I am having more and more conversations with leaders of organizations who have fundamentally the same concern:
“I have read all the literature on the “Lean Startup” movement, and find it superficial at best. I have a business with a large human resource and capex base (or regulatory constraint), and the idea of “pivoting” means releasing large numbers of people or idling large manufacturing plants – I have a hard time believing that I should do that based on a few Post-It notes in a conference room.”
The response to this line of dialogue is to take a step back and put it and innovation in a larger and more fundamental framework using the scientific method. The key to the scientific method is to take a fixed point of view, called a hypothesis, and test it against reality — at which point it will either be confirmed or disproved. Note that the hypothesis is a fixed point of view, not a fuzzy construct, and that it remains in force until it is either confirmed or proven false. The lean startup literature is largely targeted around establishing a very efficient path for creating and testing hypotheses; but since it chooses many of its examples from asset-light companies, leaders assume it’s not for them.
4 Steps to Creating and Testing Your Hypothesis
# 1: The goal of your work in the conference room is to create a robust hypothesis.
In the last newsletter, I discussed how to build a narrative, visual and analytical construct for your innovative new product or service. I want to underscore here just how important it is to follow all the steps of capturing the full wisdom of your internal team, including the critics,while also systematically including an outside viewpoint to pressure test your “inside” view. By doing a thorough job of including relevant voices during this conference room work, you greatly increase your chances of forming an effective “business hypothesis.” By the time you’re done, you should have 3-5 pages of very dense, accurate information to share (under appropriate agreements) with your partners, suppliers, investors and key internal stakeholders.
# 2: Understand that the creative work of the growth leader is to effectively use the assets of the firm to test the hypothesis.
The rookie’s mistake is to assume that you’re now ready for full investment — but it’s very important to understand that what you have at this point is simply a well-formed hypothesis — not a confirmed conclusion. The work of the program leader is now to systematically test that hypothesis. To do this, I recommend using the team’s intuition and your analytics to isolate the high leverage fiction in the business model.
Fiction is a strong word, but every business case has it: these are the areas that can quickly flip the model from growth to loss. In service businesses, this often shows itself as assumptions on the uptake and growth of the account base, or perhaps the costs of scaling the internal operations. These areas are best found as a team, then analyzed by a key analyst and one other person to construct a tornado diagram. A tornado diagram is a nice tool that shows a visual rank of key variables, along with their positive and negative effects.
Having the variances captured in a simple visual allows the team, the sponsor and their leadership to see real progress in reducing variances. By keeping this chart at the center of the next phase, it keeps the attention on risk reduction and business model improvement. Teams that don’t do this are prone to building the business prematurely and doing the risk reduction after they hit the wall — a situation that leads to unneeded conflict and turmoil.
This is a classic case of where going a little “slow” will greatly accelerate the next phase.
# 3: Lean methods are very useful for quickly and efficiently testing a hypothesis – regardless of the size of the organization.
Now is when lean methodology becomes very important. In high capex businesses, you can learn a great deal by shrewdly doing small, well-designed projects with customers you already have, or with products that may already be in the R&D lab that apply to your customer base of interest. For reference, see quadrants II & III in the Growth Zone ebook.
Here’s an example: in the early 2000’s, Apple was involved with a phone project called ROKR, which was the first phone to carry music from the iTunes store. The interesting part of this project was how it was structured – Apple held the song limit to 100 – a tiny fraction of what users really wanted – and in return, they gained a great deal of tacit knowledge about the phone design ecosystem, which eventually informed the design of their iPhone.
Putting on our wayback machine eyeglasses, we see another example in Lee Iacocca, when he shrewdly built the first Mustangs on economy chassis made from Ford’s low-end Falcon line. The first units in this commanding product line were underpowered and had abysmal brakes and suspensions, but the body design was right on. Once this beach head was established with a new demographic, the product teams were given the green light.
Coming back up to current day: everyone forgets the early days of Tesla, when Elon Musk was building a handful of super expensive prototypes to test the concept of a six-figure price tag for a real, roadable electric-only vehicle. We are now witnessing in real time how he is creating a market at lower tiers of price and increasing performance.
#4: The bridge between a validated hypothesis and a product or service is actually more important – and in large firms – requires a very clear strategy and execution plan.
The growth leader in the large firm is really a powerful influencer and bridge builder, with a strong persistence to make a firmly-held minority view into an offering the majority will come to see as beneficial. The strategic creativity and the understanding of the new value propositions – and how to test them with existing assets wisely – is what gives incumbent organizations advantages over pure start ups.
The resistance to these efforts is legion and relentless – not because those who resist it are bad people, but because we have purposefully designed business units to resist distractions to the core mission of the enterprise. Designing projects that make sense and which create a path of stepping stones for the new service or product line often requires as much creativity as the original innovation.
Using these tools to build the bridge from the whiteboard to a business will allow you, the growth leader, to move more confidently and authentically as you work through these very important and pressure-filled days of early stage business establishment.
I would love to hear from you. If you have questions or experiences to share, please connect with me on Twitter @scottpropp or send me an email. To read the full issue of this newsletter, please subscribe.
