrategyHR

• Hiring policies• Promotion Policies• Termination Policies• Bonus/Incentives• …

• Return on Net Assets• IRR• Hurdle Rates• Net/Gross Margin• operating income• …

•market share•quote to close ratio•sales per rep•customer acquisition/activation cost

•average selling price• customer lifetime value• churn/retention• sales per square foot• inventory turns • …

• Contracts• Compliance• Governance…

• Strategic/Operational fit• Accretion/Dilution• Total Shareholder Return• Economic Margin• Market Value Added•…

• Tech Strategy• Future Direction• Chief Architect•…

• …

Add Innovation Policies and Processes to each function

Innovation As Incremental but Permanent Change

• Each innovation win needs to permanently change the corporation– New KPI’s– New policies– New procedures– New comp plans

• Every time an innovation project wins an exception to an existing process, institutionalize the exception

Can Start Multiple Ways

• Top down – CEO mandate• Chief Innovation Officer Initiatives• Divisioanal projects

Common Corporate Innovation Language and Metric

• Innovation needs a common corporate language• All the support functions: HR, IT, Finance, Legal

need to develop innovation processes and procedures

NASA

NASA/DOD Technology Readiness Level (TRL)

• Formal Way to assess project maturity• Quantify Relative Risks• Data Driven• Adopted by NASA, DOD, FAA, ESA…

NASA/DOD Technology Readiness: Levels 1 & 2

Basic Technology Research• Basic principles observed• Technology concept formulated

Concept

NASA/DOD Technology Readiness Levels 3 & 4

Research to prove Feasibility • Experimental proof of concept• Breadboard validation in lab

Research

Concept

NASA/DOD Technology Readiness Levels 5 & 6

Demo Prototype • Breadboard validation outside the building• System demo in real-world

Research

Concept

Demo

NASA/DOD Technology Readiness Levels 7, 8, 9

Deployment• System Development• System deployed in real-world

Research

Concept

Demo

What Can We Do With All This Data?

The Investment Readiness Level

Investment Readiness Level

Investment Readiness Level

We can do the same for new ventures

Investment Readiness Level

We can do the same for new ventures

Emphasis is on data

Investment Readiness Level

• A Formal Way to Quantify Relative Risks• Data Driven• Analog to NASA/DOD

Technology Readiness Level (TRL)

Investment Readiness: Levels 1 & 2

Hypotheses• Value Proposition summarized• Canvas hypotheses articulated

Hypotheses

Investment Readiness: Levels 3 & 4

Problem / Solution Fit• Problem Solution fit• Low fidelity MVP

Hypotheses

Problem/Solution

Investment Readiness: Levels 5 & 6

Validate• Product/Market fit• Right side of canvas

Hypotheses

Problem/Solution

Product/Market fit

Investment Readiness: Levels 7 & 8

Validate• Left side of canvas

Hypotheses

Problem/Solution

Product/Market fit

Investment Readiness: Levels 9

Metrics That Matter

Hypotheses

Problem/Solution

Product/Market fit

Left side of the canvas

Technology Readiness Level

Problem/Solution

Hypotheses

Product/Market Fit

Validate Right side of Canvas

Validate Left side of Canvas

Metrics that Matter

InvestmentReadiness Level

Summary

• 20th century corporate structures focused on execution

• Continuous disruption requires continuous innovation

• We need a new model for innovation

Thanks

Backup

SALES FORCE PROVIDER

MEDICAL DIAGNOSTIC

DEVICE

PRIMARY CARE DOCTORS

3RD PARTY SALES FORCEINTELLECTUA

L PROPERTY

1X TRANSACTIONA

L SALES

R&DMANUFACTURING & PRODUCTION

SALES & MARKETING

OEMS

EQUIPMENTSALES &

MARKETING

DEVICE PRODUCTION

Medical Device: Cheap DNA Testing

Source: alexander osterwalder

Medical Device: Cheap DNA Testing

SALES FORCE PROVIDER

MEDICAL DIAGNOSTIC

DEVICE

PRIMARY CARE DOCTORS

3RD PARTY SALES FORCEINTELLECTUA

L PROPERTY

1X TRANSACTIONA

L SALES

R&DMANUFACTURING & PRODUCTION

SALES & MARKETING

OEMS

EQUIPMENTSALES &

MARKETING

DEVICE PRODUCTION

110K

5.5M

2.8M1.2M

1M

$1,000/ DEVICE

5% MARKET SHARE

FIXED COST

50% COMMISSION

$225/DEVICE

Source: alexander osterwalder

HOW COULD YOU IMPROVE THIS

BUSINESS MODEL?

Medical Device: Cheap DNA Testing

SALES FORCE PROVIDER

MEDICAL DIAGNOSTIC

DEVICE

PRIMARY CARE DOCTORS

3RD PARTY SALES FORCEINTELLECTUA

L PROPERTY

1X TRANSACTIONA

L SALES

R&DMANUFACTURING & PRODUCTION

SALES & MARKETING

OEMS

EQUIPMENTSALES &

MARKETING

DEVICE PRODUCTION

110K

5.5M

2.8M1.2M

1M

$1,000/ DEVICE

5% MARKET SHARE

FIXED COST

50% COMMISSION

$225/DEVICE

Source: alexander osterwalder

Medical Device: Cheap DNA Testing

SALES FORCE PROVIDER

MEDICAL DIAGNOSTIC

DEVICE

PRIMARY CARE DOCTORS

3RD PARTY SALES FORCEINTELLECTUA

L PROPERTY

1X TRANSACTIONA

L SALES

R&DMANUFACTURING & PRODUCTION

SALES & MARKETING

OEMS

EQUIPMENTSALES &

MARKETING

DEVICE PRODUCTION

110K

5.5M

2.8M1.2M

1M

5% MARKET SHARE

CONSUMABLE TESTINGSTRIPS

WWW

SALES OF 1 STRIP

PER TEST

24.8M

$75/ STRIP

PRODUCTION OF TESTING

STRIPS

$7/ STRIP

2.3M

Source: alexander osterwalder

Acquisition Integration Strategies

Buy IP

Buy Product Line

Buy Teams

Buy Product Line +

Users/Payers

Buy Revenue

Acquisition Intention

New

Ven

ture

Pha

se: S

earc

h ve

rsus

Exe

cutio

n Types of Innovation Acquisitons

Buy IP

Buy Product Line

Buy Teams

Buy Product Line + Users

Buy Revenue

Acquisition Intention

New

Ven

ture

Pha

se: S

earc

h ve

rsus

Exe

cutio

n

Searching

Executing

Acquisitions: Searching or Executing?

Buy IP

Buy Product Line

Buy Teams

Buy Product Line + Users

Buy Revenue

Acquisition Intention

Acqu

irer S

trat

egy

Integrate

Independent

IntegrateAcquisition Integration Strategy

Data on Hypotheses, Pivots, MVPs, Metrics

Evidence and Trajectory

Cohort Leaderboard

Customer Interviews

Hypotheses to Test

Invalidated Hypotheses

Weekly Canvas Updates

Track All Hypotheses

Testing

Scorecard:9 way Kanban Board

with data

Advanced Data Mining