Companies and the Startup and Growth Engineering

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I grew up in Switzerland. The closest place where we could go skiing in the winter was a 1,650m mountain 15min away from home. Due to global warming and the progressively poorer snow conditions, in 2003 the resort was converted into a summer-only park, with a spa and hiking trails. To me this is a symbol of how external conditions force you to change and how you must be ready to re-invent yourself (or pivot, to use the startup’s lingo). During the industrial age, we focused on Efficiency Engineering. It was all about Return on Investment, or output / input ratio, where input was either capital or workforce. Remember Methods Time Measurement (MTM) practices, economies of scale, economies of scope, and concepts like experience curve or learning curve? These are all Efficiency Engineering techniques, which led to automation, moves to cheaper labour countries, and other cost reduction initiatives. At the end of the last century, things changed dramatically. Thanks to the internet and the commoditisation of IT equipment, starting a new company that could address a broad market became relatively easy. Efficiency Engineering techniques could not be applied to these nascent businesses, as starting a company is a very different challenge from maximising cash flow and return to shareholders. New management frameworks were needed: it was the birth of what I call Startup and Growth Engineering, which includes techniques like Agile Development, Design Thinking and Lean Startup. These techniques are designed not to drive efficiency, but to make sure that product development, and the investments that go with it, are customer driven: the effect is not only to accelerate revenue generation, but also to invest money only on what customers are willing to pay for. A continuous loopback between product development and market needs is the pillar of most of the Startup and Growth Engineering techniques: rather than minimising input per unit of output (Efficiency Engineering), the goal of Startup and Growth Engineering is to maximise the value of every unit of input, and to do so very early in the process. The argument that Startup and Growth Engineering techniques are designed for internet companies and have no place in the industrial misses the point: any corporate that ignores that product development has dramatically changed in the last 15 years, runs the risk of being disrupted by new entrants which use these techniques. As a matter of fact, the most interesting disruptions are happening where the old and the new world combine, where startups use Startup and Growth Engineering to change the rules of the game of established industries: retail, finance, automotive, telecommunications, travel and leisure are just some examples. If Startup and Growth Engineering is here to stay, what can corporates do to embrace it and reinvent themselves? In most cases their journey begins by separating the existing, legacy and efficiency focused business from the new, risky, exploratory and disruptive business. The separation can be internal, i.e. a team dedicated to growth innovation (as we did in Colt), or structural, i.e. two parts of a company become two separate legal entities (Telefonica vs Telefonica Digital). It takes a very strong leader to do this, as essentially the existing business is providing the capital to venture into new territories. In extreme cases, the new venture is setup to disrupt the legacy arm of the company, to "kill the parent", recreating the sort of Big Bang market disruption that was at the origin of the legacy arm of the business. IBM did exactly this to create the Personal Computer market that disrupted their own Mainframe unit. The assumption is that if we are going to be disrupted, it’s better for the disruptor to be part of the same corporate. The second step in the journey is establishing a different set of KPI’s for the innovation focused arm of the company. These need to be forward looking, Leading KPI’s, as opposed to backward looking, Lagging KPI’s typical of established businesses. Leading KPI’s such as how many customers we’re pitching an idea to and how many customers request a follow-up give an indication of how well a company will perform in the future. Lagging indicators such as revenues or profits, tell us how well we did in the past. The third step in the journey is choosing the right team. My take on the team is that you should think about it as a sport coach does: if in your basketball team you have no good shooters, you can either train existing players to become good shooters, or you hire a couple of great shooters. It is the same in business: the people you need to start up and to chase disruption are very different from the people focused on improving efficiency of the status quo. The fourth and final step is to focus exclusively on results. To use Lean Startup terminology, develop a minimum viable product and bring it to market as soon as you can, learn what works and what doesn’t, improve the product and repeat the cycle. Designing and building the "perfect product", or designing and implementing the perfect process before you hit the market, means that others are establishing an early leading position in that market, extracting the extra value of being a monopoly. You’ll be forced to catch up with their product, and if they continue to improve the product rapidly using Agile and Lean, you will never catch-up and potentially you’ll need to abandon that product line to cut the losses. Startup and Growth Engineering is here to stay. A corporate that disregards these management frameworks could be making a very expensive mistake: it would be like ignoring the fact that global warming will make your low altitude ski-lifts an unviable business.This article was originally posted in Startup Business.

Make Do

20 May 2014

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