stanford breakfast briefing 111214
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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
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