Cultural Barriers To Enterprise Innovation (Part 2 of 3)

This is part two of a description of common cultural barriers to innovation in the enterprise. In the first post, I discussed two of the barriers: fear of failure and expected value bias. This post covers two additional cultural barriers and how they destroy innovation in the enterprise.

3. Business Case Bias

As any good MBA-trained business person knows, in order to evaluate a business opportunity, you need to develop and analyze a business case. The business case is essentially a financial model, constructed on a spreadsheet, that forecasts revenues, costs and profit margin for the proposed opportunity.

Once assembled, the business case is a useful tool. You can play around with different assumptions, testing hypotheses of what seems reasonable, what is the upside and downside and other "what if" scenarios. After you've worked with the spreadsheet for a time, you start to get the feeling you can predict the future. You can develop the belief that every reasonable scenario can been considered and modeled, down to the penny. It gives you a great feeling of power and control.

The business case is a great tool for an established business. But in a startup situation, it's bullshit. 

Startups are inherently unpredictable. Whenever you have a hypotheses about an unknown customer segment, an unknown problem, and an unproven solution, there is no way to predict how this is going to work out. It's impossible.

Don't believe me?

Let's go back to March 21, 2006. Pretend you received a seed-stage investment proposal from a group of serial entrepreneurs in Silicon Valley. They have this idea for a messaging platform that has very limited functionality. In fact, email was the standard platform for communication at the time. The proposed messaging platform was much more limited than email. It can't do attachments. It can't send video or images natively. I can't be sent to everyone. It can only send 150 characters of text at a time. In March of 2006, would you invest in this business?

At the time I'm writing this, Twitter (TWTR) has a market cap of $13 billion. In March of 2006, this was completely unexpected to most reasonable investors. 

Startups are inherently unpredictable. It's just the nature of the beast.

When there are a lot of unknown and unproven assumptions about a startup business model, creating a business case is of limited value. If you change just one cell on the spreadsheet, like the pricing assumption, the entire business case changes. 

Lean Startup is all about acknowledging what your hypotheses are and testing them by running real customer experiments. Then, interpreting the results and deciding how to modify your business model to make your engine of growth run hotter and faster. When you are very early, and you are searching for a business model, it makes more sense to spend time running experiments than manipulating a hypothetical spreadsheet. Once you have tested and proven the fundamental hypotheses, then you can build a business case that is more likely to reflect reality. 

And that's the problem with how enterprises look at new ventures. They demand a business case too early in the process.

"Show me a solid business case and I'll approve your budget to build the business," says the CFO. 

What the CFO struggles to understand, at times, is that a business case built on unproven assumptions is not a case at all, it's a fantasy. 

Investing in a startup venture is a leap of faith. There is no way around it. As soon as you commit $1 of money or 1 minute of time, you are investing in a highly-risky venture that in all likelihood will not work out well. Enterprises, who are accountable to shareholders and quarterly reports, have a difficult time taking flyers on unproven ideas. That's what startups do. 

Many enterprises have innovation teams who are focused on creating new business models. When the finance department assigns a financial analyst to build a business case while the team is searching for a business model, the innovation project is in serious trouble. The project is about to be cancelled and innovation is being destroyed in the quest to define the future, down to the penny. The process of assembling a business case can actually restrict possible pivots that the team may otherwise turn to in the process of creating a truly disruptive business. The business case for a startup is a fool's errand and an innovation killer.

It's ok to use a business case, but only after enough experiments have been run that help you validate or invalidate your fundamental business model hypotheses. The sequence matters. Don't use the business case too early in the process or you will kill innovation.

4. Execution Bias

The shareholders of public companies like stable, repeatable revenues and profits that improve slightly over time. Therefore, executives of these companies want the same thing. This is reasonable for an established business, that solves a known problem with a known solution for a known set of customers. 

In an established business, management is judged based on how well they execute. The investors say, "You have a great business. Now, make it incrementally better so our earnings-per-share and stock price goes up." In turn, the management team creates and executes a plan that does attempts to do exactly that. 

If a management team consistently fails to execute well on its plan, the management team gets fired. And they should. 

If a management team from an established business provides a quarterly report, and everything it says about it's strategy and plan has changed from the last report, the investors lose faith in the management team.

"Last time you said this. This time you are saying something completely different. I don't know what you are doing. You don't seem to know what the hell you are doing. I'm shorting the stock," says the understandably distraught investor. Frequent, dramatic changes in strategy destroy management team credibility. It's just not tolerated in an established business.

But startups are new business ventures. They are not established businesses. Startups change their "strategies" all the time. They run experiments, they learn new things and they pivot their business models, frequently and dramatically. As Steve Blank famously said...

"Startups are not smaller versions of big companies. They are something fundamentally different." 

To illustrate the point, I'd like to share my favorite graphic, also from SteveBlank.com

This is the best graphic I've seen that illustrates the dramatic difference between an existing (or established) company and a new company (or a startup).

The existing company has a proven business model. It works to improve its existing business model and how it performs. It develops forecasts and plans and executes against those plans. The management team is rewarded when the actual results are equal or better than the forecasted plan. 

In contrast, the new company is searching for its business model. Because it's new, everything is unproven. So, the new company (startup), runs experiments to prove or disprove the hypotheses about its proposed business. It learns, gains insight and pivots its business model to create an engine of growth that will burn hotter and faster. 

What an existing company does, is nothing like what a startup does. And vice versa. 

Enterprises destroy disruptive innovation when they apply an execution framework to an innovation project that is searching for a business model. It happens all the time. When an enterprise does this, they are asking the wrong questions at the wrong time, and they are destroying innovation in the process. I call this Execution Bias, and it's everywhere in the enterprise. 

Key Insights:

  • Using a business case framework to evaluate a disruptive innovation project is a non-value-added activity
  • Startups and disruptive innovation projects are not smaller versions of big companies. They are something fundamentally different.
  • Using an execution framework to evaluate a disruptive innovation destroys innovation

Next post, Cultural Barriers To Enterprise Innovation, Part 3 of 3