CULTIVATING THE MANAGEMENT PORTFOLIO

 

There are four major kinds of work that companies must manage.3 As an internal startup grows, the entrepreneurs who created the original concept must tackle the challenge of scale. As new mainstream customers are acquired and new markets are conquered, the product becomes part of the public face of the company, with important implications for PR, marketing, sales, and business development. In most cases, the product will attract competitors: copycats, fast followers, and imitators of all stripes.

Once the market for the new product is well established, procedures become more routine. To combat the inevitable commoditization of the product in its market, line extensions, incremental upgrades, and new forms of marketing are essential. In this phase, operational excellence takes on a greater role, as an important way to increase margins is to lower costs. This may require a different type of manager: one who excels in optimization, delegation, control, and execution. Company stock prices depend on this kind of predictable growth.

There is a fourth phase as well, one dominated by operating costs and legacy products. This is the domain of outsourcing, automation, and cost reduction. Nonetheless, infrastructure is still mission-critical. Failure of facilities or important infrastructure or the abandonment of loyal customers could derail the whole company. However, unlike the growth and optimization phase, investments in this area will not help the company achieve top-line growth. Managers of this kind of organization suffer the fate of baseball umpires: criticized when something goes wrong, unappreciated when things are going well.

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We tend to speak of these four phases of businesses from the perspective of large companies, in which they may represent entire divisions and hundreds or even thousands of people. That’s logical, as the evolution of the business in these kinds of extreme cases is the easiest to observe. However, all companies engage in all four phases of work all the time. As soon as a product hits the marketplace, teams of people work hard to advance it to the next phase. Every successful product or feature began life in research and development (R&D), eventually became a part of the company’s strategy, was subject to optimization, and in time became old news.

The problem for startups and large companies alike is that employees often follow the products they develop as they move from phase to phase. A common practice is for the inventor of a new product or feature to manage the subsequent resources, team, or division that ultimately commercializes it. As a result, strong creative managers wind up getting stuck working on the growth and optimization of products rather than creating new ones.

This tendency is one of the reasons established companies struggle to find creative managers to foster innovation in the first place. Every new innovation competes for resources with established projects, and one of the scarcest resources is talent.

Entrepreneur Is a Job Title

 

The way out of this dilemma is to manage the four kinds of work differently, allowing strong cross-functional teams to develop around each area. When products move from phase to phase, they are handed off between teams. Employees can choose to move with the product as part of the handoff or stay behind and begin work on something new. Neither choice is necessarily right or wrong; it depends on the temperament and skills of the person in question.

Some people are natural inventors who prefer to work without the pressure and expectations of the later business phases. Others are ambitious and see innovation as a path toward senior management. Still others are particularly skilled at the management of running an established business, outsourcing, and bolstering efficiencies and wringing out cost reductions. People should be allowed to find the kinds of jobs that suit them best.

In fact, entrepreneurship should be considered a viable career path for innovators inside large organizations. Managers who can lead teams by using the Lean Startup methodology should not have to leave the company to reap the rewards of their skills or have to pretend to fit into the rigid hierarchies of established functional departments. Instead, they should have a business card that says simply “Entrepreneur” under the name. They should be held accountable via the system of innovation accounting and promoted and rewarded accordingly.

After an entrepreneur has incubated a product in the innovation sandbox, it has to be reintegrated into the parent organization. A larger team eventually will be needed to grow it, commercialize it, and scale it. At first, this team will require the continued leadership of the innovators who worked in the sandbox. In fact, this is a positive part of the process in that it gives the innovators a chance to train new team members in the new style of working that they mastered in the original sandbox.

Ideally, the sandbox will grow over time; that is, rather than move the team out of the sandbox and into the company’s standard routines, there may be opportunities to enlarge the scope of the sandbox. For example, if only certain aspects of the product were subject to experimentation in the sandbox, new features can be added. In the online service described earlier, this could be accomplished by starting with a sandbox that encompassed the product pricing page. When those experiments succeeded, the company could add the website’s home page to the sandbox. It subsequently might add the search functionality or the overall web design. If only certain customers or certain numbers of customers were targeted initially, the product’s reach could be increased. When such changes are contemplated, it’s important that senior management consider whether the teams working in the sandbox can fend for themselves politically in the parent organization. The sandbox was designed to protect them and the parent organization, and any expansion needs to take this into account.

Working in the innovation sandbox is like developing startup muscles. At first, the team will be able to take on only modest experiments. The earliest experiments may fail to produce much learning and may not lead to scalable success. Over time, those teams are almost guaranteed to improve as long as they get the constant feedback of small-batch development and actionable metrics and are held accountable to learning milestones.

Of course, any innovation system eventually will become the victim of its own success. As the sandbox expands and the company’s revenue grows as a result of the sandbox’s innovations, the cycle will have to begin again. The former innovators will become guardians of the status quo. When the product makes up the whole sandbox, it inevitably will become encumbered with the additional rules and controls needed for mission-critical operation. New innovation teams will need a new sandbox within which to play.

Becoming the Status Quo

 

This last transition is especially hard for innovators to accept: their transformation from radical outsiders to the embodiment of the status quo. I have found it disturbing in my career. As you can guess from the techniques I advocate as part of the Lean Startup, I have always been a bit of a troublemaker at the companies at which I have worked, pushing for rapid iteration, data-driven decision making, and early customer involvement. When these ideas were not part of the dominant culture, it was simple (if frustrating) to be an advocate. All I had to do was push as hard as humanly possible for my ideas. Since the dominant culture found them heretical, they would compromise with me a “reasonable” amount. Thanks to the psychological phenomenon of anchoring, this led to a perverse incentive: the more radical my suggestion was, the more likely it was that the reasonable compromise would be closer to my true goal.

Fast-forward several years to when I was running product development. When we’d hire new people, they had to be indoctrinated into the Lean Startup culture. Split testing, continuous deployment, and customer testing were all standard practice. I needed to continue to be a strong advocate for my ideas, making sure each new employee was ready to give them a try. But for the people who had been working there awhile, those ideas had become part of the status quo.

Like many entrepreneurs, I was caught between constant evangelizing for my ideas and constantly entertaining suggestions for ways they could be improved. My employees faced the same incentive I had exploited years before: the more radical the suggestion is, the more likely it is that the compromise will move in the direction they desire. I heard it all: suggestions that we go back to waterfall development, use more quality assurance (QA), use less QA, have more or less customer involvement, use more vision and less data, or interpret data in a more statistically rigorous way.

It took a constant effort to consider these suggestions seriously. However, responding dogmatically is unhelpful. Compromising by automatically splitting the difference doesn’t work either.

I’ve found that every suggestion should be subjected to the same rigorous scientific inquiry that led to the creation of the Lean Startup in the first place. Can we use the theory to predict the results of the proposed change? Can we incubate the change in a small team and see what happens? Can we measure its impact? Whenever they could be implemented, these approaches have allowed me to increase my own learning and, more important, the productivity of the companies I have worked with. Many of the Lean Startup techniques that we pioneered at IMVU are not my original contributions. Rather, they were conceived, incubated, and executed by employees who brought their own creativity and talent to the task.

Above all, I faced this common question: How do we know that “your way” of building a company will work? What other companies are using it? Who has become rich and famous as a result? These questions are sensible. The titans of our industry are all working in a slower, more linear way. Why are we doing something different?

It is these questions that require the use of theory to answer. Those who look to adopt the Lean Startup as a defined set of steps or tactics will not succeed. I had to learn this the hard way. In a startup situation, things constantly go wrong. When that happens, we face the age-old dilemma summarized by Deming: How do we know that the problem is due to a special cause versus a systemic cause? If we’re in the middle of adopting a new way of working, the temptation will always be to blame the new system for the problems that arise. Sometimes that tendency is correct, sometimes not. Learning to tell the difference requires theory. You have to be able to predict the outcome of the changes you make to tell if the problems that result are really problems.

For example, changing the definition of productivity for a team from functional excellence—excellence in marketing, sales, or product development—to validated learning will cause problems. As was indicated earlier, functional specialists are accustomed to measuring their efficiency by looking at the proportion of time they are busy doing their work. A programmer expects to be coding all day long, for example. That is why many traditional work environments frustrate these experts: the constant interruption of meetings, cross-functional handoffs, and explanations for endless numbers of bosses all act as a drag on efficiency. However, the individual efficiency of these specialists is not the goal in a Lean Startup. Instead, we want to force teams to work cross-functionally to achieve validated learning. Many of the techniques for doing this—actionable metrics, continuous deployment, and the overall Build-Measure-Learn feedback loop—necessarily cause teams to suboptimize for their individual functions. It does not matter how fast we can build. It does not matter how fast we can measure. What matters is how fast we can get through the entire loop.

In my years teaching this system, I have noticed this pattern every time: switching to validated learning feels worse before it feels better. That’s the case because the problems caused by the old system tend to be intangible, whereas the problems of the new system are all too tangible. Having the benefit of theory is the antidote to these challenges. If it is known that this loss of productivity is an inevitable part of the transition, it can be managed actively. Expectations can be set up front. In my consulting practice, for example, I have learned to raise these issues from day one; otherwise, they are liable to derail the whole effort once it is under way. As the change progresses, we can use the root cause analysis and fast response techniques to figure out which problems need prevention. Ultimately, the Lean Startup is a framework, not a blueprint of steps to follow. It is designed to be adapted to the conditions of each specific company. Rather than copy what others have done, techniques such as the Five Whys allow you to build something that is perfectly suited to your company.

The best way to achieve mastery of and explore these ideas is to embed oneself in a community of practice. There is a thriving community of Lean Startup meetups around the world as well as online, and suggestions for how you can take advantage of these resources listed in the last chapter of this book, “Join the Movement.”