When Product Features Disappear – Amazon, Apple and Tesla and the Troubled Future for 21st Century Consumers

One of the great innovations of the 21st century are products that are cloud-connected and update and improve automatically. For software, gone are the days of having to buy a new version of physical media (disks or CD’s.) For hardware it’s the magical ability to have a product get better over time as new features are automatically added.

The downside is when companies unilaterally remove features from their products without asking their customers permission and/or remove consumers’ ability to use the previous versions. Products can just as easily be downgraded as upgraded.Loser

It was a wake up call when Amazon did it with books, disappointing when Google did it with Google Maps, annoying when Apple did it to their office applications – but Tesla just did it on a $100,000 car.

It’s time to think about a 21st Century Bill of Consumer Product Rights.

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Amazon – Down the Memory Hole
In July 2009 facing a copyright lawsuit Amazon remotely deleted two books users had already downloaded and paid for on their Kindles. Amazon did so without notifying the users let alone asking their permission. It was a chilling reminder that when books and content are bits instead of atoms, someone can change the content – or simply disappear a book – all without users’ permission. (The irony was the two books Amazon deleted were Animal Farm and 1984.)

Google – Well It Looks Better
In July 2013 Google completely redesigned Google Maps – and users discovered that on their desktop/laptop, the new product was slower than the one it replaced and features that were previously available disappeared. The new Google Maps was worse then one it replaced – except for one key thing – its User Interface was prettier and was unified across platforms. If design was the goal, then Google succeeded. If usability and functionality was a goal, then the new version was a step backwards.

Apple – Our Code Base is More Important than Your Features
In November 2013 Apple updated its operating system and cajoled its customers to update their copies of Apple’s iWork office applications – Pages (Apple’s equivalent to Microsoft Word),  Keynote (its PowerPoint equivalent), and Numbers (an attempt to match Excel). To get users to migrate from Microsoft Office and Google Docs, Apple offered these iWorks products for free.iwork

Sounds great– who wouldn’t want the newest version of iWorks with the new OS especially at zero cost?  But that’s because you would assume the new versions would have more features. Or perhaps given its new fancy user interface, the same features? The last thing you would assume is that it had fewer features. Apple released new versions of these applications with key features missing, features that some users had previously paid for, used, and needed. (Had they bothered to talk to customers, Apple would have heard these missing features were critical.)

But the release notes for the new version of the product had no notice that these features were removed.

Their customers weren’t amused.

Apple’s explanation? “These applications were rewritten from the ground up, to be fully 64-bit and to support a unified file format between OS X and iOS 7 versions.”

Translated into English this meant that Apple engineering recoding the products ran out of time to put all the old features back into the new versions. Apple said, “… some features from iWork ’09 were not available for the initial release. We plan to reintroduce some of these features in the next few releases and will continue to add brand new features on an ongoing basis.

Did they think anyone wouldn’t notice?

Decisions like this make you wonder if anyone on the Apple executive staff actually understood that a “unified file format” is not a customer feature.

While these examples are troubling, up until now they’ve been limited to content or software products.

Tesla – Our Problems are Now Your Problems
In November 2013 Tesla, a manufacturer of ~$70,000 to $120,000 electric cars, used a software “update” to disable a hardware option customers had bought and paid for – without telling them or asking their permission.

Tesla Model SOne of Tesla features is a $2,250 “smart air suspension” option that automatically lowers the car at highway speeds for better mileage and stability. Over a period of 5 weeks, three Tesla Model S cars had caught fire after severe accidents – two of them apparently from running over road debris that may have punctured the battery pack that made up the floor pan of the car. After the car fires Tesla pushed a software release out to its users. While the release notice highlighted new features in the release, nowhere did it describe that Tesla had unilaterally disabled a key part of the smart air suspension feature customers had purchased.

Only after most of Telsa customers installed the downgrade did Tesla’s CEO admit in a blog post,  “…we have rolled out an over-the-air update to the air suspension that will result in greater ground clearance at highway speed.”

Translation – we disabled one of the features you thought you bought. (The CEO went on to say that another software update in January will give drivers back control of the feature.) The explanation of the nearly overnight removal of this feature was vague “…reducing the chances of underbody impact damage, not improving safety.” If it wasn’t about safety, why wasn’t it offered as a user-selected option? One could only guess the no notice and immediacy of the release had to do with the National Highway Safety Administration investigation of the Tesla Model S car fires.

This raises the question: when Tesla is faced with future legal or regulatory issues, what other hardware features might Tesla remove or limit in cars in another software release? Adding speed limits?  Acceleration limits? Turning off the Web browser when driving?  The list of potential downgrades to the car is endless with the precedent now set of no obligation to notify their owners or ask their permission.

In the 20th century if someone had snuck into your garage and attempted to remove a feature from your car, you’d call the police. In the 21st century it’s starting to look like the normal course of business.

What to Do
While these Amazon, Google, Apple and Tesla examples may appear disconnected, taken together they are the harbinger of the future for 21st century consumers. Cloud-based updates and products have changed the landscape for consumers. The product you bought today may not be the product you own later.

Given there’s no corporate obligation that consumers permanently own their content or features, coupled with the lack of any regulatory oversight of cloud-based products, Apple’s and Tesla’s behavior tells us what other companies will do when faced with engineering constraints, litigation or regulation. In each of these cases they took the most expedient point of view; they acted as if their customers had no guaranteed rights to features they had purchased. So problem solving in the corporate board room has started with “lets change the feature set” rather than “the features we sold are inviolate so lets solve the problem elsewhere.”

There’s a new set of assumptions about who owns your product. All these companies have crafted the legal terms of use for their product to include their ability to modify or remove features. Manufacturers not only have the means to change or delete previously purchased products at will, there’s no legal barrier to stop them from doing so.

The result is that consumers in the 21st century have less protection then they did in the 20th.

What we can hope for is that smart companies will agree to a 21st Century Bill of Consumer Product Rights. What will likely have to happen first is a class-action lawsuit establishing consumers’ permanent rights to retain features they have already purchased.

Some smart startups might find a competitive advantage by offering customer-centric products with an option of “no changes” and “perpetual feature rights” guarantee.

A 21st Century Bill of Consumer Product Rights

  • For books/texts/video/music:
    • No changes to content paid for (whether on a user’s device or accessed in the cloud)
  • For software/hardware:
    • Notify users if an update downgrades or removes a feature
    • Give users the option of not installing an update
    • Provide users an ability to rollback (go back to a previous release) of the software

Lessons Learned

  • The product you bought today may not be the product you have later
  • Manufacturers can downgrade your product as well as upgrade it
  • You have no legal protection

Update: a shorter version of the post was removed from the Tesla website forum

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Lean Goes Better with Coke – the Future of Corporate Innovation

In 2012 I got together with Alexander OsterwalderHenry Chesbrough and Andre Marquis to think about the Lean and the future of corporate innovation. We had some radical thoughts how companies were going to have change to remain competitive in the 21st century in a blog post. What we didn’t envision was that one creative corporate VP would take that post and build a world-class corporate innovation program around it.

David Butler is the VP of Innovation and Entrepreneurship of at The Coca-Cola Company – responsible for finding breakthrough innovation and building an entrepreneurial culture.  Here’s how he’s shaping the future of corporate innovation.

Coke logo————–

Innovation isn’t the destination it’s the Journey. What CEOs, management teams and shareholders care about is growth—revenue growth, greater user adoption, increased market share, bigger margins, etc. So the first step for any corporate  “innovation” organization is to tie the word, “innovation,” to the more tangible concept of “growth.” That single step can create a lot of clarity and direction for the organization.

Breakthrough Innovation.” Innovation can create 2 kinds of growth: sustaining innovation (small and incremental growth yet predictable) and disruptive innovation (explosive exponential growth yet highly uncertain). Like most big companies, we’re pretty good at the kind of innovation that creates incremental growth. We know how to fund it, how to staff it, how to measure it, etc.

For the past year or so, we’ve been focused on disruptive “breakthrough” innovation (game-changing, etc.) to create exponential growth.

Innovation sounds easy. It never is. In our case, we’re local in over 200 countries with operations in basically every city on the planet. We have a portfolio of more than 500 brands and 4000 products and people invite us into their lives more 1.8 billion times a day. Our market cap is around $170B. For most big, established companies like us, our business models were developed years—even decades ago. We’ve built up strength in executing our business model, not creating new ones. So, if you’re Coca-Cola, where do you begin?

It didn’t take us very long to connect the dots between exponential growth, business model innovation and the “Lean Startup” movement. The Lean Startup movement is almost a decade old now and it’s now easier than ever for anyone to learn “Lean Startup” methods and become more entrepreneurial. In fact, I believe the movement is now mainstream—startups, VCs, accelerators, are no longer “new.”

There are co-working spaces in basically every city in the world—from Nepal to New York. Almost every large organization has some kind of incubator or accelerator program. And this has created a global entrepreneurial ecosystem.

But most big companies are still in the shallow-end of the entrepreneurial ecosystem pool. And this is ironic because big companies have so much to add. Big companies know how to scale—most have a lot to learn about starting (as in Lean Startup) but they know how to leverage assets, use network effects, plan and execute. Big companies with big brands have a lot to learn from startups but together, they can do things neither one of them could do alone. And that has become our vision—to make it easier for starters to be scalers and scalers to be starters.

So this is where my head was when I read Steve’s “The Future of Corporate Innovation and Entrepreneurship” post last year. At the time, we were definitely in the shallow-end. Now, a year later, (and A LOT of learning), we’re moving into the deep-end and Steve’s 8 strategies are more relevant than ever. Based on our experience, here’s are our Lessons Learned from Steve’s 8 corporate innovation strategies and then four more from Coke for consideration:

Lessons Learned

  1. 21st century corporate survival requires companies to continually create a new set of businesses by inventing new business models. What is sometimes missed is the opportunity for big companies to leverage their enormous assets (brands, relationships, routes-to-market, etc.) in developing these new models. Most startups can only dream of the kinds of assets most big companies have.
    We believe that using the customer development process to monetize these assets through new business models can create huge competitive advantage and more speed to market for us and other big companies.
  2. Most of these new businesses need to be created outside of the existing business units. We’ve found that this can only happen if it’s just on the edge of a business unit. Startups need to be close enough to the BU to validate assumptions and leverage BU resources (people, funding, relationships, etc.) but just far enough out to be able to use different processes and systems to move fast, pivot, etc. But there’s no one-size fits all approach to this—every company will have to figure out what works for them.
  3. The exact form of the new business models is not known at the beginning. It only emerges after an intense business model design and search activity based on the customer development process. This is so true but so foreign for most big companies. And why wouldn’t it be? All of their internal systems are designed to keep doing what they’ve always done best. They are also under huge pressure to deliver quarterly earnings for shareholders and meet analysts expectations. Using an alternative process including different systems and metrics is key.
  4. Companies will have to maintain a portfolio of new business model initiatives, not unlike a venture capital firm, and they will have to accept that maybe only 1 out 10 initiatives might succeed. We’re hoping for 1 out of 10 but hedging our bets by launching and networking  “Accelerators” around the world in both developing and developed economies—from Bangalore to Buenos Aires. We call this our Accelerator Program but our goal is to create new startups, not really invest in existing startups like most traditional accelerator programs. When we need to mash-up with a startup to do something neither of us could do alone, we’re doing that but or goal is to really build new companies.
  5. To develop this new portfolio, companies need to provide a stable innovation funding mechanism for new business creation, one that is simply thought of as a cost of doing business. Absolutely, but it’s not just about a new “innovation” fund—that’s almost the easy part. The hard part is designing all of the systems to enable the success of the startups. From Tax to Legal to Finance to HR, designing the new systems requires enormous amount of collaboration, transparency and trust.
  6. Many of the operating divisions can and should provide resources to the new businesses inside the company. That’s the only way this works. Everybody has to have “skin-in-the-game.” But again, when you get this right, it can create enormous engagement and excitement inside the Business Unit and across the company.
  7. We need a new organizational structure to manage the creation of new businesses and to coordinate the sharing of business model resources. Again, absolutely true. But in our case, creating the new structure and systems has been almost like starting a startup. Pitching to senior management, using minimum viable products (MVPs), validating assumptions through lots and lots of testing, pivoting hard when you need to—all of this is required in setting up the structure and systems to do this inside of a big company.
  8. Some of these new businesses might become new resources to the existing operating units in the company or they could grow into becoming the new profit generating business units of the company’s future. We’re betting on the latter. Our goal is to create new, high-growth companies outside of the NARTD industry (non-alcoholic ready-to-drink) through this program. We have literally hundreds of thousands of people focused on our core business. We’re hoping to use this opportunity to leverage our assets in new, fast-growing industries.
  9. In building capability, the company should look for “starters,” not “scalers.” Starters have a completely different mindset and skills than scalers have. We found we needed to hire expert starters—people who knew how to bootstrap, build MVPs, find a free or very low-cost way of testing a hypothesis, pitch, pivot, etc. We also learned that creating the same kinds of conditions that enable co-founders to thrive on the “outside” is very important to maintain on the “inside.” We had to design a whole new hiring process, compensation model, operating model, co-working spaces, etc. to find, attract and retain “starters.”
  10. But it’s not only about creating new revenue streams—creating new behaviors across the company’s culture is key. Getting everyone on the same page with the same language and familiar with new methods and tools is key to making this stick. So along with our Accelerator Program, we’ve also introduced a new “Open Entrepreneurship” program to give everyone inside our company the opportunity to learn Lean Startup methods and tools. This is what we mean by making it easier for “scalers” to be “starters.”
  11. Finding the balance between transparency and opacity is critical. Inside the company, the person or team or group that’s been asked to lead this effort must be completely transparent—function agnostic, open, inclusive, freely sharing everything. This is so new for everyone involved, that there can’t be any kind of “black box” or “cool club” perception around this or it won’t work. On the flip side, just like it is for every startup, there is so much iteration, learning, testing, etc. going on that even if you wanted to talk about what you’re doing in detail, it would sort of depend on the day as things change so frequently. We’ve found it best to take a “more is more” approach internally and a “less is more” approach externally.
  12. Nobody, no matter how smart they are, can do this alone. Forming informal networks, both internally and externally, is key. It’s really important for the co-founders of the internal startups to build relationships across the company. And in the same way it’s equally important for the company to authentically connect with the startup community. Being very open and honest with what they’re trying to do is key. And we’ve found that once we built this bridge, we’ve been able to count on a lot of help from the startup community (and visa versa). And as the relationship grows, so does the trust.

These are still early days for us at Coke and we have a lot to learn. But we feel that if we and other big companies can get this right, it could be really big.Butler Fast Company
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Strangling Innovation: Tesla versus “Rent Seekers”

The greatest number of jobs is created when startups create a new market – one where the product or service never existed before or is radically more convenient. Yet this is where startups will run into anti-innovation opponents they may not expect. These opponents have their own name –  “rent seekers” – the landlords of the status-quo.

Smart startups prepare to face off against rent seekers and map out creative strategies for doing so…. First, however, they need to understand what a rent seeker is and how they operate…

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Recently, the New York and North Carolina legislatures considered a new law written by Auto Dealer lobbyists that would make it illegal for Tesla to sell cars directly to consumers. This got me thinking about the legal obstacles that face innovators with new business models.

Examples of startups challenging the status quo include: Lyft, SquareUber, Airbnb, SpaceX, Zillow, BitcoinLegalZoom, food trucks, charter schools, and massively open online courses. Past examples of startups that succeeded in redefining current industries include Craigslist, Netflix, Amazon, Ebay and Paypal.

While Tesla, Lyft, Uber, Airbnb, et al are in very different industries, they have two things in common: 1) they’re disruptive business models creating new markets and upsetting the status quo and 2) the legal obstacles confronting them weren’t from direct competitors, but from groups commonly referred to as “rent seekers.”

Rent Seekers
Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.

These barriers to new innovative entrants are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, auto, steel or sugar tariffs, patent trolls, bribery of government officials, corruption and regulatory capture. They’re all part of the same pattern – they add no value to the economy and prevent innovation from reaching the consumer.

No regulation?
Not all government regulation is rent or rent seeking. Not all economic rents are bad. Patents for example, provide protection for a limited time only, to allow businesses to recoup R&D expenses as well as make a profit that would often not be possible if completely free competition were allowed immediately upon a products’ release. But patent trolls emerged as rent seekers by using patents as legalized extortion of companies.

How do Rent Seekers win?
Instead of offering better products or better service at lower prices, rent seekers hire lawyers and lobbyists to influence politicians and regulators to pass laws, write regulations and collect taxes that block competition. The process of getting the government to give out these favors is rent-seeking.

Rent seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials to enact laws and regulations in exchange for campaign contributions, appeasing influential voting blocks or future jobs in the regulated industry. They also use the courts to tie up and exhaust a startups limited financial resources.

Lobbyists also work through regulatory bodies like FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc.   Although most regulatory bodies are initially set up to protect the public’s health and safety, or to provide an equal playing field, over time the very people they’re supposed to regulate capture the regulatory agencies. Rent Seekers take advantage of regulatory capture to protect their interests against the new innovators.

PayPal – Dodging Bullets
PayPal consistently walked a fine line with regulators. Early on the company shutdown their commercial banking operation to avoid being labeled as a commercial bank and burdened by banks’ federal regulations. PayPal worried that complying with state-by-state laws for money transmission would also be too burdensome for a startup so they first tried to be classified as a chartered trust company to provide a benign regulatory cover, but failed. As the company grew larger, incumbent banks forced PayPal to register in each state. The banks lobbied regulators in Louisiana, New York, California, and Idaho and soon they were issuing injunctions forcing PayPal to delay their IPO. Ironically, once PayPal complied with state regulations by registering as a “money transmitter” on a state-by-state basis, it created a barrier to entry for future new entrants.

U.S. Auto Makers – Death by Rent Seeking
The U.S. auto industry is a textbook case of rent seeking behavior. In 1981 unable to compete with the quality and price of Japanese cars, the domestic car companies convinced the U.S. government to restrict the import of  “foreign” cars. The result? Americans paid an extra $5 billion for cars. Japan overcame these barriers by using their import quotas to ship high-end, high-margin luxury cars, establishing manufacturing plants in the U.S. for high-volume lower cost cars and by continuing to innovate. In contrast, U.S. car manufacturers raised prices, pocketed the profits, bought off the unions with unsustainable contracts, ran inefficient factories and stopped innovating. The bill came due two decades later as the American auto industry spiraled into bankruptcy and its market share plummeted from 75% in 1981 to 45% in 2012.

unplug tesla

Innovation in the Auto Industry
According to the Gallup Poll American consumers view car salesman as dead last in honesty and ethics. Yet when Tesla provided consumers with a direct sales alternative, the rent seekers – the National Auto Dealers Association turned its lobbyists loose on State Legislatures robbing consumers in North Carolina, New York and Texas of choice in the marketplace.

In these states it appears innovation be damned if it gets in the way of a rent seeker with a good lobbyist.

Much like Paypal, it’s likely that after forcing Tesla to win these state-by-state battles, the auto dealers will have found that they dealt themselves the losing hand.

Rent seeking is bad for the economy
Rent seeking strangles innovation in its crib. When companies are protected from competition, they have little incentive to cut costs or to pay attention to changing customer needs. The resources invested in rent seeking are a form of economic waste and reduce the wealth of the overall economy.

Schumpeter’s theory of creative destruction – that entry by entrepreneurs was the disruptive force that sustained economic growth even as it destroyed the value of established companies – didn’t take into account that countries with lots of rent-seeking activity (pick your favorite nation where bribes and corruption are the cost of doing business) or dominated by organized interest groups tend to be the economic losers. As rent-seeking becomes more attractive than innovation, the economy falls into decline.

Startups, investors and the public have done a poor job of calling out the politicians and regulators who use the words “innovation means jobs” while supporting rent seekers.

What does this mean for startups?
In an existing market it’s clear who your competitors are. You compete for customers on performance, ease of use, or price. However, for startups creating a new market – one where either the product or service never existed before or the new option is radically more convenient for customers –  the idea that rent seekers even exist may come as a shock. “Why would anyone not want a better x, y or z?” The answer is that if your startup threatens their jobs or profits, it doesn’t matter how much better life will be for consumers, students, etc. Well organized incumbents will fight if they perceive a threat to the status quo.

As a result disrupting the status quo in regulated market can be costly. On the other hand, being a private and small startup means you have less to lose when you challenge the incumbents.

impossibleIf you’re a startup with a disruptive business model here’s what you need to do:

Map the order of battle

  • Laughing at the dinosaurs and saying, “They don’t get it” may put you out of business. Expect that existing organizations will defend their turf ferociously i.e. movie studios, telecom providers, teachers unions, etc.
  • Understand who has political and regulator influence and where they operate
  • Figure out an “under the radar” strategy which doesn’t attract incumbents lawsuits, regulations or laws when you have limited resources to fight back

Pick early markets where the rent seekers are weakest and scale

  • For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.
  • Go after rapid scale of passionate consumers who value the disruption i.e. Uber and Airbnb, Tesla
  • Ally with some larger partners who see you as a way to break the incumbents lock on the market. i.e. Palantir and the intelligence agencies versus the Army and IBM’s i2, / Textron Systems Overwatch

AirBnb – Damn the torpedoes full speed ahead
For example, Airbnb, thrives even though almost all of its “hosts” are not paying local motel/hotel taxes nor paying tax on their income, and many hosts are violating local zoning laws. Some investors and competitors may be concerned about regulatory risk and liability.  AirBNB’s attitude seems to be “build the business until someone stops me, and change or comply with regulations later.”  This is the same approach that allowed Amazon to ignore local sales taxes for the last two decades.

When you get customer scale and raise a large financing round, take the battle to the incumbents. Strategies at this stage include:

  • Hire your own lobbyists
  • Begin to build your own influence and political action groups
  • Publicly shame the incumbents as rent seekers
  • Use competition among governments to your advantage, eg, if  New York or North Carolina doesn’t want Tesla, put the store in New Jersey, across the river from Manhattan, increasing New Jersey’s tax revenue
  • Cut deals with the rent seekers. i.e. revenue/profit sharing, two-tier hiring, etc.
  • Buy them out i.e. guaranteed lifetime employment

Lessons Learned

  • Rent seekers are organizations that have lost the ability to innovate
  • They look to the government to provide their defense against innovation
  • Map the order of battle
  • Pick early markets and scale
  • With cash, take the battle to the incumbent

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Free Reprints of “Why the Lean Startup Changes Everything”

The Harvard Business Review is offering free reprints of  the May 2013 cover article, “Why the Lean Startup Changes Everything

Available here

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When Hell Froze Over – in the Harvard Business Review

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“I refuse to join any club that would have me as a member.”

Groucho Marx

In my 21 years as an entrepreneur, I would come up for air once a month to religiously read the Harvard Business Review. It was not only my secret weapon in thinking about new startup strategies, it also gave me a view of the management issues my customers were dealing with. Through HBR I discovered the work of Peter Drucker and first read about management by objective. I learned about Michael Porters’s five forces. But the eye opener for me was reading Clayton Christensen HBR article on disruption in the mid 1990’s and then reading the Innovators Dilemma. Each of these authors (along with others too numerous to mention) profoundly changed my view of management and strategy. All of this in one magazine, with no hype, just a continual stream of great ideas.

HBR Differences

For decades this revered business magazine described management techniques that were developed in and were for large corporations –  offering more efficient and creative ways to execute existing business models. As much as I loved the magazine, there was little in it for startups (or new divisions in established companies) searching for a business model. (The articles about innovation and entrepreneurship, while insightful felt like they were variants of the existing processes and techniques developed for running existing businesses.) There was nothing suggesting that startups and new ventures needed their own tools and techniques, different from those written about in HBR or taught in business schools.

To fill this gap I wrote The Four Steps to the Epiphany, a book about the Customer Development process and how it changes the way startups are built. The Four Steps drew the distinction that “startups are not smaller versions of large companies.” It defined a startup as a “temporary organization designed to search for a repeatable and scalable business model.” Today its concepts of  “minimum viable product,” “iterate and pivot”, “get out of the building,” and “no business plan survives first contact with customers,” have become part of the entrepreneurial lexicon. My new book, The Startup Owners Manual, outlined the steps of building a startup or new division inside a company in far greater detail.

HBR Cust DevIn the last decade it’s become clear that companies are facing continuous disruption from globalization, technology shifts, rapidly changing consumer tastes, etc. Business-as-usual management techniques focused on efficiency and execution are no longer a credible response. The techniques invented in what has become the Lean Startup movement are now more than ever applicable to reinventing the modern corporation. Large companies like GE, Intuit, Merck, Panasonic, and Qualcomm are leading the charge to adopt the lean approach to drive corporate innovation. And  the National Science Foundation and ARPA-E adopted it to accelerate commercialization of new science.

Today, we’ve come full circle as Lean goes mainstream. 250,0000 copies of the May issue of Harvard Business Review go in the mail to corporate and startup executives and investors worldwide. In this month’s issue, I was honored to write the cover story article, “Why the Lean Startup Changes Everything.”  The article describes Lean as the search for a repeatable and scalable business model – and business model design, customer development and agile engineering – as the way you implement it.

I’m  proud to be called the “father” of the Lean Startup Movement. But I hope at least two—if not fifty—other catalysts of the movement are every bit as proud today. Eric Ries, who took my first Customer Development class at Berkeley, had the insight that Customer Development should be paired with Agile Development. He called the combination “The Lean Startup” and wrote a great book with that name.

HBR CanvasAlexander Osterwalder‘s inspired approach to defining the business model in his book Business Model Generation provide a framework for the Customer Development and the search for facts behind the hypotheses that make up a new venture. Osterwalder’s business model canvas is the starting point for Customer Development, and the “scorecard” that monitors startups’ progress as they turn their hypotheses about what customers want into actionable facts—all before a startup or new division has spent all or most of its capital.

The Harvard Business Review is providing free access to the cover story article, “Why the Lean Startup Changes Everything.  Go read it.

Then go do it.

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Why Big Companies Can’t Innovate

My friend Ron Ashkenas interviewed me for his blog on the Harvard Business Review. Ron is a managing partner of Schaffer Consulting, and is currently serving as an Executive-in-Residence at the Haas School of Business at UC Berkeley. He is a co-author of The GE Work-Out and The Boundaryless Organization. His latest book is Simply Effective.  For what I had thought were a few simple ideas about taking what we’ve learned about startups and applying it to corporate innovation, the post has gotten an amazing reaction. Here’s Ron’s blog post.

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What’s striking about Fast Company’s 2013 list of the world’s 50 most innovative companies is the relative absence of large, established firms. Instead the list is dominated by the big technology winners of the past 20 years that have built innovation into their DNA (Apple, Google, Amazon, Samsung, Microsoft), and a lot of smaller, newer start-ups. The main exceptions are Target, Coca Cola, Corning, Ford, and Nike (the company that topped the list).

It’s not surprising that younger entrepreneurial firms are considered more innovative. After all, they are born from a new idea, and survive by finding creative ways to make that idea commercially viable. Larger, well-rooted companies however have just as much motivation to be innovative — and, as Scott Anthony has argued, they have even more resources to invest in new ventures. Sowhy doesn’t innovation thrive in mature organizations?

To get some perspective on this question, I recently talked with Steve Blank, a serial entrepreneur, co-author of The Start-Up Owner’s Manual, and father of the “lean start-up” movement. As someone who teaches entrepreneurship not only in universities but also to U.S. government agencies and private corporations, he has a unique perspective. And in that context, he cites three major reasons why established companies struggle to innovate.

First, he says, the focus of an established firm is to execute an existing business model — to make sure it operates efficiently and satisfies customers. In contrast, the main job of a start-up is to search for a workable business model, to find the right match between customer needs and what the company can profitably offer. In other words in a start-up, innovation is not just about implementing a creative idea, but rather the search for a way to turn some aspect of that idea into something that customers are willing to pay for.

Finding a viable business model is not a linear, analytical process that can be guided by a business plan. Instead it requires iterative experimentation, talking to large numbers of potential customers, trying new things, and continually making adjustments. As such, discovering a new business model is inherently risky, and is far more likely to fail than to succeed. Blank explains that this is why companies need a portfolio of new business start-ups rather than putting all of their eggs into a limited number of baskets. But with little tolerance for risk, established firms want their new ventures to produce revenue in a predictable way — which only increases the possibility of failure.

Finally, Blank notes that the people who are best suited to search for new business models and conduct iterative experiments usually are not the same managers who succeed at running existing business units. Instead, internal entrepreneurs are more likely to be rebels who chafe at standard ways of doing things, don’t like to follow the rules, continually question authority, and have a high tolerance for failure. Yet instead of appointing these people to create new ventures, big companies often select high-potential managers who meet their standard competencies and are good at execution (and are easier to manage).

The bottom line of Steve Blank’s comments is that the process of starting a new business — no matter how compelling the original idea — is fundamentally different from running an existing one. So if you want your company to grow organically, then you need to organize your efforts around these differences.

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Qualcomm’s Corporate Entrepreneurship Program – Lessons Learned (Part 2)

I ran into Ricardo Dos Santos and his amazing Qualcomm Venture Fest a few years ago and was astonished with its breath and depth.  From that day on, when I got asked about which corporate innovation program had the best process for idea selection, I started my list with Qualcomm.

This is part 2 of Ricardo’s “post mortem” of the life and death of Qualcomm’s corporate entrepreneurship program.  Part 1 outlining the program is here. Read it first.

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What Qualcomm corporate innovation challenges remained?
Ironically, our very success in creating radically new product and business ideas ran headlong into cultural and structural issues as well as our entrenched R&D driven innovation model:

  • Cultural Issues:  Managers approved their employees sign-up for the bootcamp, but became concerned with the open-ended decision timelines that followed for most of the radical ideas.  Employees had a different concern – they simply wanted more clarity on how to continue to be involved, since formal rules of engagement ended with the bootcamp.
  • Structural Issues:  Most of the radical ideas coming out of the 3-month bootcamp possessed a high hypotheses-to-facts ratio.  When the teams exited the bootcamp, however, it was unclear which existing business unit should evaluate them. Since there weren’t corporate resource for further evaluation, (one of our programs’ constraints was not to create new permanent infrastructures for implementation,) we had no choice but to assign the idea to a business unit and ask them to perform due diligence the best they could. (By definition, before they had a chance to fully buy into the idea and the team).

With hindsight we should have had “proof of concepts” tested in a corporate center (think ‘pop-up incubator’) where they would do extensive Customer Discovery. We should had done this before assigning the teams to a particular business unit (or had the ability to create a new business unit, or spin the team out of the company).

The last year of the program, we tried to solve this problem by requiring that the top 20 teams first seek a business unit sponsor before being admitted into the bootcamp (and we raised a $5 million fund from the BUs earmarked for initial implementation ($250K/team.) Ironically this drew criticism from some execs fearing we might have missed the more radical, out-of-the box ideas!

  • Entrenched Innovation Model Issues:  Qualcomm’s existing innovation model – wireless products were created in the R&D lab and then handed over to existing business units for commercialization – was wildly successful in the existing wireless and mobile space. Venture Fest was not integral to their success. Venture Fest was about proposing new ventures, sometimes outside the wireless realm, by stressing new business models, design and open innovation thinking, not proposing new R&D projects.These non-technical ideas ran counter to the company’s existing R&D, lab-to-market model that built on top of our internally generated intellectual property.  The result was that we couldn’t find internal homes for what would have been great projects or spinouts. (Eventually Qualcomm did create a corporate incubator to handle projects beyond the scope of traditional R&D, yet too early to hand-off to existing business unit).

We were asking the company’s R&D leads, the de-facto innovation leaders, who had an existing R&D process that served the company extremely well, to adopt our odd-ball projects. Doing so meant they would have to take risks for IP acquisition and customer/market risks outside their experience or comfort zone. So when we asked them to embrace these new product ideas, we ran into a wall of (justified) skepticism. Therefore a major error in setting up our corporate innovation program was our lack of understanding how disruptive it would be to the current innovation model and to the executives who ran the R&D Labs.

What could have been done differently?
We had relative success flowing a good portion of ideas from the bootcamp into the business and R&D units for full adoption, partial implementation or strategic learning purposes, but it was a turbulent affair.  With hindsight, there were four strategic errors and several tactical ones:

1)   We should have recruited high level executive champions for the program (besides the CEO). They could have helped us anticipate and solve organizational challenges and agree on how we planned to manage the risks.

2)   We should have had buy-in about the value of disruptive new business models, design and open innovation thinking.

3)   We unknowingly set up an organizational conflict on day one. We were prematurely pushing some of the teams in the business units. The ‘elephant in the room’ was that the Venture Fest program didn’t fit smoothly with the BU’s readiness for dealing with unexpected ‘bottoms up’ innovation, in a quarterly- centric, execution environment.

4)   Our largest customer should have been the R&D units, but the reality was that we never sold them that the company could benefit by exploring multiple innovation models to reduce the risks of disruption – we had taken this for granted and met resistance we were unprepared to handle.

Qualcomm Lessons Learned

Qualcomm Lessons Learned

  • The Venture Fest program truly was ground breaking.  Yet we never told anyone outside the company about it. We should have been sharing what we built with the leading business press, highlighting the vision and support of the program’s originator, the CEO.
  • We should have asked for a broader innovation time off and incentive policy for employees, managers, and executives.  Entrepreneurial employees must have clear opportunities to continue to own ideas through any stage of funding – that’s the major incentive they seek.  Managers and execs should be incentivized for accommodating employee involvement and funding valuable experiments.
  • We needed a for a Proof of Concept center.  Radical ideas seldom had an obvious home immediately following the bootcamp.  We lacked a formal center that could help facilitate further experiments before determining an implementation path.  A Proof of Concept center, which is not the same as a full-fledged incubator, would also be responsible to develop a companywide core competence in business model and open innovation design and a VC-like, staged-risk funding decision criteria for new market opportunities.
  • It’s hard to get ideas outside of a company’s current business model get traction (given that the projects have to get buy-in from operating execs) – encouraging spin-offs is a tactic worth considering to keep the ideas flowing.

Epilogue
The program became large enough that it came time to choose between expanding the program or making it more technology focused and closely tied to corporate R&D. In the end my time in the sun eventually ran out.

I had the greatest learning experience of my life running Qualcomm’s corporate entrepreneurship program and met amazingly brave and gracious employees with whom I’ve made a lifetime connection.  I earnestly believe that large corporations should emulate Lean Startups (Business model design, Customer Development and Agile Engineering.)  I am now eager to share and discuss the insights with other practitioners of innovation – I can be reached at ricardo_dossantos@alum.mit.edu

Lessons Learned

  • We now have the tools to build successful corporate entrepreneurship programs.
  • However, they need to match a top-level (board, CEO, exec staff) agreement on strategy and structure.
  • If I were starting a corporate innovation program today, I’d use the Lean LaunchPad classes as the starting framework.
  • Developing a program to generate new ideas is the easy part.  It gets really tough when these projects are launched and have to fight for survival against current corporate business models.

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