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Can every company really act like a startup?

Eric Ries
Eric Ries
Joi

It's become a cliché for an executive at a large company to promise to run it like a startup. Yet in his influential 2011 book The Lean Startup, startup founder and business guru Eric Ries argued that businesses of any size and age — and perhaps even nonprofit organizations and governments — can still learn a lot from management methods pioneered in Silicon Valley.

On Monday, Ries began work on his next book project. Fittingly, he started it off with a Kickstarter campaign. The campaign achieved its $135,000 fundraising goal on Tuesday, and by Thursday morning Ries had more than $170,000 in pledges.

"I'm a believer that this is the future of publishing," Ries told me on Monday shortly after the campaign began. For Ries, the Kickstarter campaign isn't just about raising money; it's also a way to solicit feedback from his future readers. Pledgers will be able to participate in a closed online community for aspiring entrepreneurs. Ries wants to learn what they want from the book and — more important — gather examples of real-world business successes and failures that he can incorporate into the book.

Ries' big idea is that the key to success for a startup — or any organization trying to innovate — is to learn quickly and act on the knowledge gained. While that might sound obvious, doing it often requires people to do many things that are counterintuitive.

Why startups need a different way to measure productivity

Normal companies — and normal employees — measure their productivity by how many units of output they produce each day. A chef might measure his productivity by the number of meals he prepares, while a programmer might measure the number of lines of code she's written.

This notion of productivity assumes whatever is produced can be sold at a profit. This is a reasonable assumption for an established business in a mature industry.

But by definition, startups are trying to pioneer new product categories in situations of extreme uncertainty. There's a big risk that once the product is done, no one will buy it. And in that case, it doesn't matter how "productive" the company was in the months before the product was released, because no one is going to benefit from all that hard work.

A minimum viable product gets customer feedback as fast as possible

Zappos CEO Tony Hsieh in 2010. (Ethan Miller/Getty Images)

Ries argues that startups should think about productivity differently: as the ability to quickly receive and respond to feedback from customers. Good startups boost productivity by minimizing the amount of time they waste building products customers won't want.

A key strategy here is to create a "minimum viable product." An MVP is a real product, not just a prototype. But the goal is to get the product out the door as quickly as possible, even if it's still missing key features and may only appeal to a narrow subset of the target audience.

Sometimes an MVP can be amazingly bare-bones. For example, the popular online shoe retailer Zappos started out by just walking into retail stores, taking pictures of shoes, and then listing those shoes for sale on their website. If a customer ordered a pair, they'd go back to the same store, buy them at full price, and ship them to the customer.

Obviously, this wasn't a viable long-term business model. But starting this way allowed Zappos to learn a lot about the market before spending a single dollar on inventory or warehouses. It avoided the risk of wasting millions of dollars building infrastructure for an online store customers wouldn't use.

This approach seems counterintuitive to many people, who worry that a low-quality MVP might turn off customers and tarnish a company's brand. But having customers who are frustrated with your product's limitations is a lot better than not having customers at all. And if you're building a new type of product, having no customers is a real risk.

Why specialized teams kill innovation

Many companies are organized by function. A company might have a sales department, an engineering department, a design department, and so forth. While this method of organization has intuitive appeal, Ries argues that it's deadly for innovation.

Remember, the key to innovation is to learn what customers want as quickly as possible, and then to act on that knowledge. At any given point in time, different companies will have different ideas about how to make the product better. For example, the sales team's frequent contact with customers might give them insight into what features customers would like, while only people on the engineering team know which feature ideas are technically feasible.

If these two groups are segregated into different departments, learning will happen slowly. The engineering department will spend hundreds of hours building a new feature before the sales team tells them it's not what customers were asking for. The sales team might spend weeks touting a new feature to customers before learning the engineering team can't actually deliver it.

Ries notes that this idea — that cross-functional teams are more efficient than specialized ones — flies in the face of most peoples' intuition. When people are thrown into teams containing a mix of different job skills, they often feel they're being less productive, because they're forced to spend a lot more time talking to people with different job skills.

Individual workers might feel these interruptions reduce productivity. But these conversations tend to increase the productivity of the organization as a whole. That's because one part of the company is less likely to waste time working on things that don't actually serve the needs of other parts — or, ultimately, of customers. The programmer will overhear the sales guy in the next cubicle promising a customer features that are impossible. The sales guy will be able to give the programmer earlier feedback about what customers are looking for.

Can every company really act like a startup?

One of the big themes of The Lean Startup is that any company — large or small, old or new — can innovate like a startup. In theory, the strategies he advises — including building minimal viable products and organizing around small, cross-functional teams — can be practiced by a company of any size.

Still, a large company wanting to follow these strategies faces an uphill climb. Organizing a company by function is such an intuitive idea that most wind up doing it. The larger and older a company is, the harder it will be to change how business is done.

And while an MVP is a great way for a startup to test out a new product, the potential pitfalls are bigger for established companies. Customers expect a new product from a well-known brand to meet a certain quality threshold, and when a product fails to deliver, they judge it harshly. Big companies are naturally cautious because they have a lot to lose.

Ries isn't blind to these challenges, of course. In his first book, he offers some advice on how to deal with them. The goal of his new book project — which aims to produce one book designed for his Kickstarter supporters and then a second book for a broader audience — is to develop more practical advice for putting the principles of his first book into action in a variety of settings.

And he's hoping to have a lot of help to do that. Over the next year, he'll be encouraging members of his online community to put his ideas into practice and report back on the results. Hopefully, he'll learn a lot, and then share that with the rest of us.