1. Innovation Stage-Gates: Reconciling Lean Learning Loops with the Need to Demonstrate Discipline

The Lean Startup methodology is somewhat chaotic. It works, when it works well, because the chaos is managed through a learning agenda. Over the course of a monthly sprint, many things can change: The feature set of an MVP, the target customer, the channel to market, the revenue model. To executives used to evaluating whether or not a project is on plan and on budget, this constant change can be unsettling, even with frequent reviews and good documentation of the decisions made. Executive leadership teams often want a more linear assessment of progress.

The use of an Innovation Stage-Gate process with clear intermediate deliverables and a reasonable estimate of time frames for creating them can provide the necessary framework (see Chapter 4). In an Innovation Stage-Gate system, the process within the stages is agile, dynamic, and a bit chaotic; at the level of the gate deliverable, however, it is more defined and more predictable.

Introducing an Innovation Stage-Gate process requires separating in time some of the activities that might be undertaken simultaneously in the Lean Startup approach [Ganguly and Euchner, 2018]. Customer insight and the development of the customer value proposition can be usefully separated from creation of the business model, for example. Similarly, business model development can be separated from in-market incubation of the concept, reducing the risks of entering the market. Finally, the decision to scale the venture can be separated from the decision to incubate it. In essence, an Innovation Stage-Gate is simply the unraveling of the hypotheses at the vertices of the Lean Startup triangle.

A stage-and-gate process may strike some as antithetical to the Lean Startup approach—and even to innovation itself. It is, however, a critical element in matching the Lean Startup to other business processes in large organizations. The stage-and-gate structure provides a clear sense of progress, clear points at which investment decisions can be made, and a space where executives can learn, over time, about a new market and its risks and promise.

2. Graduated Engagement: Developing MVPs in the Context of the Performance Engine

Every established company has what Vijay Govindarajan and Chris Trimble call the “performance engine.” [Govindarajan and Trimble, 2010]—the collection of functions, processes, and resources that have been optimized over time to support the profitability of the core business. The people who manage the performance engine have objectives, internal client expectations, and methods of operating that can be disrupted by an innovation team—especially one focused on breakthrough innovation. Nevertheless, the internal venture needs to leverage the skills, resources, and imprimatur of the internal functions.

How can an organization resolve this paradox and create an environment where the performance engine and the new venture can co-exist—and even support one another? Some companies create an entirely independent innovation entity, with its own HR, IT, procurement, legal, and engineering functions. This approach is expensive and, in many cases, impractical. Others attempt to use the existing functions, together with pressure from the top, to get things done. This works well until it wears thin, and then it tends to collapse.

There is a third way, one that engages the performance engine throughout the innovation process in a transparent but graduated way. In essence, core functions provide basic support during the exploratory parts of the process and only become more engaged as the concept advances. Decision rights are explicitly negotiated for each stage in the Innovation Stage-Gate process. The various functions provide the support needed, using budgeted funds allocated for that purpose. The innovation function assumes the risk of doing things differently and more quickly; it is the responsibility of the functions simply to highlight issues they anticipate and to make the risks explicit. When the venture moves into incubation, the functions become more active in assuring (appropriate) compliance with established practices (see Chapter 5).

Graduated engagement assures that existing standards and ways of working, which often seem very constraining for those doing something new, will not slow down the innovation team as the business is being developed. It also assures that the venture will comply with corporate standards once it is launched. Implementing this kind of ramped engagement takes time, planning, open communication, and compromise, but it enables an internal venture to move quickly and to do so in a way that still leverages corporate knowledge and resources—one of the primary advantages corporate ventures have over startups.

3. Opportunity Spaces: The Value Hypothesis and the Need to Create Strategic Alignment

An ongoing corporation has strategies, whether they are explicitly stated or implicitly enacted. Any new venture must align with these strategies or with an explicitly espoused growth strategy. If executives cannot see the connection between a new venture and a larger corporate objective; if they do not see the value in spending the time necessary to understand a new domain in sufficient depth to make investment decisions with confidence; if the new venture is seen as diverting resources from the existing corporate strategy rather than moving it forward, then investment will not flow.

One way of achieving this alignment is by creating sanctioned opportunity spaces. Assets of the corporation—including the customer base, the brand, the service network, and core technologies—provide a basis for future competitive advantage. They can often be combined with market opportunities in a way that provides a unique advantage.

Shaping the opportunity space within which a corporation will play and making it explicit is difficult work. It requires thinking through alternative spaces, understanding their potential for the company, and being realistic about corporate assets. This is not something that senior leaders can delegate. But once the opportunity space is sanctioned, it reduces the concern that the innovation initiative is going off in irrelevant or even destructive directions (see Chapter 6). Of course, startups must also define their opportunity spaces, but they do not have to align them with an external strategy, as internal ventures must.

4. The Business Model Pyramid: The Business Model Hypothesis and the Need to Manage Internal Risks

A business model is a configuration of resources, assets, and processes designed to deliver a customer value proposition profitably. A good business model creates differentiation in the marketplace and has economic leverage—it gets stronger with scale. Over time, a company’s business operations become optimized, and when they reach this stage, the business model is resistant to change. Introducing a new business model appears to be both costly and risky. It means going back to square one and learning anew how to drive profitability.

Business models that leverage assets and are compatible with a corporation’s strategy can be systematically developed (see Chapter 7). The Business Model Pyramid is a useful tool for doing so. It moves systematically from the value proposition to incubation. It starts by considering multiple business model options and identifying the risks of each. A key element is understanding in a quantitative way any risks to the core business (in addition to market and execution risks). Use of the Business Model Pyramid is helpful in managing internal resistance by making the risks (as well as the opportunity) explicit, and by creating clarity about the impact of the new venture on the core business.

5. Organizing for Growth: The Growth Hypothesis and the Separate-but-Connected Organizational Model

Organizational issues do not loom large when a venture inside a large company is small. Everyone involved does whatever is necessary for success. Resources are begged, borrowed, stolen, and cajoled into being. (This is true for startups, as well, although the sources of resources are different.) As the venture matures, both startups and internal ventures need to manage a new set of challenges. In both cases, for example, the leadership may need to change as the venture enters the growth stage. The team must often be reshaped to take full advantage of the opportunity the venture has created.

An internal venture has an additional set of issues to address. When it was small, it could fly under the radar. As long as it was able to muster the resources it needed and the permissions required to operate, it was not challenged. But growth changes this balance. Suddenly, the new venture challenges the status quo in ways that were not visible when it was small. It may attract scarce budget, draw on scarce internal talent, and demand managerial time from the core business. The core often fights back (if it feels it has the political permission to do so). Moving the venture from incubation to scale must therefore be done carefully, especially if the business intends to leverage the assets of the core business.

Internal ventures fail when the balance is poor—when integration is too tight to accommodate differences in business models or when the separation is so complete that the parent venture confers no competitive advantage. Too tight an integration can mean that the new business is force-fit into the existing business model, with the functions, routines, and policies of the core grafted onto the new venture—whether they support it or not. Too tight an integration can also lead to investment that is governed by normal corporate allocation processes, not by the opportunity the venture presents.

Full separation of the new venture and the core business brings other risks. The primary danger of full separation is that the assets of the core will not be available to help the venture create a competitive advantage. Without these advantages, the new venture might as well be a startup.

The Separate-but-Connected model for achieving the needed balance between the core business and the new venture calls for structural separation together with explicit, negotiated relationships between the new venture and the core business functions (see Chapter 8). Applying this model requires open discussion that is often difficult in a corporate context, as the organizational issue inevitably impinges on issues of power and budgets. It is helpful—perhaps essential—to sequester funds to incubate the business so that the questions concerning organization are not fraught with budget issues.

6. Making the Bet to Win: Ambidextrous Leadership

There is another risk that must be balanced differently inside a corporation—the risk associated with the “bet to win.” Once a venture has been brought to the point where it has proven to be attractive to customers, profitable, and scalable, a venture capitalist will often go all-in to win in the marketplace. The corporate investor, confronted with alternate investment paths, will often choose the path that minimizes the downside risk rather than the one that maximizes the venture’s potential. This is understandable. It can be hard for a public company to explain to Wall Street a dip in earnings due to significant investment in a new and very different business. Getting to the point where the resource allocations match the opportunity requires double loop learning and ambidextrous leadership, the subject of Chapter 9.

Ambidextrous leadership skills are built up over time. Executives may be emboldened and invest more aggressively in a new venture if the corporation has implemented some of the practices recommended in this book to help the leadership team understand the opportunity and its risks.