Why Companies are Not Startups

In the last few years we’ve recognized that a startup is not a smaller version of a large company. We’re now learning that companies are not larger versions of startups.

There’s been lots written about how companies need to be more innovative, but very little on what stops them from doing so.

Companies looking to be innovative face a conundrum: Every policy and procedure that makes them efficient execution machines stifles innovation.

This first post will describe some of the structural problems companies have; follow-on posts will offer some solutions.

—-

Facing continuous disruption from globalization, China, the Internet, the diminished power of brands, changing workforce, etc., existing enterprises are establishing corporate innovation groups. These groups are adapting or adopting the practices of startups and accelerators – disruption and innovation rather than direct competition, customer development versus more product features, agility and speed versus lowest cost.

But paradoxically, in spite of all their seemingly endless resources, innovation inside of an existing company is much harder than inside a startup. For most companies it feels like innovation can only happen by exception and heroic efforts, not by design. The question is – why?

The Enterprise: Business Model Execution
We know that a startup is a temporary organization designed to search for a repeatable and scalable business model. The corollary for an enterprise is:

A company is a permanent organization designed to execute a repeatable and scalable business model.

Once you understand that existing companies are designed to execute then you can see why they have a hard time with continuous and disruptive innovation.

Every large company, whether it can articulate it or not, is executing a proven business model(s). A business model guides an organization to create and deliver products/service and make money from it. It describes the product/service, who is it for, what channel sells/deliver it, how demand is created, how does the company make money, etc.

Somewhere in the dim past of the company, it too was a startup searching for a business model. But now, as the business model is repeatable and scalable, most employees take the business model as a given, and instead focus on the execution of the model – what is it they are supposed to do every day when they come to work. They measure their success on metrics that reflect success in execution, and they reward execution.

It’s worth looking at the tools companies have to support successful execution and explain why these same execution policies and processes have become impediments and are antithetical to continuous innovation.

20th century Management Tools for Execution
In the 20th century business schools and consulting firms developed an amazing management stack to assist companies to execute. These tools brought clarity to corporate strategy, product line extension strategies, and made product management a repeatable process.

bcg matrix

For example, the Boston Consulting Group 2 x 2 growth-share matrix was an easy to understand strategy tool – a market selection matrix for companies looking for growth opportunities.

Strategy Maps from Robert Kaplan

Strategy Maps

Strategy Maps are a visualization tool to translate strategy into specific actions and objectives, and to measure the progress of how the strategy gets implemented.

StageGate

StageGate Process

Product management tools like Stage-Gate® emerged to systematically manage Waterfall product development. The product management process assumes that product/market fit is known, and the products can get spec’d and then implemented in a linear fashion.

Strategy becomes visible in a company when you draw the structure to execute the strategy. The most visible symbol of execution is the organization chart. It represents where employees fit in an execution hierarchy; showing command and control hierarchies – who’s responsible, what they are responsible for, and who they manage below them, and report to above them.

GM 1925 org chart

All these tools – strategy, product management and organizational structures, have an underlying assumption – that the business model – which features customers want, who the customer is, what channel sells/delivers the product or service, how demand is created, how does the company make money, etc – is known, and that all the company needed is a systematic process for execution.

Driven by Key Performance Indicators (KPI’s) and Processes
Once the business model is known, the company organizes around that goal and measures efforts to reach the goal, and seeks the most efficient ways to reach the goal. This systematic process of execution needs to be repeatable and scalable throughout a large organization by employees with a range of skills and competencies. Staff functions in finance, human resources, legal departments and business units developed Key Performance Indicators, processes, procedures and goals to measure, control and execute.

Paradoxically, these very KPIs and processes, which make companies efficient, are the root cause of corporations’ inability to be agile, responsive innovators. 

This is a big idea.

Finance  The goals for public companies are driven primarily by financial Key Performance Indicators (KPI’s). They include: return on net assets (RONA), return on capital deployed, internal rate of return (IRR), net/gross margins, earnings per share, marginal cost/revenue, debt/equity, EBIDA, price earning ratio, operating income, net revenue per employee, working capital, debt to equity ratio, acid test, accounts receivable/payable turnover, asset utilization, loan loss reserves, minimum acceptable rate of return, etc.

(A consequence of using these corporate finance metrics like RONA and IRR is that it‘s a lot easier to get these numbers to look great by 1) outsourcing everything, 2) getting assets off the balance sheet and 3) only investing in things that pay off fast. These metrics stack the deck against a company that wants to invest in long-term innovation.)

These financial performance indicators then drive the operating functions (sales, manufacturing, etc) or business units that have their own execution KPI’s (market share, quote to close ratio, sales per rep, customer acquisition/activation costs, average selling price, committed monthly recurring revenue, customer lifetime value, churn/retention, sales per square foot, inventory turns, etc.)

Corp policies and KPIs

Corporate KPI’s, Policy and Procedures: Innovation Killers

HR Process  Historically Human Resources was responsible for recruiting, retaining and removing  employees to execute known business functions with known job spec’s. One of the least obvious but most important HR Process, and ultimately the most contentious, issue in corporate innovation is the difference in incentives. The incentive system for a company focused on execution is driven by the goal of meeting and exceeding “the (quarterly/yearly) plan.”  Sales teams are commission-based, executive compensation is based on EPS, revenue and margin, business units on revenue and margin contribution, etc.

What Does this Mean?
Every time another execution process is added, corporate innovation dies a little more.

The conundrum is that every policy and procedure that makes a company and efficient execution machine stifles innovation.

Innovation is chaotic, messy and uncertain. It needs radically different tools for measurement and control. It needs the tools and processes pioneered in Lean Startups.HBR Lean Startup article

While companies intellectually understand innovation, they don’t really know how to build innovation into their culture, or how to measure its progress.

What to Do?
It may be that the current attempts to build corporate innovation are starting at the wrong end of the problem. While it’s fashionable to build corporate incubators there’s little evidence that they deliver more than “Innovation Theater.” Because internal culture applies execution measures/performance indicators to the output of these incubators and allocates resources to them same way as to executing parts of company.

Corporations that want to build continuous innovation realize that innovation happens not by exception but as integral to all parts of the corporation.

To do so they will realize that a company needs innovation KPI’s, policies, processes and incentives. (Our Investment Readiness Level is just one of those metrics.) These enable innovation to occur as an integral and parallel process to execution. By design not by exception.

We’ll have more to say about this in future posts.

Lessons Learned

  • Innovation inside of an existing company is much harder than a startup
  • KPI’s and processes are the root cause of corporations’ inability to be agile and responsive innovators
  • Every time another execution process is added, corporate innovation dies a little more
  • Intellectually companies understand innovation, they don’t have the tools to put it into practice
  • Companies need different policies,  procedures and incentives designed for innovation
  • Currently the data we use for execution models the past
  • Innovation metrics need to be predictive for the future
  • These tools and practices are coming…

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31 Responses

  1. I’m not sure if the new CEO of Microsoft is aware that businesses are not startups because he keeps using the language of startup land. He talks a lot about innovation etc. you might wanna give him a call Steve if you haven’t already been invited to help them innovate their way to the next level. It was suggested that they buy red hat, but that’s another story.

  2. In a good economy you need to have startup and company. And it is essential that the two sets creating interchange.

  3. Great piece.

    I expect that, with this bolt of lightening, the clouds will open and the rain storm will ensue …

    Will retreat and do my part in amplifying this important message.

    See you tonight @ Stanford.

  4. I’d argue the focus on execution is what set a successful startup from others. Large corporate problem does not lie in the goal setting on execution, but the means to achieve those goals. The operation org-chart, policy and procedures are impeding innovation simply because it is designed to scale the execution (aka mass production) without mindful directing on every turn. In other words, an automation based on converting human labor to mindless machine in order to best overall operation efficiency.

    The skills, experiences and management are bolts and nuts, it is a culture but also by design. Can you imagine Apple innovate without the best operation execution to support Jobs’ vision or Ive’s design?

    The conundrum in this mystery has to come from the difference of startup’s operation model comparing to large corporation’s operation model. A key element in startup’s equation is its endless desire of talent pool. The sheer competency of employee can make processes, procedures (which mostly are designed to compensate mediocrity) unnecessary. In effect, it free up the capability of employee, then the possibility is endless.

    Evidently, large corporation realize this and resolve this by acquisition of small startup and often meant for the talent than its product.

  5. Nice piece, and it all makes sense.
    They need “Lean Startup”, so future posts will be on a calcified corporation changing. It seems like “Lean Startup” as taught by Eric Ries is already being sold to the corporation for use in “innovation theater”. Change is difficult, even when it is good for you.
    There is another huge piece of this puzzle, and that is the psychology of humans working in groups. You can not discount the people and claim this is an accounting problem. Folks in a corporate environment did not sign up for a chaotic startup ride. They want a steady paycheck and to get to their soccer game on time. There is risk involved. Taking the risk out by sheltering under an existing business sounds like a great idea. If you have some examples where this works, I would love to see and study them.
    Seems like it is easier for the existing company to buy innovation, and avoid disruption. It keeps the startup ecosystem healthy too, which is fun for us.

    “@ML_Hipster: A machine learning researcher, a crypto-currency expert, and an Erlang programmer walk into a bar. Facebook buys the bar for $27 billion.”

  6. What if a corporate business model, through some external disruption, has become flawed (today’s notice that Radio Shack will be closing 25% of their stores)? Is it not time to throw all the regular metrics out the window and attempt to find a new model via minimum viable product? Should not a turnaround now act as a startup?

  7. Great observations on why innovation is hard at large companies. Charles O’Reilly at Stanford Business School talks about creating an ambidextrous organization to foster innovation. Unlike incubators, these are effectively internal startups that have completely different metrics and have the flexibility to hire and compensate people in ways that align more to their business vs that of the parent organization.

  8. Dear Steve,

    Excellent reflexion and comparison between entrepreneurship and intrapreneurship. Look forward to your following post about solution to corporate innovation.

    Kwanrat Suanpong

  9. Actually, companies big and small around the world execute innovation everyday. It may be by a process of gentle suffocation, deliberate strangulation, or frantic bludgeoning, but when it is all over there is no doubt left in anyone’s mind that the poor thing was executed.

  10. Isn’t it precisely this dichotomy that creates the exit market for startups?

  11. Steve,
    Have you seen any of the larger companies try alternative compensation models that are heavy on equity in their innovation incubators? I’m curious if that would help pull stronger people into the incubators and compensate them for taking on additional career risk.

  12. Many many thanks for this post, but I’m missing here the (unique) value proposition (UVP), aka the underlying magic / the secret sauce. Many companies / startups have an interesting solution (MVP of product/ service) for a problem, but this is also for many users and employees not good enough.

  13. Google, Apple, Madonna, Coca Cola; large corporations are not mere executors, and lean start-ups are not necessarily survivors. I don’t think this is the problem. The problem starts with procedures/policies that unintentionally create the right conditions for inertia and lack of knowledge pooling, compromising the effectiveness of employees that should also be able to deliver on ideas and direction, at the right time. Any good CEO or management team will recognize the need for continuous innovation as a core principle of a large organisation. It is the small start-up that will have problems with continuous change due to lack of resources, networks and funds. Undeniably, the barriers to entry have been reset and threats to existing markets are greater, increasing competition; thus, making change the only constant.

  14. I agree that this is a great and important piece and am looking forward to more. In my work with corporations, I have seen that the innovation tools are best for ideation, but that they seem to leave out two important factors (1) integrating innovation incentives into the “calendar” of business, financial and performance management processes and (2) the people involved.

    People who enjoy being entrepreneurs are like business bungee jumpers–they think it is fun to take risk and get that start up rush. People who work for corporations have chosen to do so because even if they like risk, they think they can’t afford it. For them, risk and uncertainty create anxiety, and anxiety affects personal performance. I believe there is a certain level of naiveté in some of the innovation business tools available that reflect a lack of experience in, for example, managing through a personal distribution channel.

    A complete integration of innovation into an Enterprise, from design management all the way through to marketplace success, requires a level of integration among leadership selection, practices and policies that I am hoping Steve will address in future posts.

    • Hi all,

      Steve, I recognized in your article the general issue the company I work in experiences every day in selling new products. Why should those products be innovative (meaning : unknown and thus risky market) when the goals in terms of ROI and conventional indicators are met thanks to “regular” products ?
      (answer : because the company will tend to die or be too exposed to its competitors if it remains so conservative)

      I tend to see this as a fight :
      ‘necessity to meet ROI/conventional KPI goals’ vs. ‘desire to innovate’
      in which the referee could be ‘acceptance of taking risks’

      How can we blame people to fight for achieving their KPIs ?
      Therefore, there is a need for Innovation KPIs as you said at the end of this article, in order to involve people as Ronna writes right above.
      What could be those indicators ?
      I have at leat a suggestion for the last Innovation KPI of the list that my board could have hard time to accept : minimum number of products that… don’t fit the other indicators goals ! Because acceptance of failure must be part of the innovation process.

      If any of you have thoughts or sources about this Innovation KPIs topic, I’ll read them with a deep interest.

      Regards.

  15. Steve, are you proposing a KPI-driven execution model for startups so starting-up can live inside an execution-driven culture–an execution-driven search for an executable business model?

    Is it not so much the conventional wild and free startup culture that creates innovative new markets, but instead the extent to which the startup works proven startup processes?.

    Seems to me that teaching innovation to big organizations using a process model ought to be pretty comfortable for them–witness your experience with the scientists.

    Execution vs. innovation -> execution of innovation.

    Hope for all of us!

    Thanks…

  16. You’ve mentioned business model, management tools (strategy, organizational structures, KPI ,et), they have been fixed in companies ,especially large ones, how “Lean Startup” can change all current situations? Are companies willing to adapt them according to “learn startup” ? Look forward to your following post about the solutions for companies

  17. Thanks for writing this Steve – it was cathartic to read.

  18. You really need a third group (Alliance) that bridges the innovation and execution groups. Without that, it rarely works. Unless the Alliance group has CEO visibility, it also will fail and all a company will then be left with is to keep making acquisitions.

  19. Clay Christensen’s “The Innovator’s Dilemma” quite neatly argues that larger companies innovate very effectively — and not solely to improve execution efficiency.

    I agree with your characterization that start-ups are searching for a business model (rather than executing it) if by “model” you mean the nuanced combination of processes, techniques and product features that repeatedly and predictably acquire customers and generate revenues.

    Companies have many mechanisms for fostering innovation — e.g. internal incubators and venture arms. And there is always buying innovation directly in the marketplace. Though I’m personally more the start-up guy and prefer a more level marketplace, I support the idea of equipping companies with more tools for fomenting innovation.

    I might offer that simply allocating resources for level 9 in the Investment Readiness Level is a very high hurdle in a typical large-company culture. It gets much easier after that :-)

  20. I nodded my head emphatically until I got the very end and read “corporations that want to build continuous innovation realize that innovation happens not by exception but as integral to all parts of the corporation.” In a startup, yes. In an established company, no way! For all of the reasons you state above that sentence: the permanent organization exists to execute the known, repeatable, scalable business model. When we try to make innovation integral to all parts of a permanent organization, we disrupt the performance engine. First do no harm…

    • Paul,

      I’d start from my original premise…”companies need to integrate innovation.” Your observation “…when we try to make innovation integral to all parts of a permanent organization, we disrupt the performance engine…” is the mantra of the status quo. It assumes 1) that the companies who have succeeded in doing so are not replicable, 2) do no harm means continue on the current path until the company runs out of steam under the next CEO? I don’t get it. “Do no harm” assumes everything is just fine “nothing to change here, please go away.”

      I’d like to believe that we can find a way to organize companies to do both. You seem to imply it’s not worth trying.

      steve

      • Thanks for the quick reply, Steve. My language was a bit sloppy — I definitely didn’t mean to imply it’s not worth trying. I’ve just taken on the role of innovation head in my own company, so I’d be in big trouble if I felt that way… My reaction was to the wording “integral to all parts of the organization.” I agree with your observation that the policies, processes, and incentives that make incentives work in an established company are antithetical to innovation. I also believe that the corollary is true. We definitely need to rethink how we govern and reward innovation in the enterprise for the relevant people and groups, but don’t want to apply that model everywhere. I’m a fan of Govindarajan and Trimble’s model of an innovation team (startup within the enterprise) integrated into the broader organization through shared staff.

        • Paul,

          I’ll have more to say in my commencement speech at ESADE on Friday. To be continued…

          steve

        • It occurs to me that I was reading the word “integral” as “essential for wholeness” and taking it to mean it should apply everywhere. Upon reflection of your “work backwards” comment, I realize you meant “integrated throughout.” I not only agree with this, but it’s the reason I forwarded your post to my CFO and CHRO… Looking forward to the commencement speech. Hopefully it will be posted?

        • <> should read <>

  21. One answer to this conundrum is a strong leader who is willing to blow up processes and cannibalize existing products in order to claim a new market. (Apple, Google, Amazon)

    The other way corporations deal with this problem is to let innovators do their thing, then acquire them and form a new division, or a completely new brand. It can be a portfolio of companies that compete with each other, or complement each other. (Publicis and Omnicom, P+G) This doesn’t create new innovation, but it’s a way to manage the risk of getting complacent. Unfortunately, in many cases, insecurity causes corporate entities to swallow acquisitions whole and subjugate their cultures, which completely stifles the flame of innovation.

    In the end, only a bunch of hungry fanatics can really innovate. These are people who abhor bureaucracies and cubical farms. It takes a completely different mindset.

  22. […] smaller versions of large companies. In fact, there is a vast ideological (and organizational) difference between a startup, small business, and large corporation_kmq.push(["trackClickOnOutboundLink","link_53e1025fece73","Article link […]

  23. […] Blank wrote a great article titled “Why Companies are Not Startups.” In it, he talks about the barriers to innovation and states: “Innovation happens not by […]

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