Lean Enterprise & Innovation Ecosystems

Lean Startup +  Enterprise = Lean Enterprise

Compelling. Isn’t it?

The idea that an enterprise scale company with tens of thousands of employees can be as swift and nimble as a startup is enchanting…

…but it’s false.

Comparing an enterprise to a startup is like comparing an ocean to a dolphin. They simply don’t equate. Click To Tweet

Enterprises can’t be like startups and they certainly can’t be Lean Enterprises. They can however nurture startups as the ocean can hold and nurture an abundance of life.The ecosystem paradigm applies to lean enterprise

(I’m not the first person to make this analogy or talk about startup ecosystems. You can read some back story in the National Science Foundation or Forbes.)

The Ocean

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.  – Eric Ries, What is a Startup?

Enterprises don’t exist in this state. For the most part, they have established business models.

We can argue that we live in uncertain times and all enterprises exist in conditions of extreme uncertainty. Ok. Fine.

Compared to a startup, most enterprises can predict next year’s revenue for their core business with relative precision.

An enterprise is not a startup and to treat it as such is dangerously wrong. Click To Tweet The most comparable thing to an enterprise is not a startup, but a startup ecosystem. Click To Tweet

An ecosystem is a community of living organisms (plants, animals and microbes) in conjunction with the nonliving components of their environment (things like air, water and mineral soil), interacting as a system. These biotic and abiotic components are regarded as linked together through nutrient cycles and energy flows. – Wikipedia, Ecosystem

Dolphins - The friendly members of the aquatic ecosystemAn enterprise has within it, a variety of people doing a variety of jobs who dynamically form different groups through the lifespan of the enterprise. These groups utilizes various resources such as office space, production material, etc and are linked together via cash flows, resource allocation, and the value chain.

Some of these groups operate in conditions of extreme uncertainty, some do not.

The Case for Waterfall

Waterfall Development in Lean EnterpriseSome groups, responsible for executing a known business model in a stable market, don’t need to operate using Lean Startup principles. The markets are, for the most part, predictable.

If you’re selling hamburger meat you can add spices, you can package the meat differently, you can go organic, but between 80% lean and 85% lean beef, there’s not a whole lot of room for innovation.

It will be difficult, if not impossible, to try to convince the existing business unit to stop doing business as usual, particularly when they’re making money and being judged on their ability to deliver ROI.

However, the enterprise in its entirety has an interest in knowing whether there is a possibility to disrupt the market radically. At least before someone else does it for them. (Lab grown beef anyone?)

Investigating disruptive innovation shouldn't mean killing the cash cow prematurely. Click To Tweet

Fortunately, enterprises don’t have to make this choice if they accept the idea that they are not a single organization bound to a single set of rules and a single business model for all business units.

Homogeneity and Ecosystem Collapse

Business model/business unit homogeneity is a big problem. It creates a single point of failure. When the business model is eventually disrupted, then the entire system collapses.

There’s a clear parallel to biodiversity.

In a thriving ecosystem, changes to the environment can radically reorganize the species living there. Many may go extinct. But even in a state of catastrophic environmental change such as with the Permian mass extinction (yes…I’ve been watching Cosmos), some species will survive and thrive.

The typical enterprise business model - ready for disruption

Those surviving species may have adapted to live in a small niche, but given the new environment conditions, they do very well and can occupy a more dominant role in the ecosystem.

In an ecosystem with limited biodiversity, even a minor environmental change can cause a complete collapse of the ecosystem. Irish potato famine anyone?

Too Small for Our Business

cash cow - the enterprise staple foodThe common investment thesis of many large corporations orients itself on the size of the market opportunity under the assumption that market sizes are static and/or highly predictable.

Enterprises rarely encourage diversification into an assortment of niches which may one day grow due to radical market disruptions. It’s “too small of an opportunity for our business, so shut it down!” Why invest in something the size of a grasshopper?

Enterprise resources are allocated to the cash cow, oblivious to the plague of locusts about the devour all the grass. Click To Tweet

We should all remember the lessons of Kodak, who consistently failed to invest in alternative business models.

The Innovation Ecosystem

Enterprises shouldn’t try to be a Lean Enterprise or simply “do” lean startup. That’s a fool’s quest.

Instead, the enterprise can set up conditions favorable to small startups, internal or external, using lean startup principles to discover new business models in adjacent markets that leverage the company strengths or develop new ones.

Enterprises can become Innovation Ecosystems. Click To Tweet

Over the next posts, I’ll be outlining some common elements that seem pivotal to enabling innovation and lean startup methodologies to thrive.

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A framework for creating an Innovation Ecosystem

 

Discussion (21 comments)

  1. Trevor Owens says:
    17.06.2014.

    Great to see you talking more about enterprise, Tristan. But you’ve clearly created a straw man argument here. If you read my book you’d know we advocate for creating something similar to an innovation ecosystem called innovation flow, just like has been done at Intuit and is being done at GE.

    1. Tristan says:
      17.06.2014.

      I read your book on the plane last week actually, and like it very much. I thought you were advocating for “Innovation colonies” which I think is a better term than accelerators and a better differentiator.

      It’s also the best written business book I’ve read in a while. Up there with Laura’s UX for Lean Startup and Rob’s The Mom Test.

      I agree with almost everything you’ve got in that book with some exceptions such as the equity model as a blanket recommendation. That’s a good model for some, but not all enterprises.

      I’m not a big fan of blanket best practices for complex entities.

      I’ll be referencing your book and Barry’s book in the next few posts.

      1. Trevor Owens says:
        17.06.2014.

        Thanks for clarifying, Tristan.

        My main goal is to avoid confusion here and I take issue with this statement:

        “Enterprises shouldn’t try to be a Lean Enterprise or simply “do” lean startup. That’s a fool’s quest.”

        Anyone who knows of our book would interpret this sentence as saying, “Owens’s & Fernandez’s book says you should just ‘do’ lean startup.” Which is false.

        We would appreciate if you’re not referring to our book please add a disclaimer to avoid misrepresenting our ideas.

        1. Jim Croce says:
          17.06.2014.

          I agree with Trevor – you should put up a disclaimer for sure. That will help avoid confusion and will also indemnify you if Jez Barry and Joanne “take issue” with the very same statement. http://shop.oreilly.com/product/0636920030355.do

          1. Tristan says:
            17.06.2014.

            That is going to be a long disclaimer, but just for you guys…I already have one written. Wait ’till Thursday.

    1. Tristan says:
      17.06.2014.

      Love it. What’s his twitter handle?

  2. Tendayi says:
    17.06.2014.

    Some of the best thinking I have read on the topic. Thanks Tristan. This is a really good exposition of how in practice, organizations can be ambidextrous (i.e. searching and executing at the same time). If they think of themselves as an ecosystem, hold different types of business models then every piece has value.

    In Anti-Fragile, Nicholas Taleb rails against monolithic large entities because they may be robust, but they are certainly not anti-fragile and are often victims to the rare black-swan event that wipes the entire organization out.

    What I love about your perspective is that large enterprise can be come robust by having a diverse ecosystem of business models. Some in search, some in execution. Some stars, some cash cows, some questions marks (and hopefully no dogs!).

    1. Tristan says:
      17.06.2014.

      Yes! Great tip.

      I’d love to get more Anti-Fragility thinking in SV. Thanks for bringing it up.

  3. Jason Fraser says:
    17.06.2014.

    Outstanding post Tristan! Looking forward to more.

  4. Brian Crofts says:
    17.06.2014.

    Classic innovator’s dilemma … I think every enterprise needs to understand where to apply lean … depending whether they are addressing a disruptive (and thus unknown) or a sustaining technology. I agree that many times the enterprise applies lean startup principles to areas that are already known when in reality, they are running experiments to help make investment decisions to help sustain technology. I don’t know if its all that damaging if they call it lean or not–just as long as “innovators” aren’t wasting time “experimenting” when they already have the answers.

    1. Tristan says:
      17.06.2014.

      Good point.

      It’s always difficult to know if you’re about to be disrupted!

      1. Tendayi says:
        18.06.2014.

        Also difficult to know whether disruption is sudden, like in the meteor picture above, or slow like global warming.

        1. Tristan says:
          18.06.2014.

          That’s a good point as well. Anything out there written about glacial disruption?

  5. John Maloney says:
    18.06.2014.

    Eric Ries’ definition of a startup is wrong. Startups are not ‘…designed to deliver a new product…’

    Startups create two things, and two things only: (1.) customers and (2.) a scalable business model.

    Since enterprise already has customers and a scalable business model(s), Lean Startup is poor model. ‘Lean Startup Enterprise’ is indeed a fool’s errand. Beware.

    If a startup is able to create customers and a scalable business model, THEN it creates products, services and offerings. Never, ever the other way around!

    The enterprise already has products, services and offerings. The enterprise imperative is to lead lifecycles. Enterprise innovation, growth and prosperity inhabit the lifecycle.

    The lifecycle context of enterprise innovation objectively precludes Lean Startup.

    Recall, among the most difficult stages of enterprise lifecycle is decline and obsolescence. It is very difficult and painful to ‘eat you children.’

    The decline stage of lifecycle is positively critical. It is creative destruction (Schumpeter Gale). The best enterprise companies do it well. It is the soul of enterprise innovation and growth.

    Some enterprise lifecycles may have renewal stages. They extend the lifecycle. They are not Lean Startups. Again, customers and scale already exists.

    Entirely new enterprise lifecycles enjoy existing and prospective customers and scale. By no means are they Lean Startups. Please, they have entirely different challenges and objectives.

    Among the most difficult activities of enterprise lifecycle leadership is positioning/retiring legacy offerings. Lean Startups are not faced with these difficult, intractable enterprise decisions. Oh, not to mention grinding politics, inertia, governance, organizations and a long list of enterprise constraints foreign to startups.

    (For these reasons people often flee enterprise to find refuge in startups!)

    Lean Startup is a novel and important conceptual framework for authentic startups. Some principles are valuable for the enterprise, like radical customer focus. However, overall, Lean Startup is a poor model for enterprise and is best avoided.

    1. Tristan says:
      18.06.2014.

      Words are what we define them to be. So in one sense, all of the definitions are right. In another sense totally wrong.

      I think we get into trouble when the intent of the word is subsumed by the associations of popular culture. That’s when we play buzzword bingo.

  6. Greg Gentschev says:
    18.06.2014.

    Good stuff. Looking forward to hearing more about your enterprise ecosystem thoughts.

    But I do want to belabor the point about enterprises dealing with uncertainty. Big companies do operate in a more predictable mode than startups. Yet supposedly 95% of new consumer product launches fail, despite many or most coming from established enterprises: http://hbswk.hbs.edu/item/6496.html. Something similar is probably true in most product categories.

    We’ve probably all seen examples of enterprise new product development that’s based on flimsy assumptions and that goes forward primarily on the basis of ignoring the potential for failure as long as possible. Waterfall development is great if the product won’t launch for two years and you’ll be in a different position in one year. Plausible deniability!

    So when you get down to it, most enterprises are living in some degree of ignorance about customers and markets, which is camouflaged by revenue from existing products.

    1. Tristan says:
      18.06.2014.

      Aha! That’s the part I think is the most interesting.

      I think startups (a.k.a teams) in the enterprise face a lot of uncertainty. Those new product launches fail. Massive uncertainty.

      However, the enterprise as a whole, is relatively stable and has an existing core business model (or more than one!)

      The important part to me is applying lean startup to the teams and thinking about the enterprise as an ecosystem which contains those risk taking startups.

      1. John Maloney (jheuristic) says:
        18.06.2014.

        Hi – Here below is the famous ’40 Ways to Crash a Product Launch’ from Schiender/HBR.

        I don’t think Lean Startup would correct or even ameliorate these issues. Lean Startup is customer creation, business hypothesis and company building method. It is not a enterprise or consumer product launch technique.

        Pre-Launch Phase

        1. No market research on the product or the market has been done.

        2. Most of the budget was used to create the product; little is left for launching, marketing, and selling it.

        3. The product is interesting but lacks a precise market.

        4. The product’s key differentiators and advantages are not easily articulated.

        5. The product defines a new category, so consumers or customers will need considerable education before it can be sold.

        6. The sales force doesn’t believe in the product and isn’t committed to selling it.

        7. Because the target audience is unclear, the marketing campaign is unfocused.

        8. Distribution takes longer than expected and lags behind the launch.

        9. Sales channels are not educated about the product and thus slow to put it on shelves.

        10. The product lacks formal independent testing to support claims.

        11. The marketing campaign is developed in-house by the manufacturer and lacks objectivity.

        12. The product is untested by consumers; only the company can assert its benefits.

        13. The website is the primary place to order, but the product description is unclear and the site isn’t fully functional.

        Launch Phase

        14. The product is launched too hastily and doesn’t work reliably.

        15. The launch is aimed at the wrong target audience.

        16. Supplies of the product are insufficient to satisfy orders.

        17. The product is launched too late for its key selling season.

        18. The product doesn’t fit into any key selling season.

        19. The manufacturer’s claims can’t be backed up.

        20. A governing body (the FTC, the FDA) pulls the product, citing false claims.

        21. The product is given a limited “trial at retail” but without public relations, marketing, or promotion to “turn” it.

        22. The product is launched without influencers to promote its efficacy.

        23. The launch budget is insufficient to “pull” the product off the shelf.

        24. The product has no trained spokesperson to educate the media.

        25. Management launches the marketing campaign before distribution is complete.

        26. Management has promised the board and stockholders an instant hit without considering how much time is needed to educate consumers about the product.

        27. The ad campaign is untested and ineffective.

        28. The launch campaign depends solely on PR to sell the product.

        29. The company spends the entire marketing/advertising budget at launch, so no funds are left to sustain the campaign.

        30. Company executives underestimate the value of Twitter and Facebook.

        31. Retailers are given no incentives to feature the product.

        32. All marketing dollars go to advertising and public relations, none to social media.

        33. Line extensions aren’t test-marketed as thoroughly as the original product, so they fail.

        34. The product is launched to capitalize on a fad that soon fizzles.

        35. The product design is unique but confuses consumers, who don’t understand how the product works.

        36. The spokesperson is a bad fit with the product, creating a discordant message.

        37. The product is priced too high for mass adoption.

        38. Consumers are unclear about what demographic the product is geared toward.

        39. The product is manufactured offshore; quality control issues result in negative consumer feedback and product returns.

        40. The ad campaign is launched before the sales force is fully briefed, so customers know more than salespeople about the product.

        BTW, to claim 95% of new consumer products ‘fail’ is not correct. New products, ‘new and improved’ and so on is a marketing technique. It helps get space on the shelf, to get press, to motivate sales, to freshen the brand, to repel competition, etc. It is hardly a failure; it’s sound marketing.

        This is yet another reason Lean Startup is a poor model for enterprise and consumer offerings from mature organizations.

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  8. Emrah says:
    20.06.2014.

    Trevor is confused: this isn’t a straw man because 1. Tristan isn’t misrepresenting (he even understates how lean may be inappropriate for enterprise given incentive asymmetries and capacity constraints), 2. Tristan’s readers aren’t ignorant of the original Lean Enterprise argument, and 3. Lean Enterprise as an original argument does not belong to Trevor (5+books, Mary Poppendieck)

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