Steve Blank & Alexander Osterwalder are world famous entrepreneurs and authors whose work in many ways launched the Lean Startup movement. We had a great conversation at CSL’s Corporate Entrepreneurship Forum.
We are in the process of sharing all of the videos from this year’s Forum on the 2020 Forum Website. But I also wanted to share a few highlights here on Agile Giants.
Sean Ammirati (00:08):
Welcome to Agile Giants: Lessons from Corporate Innovators. I’m Sean Ammirati, your host, co-founder and Director of The Carnegie Mellon Corporate Startup Lab and Partner at the early-stage venture capital fund, Birchmere Ventures. Each week, I’m going to talk to guests who are experts at creating startups inside large corporations. I believe fundamentally a startup within a company is the same as one inside the proverbial garage, a group of entrepreneurs trying to make the world a better place using new ideas and inventions. However, I also believe some of the techniques and processes are just inherently different. This podcast is going to explore those similarities and differences.
Sean Ammirati (00:56):
It’s been a really busy month at The Corporate Startup Lab. Actually, much busier than I even forecast. We did what was historically a one-day corporate entrepreneurship forum and transitioned it to a six-day, three-hours-a-day virtual event. In the process of doing that transition, had some amazing conversations. The theme that we talked about was reinventing your business in 2020 and responding to changes, and we certainly had to respond to the change of COVID to make the forum work, but it worked. We had over 450 people participate, over 60 speakers, and some amazing content.
Sean Ammirati (01:33):
All of that content is available in video format on The Corporate Startup Lab’s site, but what I wanted to do here was share just a couple episodes over the next few weeks with some really special conversations. I’m going to start today with my conversation with Steve Blank and Alexander Osterwalder. I’m sure you know who they are. I introduced them at the beginning of the episode so I won’t do that here, but again, this is just a taste of the content available from The Corporate Entrepreneurship Forum. Hope you enjoy today’s episode and hope you get a chance to check out all of the content on our CSL site.
Sean Ammirati (02:11):
I really, really appreciate both of these guys doing it. I would describe this probably as a highlight in my career to be honest to get to talk to both of these guys. If you don’t know who Alex and Steve are, I’m not sure what you’ve been doing the last 10 years, but I will give the quick introductions on both of them just to set the table. I’m fairly sure everybody listening knows who they are.
Sean Ammirati (02:36):
Steve Blank is arguably the guy who’s the father of modern entrepreneurship. He wrote the book that certainly shaped how many of the early startups that I led did customer development, Four Steps to the Epiphany, and then later released The Startup’s Owner Manual. We have a class, like most universities do, called Lean Entrepreneurship or Lean Startup. That whole methodology really got defined and catalyzed with Steve’s 2013 Harvard Business Review article on the lean startup movement. He teaches at Stanford, Columbia, Berkeley, NYU, and also created the NSF I-Corps program, which is something we’re really excited to have at Carnegie Mellon and I know a lot of other universities are as well.
Sean Ammirati (03:25):
Then, Dr. Alexander Osterwalder, or Alex, is the guy who created the Business Model Canvas, and then Lead Strategyzer. I think almost every single company that I talk to talks about using the Business Model Canvas. We certainly interact with it all of the time at Carnegie Mellon at the Corporate Startup Lab. I think that’s probably what he’s most known for, but he’s got a bunch of other canvas-like tools as well. The Value Proposition Canvas, the Business Portfolio Map, and then he has the whole consulting and training and tech-enabled service business. Strategyzer is the way to talk about this.
Sean Ammirati (04:01):
These guys are really as much of experts as we could bring in. We’re about five days through the program here, but I wanted to kind of start maybe just stepping up a level because I think these two can speak to this as well as anybody. Steve, Alex, either one of you, feel free to start here, but why do you think it’s more important than ever to innovate at speed?
Steve Blank (04:23):
Unless you’ve been in Antarctica in the last nine months, the world’s kind of changed pretty radically for almost everybody who breathes exactly.
Sean Ammirati (04:32):
Steve Blank (04:33):
We’ve talked about disruption for the last decade or two about business disruption, about globalization, all of those other variables, but obviously COVID-19 has changed the world completely. Whatever business model you had in January is obviously completely different now, for most companies for the worst, and some for the better, but for all different. Given there’s a vaccine on the horizon, it’s going to change again and you’re going to have to figure out how much of the changes have been temporary, how much are permanent, how much would you like to be temporary and permanent. We need antibodies for human beings to react to things coming and changes. We need kind of a methodology to deal with disruption when it happens and take advantage of it when it happens.
Dr. Alex Osterwalder (05:19):
Yeah, I mean, if you look at the pandemic now, it’s been a disruption that affected everybody, but the reality is that sooner or later, maybe not a disruption this big, but an industry-specific disruption, some technology disruption will hit any company on the planet. Not just companies, and I think Steve can speak to that, any type of organization. This is just a wake-up call. It is really shaking leaders and saying, “Hey, this is happening.” It happened to everybody, but if you look at different arenas and industries, this is reality and I think the type of innovation that companies have always been pretty good at, efficiency and innovation, to a certain extent product innovation, is just not enough anymore when the world so radically changes.
Dr. Alex Osterwalder (06:05):
If you are focused on efficiency and innovation, better processes, or just replacing old products with new ones, you’re just going to more efficiently die, so you really need to start to ask yourself, what is that future that you envision? Start building it today because you’re not going to build it by just deciding that’s the right thing to do. You’re going to build it by experimenting a lot and the best ideas and best teams will emerge. You always have the possibility to acquire as an established organization, but that is getting more and more expensive, so it’s not always an option.
Sean Ammirati (06:40):
Yeah, I think that’s exactly right and I know you guys have been talking a lot about being ambidextrous and the importance of that as part of dealing with this rapid experimentation, the dynamics that we’re dealing with. For companies who may be trying to do that, to experiment rapidly, to be ambidextrous, what are some things they should be thinking about?
Dr. Alex Osterwalder (07:01):
The first thing I would throw in is you need to give innovation power. There’s no organization today on the planet probably that doesn’t have innovation activities, but with Steve, we like to call this innovation theater-
Steve Blank (07:14):
Dr. Alex Osterwalder (07:14):
… because it’s not really embedded in the organization ad you’re not able to kind of build a really serious innovation engine that lives beside the execution engine. It’s not that you should forget execution. You still need to manage what you have, but you won’t get a really serious innovation engine, that’s what we call explorer. If you don’t give innovation power, and that means either the CEO spends at least 50% of his or her time on innovation, or take the model of Ping An, you have a co-CEO who is a hundred percent dedicated to innovation. Without giving innovation power, don’t even talk about the ambidextrous organization.
Steve Blank (07:54):
It’s probably worth reminding your listeners about that phrase, ambidextrous, which and I think it was Tushman and O’Reilly who kind of popularized it in the 20th century, which basically said, “Hey, why don’t we build organizations that could both chew gum and walk at the same time?” That is through execution and innovation, and it was a nice theory and, yeah, people read the books and it was great, but in the 20th century, it wasn’t particularly urgent. That is, there was no gun to the head of corporations or government agencies to, “Well, why do I need to do that? My competitors are up here, other big companies, et cetera.”
Steve Blank (08:28):
We kind of look back at that and I think kind of go, “Well, that was the golden age of stupid management.” It was like you didn’t have to be very smart to be a large company CEO. You had to play golf well, but in the 21st century, the skill sets are different and it’s not that CEOs have gotten stupider, it’s that the environment has changed so radically. We kind of go through the checklist and Alexander does a great job. I just want to remind your listeners is China’s a competitor. The idea of startups when I was an entrepreneur of being able to raise more money than a corporation for R&D or even more money than they have in the bank was insane. A startup challenging an existing brand? That was insane.
Steve Blank (09:09):
Now, brands are affirmo. You an create a brand on the internet in a year. We could go through the whole checklist of changes that corporations are now facing, and we use the phrase “disruption” and I want to remind your listeners it’s also true for countries. In the U.S., we can afford to have Macy’s go out of business, but it’s a little worse when your country is being disrupted, and in the U.S. we’re finding that’s the case in our Department of Defense. We’re down to number of two in a number of cases to China and in some cases Russia. I just want to set the scene of why ambidextrous is important.
Steve Blank (09:41):
It was a real surprise for me, though Alex, I think, had figured this out much earlier, is that the problem is not, “Let’s have a party and set up an accelerator,” and as Alex said, do innovation theater. I feel kind of guilty of it because that article you mentioned, Why the Lean Startup Changes Everything on the cover of The HBR gave corporations permission to try to take startup tools without really understanding and I didn’t even understand. That’s not the problem in a large corporation trying to do innovation. The large problem in a corporation is organizational design. It’s culture and process that you put in place for execution.
Steve Blank (10:18):
People come to work nine to five, there’s my business card. It’s actually an implicit hotlink to a job spec. That’s what I’ve trained for, et cetera, and now you want to take away my power or achieve very specifically. Now, there’s a new product that’s going to conflict with my existing sales channel and my commissions are at risk. How do I do that? That’s the biggest problem I have found in getting large companies to actually take innovation seriously rather than that phrase “innovation theater.”
Steve Blank (10:47):
If you haven’t rearranged your exec staff or rearranged compensation plans or rearranged anything and your CEO isn’t on a different comp plan, then you’re not doing innovation. By the way, the marketplace will take care of that for you because you’re going to be a short-term company. Alex, does that [crosstalk 00:11:05] make sense to you? Or [crosstalk 00:11:06]-
Dr. Alex Osterwalder (11:06):
Absolutely, and I’ll go back to one of the things you mentioned, which is a big variable change, is that today I’d say startups are often better funded than corporate ventures. Don’t mistake R&D for corporate ventures and innovation. R&D is about technology innovation, new science, and it usually helps make the existing business model better, but when we’re talking about innovation, it’s about new value creation, value for customers, and value for the business. If you look at innovation teams, not R&D teams, those are separate worlds. They should collaborate, of course, but they’re separate things, if you look at the teams in companies, they’re rarely as well-funded as a subset of the startups out there.
Dr. Alex Osterwalder (11:51):
Today, I believe the incentives are correct for startups because they’re incentivized to grow in scale. Inside most corporations, the incentives are not for these corporate venture teams. They don’t get enough money. If you don’t succeed or if one out of the 10, 20, or 200 we invest in are not going to succeed, it’s over. The incentives are wrong, the financing is wrong, and I’d say it’s not because these companies are stupid, they just haven’t understood the innovation that’s relevant today well enough. They’re [crosstalk 00:12:25]-
Steve Blank (12:24):
Yeah, I’d [crosstalk 00:12:25]-
Dr. Alex Osterwalder (12:25):
… stuck in the R&D world-
Steve Blank (12:25):
… say they are stupid, Alex.
Dr. Alex Osterwalder (12:28):
… is they’re stuck in the R&D world and we need to move to an innovation world. R&D may or may not drive innovation. Think Nintendo Wii. It was an inferior product, but came in a multi-billion-dollar spitting machine. Is it really profitable with inferior technology? I don’t want to say you don’t need technology, but technology innovation is a subset and it may or may not be the foundation of innovation in your organization.
Dr. Alex Osterwalder (12:53):
Back to what Steve said, it’s all about putting in place the right organizational structures, the right funding, the right KPIs. Otherwise, there’s no chance of getting innovation, and that is the job of the leadership. Innovation is bottom-up and top-down. Top-down, not to pick the ideas, that’s the worst thing you could have. That comes bottom-up, but it’s top-down to create the conditions for the best teams and the best ideas to emerge.
Sean Ammirati (13:19):
If you could deliver like one message to the CEO around this, so you got the incentives, you’ve got the org structure, you’ve got budget, you’ve got KPIs, but you get 20 minutes with the CEO of one of these Fortune 500 companies that’s on today. What’s like the one message you would deliver to them?
Steve Blank (13:41):
What’s your comp plan look like? Seriously, we’d be asking, “Are you being incented by the board for current share price and short-term returns? Then, don’t do a damn thing.” It’s the classic prepare an envelope for the next guy and put it in a drawer that says, “Prepare an envelope for the next guy.”
Sean Ammirati (13:57):
For the next guy, yeah [crosstalk 00:13:59].
Steve Blank (14:00):
If you remember, at least in the United States, corporate CEOs are driven by boards who are worried not only about current quarterly earnings and profit, but they’re also driven, and for the largest companies, to try to fend off activist investors, i.e., look at what happened to GE and P&G and whatever for better or worse. Ironically, and here’s the big idea, that the best way to kind of… an activist investor is to actually innovate and deliver innovation, not deliver innovation theater. That message I’m not sure has really gotten across because someone hasn’t made a great economic case for boards that really is better because, again, those boards are also short-term motivated.
Steve Blank (14:40):
The long-term survivors will be those that continually innovate. Apple is a great example, Netflix, et cetera, Tesla, SpaceX. Tesla versus the [inaudible 00:14:49] a single company puts the entire auto industry with a hundred years of expertise, great brand, whatever, back on its heels, and they’re all catching up with a startup that almost went out of business. Same with SpaceX. Took on a monopoly, but whoever thought, boom, it was both technical innovation and business innovation. You go through the whole list. Netflix, basically we used to point to Netflix versus Blockbuster. It was Netflix versus the entire Hollywood. Holy cow, who would have thought that? Spending more money making content than all of Hollywood.
Steve Blank (15:21):
Getting boards to understand, and we point to CEOs, but we forget, CEOs are an employee of the board of directors. The board is responsible for overall hiring and firing a person responsible for executing a strategy. Meanwhile, CEOs believe that, “If I just had an accelerator and coffee cups and mugs that say, ‘Innovate’ and posters in the cafeteria,” it’s kind of like building a cargo cult, you know [crosstalk 00:15:46]-
Sean Ammirati (15:46):
Don’t forget jeans and a ping pong table, but yeah, that’s what you need, for sure. Should I infer from what you’re saying, Steve, because you quickly went to incentives out of kind of the incentives, the org structure, and the KPIs, you feel like incentives are the place that companies should start if they’re trying to really shift from this incremental to this more transformational innovation?
Steve Blank (16:06):
I’ll give you my answer, but I’m really interested in Alex’s as well. My answer is, remember, I’m not talking about individual incentives, I’m talking about the rationale for the-
Sean Ammirati (16:16):
Steve Blank (16:17):
… corporation. Right, so I’m not talking about, “Do we goose the CEO’s pay to put the thumb on innovation?” That’s an outcome of having a board-level discussion about, “Okay, are we optimizing short term? Great, we have great market share, great whatever, and I don’t really care about what happens in five years. We’re not going out of business in five years. Not on my watch. It doesn’t matter.” Or, are we going, “Holy cow, we want a company around for the next 10 or 15 years? Therefore, what type of incentives and motivations and organizational design do we need to insist that the CEO and exec staff deal with? Are we ready to put up with some of that changes and bumpy transition and try to minimize that based on best practices that we’ve seen others do and some of the tools that Alex has built?”
Steve Blank (17:04):
Incentives are kind of an outcome of making probably the toughest high-level strategy decision that a board will make on a public company, or even a private. Alex?
Dr. Alex Osterwalder (17:14):
Absolutely. Build on top of that. I’d go a step further and say, “Well, even the board who’s employed by the shareholders.” If you can’t convince the shareholders at the end of the day, nothing’s going to happen. I was exactly in this situation before the lockdown. I was with one of the biggest global and European financial institutions with the CEO. We had a short amount of time. Turned out to be longer because he was very interesting, but he was asking, “How can I do this? How long does it take?” Then I said, “Well, first of all, one question of the board, we answered that one, you need the board behind you. Then, are you really willing to do this? It means you are going to probably even change your base of shareholders.”
Dr. Alex Osterwalder (17:56):
I’ll give you an example, not a hundred percent innovation, but transformation. Paul Polman, when he took over Unilever, he did two things. First thing is, he said, “We’re in it for the long term. We’re going to abolish quarterly reporting.” Wow, this is a publicly listed company. Can you imagine the shareholder reaction? The second part was then saying, “You are with us in the long term. We will create value by really focusing on environmental sustainability and profits in harmony, not one at the expense of the other. We’re a business. We need profits. We need to grow profits, but we want to do this by focusing on sustainability and we can’t do this in quarters.”
Dr. Alex Osterwalder (18:39):
He had to work really hard to convince shareholders about this long-term story. Now, you can take a Jeff Bezos and make the same case, but that’s easier because he is the big owner of the company, still owns today 10% of the shares. For Paul Polman, the work was a lot harder. It’s a publicly listed company. He’s not the majority owner. He has to convince the market. You need the board, number one, otherwise you’re dead. Then, number two, you need to convince the market, and no CEO who doesn’t understand that will stay in it for very long.
Dr. Alex Osterwalder (19:13):
That’s a hard job and if you’re just after the money and compensation, probably you’re not going to do this because it’s a really, really hard thing to do. You need to be extremely passionate. In this case, Paul Polman was passionate about helping save the planet. The other companies like Patagonia do the same. You need a CEO who’s extremely passionate about innovation, but also to a certain extent so naïve to actually pull it off. That’s again, I would say, an entrepreneurial CEO. You need that entrepreneurial spirit, right?
Sean Ammirati (19:43):
Dr. Alex Osterwalder (19:43):
Steve can confirm this. Entrepreneurs, they do things because they don’t know they can’t be done, right? It’s the same for innovation. When you’re a publicly listed company it’s really hard, but it can be done. We now have the first examples.
Sean Ammirati (19:57):
Yeah. That’s awesome. I want to pick up on something else, Steve, that you said earlier, and there’s some questions in the chat that we’ll get to as well. I wanted to pick up on something you said earlier, Steve, because it’s something that’s been interesting to us at Carnegie Mellon and The Corporate Startup Lab a lot, which is you mentioned when you wrote the HBR article, all of these companies started using the tools, the best practices, the techniques from the startup and applying them inside their companies. This is a great question for both of you as sort of the fathers of most of those tools. Of the tools that are being used in at least our methodology and generally, how much of them do you think work one for one inside a company? How many of them do you think the tools need to be tweaked for use inside a big, large, established company?
Steve Blank (20:47):
I’ll give you my piece, which is the customer development piece, and then I’ll let Alex talk about the Canvas, but I’ll give my little tweak on that. Number one is customer development, this whole idea of you’ve got to have the building to build MVPs, blah, blah, blah. The thing that people miss in corporations, particularly if you haven’t re-engineered the rest of the organization, you’re trying to innovate it in an existing company, is that half of your customer discovery ought to be done inside the building. What I mean by that is, “Oh, look, we got product markets in and we’re tying into new customers and, yeah, this will be a great product.” You forgot to talk tot he VP of Sales-
Sean Ammirati (21:21):
Steve Blank (21:22):
… because of over his or her dead body, are you going to do that? It’s channel conflict. Boy, this thing is going to be killed before you even know what happened, or gee, you forgot to talk to legal, and because here’s a big idea. Startups could do anything and, in fact, let me emphasize anything. The biggest IPOs all broke the law. Airbnb broke the law. Uber broke the law. Tesla broke the law. By the way, they never would have been funded in the 20th century. In the 21st century, when Frederick [inaudible 00:21:51] said, “Really? We could have a $10 million market? What the hell. Hey, we don’t know you if you get sued, but have a good time. We’ll give you some money for hiring Bradley Tusk or someone else and good luck.” Turns out, that’s now a model. If there’s laws you don’t like, well, what the hell.
Steve Blank (22:06):
I say that not glibly because, again, Uber and Airbnb all broke local laws. Tesla in the U.S. broke the laws on having distribution channels outside the existing auto companies and they consciously said that, “If we do that, we could make a ton of money.” Imagine having that conversation inside of Marriott or Hyatt saying, “Hey, why don’t we rent our rooms to some general counsel or et cetera?” Or tell you, “Well, here’s the phone number of the attorney general of name of our state. They’re going to be here in about an hour.”
Steve Blank (22:36):
Number one is trying to do your own internal customer discovery and, by the way, in a large company, if you’re innovating, if you don’t know who the saboteur is, it’s like playing poker and not knowing who the fool at the table is because then that means that’s you. There’s almost always a saboteur in a large company because it threatens their power or position or budget or something else.
Steve Blank (22:57):
To answer your question, number one is customer discovery needs to be done inside as well as outside and, by the way, in a large company you need to preempt all of the people who might want to kill this by making them mentors and coaches and whatever. Whereas in a startup, everybody’s aligned for your success. In a large company, my experience is most people want to strangle innovation in its crib because its a threat to their day-to-day jobs, and some of them just unconsciously. “Hey, it’s like a disruption of what I know what to do.”
Steve Blank (23:30):
The second part is, and then I’ll transition to Alex, is in startups, we took Alex’s Canvas as is in the classic nine boxes and just modified one box, what Alex called customer relationships, which in large companies mean the long-term relationship between a customer and the company. In a startup, we teach you that that box means, how do you get, keep, and grow individual demand creation activities? While we left the box identical, I remember Miura-Ko and I meeting Alex saying, “Well, we need a 10th box.” It was like somebody telling me I needed five steps to the Epiphany and realized that I could just simply repurpose one of those boxes.
Steve Blank (24:10):
The other thing that Alex and I and some people in the Defense Department did is we took the Business Model Canvas and made a variant of it for government agencies and it turns out it works great for nonprofits, called The Mission Model Canvas. That when you don’t have revenue but you have mission achievement or mission success or when you don’t have channels but you have to deploy products or services, it was a great modification that Alex did, but a lot of us still kind of use that same model. Alex, over to you.
Dr. Alex Osterwalder (24:39):
Yeah, a hundred percent what Steve just said, and we work a lot with pharma companies, pharmaceuticals, so there you just can’t break the law because you will literally land in jail because you can’t just go out and test the way you want to as a startup. Even startups would actually land in jail-
Sean Ammirati (24:55):
Dr. Alex Osterwalder (24:56):
… because it’s a heavily regulated environment. The thing I’d add is, do we need to modify the tools? That’s kind of the approach, “Oh, can we make a Swiss Army Knife to do surgery?” It’s not about having one tool that does everything, we need several tools to do the job. Now, the big difference with a corporation that’s established and with a startup is that a startup is looking for one business model, and until they have that that’s their only concern.
Dr. Alex Osterwalder (25:23):
When you’re in an established company, you actually have a portfolio of business models, so you’ll have some startups, some ventures that are looking for one business model, but overall, if you’re the leadership, you’re actually less concerned about individual business models. You’re concerned about your portfolio of business models, those that I’m running and those that I’m inventing. That was kind of what we realized about three years ago together with Yves, I was wondering, “Could we create a language for that top level, for senior leaders, just like we created a language for business models at the doers level?
Dr. Alex Osterwalder (26:03):
What we came up with was this business portfolio map which allows you to look at that top layer and then ask, “Are we at risk of disruption because of the business models we have? Or running out of steam? Do we have an innovation funnel to kind of fill that gap that will exist sooner or later?” What you can see today is those companies that already were thinking about ambidextrous and business model portfolio, they were much better prepared for the pandemic because they could pivot a lot faster. In that piece, that’s where I’d say again more tools, and tools are not the solution, but they’re part [crosstalk 00:26:42]-
Sean Ammirati (26:41):
Dr. Alex Osterwalder (26:42):
… you can’t do surgery without a scalpel, but the other piece is culture. You can actually manage, design culture. It sounds pretty abstract, but if you don’t, you will never be able to establish an innovation culture. That is extremely important to understand. There are more things and if you put those in place you will succeed. Think Netflix, Steve mentioned. Why is Netflix better than everybody else? Do they use these tools better? Business Model Canvas, the [inaudible 00:27:13] Canvas so? Sure, but what they really did, you just got to read the last book from Reed Hastings, No Rules Rule.
Dr. Alex Osterwalder (27:19):
They built a true innovation culture, just like Amazon is not better because they have smarter people. All of these companies have smart people, but they built a true innovation culture, meaning it’s designed into the organizational structure back to what Steve said. If you want a culture to happen, emerge, you need to design and manage it deliberately. If you read Hastings’ book or before there was one from Patty McCord on the Netflix culture, you will see it’s by design.
Dr. Alex Osterwalder (27:48):
I think we still have this conception of innovation, it’s just about creative genius. Of course, you need some people who are more driven. Of course, you need people who are better pattern recognition, but they will get killed inside corporations, the antibodies that Steve mentioned, if you don’t put in place that system. I don’t believe it’s a talent problem. I believe it’s problem of organizational structure and culture, which we need to actively, proactively, and deliberately design.
Sean Ammirati (28:15):
Yep, and that really builds on a lot of what we talked about yesterday at the forum. We had the former CEO of Bank of America say, “A hundred percent of a CEO’s time should go to managing and optimizing the culture.” We had some organizational behavior professors talk about that, and people are, I think, in the up chat you’re asking for maybe best practices around optimizing your culture for innovation. Any specific things you would point to just to build on what you were just saying, Alex?
Dr. Alex Osterwalder (28:45):
I’d go back to the one thing you need to do first. You need to have a leadership that spends time on innovation. Our friend Rita McGrath, she says, “Look at the CEO’s agenda,” literally their calendar, and you’ll see if they’re serious about it because everybody uses the words. Now, I start to call this the Rita McGrath Test. Look at the calendar and if every week, 50% is earmarked for activities around innovation, again, not picking ideas but building the culture, working on the system, or look at the last five leadership meetings. Did they actively work on innovation culture, the system? If you don’t see those in the agenda of the last five leadership meetings, guess what? Innovation has no power because if you have the head of innovation reporting to the person who reports to the person who reports to the person who reports to the CTO and the CMO, nothing’s going to happen.
Dr. Alex Osterwalder (29:42):
For me, number one, you talk organizational culture. You need to talk about power and it is kind of the org design or org chart part. You get that right, a lot of the other things will happen. Obviously, you need to put the right person in place. It’s not just the org chart, it’s the people, but if you do that, a lot of the rest will get unlocked almost… I won’t say magically because innovation is hard, but it will be a lot easier. If you don’t do that, everything will be a struggle.
Steve Blank (30:09):
Let me give you a couple of more on top of what Alex said-
Sean Ammirati (30:12):
Steve Blank (30:12):
… if that makes sense, Sean.
Sean Ammirati (30:13):
Steve Blank (30:14):
One is about culture and literally it’s not a memo or a post and it constantly has to be for an existing organization kind of be reinforced multiple times until people actually understand on both onboarding and training, et cetera. The phrase I use is, “Execution pays your salary, but innovation pays your pension.” It’s a big idea. One’s a short-term investment, and the others are a long-term investment. As that translates, as Alex said, is not only in org chart design, but I remind people, after you think you have innovation in place, if you have the exact same org chart you had last year and no new people at the table, then you really have innovation theater. I mean, that’s the other test. It’s not only look at the calendar, look at the org chart, look at the comp plans and whatever.
Steve Blank (30:59):
Then, the other piece I kind of am now a big believer on is companies miss two things [crosstalk 00:31:04] and a simple way to kind of implement this is, number one, is you need an innovation pipeline. What I mean by that is, where do you source innovation from? Is it internal? External? Is it Chesbrough’s Open Innovation? Is it you’re working with industry? Is it all internal? Is it, by the way, you have an M&A group and they’re separate and they’re not part of an integrated strategy? Or you have a VC group and it’s all siloed? That’s just backwards. That’s like not innovation. That’s again power plays about who owns the silo.
Steve Blank (31:33):
Number one is, how do you feed this pipeline? The pipeline could be beginning of discovery, et cetera, and then we have an accelerator. Then, maybe the output of the accelerator goes to full stop. Where does it go to? “Oh, well, we haven’t figured that out. Oh, that’s unbudgeted and unscheduled. Oh, that’s a conflict.” It turns out it’s kind of like building the classic highway that ends in the middle of the desert. It’s like most people build this but don’t actually have the organizational design. When we keep talking about this is, what happens after things come out?
Sean Ammirati (32:08):
Steve Blank (32:09):
Well, do we spin them out? Or do we change engineering priorities? Are we allowed to have channel conflict? Who decides that? Number one is, what’s the organizational design for an end-to-end innovation process? Not a point process but end to end. Then, number two is, and this is radical but it’s the only way this works, is if you have what I call a Appendix A Authorities for Innovation. What I mean by Appendix A is every company kind of has the HR manual and every company has the finance manual and then the legal manual. When you’re an innovator, you go, “Okay, I just want $10,000 to buy X.” “Oh, you need to go to our approved vendor,” or, “No, you can’t go to that conference,” or, “Oh, no, you can’t take those people in your innovation group because those people need to go in by seniority.”
Steve Blank (32:57):
Well, those are the last people you want, but they’re looking through their existing manual for execution. What I call Appendix A Authorities is you need them to turn to the back of that manual and go, “Oh, there are 10 pages here that say, ‘If you’re in the innovation pipeline, you’re allowed to do these different things.'” They shouldn’t be a battle every time. They’re actually a normal process for the 1% of the company, not 99%, but yes, innovators are different. They need different rules, different tools, different techniques, et cetera. If they’re never been articulated and never been worked out, everything is a fight every time and we don’t learn from those fights.
Sean Ammirati (33:38):
I know you’ve been talking a lot recently about creating an innovation doctrine, which I think kind of feeds into some of this
Steve Blank (33:45):
Sean Ammirati (33:46):
… as well. I do want to get to some more questions from the audience, but maybe if this is a nice chance to talk a little bit about, what’s an innovation doctrine? Then, I think, at least as important why you need an innovation doctrine.
Steve Blank (33:59):
Yes. To me, an innovation doctrine is kind of the operating manual for innovation in large organizations rather than just using the words. Again, the nice part is senior leadership in military organizations and in corporations are using those words, innovation, but there really is no handbook of, what is it? Why is it? Number one is, it has four parts. One starts with context. Yeah, we all agree that we’re screwed, because if we don’t agree, that’s a nice way that we need change. If we don’t understand that we need change or the magnitude of change we need, then the conversation can’t even start because to some people it’s like, “Why are you changing my job title or career or budget or something else?” In the military, “Why are you taking away my aircraft carriers? That’s what I wanted.” Those are actually floating bullseyes in the Western Pacific or in large companies.
Steve Blank (34:52):
Once we get everybody kind of aligned about the new circumstances and circumstances going forward, then we can talk about the role of leadership. “Do we have Appendix A Authorities? Do we have all of these things that we agree on? Do we agree on how we’re going to kind of adjudicate between these existing execution processes and the innovation processes? Then, step three is the one I mentioned is we need a formal innovation pipeline that goes end to end, that are not individual activities. Key idea, we’ve confused individual innovation activities with an innovation end-to-end process. For me, innovation is the stuff that delivers new products and services with speed and urgency to customers or warfighters, depending on whether in a company or governments.
Steve Blank (35:36):
Then, the fourth part is all of these processes and procedures I talked about need to be in place, training and Appendix A Authorities and whatever, to support those three things above then. That’s a doctrine. That’s an end to end. “We thought this through. With all due respect, you didn’t bring McKinsey in to reshuffle the chairs, whatever.”
Sean Ammirati (35:56):
Steve Blank (35:56):
This is like a new idea on how do we… By the way, it’s not moving 99% of your company around. It’s true. Most people will just kind of notice the cultural change, but their jobs for execution will still be in place, but they will understand the role of the crazy people in those other rooms who are betting their jobs and careers because they might be wrong. In fact, if you remember, I called it a pipeline. We know it’s actually a funnel. Most of those innovation activities are going to fail, and that’s the last piece of culture change, by the way, we didn’t mention.
Steve Blank (36:29):
In a large corporation, and certainly in the military, failure is not an option because if you think about it, in a corporation, if you fail for a known job, I mean, “We’ve been doing this job for years and here’s the spec and you’ve been through training and whatever, it’s your fault. You failed personally. Get the heck out of my company. This was an execution job.”
Steve Blank (36:50):
Failure shouldn’t be tolerated on most of those known processes, but inside a company, innovation, most of those things will fail. “Well, wait a minute, our culture says you can’t fail.” How do you, in fact, allow failure inside of an execution culture? In the military, it’s even worse. Failure could be life and death on the battlefield, but if you’re not innovating in R&D labs and if you’re not failing enough, you’re not trying enough. We know that as startups.
Sean Ammirati (37:19):
Well, and some of the things with [crosstalk 00:37:20] Alex’s portfolio approach, too, right? You want to take a portfolio approach to these things and make some of what you were just describing a lot more palatable, Steve, I [crosstalk 00:37:28] suspect.
Dr. Alex Osterwalder (37:29):
Can I give you an example?
Sean Ammirati (37:30):
Dr. Alex Osterwalder (37:30):
I think this is an important part. We looked at kind of the top and the culture and I think the details actually matter in this, and there’s a misconception to a certain extent with the whole Lean Startup movement and sometimes in how people perceive customer development. They think you can pivot yourself to success, but actually it’s not about wasting resources.
Sean Ammirati (37:50):
Dr. Alex Osterwalder (37:50):
You actually need to be really good at peeling ideas. In the startup world, that happens naturally because you have follow-up rounds of investments, so some of the teams who don’t have evidence, they just get killed because they don’t get follow-up investment. In corporations, you need to rethink how you actually invest in ideas. In the execution world, pick an idea. Let’s say we’re going to build a new factory for our new technology, that is an execution challenge. You build factories before you know how to do it, but you don’t know what the next breakthrough business model is going to be.
Dr. Alex Osterwalder (38:27):
If you look at early-stage venture capital data, you can see that only one out of 250 ideas or four out of a thousand will be a breakthrough result. They will give you 50X return on capital, and that’s not even revenues, that’s valuation. Think of it, in companies we need at least the ratio of 200 teams working until you get one that is really breakthrough, and companies are starting to do that. I’ll give you one example. Bosch in Germany, it’s a big engineering company, 400,000 people, they over three years invested in 200 teams, but they only give them three months.
Dr. Alex Osterwalder (39:08):
After three months, listen, this is the interesting part, 70% of the projects of those three months, they’re retired or we could say killed. Then, retired is a nice word. They don’t get follow-up investment, so only 30% get follow-up investment to go on and continue to test. We’re not at execution yet. Again, maybe after six months or so, slightly higher amount of money. Not a lot. In this case, it’s 75% of the teams get retired, so only a few make it to the very end. That is a completely different way of working and it means we’re embracing failure. Teams that don’t get to the next round, it’s okay. You can try again the next time because maybe you were too early, the technology wasn’t perfect yet. There are a thousand reasons why a venture will fail.
Dr. Alex Osterwalder (39:57):
It also means we need to think of the other thing and a counter example. When you have too much money, you give a team or a project too much money, they’re very likely to not succeed because they will maximize the risk of building something nobody wants. The classic example from right now is Quibi. Over $1.7 billion to fund an idea. When you have $1.7 billion, you’re not going to go and experiment and test customer demand. You’re going to build the thing. That is the approach that we have in corporations because we’re sinking execution, we’re expanding the sales force. Business plan, trajectories, you can deliver, but in innovation, you don’t know.
Dr. Alex Osterwalder (40:40):
We need a completely different approach, even how we finance this. We have the answers. Now, it’s a question of, are you going to put really the energy, the KPIs, the money where your mouth is and we’re going to build this? We have a lot of answers. Innovation is not a black box anymore. It’s something now that is really a question of decision and dedication. It’s not easy. We have a lot of answers. It’s still hard to do, but you have to start changing those kind of components. Otherwise, you’re going to stay stuck with innovation theater. That over the longer term is a very risky strategy because a lot of companies will disappear because they did not understand how to overcome these innovation myths.
Sean Ammirati (41:24):
Probably worth noting the person who asked the culture question actually runs the innovation program for Bosch America, the North America Group, interestingly, Alex. That was kind of a serendipitous connection, and also, a couple of people have messaged me in the app. The Rita that they were mentioning is the same Rita who spoke last year at the forum. She did a talk last year on her Seeing Around Corners book, but yes, that is the same… As it turns out, there aren’t too Rita McGraths. Or, there may be but [crosstalk 00:41:51] this is the same one. Steve, go ahead. Sorry, I didn’t mean to cut you off.
Steve Blank (41:54):
Sean, let me just add one more thing that just blew me away that I have found in the last couple of years about the difference in innovation in large companies and government agencies and startups. This one just blew my mind because I spend a lot of time with the innovators who do heroics inside of large corporations. In fact, I’ll make two observations. One is we all know the stories of the innovators in larger organizations, in spite of X, manage to work their way through and when people said no. At the end, they’re recognized and get some reward. We’ve told these stories for a hundred years or more, never once recognizing that that’s actually a symptom of a broken organization. It’s a big idea. Why should innovation be heroics rather than an integral part of the organization? That’s number one.
Steve Blank (42:44):
I just want everybody who’s listening to kind of go back to your management team and tell senior leadership, “We don’t want any damn rewards for heroics. We want a process that actually makes it integral to the company.” That’s one idea, but the corollary to that, and this just blew my mind and I went back and actually thought about and I think it’s true. When you meet these heroes, these individual innovators who actually love being the heroes, it turns out that a number, maybe most of them don’t want an innovation process.
Steve Blank (43:15):
It turns out there’s a type of individual who are incredibly happy to have their ego satisfied to actually beat the system and not have a process. No, but they don’t want to leave and do a startup. They actually get off on, if I can use that expression, of like, “Oh, I get to work in whatever.” Then you go, “Well, why don’t you take everything you have been doing and actually formalize it as a process?” You could just see them getting scared of, “Oh, no, this would take away what I’m special about.”
Steve Blank (43:45):
I’ve actually found that those people, surprising to me, are actually one of the detriments to making innovation better in large corporations. Even though as individuals they actually move the individual ball forward, they’re not allies in building an innovation process. It didn’t make sense to me until I actually saw it in practice and [crosstalk 00:44:05]-
Dr. Alex Osterwalder (44:05):
Steve, I love that because if you see companies that still have pirates and rebels and they call them pirates and rebels, you know this is innovation theater. Then, people who are proud of calling themselves pirates and rebels, you need to understand that historically pirates and rebels were hunted down and killed-
Sean Ammirati (44:25):
Dr. Alex Osterwalder (44:26):
… so that’s not what you want. My colleague Tendayi Viki, he said, “Well, why don’t we call them Pirates in the Navy?” They still need the behavior of those people who will break down all obstacles because in innovation there are obstacles besides the organizational obstacles. Pirates in the Navy were those privateers that were actually in the service of a nation to maybe… We don’t want to compare innovators to criminals, but they were in the service of the institution, so [crosstalk 00:44:55]-
Steve Blank (44:55):
I love the idea of privateers, Alex. We ought to call them [crosstalk 00:44:58]-
Dr. Alex Osterwalder (44:58):
Steve Blank (44:59):
… privateers. That’s actually a great phrase. Who was the English privateer? I’m trying to think of his name, but that’s…. Drake? No [crosstalk 00:45:06]-
Dr. Alex Osterwalder (45:06):
It was Drake [crosstalk 00:45:07] Drake.
Steve Blank (45:07):
Was it Drake?
Dr. Alex Osterwalder (45:08):
Steve Blank (45:09):
We should name them The Drake Crew, right? That’s a great idea, Alex. Sorry, sorry to interrupt.
Dr. Alex Osterwalder (45:15):
The other thing, you what you said, Steve, is that we reward people for those kind of breaking the rules rather than changing the rules, and that’s a big idea. To emphasize what Steve said, this doesn’t work. This is when we still believe innovation is about the creative genius alone. Again, the innovators have a different behavior, but you don’t want to make it harder for them. You need to create the system for then, and while it sounds so trivial to say, “Create the system,” it is about processes, it is about reward systems and KPIs, and that starts to sound boring.
Dr. Alex Osterwalder (45:50):
I believe actually there’s a generation of innovators that’s going to leave this field because it’s starting to get a little bit closer to accounting to a certain extent because we understand how it works. Those who call themselves rebels, they won’t be fascinated by this domain anymore and they will move on to something else, so I do think we’re moving towards a professionalization of innovation in corporations today. I think it’s a big shift and I can see that the last five years, companies are looking at innovation in a very, very different way and they don’t see it as a black box anymore. They’re starting to understand it is about processes. Processes won’t stifle innovation. They will actually leverage the human creativity that we have in corporations today.
Steve Blank (46:33):
I just want to double down what Alex described is companies will have their innovation doctrine, that is they will have kind of a rule book. It’s funny, those who wanted to fight the guerrilla war are often not the ones who want to write the Constitution, and so here we are, those worn out proposing, I think both of us, is that it’s time to stop fighting these as individual battles, individual what I call point activities because that really doesn’t win in the long term. You get these heroics but you don’t get permanent change through the organizations, and that means you’re at risk of going out of business or…
Sean Ammirati (47:08):
If someone wants to create one of these innovation doctrines, Steve, is there a reference you would point them to to do that?
Steve Blank (47:16):
Yeah, I’d point them to Alexander Osterwalder who’d be happy to come into your large company and kind of go do that. I’ve been threatening to write this book with Pete Newell, and maybe I’ll get Alex to kind of help as well, about I think this is the next level and as a startup guy, I never thought I’d be interested in process and whatever, but I think we kind of got the startup thing, if not nailed-
Sean Ammirati (47:38):
Steve Blank (47:39):
… but it’s the corporate thing and the government thing that is clearly… It feels to me a lot like when I looked at startups at the turn of this century is how I’m feeling about learning about large organizations. I’ve been learning a lot. By the way, I have to say I am blown away that 20 years after I started thinking about customer development and writing the book, it’s still a thing. I mean, it’s Alex’s work and Eric Reese’s work, and there’s now hundreds or thousands of other books that are standing on their shoulders, but the fact is, holy cow, we might have been right that this was better than what we replaced. I just have to tell your audience, I’m always thinking every time I think about that because I was just trying to solve a problem to get my own head around, and then I ran into Alex and then Eric took up the flag, and boom, we had something that I thought major change and permanent change.
Steve Blank (48:27):
I guess to answer your question, Sean, I think we’re about to do it again, either us or someone else to kind of professionalize these conversations we’ve been having based on the bad experiments we’ve run [crosstalk 00:48:40] collectively in corporations. Again, that HBR article, it wasn’t that the article was brilliant, though Alex helped write it, it was the fact that it gave permission to seven years of experiments that have gone on that we can now look back and go, “Well, this didn’t work the way we thought. What the heck happened?” Then, to circle back to I think we’re ready to codify some of these things in a framework that we can hand a CEO and a board and say, “Well, here’s your choice. We kind of thing we know about how to retrigger your organization. Now, it’s up to you about whether you want to follow this.”
Sean Ammirati (49:14):
It’s funny, Steve, like the levels of discussed here, but when I wrote my book, I wrote it for entrepreneurs and I actually would tell people explicitly like, “I want you not to go work for a big company,” and then all of these companies started buying the book and I started spending time with them. I’ve become convinced that as much fun as helping create the Lean Entrepreneurship Course was 10 years ago at Carnegie Mellon, creating this Corporate Startup Lab where we’re trying to do corporate innovation inside these big companies is like it’s the next frontier.
Sean Ammirati (49:45):
I’m actually convinced personally there are pockets of innovation that are better suited to companies and we’re unintentionally kind of systematically underinvesting in those and undercreating the future in those areas because we’ve gotten so good at three entrepreneurs at Y Combinator and not as good at three entrepreneurs in any of your Fortune 500. I think it is, and for what’s it worth, I think that innovation doctrine book would be remarkable, not that you need more people telling you to write it, it sounds like, but I do think that would be absolutely awesome.
Sean Ammirati (50:19):
We’ve got just a couple of minutes left here. The one question I think that would be great to get in this last four minutes, for the people who are responsible for corporate innovation in their organization, maybe they’re more like a mid-level person in the org but they’ve been tasked with doing innovation, what advice would you give them to try to help achieve this transformation we’ve been talking about the last hour?
Steve Blank (50:44):
I think the big idea is to realize that most of you, and I don’t mean all of you, but most of you are doing innovation activities, and in activities, if you’re running an incubator and accelerator and you don’t have an end-to-end process in how to deliver stuff through your corporate whatever with speed and urgency, then maybe you ought to start thinking about, “How do we start putting together the innovation doctrine internally? What are the rules that we need to have?” By the way, these are not pleasant conversations because all of a sudden, people’s jobs and mindset need to change. If you’re not willing to do that, then either update your resume or be happy with the accelerator or activities you have.
Steve Blank (51:22):
It doesn’t require a fight to have a fight, it requires an education to C-level staff about, “Here’s the alternative and here’s why and here’s the things that need to change.” They’re not trivial. Alex?
Dr. Alex Osterwalder (51:34):
I think it’s always hard when you’re not the decision-maker convincing others. I don’t believe you can convince anybody of anything, but there’s a way you can get them to figure it out themselves. In one instance, we worked with a really, really big corporation, Fortune 100, and we took their risk assessment exercise, which they have annually, and got the executives to work on to destroy their own business model. It opened up their mind to, “Wow, we are actually at risk of disruption,” and because they did that exercise, it unlocked a lot of energy in the organization. I don’t believe you can convince your leaders if they’re not already there, but you can get them there through these kind of exercise.
Dr. Alex Osterwalder (52:17):
Another aspect would be connect them with other leaders at their level in their types of organization that understand. They will listen to peers, they won’t listen to you, and that’s what you have to do is work towards it, understanding you’re not the decision-maker and you can’t really influence the decision-maker other than if you try to get them there through their own way of working.
Sean Ammirati (52:42):
That’s awesome. I do think the budget process, too, is interesting. We did a lot of work with one of the three big [inaudible 00:52:49] in the U.S. just to help them reimagine their budgeting process, and I do think where the companies already have these handles, there’s interesting opportunities for you to build on top for that kind of forecasting budgeting thing.
Sean Ammirati (53:01):
Okay, we’re basically done here, but I think a perfect note to end on is actually from, again, our colleague at Bosch who spoke earlier at the forum. She says, and this is a great last line and I’ll hand it over to you for any last thoughts, but she says she’s looking forward to reading The Innovation Doctrine: The Next Frontier in Corporate Innovation. Steve, so you’ve got more votes for the book it turns out.
Steve Blank (53:22):
Well, good. I’m looking forward to actually getting my head around writing it because the pace of learning that I’ve gone through the last year or two has just been amazing, and again, the COVID changed everybody’s view-
Sean Ammirati (53:35):
Steve Blank (53:35):
… about disruption. Then, we’ll have whiplash coming out of COVID. We’ll have disruption again and no one knows how consumer behavior or government behavior is going to be. For everybody who’s stayed on for the hour, thank you. I hope we didn’t confuse you completely and gave you some new ideas. Thank you, Sean.
Sean Ammirati (53:53):
This is awesome. Thank you. Alex, thanks for making the time, too. Any final thoughts from you?
Dr. Alex Osterwalder (53:58):
Don’t give up. Connect with other peers who’ve done it and pulled it off. Learn from others who’ve made the mistakes so you don’t have to make them yourself.
Sean Ammirati (54:04):
That’s awesome. All right, thanks, guys. I really appreciate it.
Sean Ammirati (54:12):
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