Big companies aren't start ups, so why keep asking them to act like one
Exploring an alternative to the VC/start up version of innovation
Somehow start-ups and the narrative around start-ups took over the world of innovation and this became the blueprint and the only way to really think about innovation. Start-ups are the rock stars big corporates want to hang out with, and the tools and approaches in innovation have increasingly been start-up dominated as a consequence. Whilst this has brought many benefits, it creates a flawed understanding of innovation for large organisations.
What to take and what to leave behind
Full credit to the start-up thinkers, pressed for money and time they got super smart on how to think about innovation and what is certainly true is the quality of thinking, the push on different approaches and just the exciting growth and impact of start-ups turned new businesses is alluring. From thinking on experimentation to business modelling, from the musings of “The Mom Test”, on the reflections of pivots and MVPs, there is so much rich and thoughtful insight and understanding. Fuelled by the opportunities and never ending stories of market growth, hard work translated into millions of dollars it felt like an obvious place to look. What are those guys up to over there and how do we get a piece of the action?
The corporate models of innovation meantime have languished in NPD models of product flow, pipelines and stage gates and portfolio maps. What the start-up world, with its VC thinking has done is lifted it out of some complex and process/ rational driven models to recognise innovation is as much a journey of excitement, boldness and belief. All the excel spreadsheets in the world can’t solve for that. And that injection of “peopleness” and pace has been a shot of adrenaline to a floundering model.
It has also lifted the corporate world to look anew at the role and impact of innovation. Start-ups remind us of stories of the possible, of how to reframe the world, of how to not get stuck in a rut of “the way it has always been done”. It has encouraged large corporations the world over to think about things differently and pursue new paths of possibility. And on a good day it has reconnected businesses with things that matter. BP has made a lot of noise in the last year repositioning itself in the sustainable energy market, and is currently reviewing its position in Russia following the Ukraine invasion (this post will age terribly..). Who knows if BP will succeed or the underlying intentions behind the positioning (some may suspect greenwashing). However you cut it, start ups have raised the bar on connecting with needs beyond “shareholder value”.
This has brought us to the current version of corporate innovation, start-up infused. Some great outcomes include an awareness and comfort with experimentation and working with hypotheses, the speed of thought, the mixed teams and the levels of autonomy. But the world of start-ups and VCs was never trying to solve innovation for big corporates, rather to outflank it.
In doing so it has left a sprawl of approaches that are often ill suited, the mantra of “think like a start-up” being possibly the most unhelpful. This has spawned venturing and incubating models, Lean Start Up replicas (the ultimate being Erik Reis helping GE, which didn’t turn out quite as hoped). And it brought versions of venturing lifted wholesale which had a high propensity to fail a few years after the fireworks and marching bands, and when they were starting to ask for more money. This not to say models of venturing can’t work in corporate world, it just it needs a lot more thought than cut and paste.
Business model thinking is the weakest link
Business models are the new jazz hands of innovation and create a sense of complexity and deep thinking. To put it plainly offers drive revenues, business models create sustainable profitable growth. The business model is the wrap around that gets the offer to the customer and fulfils the promise of solve at a reasonable price, it’s not more complicated than that.
It is in business model thinking that this cut and paste approach from start-up to large organisation is probably at its most dangerous, as it short circuits a lot of what has made a business the success it has today. It falls short of being a suitable model corporates for a number of reasons.
The start-up growth model is not like corporate. They are typically funded by VCs and the VC model is not one of long term profitable growth, it is flip the business to the next person down the line ideally at a significant multiple against a high risk portfolio. They themselves are valued differently to corporates, with models of exponential growth and no profit because of a narrative of golden futures and winner takes all. Sometimes these models come crashing, none so spectacularly as WeWork, where when Silicon Valley met Wall Street, it as a WTF moment, immortalised by Scott Galloway’s reference to WeWork as WeWTF.
Corporate performance is about profit and growth, sometimes growth to get to profit, but profit is always in the equation. Because corporates, unlike start-ups are not high risk plays funded by someone else’s money to grow, they are asked to be sustainable engines of profitability. This means corporate investments need to have well thought through business design and commercials.
Start-ups at not so successful at reaching IPO. It is not obvious that it is a great model to replicate for targeting profitable growth. Fewer and fewer start-ups actually reach IPO these days, generally snatched up by someone else along the way, often because they are not really a business, but rather a product or a feature or a technology. But those that do get to IPO, and so are real businesses haven’t fared very well. Verdad Capital, a US investment group ran the rule over 3,700 IPOs since the late 1980s, for which data was available. It turns out if you invested in each IPO the median decline in share value was 31% after 3 years, and 41% after 5 years. That makes the average returns on IPOs even worse than the “most bankruptcy-prone categories of leveraged equities”, Verdad says. Start-ups are potentially designed to live in this high risk environment, corporates less so.
Most importantly start-ups have no business model when they get going. What they have is an idea, then an offer then hopefully a financially successful business model. They necessarily have to design a business from the bottom up, so build the one best suited to the offer they have. They have no constraints nor existing culture or competitive advantage to leverage. As a consequence, when well-designed it is totally fit for purpose. But despite this the success rates are low, particularly for an existing corporate looking to bolster future growth. Sure, I can throw a lot of stuff at a wall to see if it sticks, but is this the most effective way of driving profitable growth?
The reality is existing businesses live within an existing business and for better or worse this becomes their starting point. Any new offer needs to recognise this and find a way to use it rather than lift and drop a model that was never designed to solve their problem.
The lazy application of a great tool
If start-ups struggle to do this when it is a necessary rite of passage, then it is exponentially harder for large corporates to work out the next steps because they live in their own corporate bubble. The business model question doesn’t occur to them. Living in a functioning business means the business model is invisible, it is all around you. Historically, come up with an interesting new proposition, drop it into the business and it gets made, shipped, promoted, positioned and bought. Until it doesn’t. Yet the slow decline of an existing business model makes it very hard to look beyond the set of tools you have, there is no universe beyond the one you are in. It doesn’t leap out that the whole way of framing the world is flawed.
When a business gets to the point of realising it is not the offer that is struggling but the supporting business model that is failing to deliver the promise, the go to answer now is a new business model. Take the lean start up approach, take Alex Osterwalder’s excellent canvas model and just apply it, right? Build a totally new business and ignore the one you have because it is just a constraint with its ways of working and response times, right?
It sounds fun, it has energy, you are accompanied on safaris to meet start up founders who fill you with the belief that this is it. But this is where lazy thinking gets you to, way too quickly. The lift and drop of an approach designed for a very different context into an existing business.
It ignores so much of what has made a business great and ignores the capabilities that still lie within it. It ignores the realities of most business challenges for existing businesses. It is easy to throw everything away and do the whole “think like a start-up” thing, because sweating through the existing operating model, exploring expertise in a new light, addressing deeply entrenched beliefs is just too damn hard, particularly when those start up guys just seem to stand up businesses in the blink of an eye.
But rarely is the need to set up a business completely different from our existing business the right answer. As an answer it denies enormous value the business has created the assets and understanding it possesses, the potential energy in its people. This approach also ignores the challenge of the whole start up model in “corporateland”. It is inevitably slower and less flexible as governance and risk assessments kick in.
When it is, it is doubly hard. Perhaps in 5% of cases is the answer to build a completely new business with new assets, new capabilities and absolutely no relationship to the existing business, no exploitation of its reach, its skills, its business. The risk is when the default answer leads to the artificial separation of the new thinking into some kind of ventures set up it loses its grounding in the business and develops a weird set of unhelpful behaviours. 95% of the time there are skills, assets and capabilities in the existing business that are the source of a future competitive advantage. But it will still be handicapped by governance and oversight, concerns of brand leakage, a learned rhythm of behaviour. This doesn’t need to be much of a drag to be critically harmful. 2lbs handicap on a 500lb thoroughbred horse is enough to lose it the race.
In reality exploiting what you have in some new and thoughtful way is by far the most likely route to future profitable growth. Whether it is Netflix shifting to streaming, or again to content production, Amazon setting up AWS or more traditionally BASF constantly evolving its business over decades, Ericsson becoming a mobile player or Rolls-Royce shifting from selling to an “as a service model”, the most successful route to working out your future is use what you have in a smart way. This isn’t start up-like, it involves a more complex and deeper exploration of the emerging opportunities, the exploration of the underlying assets that give you a leverage and working out a route to success.
The corporate sweat of innovation
This is a much more complex beast as it involves shifting all of part of the business to another business model while keeping enough focus on the current one not to disturb customers and revenues. But the upside is a much more thought through journey, the deeper understanding of the possibilities that lie in your business, beyond the existing approach, the opportunity to gain an edge of the market because you are leveraging something, and a reduced risk.
The thoughtfulness involves a deep internal interrogation around the business you have and what it offers you, and a push into the market to explore possibilities. The fit is where there is a customer need that plays to an asset you have, but probably not an asset that is immediately obvious. It involves an analysis of what makes your business what it is, a deep reading of the underling operating model. In that you can find things that make your business hum, you can find a culture ripe for something new and resistant to a different direction. You can find capabilities hiding behind assets that are adaptable to something else. But you get there through the thoroughness of the look, the openness of the possibilities and the exploration of what lies beyond your existing customer, or at least your existing version of who those customers are.
It is also a much more thoughtful management of risk. By defining a route accessible through what you have means there are things you don’t have to build or learn, lessons that have already been absorbed, experiences to leverage and possibly clients already on the journey. This creates a lower investment cost, a level of togetherness and excitement in the employees that they are all part of the journey and a knowledge of elements of the answer that you already master. This in turn gives confidence about the nature of the solution and the journey to get there.
When Rolls Royce went on the journey to create a “hours of thrust” model they took full advantage of their excellence in jet engines, their strength of brand and customer relationships and their deep expertise of the broader airline industry.
How to think about it
Experience highlights a number of routes for reflection that may help along the journey.
Future back means busting through the constrained set of beliefs about the way the world works that formed the backbone of the current business.
The current business was once a start-up, figuring out its place in the world, and once done doubled down on that tight answer to reap the rewards of its insight. It then got stuck in a view of the world that confirmed the early success and kept optimising to that version.
The need is to reopen that aperture of reflection and work out what has changed about the unique set of circumstances that came together to spot the last version of the business, and then to project and explore what could continue to change in the world to anchor to for future growth. It is about first understanding what you missed in the world around you, secondly reconnecting with that initial appetite to look into the world around you, and finally exploring the possibilities and patterns about the future beyond the current frame of reference to understand how the world could turn out, and how you could shape that turning out.
Business model/ operating model
From a view of the future there is a need to work out what is the possibility of the future offer and business model and how to get there from today. This is the corporate growth tension, do I chase down the really exciting opportunity but recognise this is a business model disruption, or do I explore the more sober opportunity but know it carries less risk because it is much more easily accessible from my existing business model?
There is no right answer to this question. It will depend on the challenge to the business and its ambitions. It will depend on the future potential in the different choices of routes, their use as a platform for future growth vs a one-off answer, it will depend on the reading of the future trends and what path to exploit. The future state and business model view will give you an outside in view of which route carries risk and reward.
The operating model understanding in all this is crucial since it highlights your current assets and formula for success, as well as identifying the gaps between todays operating model and the target future business. In here lies a richness of complexity, what can I keep doing, and therefore look to exploit in the future state, what do I need to add in, and most critically what do I need to change. It is in the change that the tensions exist, things I do today need to change to achieve the future state and this is the greatest source of resistance and tension. Exploring this helps work out, from an inside out view, which path carries the greatest risk.
Sweating the challenge
There is no getting round that this is a sweaty exploration. The start-up route is seductive because it is clean sheet of paper, zero based business modelling, rather than untangling the complexity of today to find out what to leverage. Yet this is the edge, this untangling is the key to something evolved and exciting because in it lies the unfair advantage, the asset you already have that can be leveraged to get to that new future. But this is hard work, as Richard Rumelt puts it in Good Strategy Bad Strategy, “if you are serious about strategy work, you must always do your own analysis”.
This means spending enough time in the diagnosis, framing the challenge, understanding in depth the existing business, how it got to today and it’s possible edge. Understanding the context and the challenge is the hard bit, not the smart answer that pops out. That becomes obvious from the diagnosis and the constraints. The risk is rushing to the answer, focusing on the cool idea and then locking down. As the SEALS say, “slow is steady and steady is fast”.
This is very linked to the above and perhaps the hardest part, it’s what Aswath Damodaran refers to in his book Narrative and Numbers. It is about constructing a clear and joined up understanding of the existing and future elements that tell both a compelling and engaging story and stack up to a set of strong commercials. This is a hard skill and an uncommon skill in a large organisation. Someone back in the history of the organisation did this to go from a start-up (though we didn’t call them that back then) to the large multi-million corporate business we have today.
Today the skill is lost in the specialisation of the complex functional roles and few people have the breadth of business understanding coupled with the strategic awareness of how this all joins up into a dynamic system. But get this right and you can figure out the complexity of the existing and the evolution from here to the future business you need to become.
Steal with pride
This gets back to the starting point, there IS loads of good thinking in the start-up world, fruit of the enormity of the challenge of starting a new business and the richness of possibilities, so do go back into that space and pull out the useful tools. A few worth thinking about are
Business model canvas – any easy and comprehensive view of a business, as well as being so universal that it becomes much easier to explore your thinking vs others.
Assumptions testing – how to move at pace with clarity of thinking and your thinking from massively uncertain to confident enough to move forwards without boiling the ocean.
Strong teams, low hierarchy – having a space for the team to explore, challenge and build their thinking largely free of the weight of existing thinking, and with this how to choose the right people to do this, remembering this isn’t an experiment in democracy, the best thinking is unlikely to be something everyone agrees to.
From the corporate world a few behaviours worth considering would be
Rich commercial modelling and using this to filter and create blockers. Too much innovation speak sees finance as a constraint rather than a tool of focus and insight.
Proper governance so as not to lose sight of the broader company strategy and intent and bring in sobering challenges built off deep expertise.
Using what you have, so smart use of deep pockets, making use of the rich expertise in the business and the potential of people who would love to help shift the focus, taking strength and insight from customers with whom you have strong, tight and deep relationships, who will help you explore future possibilities with them, leverage your ecosystem what you know about it and the relationships and possibilities around you.
There are so many smart people in corporates with the experience and ambition to help a business grow, to shift the culture and point in a different direction. These people can have the same fire to change the world yet are hidden in business as usual. To not look here, to not grapple with the complex richness that sits within a company is to miss out on its greatest asset for future growth. To listen to siren song of start land or its poor cousin in corporate start-ups is to overlook potentially the greatest assets you have. You may end up there, but don’t start there, not without looking within yourself and the possibly thousands of smart people who work within your own business.