Ep. 278 - Jim Euchner, Author of Lean Startup in Large Organizations on Building Lean Startup Methodologies to Stay Competitive

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On this week's episode of Inside Outside Innovation, we sit down with Jim Euchner, author of the new book Lean Startup in Large Organizations. Jim and I talk about the underlying fears companies have when trying to change and implement innovation initiatives. And what they can do to initiate and build Lean Startup methodologies to embrace change and stay competitive. Let's get started.

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Interview Transcript with Jim Euchner, Author of Lean Startup in Large Organizations

Brian Ardinger: Welcome to another episode of Inside Outside Innovation. I'm your host, Brian Ardinger. And as always, we have another amazing guest. Today, we have Jim Euchner. He's an honorary professor at Aston Business School in the UK. Editor in chief of Research Technology Management Journal. Former VP of Global Innovation at Goodyear. And he is author of a new book called Lean Startup in Large Organizations. Welcome to the show, Jim.

Jim Euchner: Thank you. Thanks for having me.

Brian Ardinger: Well, I'm excited to dig in. You've been involved in Lean Startup for a long time, specifically around this idea of corporate innovation, which I think when you hear Lean Startup, at least in the early days, you didn't think about it from a corporate perspective.

I found, like when I talk to establish enterprises and you bring up the word or the term lean startup, a lot of times it has baggage around it. They dismiss it or think about it as you know that startup term. How do you define or talk about Lean Startup?

Jim Euchner: I think about Lean Startup, in its basics the same way that the founders of it did. You know, Eric Ries and Steve Blank and so forth. I think it's a way of taking a high-risk venture from a very high-risk place to a place where it's something that you can bet on. It's a way of iterating your way toward a great customer value proposition and a good business model.

The challenge in large corporations is that each of the practices of Lean Startups in its own way, sort of sparks an antibody inside the corporation. So Lean Learning Loops. They are a wonderful way of learning. Business experiments is another term for it. But if you have a lot of experiments and pivots, it can seem very chaotic to people inside the corporate setting.

So, you have to do what I would call an impedance match between the corporate setting and the Lean Startup practices. The central Lean Startup practices are still very valid. But the way they're managed, there are some complimentary practices that make them effective inside large organizations.

Brian Ardinger: You bring up a great point. It really doesn't matter if you're building something brand new in an uncertain environment as a startup or within a corporate environment. The same principles can be used to navigate that unknown or that uncertainty.

In your book you talk a lot about, I guess, the common fears that leaders and organizations have when it comes to change or Lean Startup and that. Can you talk through and outline some of the key fears that you talk about in the book?

Jim Euchner: Yeah, sure. So, the first one is this sort of fear of chaos. That the innovation program will just be out of control. And one way that's effective in doing that is to create what I would call an Innovation Stage Gate. So the practices of Lean Startup are still practiced, but they're inside a discovery phase, a business model development phase, and an incubation phase.

That gives people inside corporations the chance to learn, to comment, to review at very critical stages. So, review the customer value proposition and the customer value. Review the business model. And very importantly, the effects that the business model will have on the core business. And then before scaling, understand how it works in the real market.

The first fear is the fear of chaos. The second fear is a fear that the innovation team will disrupt the operations of the core. Everybody they're working with has a day job. Right. And you're asking them to take exceptions, to move quickly, to do stuff that you know, that really on the financial side, doesn't matter a lot in the near term. But it still has an urgency. And it may be outside the bounds of their usual experience. So, it's risky. Helping people manage that is important as well.

Brian Ardinger: This fear of distraction. I hear it all the time. We don't have time to innovate. You know, we don't have time to try these new things and that. What are some of the ways that you can get people to overcome that mindset?

Jim Euchner: It's a combination of things. And I really think that each company has to look at their own culture in order to decide. One thing that people do is, and it's the first thing to do, is just try to get corporate air cover. Someone says it's okay to do it. And that gives a permission. And then if they don't do it, it gives us permission also to escalate.

The problem with that is escalation wears thin very quickly. And you make more enemies than you can afford to make. One of the things that I found most effective in my experience is to bring the functions along as you go, but to have no expectations of them in the early stage, other than that, they'll just provide the support you need to get something done.

So, if I'm talking to procurement, I don't want them to do a full RFP. I don't want them to take a risk with their own career on something, but I need their help in putting together a contract that will meet our requirements. And if I have to sign off on that or I have to provide them some resources in order to cover the cost that that will have to them, then I'll do that.

The very important one is legal liability. Legal liability is very important to protect the core corporation. But when you're doing experiments, they can seem awfully risky. In that instance, you may need to raise the issues, explore the issues, understand the implications, and then co-sign off. They may still say, I don't like that liability risk, you say, okay. But we'll take it in this one instance. And I'll take that on myself.

The core thing is just to not keep people in the dark because you're afraid they'll jump in. And to give them at the stage of incubation, really a chance to rash through all those issues. So, if you're a non-standard IT organization, what are you going to do about the final product? And you can thrash that out in incubation, not during the early experiments. And the same kind of thing happens across the company in sales and procurement and everything.

Brian Ardinger: Yeah. I find that if you have this almost side project mentality, it's like, oh, we're doing a side project to test or iterate or try something. And then by the time it gets to the point where you need to escalate it, a lot of times you have additional evidence or insights that you can then get that buy in from the higher ups.

Jim Euchner: And that's exactly what you're trying to do. You're trying to get the evidence and the learning so that it's worth it for people to do whatever they have to do to support you. But in the early stages, if you don't share where your portfolio is, what you're doing, and then people are just going to get nervous that you're doing something that's going to cause them problems.

A specific example is if you're in IT and someone's building something in a non-standard environment, they're afraid you're going to get up to incubation, you're going to launch it. And then they're going to be stuck supporting it. They won't even know what it is. Right. So, they want to control it early so that, that doesn't happen. You have to give them assurance that there will be a time. You have to adhere to it. You'll really address their issues fully when you're in that incubation phase.

Brian Ardinger: Let's continue on with some of the other fears that stop or inhibit folks from implementing some of this Lean Startup methodology.

Jim Euchner: The next ones really play out more at the executive level. One of them is just a very direct concern. This business will succeed by cannibalizing the core business. So, it'll look like your business is doing great, but your business is actually only succeeding because it's hurting the core business.

So, in that instance, there's just a fear of an overall net loss. And to deal with that when you're developing a business model, and when you're incubating, it's very important to sort of keep track of what is happening to the core business as the result of what you're doing, as well as keeping a PNL for the, for the basic business itself. So that's one. Another is a concern that this whole process will lead you into a place that the company can't even recognize.

We were in the document management business at Pitney Bowes. We worked to move into document management in healthcare. Eventually once we had a client and we were ready to go forward people saying what are we doing in healthcare? You know, how did we ever get here? And so, there's an identity issue. And the best way to deal with that is for the executives to just be very clear about the opportunity spaces they're willing to bet in.

And then go beyond that. If they're interested in health care, for example, spend some time there. Learn about the customers. Learn about the industry. Learn about the other players. There's always the risk that the new business, as it grows, will bleed resources from the core. And they'll have to somehow make it up. The result of that oftentimes is that you under invest in the new business and people implicitly or directly try to smother it.

The best solution to that is to separate the growing business from the core business. But to have very clear and negotiated relationships between the two entities. Which is something Govindarajan and Trimble proposed. Those are some of the fears. They're real fears. They have legitimate basis. They're also emotional and that's why I call them fears. But given that you can start to address them.

Brian Ardinger: Well, it's interesting also because if you think about an organization and what they've effectively done is figured out a business model that works. And their job is to optimize and execute on that particular business model. So, they hire for that. They measure for that. They do all that.

And so, you have what is an effect, a group of people that are not designed or not there to explore and try new things. And so you have that constant tension, I think. Talk a little bit about incremental innovation. And how does that play in with some of the launching of these new, bigger business models or ideas in Lean Startup.

Jim Euchner: I actually think of innovation, what I would call type one innovation. Which is innovation inside the core business model. And there's type two innovation, which is creating a new model and new revenue stream. And I make that distinction because you can have really breakthrough innovation of type one.

Intel is in the same basic business it's been in for years. But it does some of the most fantastic technological innovation way ahead of the game. Still, if it's successful, it's not challenging the core business. If you do it well, it will move through the pipeline. If you're in the, at Proctor and gamble and you develop a new consumer product that fits within their basic brand, it'll flow through whether it's a radical product or line extension. A new business on the other hand, challenges the assumptions. And this is just what you were pointing out.

It challenges basic assumptions about why we're here. What we're doing. What matters. How I get compensated and so forth. That kind of innovation really has to be managed differently. So, I think that the type one innovation can be managed with less executive attention. Much more integrated with the core. The type two innovation oftentimes requires entirely different structures.

Brian Ardinger: And I think that's important because I think oftentimes, we hear the word innovation and we immediately jump to one end of the spectrum or the other and having that common definition. And how do you look at this particular innovation? Is it type one innovation? Or is it something that we're trying to build a brand-new business around? You know, I think having those conversations early and often probably help set the groundwork for executing on it as well.

Jim Euchner: Absolutely. And I think there are multiple stages where you do that. So, you do it at the beginning and you know where you're trying to understand what am I about? When you get to the stage of incubation, you have to make a decision. Do I incubate this as part of a business or independently?

There are techniques for deciding what you need to do and engaging the stakeholders in doing that. And then when you want to scale it. It's a decision again. Am I going to integrate this with one of my businesses? Am I going to take parts of existing businesses and combine them with the new to create a new venture?

Am I going to acquire something to grow the business? Or am I just going to grow it organically? These are big decisions. So, you need to ask those questions repeatedly. And I've seen all three, even at Goodyear, all three types of scaling methods.

Brian Ardinger: So, a lot of this comes down to culture, it seems. How do you start building that culture of innovation inside established companies?

Jim Euchner: It depends on what you're trying to do. And of course, as it always does. Sometimes people are already in the midst of an innovation program, and they're not satisfied with how fast it's moving. Right. And it may be an incremental or an employee innovation. They're maybe not satisfied with the scale of the ideas that are coming out.

Then I would say, you'll look back. You try to say, why. Why are people not collaborating? Why are people not proposing good idea? Why are people turning away ideas that are good ideas, but maybe outside the norm? And you just keep asking why until you get to that cultural reality which is what we believe about what should happen or shouldn't happen.

Edgar Schein, who's really the father of corporate culture, he made people aware that it exists and that it matters. He would say that at the core, there are a set of beliefs about who we are, what we do, what's acceptable. And even if we were trying to change and we articulate a whole different way of operating, those beliefs won't change just because we've articulated different view. They're like the compiled wisdom about what works for a career inside a company.

If you want to change those, you have to do it very deliberately. First, you have to identify the ones that have leveraged. And then you have to deliberately put in place counter behaviors and supports that help people and remind people to exercise those behaviors.

If you do that and it succeeds, eventually the culture will change. But you won't change the culture by telling people, by training people that this is now the culture. By espousing a different set of values. It just, it happens over time, in a very deliberate way, I think.

Brian Ardinger: Yeah, you got to walk the walk. Another big topic that I always run into and people in the audience ask us about all the time is how do you incentivize corporate innovation efforts. And how do you measure them? How do you know if you're on the right track?

Jim Euchner: I have maybe a different view than a lot of people do about the incentives part of the question. I think people who are in the field of innovation want to innovate. And the biggest incentive you can give them is a place where that can happen.

If you don't give them the elements that are necessary for that, they're going to be gone. Or they're going to be frustrated and they're not going to be productive. If they feel like I'm working someplace where I can make a difference. I can make something happen. That's more important than, you know the bonus structure or something like that.

The metrics I think, need to be there for metrics, both of how the project's going and how the organization's supporting it. I think the best metrics for big innovation is at a portfolio level. You look at a lot of ideas. You test them. Only a few may come to the value proposition stage. Fewer go into incubation. And you measure on aggregate are we moving stuff through the pipeline. Are some things getting into incubation? Are we launching any of those businesses? Are they hitting profitability targets?

But it's over a period of years, not a particular year. You get rewarded in year eight for work you did three years ago, oftentimes. Right. And they're at a portfolio level. So you're not saying this team got an award and that didn't because it's the overall portfolio that's driving success. And we use something called 10- 3 -1 at Goodyear. Over a period of five years, we wanted to put 10 businesses into incubation. We wanted to decide to scale three of them. And then we had a revenue target for what we wanted to get out of the aggregate.

Brian Ardinger: Yeah. It's very similar to, I guess, venture capital-based model. Betting on a portfolio. Knowing that some are probably going to fail. Others may return some capital, but you'll have those outliers that eventually returned the fund and then some.

Jim Euchner: Yeah, exactly. And I think that's the way executives have to think. A difference between inside a corporation and outside is, a venture capitalist is playing with his or her own money and they can make a bet to win inside a corporation. There's often a reluctance to make a big bet to win. Because you got to explain it to the street and it might not succeed, or it might take longer than you expect to succeed.

And so, there's this asymmetry between those two worlds, even if they're about the same objective. Amazon doesn't worry about that. Tesla doesn't worry about that. They've got credibility and cash and they can make it happen. If you're a company that's been around a hundred years and people are watching quarterly earnings growth, and they're worried about dividends, it's a harder play. But I think in the new world, executives are going to have to get good at betting to win, not betting to minimize the, the downside loss.

Brian Ardinger: You've been in this space for a number of years. Have led it in corporations. And now on the outside as well. What are some of the biggest changes that you've seen over the years?

Jim Euchner: The first big change I saw was really you would call it design. That's really part now of the practice is a part of the lean startup. But it's being customer centered in the way you're doing innovation. So, identifying a space that you're interested in. And then spending real time. So, some places borrow tools. I have in my career from the field of anthropology to really understand customers from the world that they're in. And to innovate into their needs instead of from your technologies or from your idea of what customers want.

I think that's been a pretty profound change. I think a lot of companies do customer centered approaches without trying to short circuit the deep anthropology or the deep ethnography. And I think they miss a lot. They'll get good stuff to make a better product, but not necessarily the kind of insight that will let them create a new business.

So that's a big one. Another is Agile. And iterative and business experiments. The idea that you don't need to do this stuff in the lab. You need to do the stuff in the world, right. You need to get out of the building. And that's difficult for a lot of R and D people especially. Getting out in the world and framing business experiments the same way you might frame a technical experiment and learning from them. And pivoting from there.

I think that's a big shift. And then I think people are now thinking more about business models and about the difficulty of them than they ever have before. That's a still, I think, a very difficult subject. I think there are systematic ways of developing business models. But it's dicier. But I think those three things focusing on the customer. Focusing on an iterative experimental prototyping way. And worrying fairly early about well what's the right business model. Not just what's the easy business model.

Brian Ardinger: That makes sense. Are there any trends or anything in the future that you're excited about?

Jim Euchner: I'm very bullish on innovation right now. And part of the reason for that is there are so many technologies that are growing so fast. Every time you have a new technology, it opens up the design space. It opens up the way you can address customer needs. And sometimes in a really fundamental way. AI is particularly interesting to me. I think there are some archetypes of companies that are born with that perspective in mind.

And they're productive and efficient and fast and customer centered. And I think they're a new model. I really think there is a new template for what the corporation of the future are going to look like. And innovation is much more at the center of it. Amazon is a wonderful... there are a lot of detractors of the way it optimizes the workforce, and so forth. But I think the way it focuses on customers and what you experience every day, if you use it. The way it experiments to create new businesses.

In particular, the way it uses its assets to enter a new realm and just pivots all over the place. So, who would have thought, you know, a book seller is going to be a movie producer and a cloud services producer, a logistics provider on the scale as FedEx and UPS. It's amazing. I think companies are going to need to really learn from that example. And it's a, I don't know they'll all be grown from the ground up or whether some companies will be able to adapt. But I'm excited to see which, what the innovation companies of the future look like.

For More Information

Brian Ardinger: Absolutely. We are living in accelerated times, and it'll be interesting to see where it all ends up. I really do appreciate you coming on Inside Outside Innovation to share your knowledge and that. The book is called Lean Startup in Large Organizations. If people want to connect with you and or find out more about the book, what's the best way to do that?

Jim Euchner: They can go to Leanstartup.biz. So that's a website and, or they can connect with me on LinkedIn.

Brian Ardinger: Well, Jim Euchner, I really appreciate you coming on Inside Outside Innovation today. We're looking forward to continuing the conversation in the future and then have a great day.

Jim Euchner: Thank you. Very nice to talk with you.

Brian Ardinger: That's it for another episode of Inside Outside Innovation. If you want to learn more about our team, our content, our services, check out InsideOutside.io or follow us on Twitter @theIOpodcast or @Ardinger. Until next time, go out and innovate.

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