In The Lean Startup, Eric Ries laid out the practices of successful startups – building a minimal viable product, customer-focused and scientific testing based on a build-measure-learn method of continuous innovation, and deciding whether to persevere or pivot. In The Startup Way, he turns his attention to an entirely new group of organizations: established enterprises like iconic multinationals GE and Toyota, tech titans like Amazon and Facebook, and the next generation of Silicon Valley upstarts like Airbnb and Twilio.
Drawing on his experiences over the past five years working with these organizations, as well as nonprofits, NGOs, and governments, Ries lays out a system of entrepreneurial management that leads organizations of all sizes and from every industry to sustainable growth and long-term impact. Filled with in-the-field stories, insights, and tools, The Startup Way is an essential road map for any organization navigating the uncertain waters of the century ahead.
|Publisher:||Crown Publishing Group|
|Sold by:||Random House|
|File size:||8 MB|
About the Author
He has founded a number of startups including IMVU, where he served as CTO, and he has advised on business and product strategy for startups, venture capital firms, and large companies, including GE, where he partnered to create the FastWorks program. Ries has served as an Entrepreneur-in-Residence at Harvard Business School, IDEO, and Pivotal, and he is the founder and CEO of the Long-Term Stock Exchange.
Read an Excerpt
Respect the Past, Invent the Future: Creating the Modern Company
When I first began working with GE six years ago, I sat down for a conversation with CEO Jeff Immelt. Something he said to me that day has stayed with me ever since: “Nobody wants to work at an old-fashioned company. Nobody wants to buy products from an old-fashioned company. And nobody wants to invest in an old-fashioned company.”
What followed was an in-depth discussion of what makes a company truly modern. How do you know it when you see it?
I asked him to imagine the following: if I selected an employee of the company at random, from any level or function or region, and they had an absolutely brilliant idea that would unlock a dramatic new source of growth for the company, how would they get it implemented? Does the company have an automatic process for testing a new idea, to see if it is actually any good? And does the company have the management tools necessary to scale this idea up to maximum impact, even if it doesn’t align with any of the company’s current lines of business? That’s what a modern company does: harnesses the creativity and talent of every single one of its employees.
Jeff answered me directly: “That’s what your next book should be about.”
The Marketplace of Uncertainty
I think most business leaders recognize that the everyday challenges of executing their core business leave little time and energy for harnessing and testing new ideas. This stands to reason, as today’s companies are operating in an environment quite different from their predecessors. I’ve had the privilege of meeting thousands of managers around the world in the past few years. Over and over again, I see their incredible anxiety about the unpredictability of the world they live in. The most common concerns I hear:
1. Globalization and the rise of new global competitors.
2. “Software eating the world” and the way automation and IT seem to destroy the competitive “moats” companies have been able to set up around their products and services in the past.
3. The increasing speed of technological change and consumer preference.
4. The ridiculous number of new potential high-growth startups that are entering every industry—even if most of them flame out.
And those are just examples of the external sources of uncertainty that face today’s managers. Increasingly, today’s managers are also under pressure to create more uncertainty themselves: by launching new innovative products, seeking new sources of growth, or entering new markets.
It’s important to see this as the change it is. For most of the twentieth century, growth in most industries was constrained by capacity. It was considered completely obvious what a company would do if it had extra capacity: make more stuff and then sell it. “New products” meant mostly variations of what they already made. “New growth” usually meant putting out more advertising to reach new audiences with existing products. The bases for competition were primarily price, quality, variety, and distribution. Barriers to entry were high, and if competitors did come on the scene, they entered and grew relatively slowly—by today’s standards.
Today, global communications means that new products can be conceived and built anywhere, and customers can discover them at an unprecedented pace.
This setup flips Karl Marx’s old dictum on its head; what he called the means of production can now be rented. Entire global supply chains can be borrowed at little more than the marginal cost of the underlying products they produce. This dramatically lowers the initial capital costs required to try something new.
The Management Portfolio
In addition, he basis of competition is shifting. Today’s consumers have more choices and are more demanding. Technology trends reward businesses who have the broadest reach with near-monopoly type power. The basis of competition is often design, brand, business model, or technology platform.
This is the context in which a modern company operates. Plenty of companies still make commodity products. But more often, they require new sources of growth that can only come from innovation. This has very real effects for what I call the management portfolio of a company. Incremental improvements to existing products or new variations thereof are relatively predictable investments, as are process improvements to increase quality and margins. The tools of traditional management—from forecasting to typical performance objectives—work fine in these situations.
But for other parts of the management portfolio, where leaps of innovation are being attempted, the traditional management tools don’t fit. Yet most companies don’t have anything to replace them with—yet.
Why Traditional Management Tools Struggle with Uncertainty
Some years ago, I picked up one of the classics of the management genre, Alfred Sloan’s My Years with General Motors (1963). In it, he recounts the moment in 1921 that GM almost ran out of cash. The cause? Not some devastating catastrophe or embezzlement scandal. No, they simply dramatically overbought their inventory supplies, to the tune of several hundred million dollars (in 1920s dollars!), unaware that the general economy was slumping that year and demand would prove to be soft in 1920–21.
After saving the company through emergency measures, Sloan undertook a several-years-long journey to find a new management principle that could prevent this kind of problem from recurring. Eventually he made a breakthrough discovery, which he called “The Key to Co-ordinated Control of Decentralized Operations.”
The foundation of this system was the rigorous production of estimates, for each divisional manager, of the precise number of cars that GM should sell in an “ideal” year. Using these estimates in combination with a number of internal targets and external macroeconomic factors, the company would produce a forecast of how many cars each division was responsible for selling. Managers that exceeded this total were promoted, those that fell short were not. Once put into place, the system worked to prevent the kind of miscalculation and waste of resources that had previously occurred in the company.
The structure that Alfred Sloan pioneered became the basis for all of twentieth-century general management. You can’t run a multi-product, multi-division, multi-national company and its attendant global supply chains without it. It is one of the true revolutionary ideas of the past one hundred years and is still widely in use today. Everyone knows the drill: beat your forecast, your stock goes up, you get promoted. Miss it and watch out.
But when I first read this story, what I thought was: You’re telling me that . . .
once upon a time . . .
people made forecasts . . .
and they came true?
And, not only that, the forecasts were so accurate that they could be used as a fair system for deciding who gets promoted and who doesn’t? As an entrepreneur, I had never experienced or heard of such a thing.
The startups I had always worked on and got to know in Silicon Valley couldn’t make accurate forecasts because they had no operating history at all. Because their product was unknown, their market was unknown—and in some cases, even the functionality of the technology itself was unknown—accurate forecasting was entirely impossible.
Nevertheless, startups make forecasts, too—just not accurate ones.
Early in my career, I knew why I had always made a forecast for my businesses: you can’t raise money for a startup without one. I assumed it was a kind of kabuki ritual where entrepreneurs prove to investors how tough they are by showing how much spreadsheet pain they can endure. It was a fantasy exercise driven by our desire to show an outcome remotely plausible for an idea that was—usually, at that point—totally unproven.
Eventually, though, I found out that some investors actually believed the forecast. They would even try to use it as a tool of accountability. If a startup failed to match the numbers in the original business plan, the investors would take this as a sign of poor execution. As an entrepreneur, I found this baffling. Didn’t they know that those numbers were entirely made up?
Later in my career, I befriended more managers in traditional corporate jobs who were trying to drive innovation. The more corporate innovators I met, the more I heard about how much faith their bosses put in forecasts as a tool for holding people accountable—even senior managers who (I thought) surely would know better. The “fantasy plan” of the original pitch is often far too optimistic to be used as a real forecast. But managers, lacking any other system to use, need something to hold on to. Without an alternative, they cling to the forecast—even if it’s “just made up.”
You’ve probably started to sense the problem here: an older system of forecasting, designed in a very different time and for a very different context, is still being used in situations where it doesn’t work. Sometimes, failure to hit the forecast means a team executed poorly. But sometimes it means the forecast itself was a fantasy. How can we tell the difference?
How Do We Deal with Failure?
No doubt you’ve heard of Six Sigma, one of the most famous corporate transformations in management history—it’s just one of the systems Sloan’s work spawned. Introduced to GE in 1995 by CEO Jack Welch, Six Sigma is a process to develop and deliver near-perfect products. Sigma is a statistical term measuring how far a given process deviates from perfection. To achieve Six Sigma Quality, a process must produce no more than 3.4 defects per million opportunities, i.e., it must be defective less than 0.0000034 percent of the time. Welch introduced the process to GE with the goal of achieving Six Sigma Quality across the company within five years, stating, “Quality can truly change GE from one of the great companies to absolutely the greatest company in world business.”
As I traveled around GE training executives, a lot of questions arose, from both fans and skeptics of Six Sigma, as to whether FastWorks was to be GE’s next “big thing.” Did it render past Six Sigma training obsolete? If FastWorks was meant to work alongside Six Sigma, how would you know when to use which? Were there certifications and levels to Lean Startup knowledge, akin to the colored belts of Six Sigma?
One day, as I was meeting with the head Six Sigma leader from GE’s industrial business—who was quite skeptical of me and FastWorks—I found myself distracted by the mug on his desk, which read: failure is not an option. To me, it epitomized the mindset of the old-fashioned way of thinking. Nobody in the startup world could have such a mug, I mused; it would be ridiculous. Underlying the inscription on that mug is an assumption that failure can always be prevented by careful analysis and rigorous preventive action. There are places and times when that’s true. But my experience is full of situations where reality proved too unpredictable to avoid failure.
I thought of the best, most successful entrepreneurs I know. What would their mug say? I settled on: “I eat failure for breakfast.”
The tension between our two slogans is a great starting point for understanding why startups have had such a hard time adopting traditional management methods, and vice versa—but also what connects them. There was a time when producing high-quality products on time, on budget, and at scale was one of the preeminent problems of the age. Understanding how to build quality into products from the inside out required mastering the new statistical science of variation, and then devising tools, methodologies, and training programs that could make this practical. Standardization, mass production, lean manufacturing, and Six Sigma are all fruits of this hard-won conceptual victory.
Baked into these methods is a presupposition that failure can be prevented through diligent preparation, planning, and execution. But the startup part of the management portfolio challenges this assumption. If some projects fail to meet their projections because the underlying uncertainty was extremely high, how do we hold those leaders accountable?
Changing How Companies “Grow Up”
Aditya Agarwal, who worked at Facebook in the company’s early years when it grew from ten people to about 2,500 people, and is now chief technology officer at Dropbox, sees the entrepreneurial dilemma this way:
One of the reasons it’s hard to build new things at larger companies is because people don’t have the mental model of “My job is to actually learn new things.” A lot of the mental model is you get really good at doing something and then you are supposed to keep on doing that. Yes, there’s incremental learning, but it’s more about perfecting your craft as opposed to bootstrapping your craft. Even companies that seem to have launched one good product won’t easily know how to do it again.
You’d think that an innovative, hot startup like Dropbox, which was founded in 2007 and as of this writing is worth $10 billion, has 500 million users, and roughly 1,500 employees worldwide, would easily avoid the problem of replicating an old-fashioned structure, right? After all, it came into the marketplace with a product no one even knew they needed yet and blew up in a big way.
But it, too, has run into some of the problems we typically associate with traditional, more established companies. Why? Because over the course of its tremendous, and tremendously fast, growth, the company was built to a familiar blueprint. It lost some of the first principles of product thinking that made its initial success possible. Its launches of two new flagship products, Mailbox and Carousel, were, in Agarwal’s words, “disappointing. There wasn’t the massive scale we wanted and we ended up having to sunset them.”
The reasons for these failures were familiar. Says Agarwal, “We did not get enough pertinent user feedback. We were building and building but not listening enough.”
The difference between Dropbox and more established, legacy companies, was that at the company’s core, there remained the original understanding of the best ways in which to test, market, and grow ideas. “It was the most painful experience the company has gone through,” Agarwal says, “but also the most rewarding and important one. It taught us so many things about what we were doing wrong building new products. It’s important that you accept the pain and do all the postmortems and you learn from it. And that’s how you get better and stronger.”
After adopting a series of changes, they released Dropbox Paper, a new feature for communicating and collaborating on the platform that draws on what they learned from previous attempts, globally and in twenty-one languages, in January of 2017.
As Dropbox director of product Todd Jackson puts it, “It’s a different discipline to launch brand-new products.” The awareness of the need to both protect and grow an existing product while also being able to experiment with new ones in this way is critical to success in the twenty-first century, and a hallmark of a modern company.