Why Lean Startups Turn Into Innovative Firms


One of the exciting trends in innovation right now is the lean startup idea.  The basic premise is that when ventures are starting out, building a scalable business model needs to be a top priority.  People like Steve Blank, Eric Ries, Ash Maurya and Alex Osterwalder are all doing great work in this area.

I’m all for lean startups, and if you’re building a new venture, this is an essential approach.  However, the area that I keep focusing on is this: how can we make established firms more innovative?  One of the reasons that I love the lean startup movement is this: it embeds the innovation DNA into the venture from the word go.

I’ll use The Innovation Matrix to illustrate:

As I’ve said before, most startups begin as accidental innovators.  They have to successfully execute an innovation, or they won’t survive, but they don’t have any kind of innovation infrastructure in place.  The problem is that if they don’t think about how to embed innovation, then even if they are successful, they are likely to become less innovative over time.

This is largely due to the management structures that you need to put into place as you scale.  Ben Horowitz describes this well in a great piece about how to scale effectively:

When you scale an organization, you will also need to give ground grudgingly. Specialization, organizational structure, and process all complicate things quite a bit and implementing them will feel like you are moving away from common knowledge and quality communication. It is very much like the offensive lineman taking a step backwards. You will lose ground, but you will prevent your company from descending into chaos.

Horowitz’ approach is built around managing communication above all else in building your organisation, and this makes good sense.  The problem, though, is that often the structures that we put in place end up impeding innovation as it gets stifled by other management processes.  On the innovation matrix, this is shown by the blue arrows, as the firms lose their innovation capability over time.

This is where the lean startup approach is particularly useful.  If you successfully execute one of the lean startup approaches, you will move in the direction of the red arrow.  At worst, this will leave you as a fit for purpose innovator, but in the best case, it will set you up to become a world class innovator.

Here’s how:

  • The first management structure you put in place is an innovation process.  Lean startup is a management process.  Or as Eric Reis puts it, “entrepreneurship is management.”  Here is how he frames the problem:

    I think the root cause of these mistakes is the fact that most MBA’s are not adequately educated about entrepreneurship. The problem afflicts general managers who try to innovate within big companies, too. In fact, I hope longtime readers will recognize these as the exact same mistakes that afflict us as entrepreneurs when we try to hold ourselves and our teams accountable. Are we making progress? Is what I’m working on creating value? What should I work on next? These are the enduring startup questions.

    By putting these questions up front, the lean startup gets the management thinking about questions that are important not just for startup success, but also for long-term innovation success. The lean startup approach makes your first management systems innovation systems. These are the kinds of skills that you need to be building in firms. This increases innovation commitment.

  • Lean startup approaches also increase innovation competence. Of course, one of the core insights from using The Innovation Matrixis that increasing Innovation Commitment by itself isn’t enough – in fact, it can often be dysfunctional. The overall objective must be to improve your ability to successfully execute ideas.Lean startup techniques do this.First off, the lean approach forces you test hypotheses as you build a dynamic business model. Ben Yoskovitz has a great post explaining how to do this:

    Try structuring your hypotheses this way:

    I (or We) believe…

    Finish that statement and see what comes out of it. Each key element in that sentence is a variable in your experiment, and potential feature/component of your MVP. Each variable in your experiment has to be properly tested. If a variable passes a test it may very well become a cornerstone of your value proposition. Remember: The statement has to be testable, and it has to have the potential of failing.

    If you do this, you are building a culture of experimentation into your venture right from the start. This increases your Innovation Competence from the word go.

  • Lean Startup builds a competence in business model innovation. I am starting to suspect that to be successful, any new innovation will require a business model innovation as well. Alex Osterwalder says that you can compete on business models, and I agree. He identifies four levels of business model mastery:

    Level 0 Strategy – The Oblivious: Focus on products/value propositions alone rather than the value proposition AND the business model.
    Level 1 Strategy – The Beginners: Use the Business Model Canvas as a checklist.
    Level 2 Strategy – The Masters: Outcompete others with a superior business model where every one of the business model building blocks reinforce each other (e.g. Nintendo Wii, Nespresso, Dell).
    Level 3 Strategy – The Invincible: Continuously disrupt themselves while their business models are still successful (e.g. Apple, Amazon.com).

    Apple and Amazon are two of the firms that most people think of as World Class Innovators. The point is that by using the lean startup approach, you build a competence in business model innovation from day one. This is necessary if you are going to hit the Level 2 or Level 3 strategies that Osterwalder describes.

The best way to be an innovative big firm is to start out as an innovative small venture. The lean startup approach helps with this in several ways. It has a focus on innovating the business model, which is a critical skill to build. It helps a venture develop a culture of experimentation, which is also essential. And it helps to build an management structure that supports innovation.

If you’re starting out, this is the way to go.

If you’re already big, this is what you’ll be competing against. So how you can you build the same skills? Find an answer to this question, because you’ll need them.

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Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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