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 / Winter 2013 / Issue 73(originally published by Booz & Company)


Why Eric Ries Likes Management

Of course, large companies are full of entrepreneurs and always have been. Where did all those different business divisions come from? Were they handed down from God on tablets? No, they were created. They were once startups.

S+B: How does that affect the typical innovation process in a large company?
Most of these companies have some version of a stage-gate development process for new products. It’s a linear, rigorous, checklist-based process with a series of go/kill decisions. All these companies have introduced successful new products. Their win rate may not be very high, but the law of large numbers says every company has at least some new product successes.

I’ve noticed a strange phenomenon. If I ask the senior management for an example of the stage-gate process working well, they’ll tell me about a successful new product they just launched. Then, when I interview the product development team—I’m always looking for new case studies—the conversation will go something like this:

“Did you guys follow the stage-gate process?”

“Are you kidding? Of course we didn’t.”

“Why does senior management think you did?”

“Well, that’s what we told them. You get fired if you don’t check the boxes. But we actually set up a parallel process to bring out the product, working off the books, and then we retroactively applied the stage-gate process to describe what happened.”

The first time I heard this, my reaction was: “You committed fraud against the corporation. You should be fired.” The response was always the same: “You don’t understand. Nobody in this company believes these reports. Nobody thinks the official process works.”

In nearly every big company, the real work of developing new products and new businesses is happening underground, in secret. There’s an incredible amount of inefficiency and waste because we go through these gyrations to pretend we’re following a completely different process. We try to fit the circle into the square box.

S+B: So there is a subtle chaos at work in organizations everywhere?
Sort of, but it’s not the product development process that’s chaotic. It’s the world. In traditional companies, people carve out this beautiful little bubble of orderliness and calm and low variation—or they think they do. But that’s getting harder and harder to sustain as business becomes more and more uncertain, as things keep moving faster.

The cost of starting a new company is going down. And the distribution and scale that it’s now possible for even a tiny little company to access is growing. So, in previously safe industries, where there were very few competitors and an oligopoly once controlled everything, you can now wake up one day to find that 100 startups have entered your market, and then things suddenly go to hell. We’re all facing that chaos.

Part of the challenge is just to acknowledge that the reality of competition has changed, rather than trying to fit the signals from an increasingly uncertain world into forecasting-based spreadsheets that demand predictability.

S+B: How is your methodology different?
It starts with a few principles. We’ve talked about two of them. First, entrepreneurs are everywhere; not just two guys in the garage but anyplace uncertainty is being managed. Second, entrepreneurship is a system of management.

Next, there’s the idea of validated learning. The most difficult problem in entrepreneurship is that you can’t tell if you’re making progress. For people who have only ever held a “regular” management job, this is a foreign idea. They try to use the same measurement tools from elsewhere in the organization and we end up with those shadow startups in large companies.

Compare that to your typical Silicon Valley startup. The business plan says that on such-and-such date the product will be launched and a certain amount of time later we’ll have this many customers and that much revenue. There’s always a beautiful appendix with spreadsheets and hockey-stick graphs. The hockey stick shows a few months passing after the product launch, with the curve nice and flat—and then boom, up into the black.

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