The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth

by Eric Ries

In the Startup Way, entrepreneurship is a management discipline, a new framework for organizing, evaluating, and allocating resources for the work of a company. It’s a philosophy that replaces the old-fashioned template currently holding so many companies back, providing a new blueprint of how a modern company should work to create sustained growth through continuous innovation.

The five key principles behind the Startup Way philosophy are:

CONTINUOUS INNOVATION: Too many leaders are searching for that one key innovation. But long-term growth requires something different: a method for finding new breakthroughs repeatedly, drawing on the creativity and talent of every level of the organization.

STARTUP AS ATOMIC UNIT OF WORK: In order to create cycles of continuous innovation and unlock new sources of growth, companies need to have teams that can experiment to find them. These teams are internal startups, and they ...

THE MISSING FUNCTION: If you add startups to an organization’s ecosystem, they must be managed in ways that confound traditional techniques. Most organizations are missing a core discipline—entrepreneurship—that is jus...

THE SECOND FOUNDING: Making this kind of profound change to an organization’s structure is like founding the company all over again, whe...

CONTINUOUS TRANSFORMATION: All of this requires the development of a new organizational capability: the ability to rewrite the organization’s DNA in response to new and diverse challenges. It would be a shame to transform only once. When a company has figured out how to transf...

the goal is to make it possible for startup teams to operate reliably and give every employee the opportunity to act in an entrepreneurial way.

This allows for the emergence of people who are naturally inclined to work this way—or could be inclined, given encouragement and permission.

Accordingly, every manager in the company must become literate in the tools of entrepreneurial management, even managers who are not directly involved with startups. They need to understand why some people are working differently, be able to hold them accountable to new standards, and recognize when their own normal ...

Our world is awash with gurus and experts telling us all to move faster, be more innovative, and think outside the box. But we are short on specific details: How, exactly, do we attain these results? This book is an attempt to fill in the missing details.

When teams are given the chance to organize in the Startup Way, they naturally gravitate to new and different processes than people are accustomed to. We will explore these unconventional techniques—some of which are based on concepts from The Lean Startup, and some of which are brand-new. We’ll also talk about how to manage conflict between these new processes and legacy systems, including conflicts among the middle managers, who historically have been the assassins of progress.

For a modern company, the payoffs of continuous innovation are not only the breakthrough new products, services, internal systems, and commercial wins that it produces. Innovation also provides the opportunity to incubate a new culture, one that unleashes entrepreneurial creativity at every level of the organization.

At its core, the company is already experimental. If it weren’t, it never would have uncovered a whole hidden market and grown in just ten years to a valuation of $30 billion. So what more could startup thinking possibly bring to a company that very recently found huge success by disrupting an entire market?

“Hypergrowth for a company also requires hypergrowth of the people inside it.” Airbnb is just one example of a startup structure that allows for experimentation.

“Nobody wants to work at an old-fashioned company. Nobody wants to buy products from an old-fashioned company. And nobody wants to invest in an old-fashioned company.”

Over and over again, I see their incredible anxiety about the unpredictability of the world they live in. The most common concerns I hear: Globalization and the rise of new global competitors. “Software eating the world”1 and the way automation and IT seem to destroy the competitive “moats”2 companies have been able to set up around their products and services in the past. The increasing speed of technological change and consumer preference. The ridiculous number of new potential high-growth startups that are entering every industry—even if most of them eventually flame out.3

Increasingly, today’s managers are also under pressure to create more uncertainty themselves: by launching new, innovative products, seeking new sources of growth, or entering new markets.

It was considered completely obvious what a company would do if it had extra capacity: make more stuff and then sell it. “New products” meant mostly variations of what a company already made. “New growth” usually meant putting out more advertising to reach new audiences with existing products. The bases for competition were primarily price, quality, variety, and distribution. Barriers to entry were high, and if competitors did come on the scene, they entered and grew relatively slowly—by today’s standards.

Today, global communications means that new products can be conceived and built anywhere, and customers can discover them at an unprecedented pace. What’s more, individuals and small companies have unprecedented access to these new global systems, compared to a small number of owners of capital in the past.

Entire global supply chains can be borrowed at little more than the marginal cost of the underlying products they produce. This dramatically lowers the initial capital costs required to try something new.

In addition, the basis of competition is shifting. Today’s consumers have more choices and are more demanding. Technology trends reward businesses that have the broadest reach with near-monopoly-type power. The basis of competition is often design, brand, business model, or technology platform.

This is the context in which a modern company operates. Plenty of companies still make commodity products. But more often, they require new sources of growth that can come only from innovation. This has very real effects for what I call the management portfolio of a company.

Incremental improvements to existing products or new variations thereof are relatively predictable investments, as are process improvements to increase quality and margins.

After saving the company through emergency measures, Sloan undertook a several-years-long journey to find a new management principle that could prevent this kind of problem from recurring. Eventually he made a breakthrough discovery, which he called “the key to co-ordinated control of decentralized operations.”

The structure that Alfred Sloan pioneered became the basis for all of twentieth-century general management. You can’t run a multiproduct, multidivision, multinational company and its attendant global supply chains without it. It is one of the true revolutionary ideas of the past one hundred years and is still widely in use today. Everyone knows the drill: beat your forecast, your stock goes up, you get promoted.

You’ve probably started to sense the problem here: An older system of accountability, designed in a very different time and for a very different context, is still being used in situations where it doesn’t work.

The tension between those two slogans is a great starting point for understanding not only why startups have had such a hard time adopting traditional management methods, and vice versa—but also what connects them. There was a time when producing high-quality products on time, on budget, and at scale was one of the preeminent problems of the age. Understanding how to build quality into products from the inside out required mastering the new statistical science of variation, and then devising tools, methodologies, and training programs that could make doing so practical. Standardization, mass production, lean manufacturing, and Six Sigma are all fruits of this hard-won conceptual victory.

One of the reasons it’s hard to build new things at larger companies is because people don’t have the mental model of “My job is to actually learn new things.” A lot of the mental model is you get really good at doing something and then you are supposed to keep on doing that. Yes, there’s incremental learning, but it’s more about perfecting your craft as opposed to bootstrapping your craft. Even companies that seem to have launched one good product won’t easily know how to do it again.

You’d think that an innovative, hot startup like Dropbox, which was founded in 2007 and as of this writing has a $10 billion valuation, 500 million users, and roughly 1,500 employees worldwide,7 would easily avoid the problem of replicating an old-fashioned structure, right?

But it, too, has run into some of the problems we typically associate with traditional, more established companies. Why? Because over the course of its tremendous, and tremendously fast, growth, the company was built to a familiar blueprint. It lost some of the first principles of product thinking that made its initial success possible.

The reasons for these failures were familiar. Says Agarwal, “We did not get enough pertinent user feedback. We were building and building but not listening enough.”

“It was the most painful experience the company has gone through,” Agarwal says, “but also the most rewarding and important one. It taught us so many things about what we were doing wrong building new products. It’s important that you accept the pain and do all the postmortems and you learn from it. And that’s how you get better and stronger.”

“It’s a different discipline to launch brand-new products.” The awareness of the need to both protect and grow an existing product while also being able to experiment with new ones in this way is critical to success in the twenty-first century, and a hallmark of a modern company.

‘That’s great, but you don’t have time to do twelve things. You have time to do one thing well. You don’t have the resources to build all this extra stuff. You need to build what you actually need right now. You can make all these excuses about not having customers, but not having customers is like not having oxygen. You can’t survive.’

I’ve made billions of dollars of failures at Amazon.com. Literally. None of these things are fun, but they also don’t matter. What matters is that companies that don’t continue to experiment or embrace failure eventually get in the position where the only thing they can do is make a Hail Mary bet at the end of their corporate existence. I don’t believe in bet-the-company bets.

“There are many ways of thinking about this, but the reality is that Amazon is a collection of several businesses and initiatives,” Bezos said that year. “It’s kind of like we built this lemonade stand twenty years ago, and the lemonade stand has become very profitable over time, but we also decided to use our skills and the assets we’ve acquired to open a hamburger stand, a hot dog stand—we’re investing in new initiatives.”

Even in situations where you can’t forecast, you can still plan.

It’s that long-term vision—the understanding that the lemonade itself might end up not being a long-term bestseller, but instead some other bet might be— that allows the creation of a portfolio of experiments.

When I talk to leaders going through this transition, there is one concept I have found the most helpful: legacy.

Most of us have inherited the organization where we work from a prior generation of leaders. This is true in governments and global companies like GE, but it’s also true for almost anyone who is not the original founder of the organization where they work. So we have to ask ourselves: Do we want to leave behind an organization to the next generation of managers that is stronger than the one we inherited? What do we want our legacy to be?

The end goal of this process is to create a true synthesis: a new, modern way of thinking about organizations and leadership that can become the basis for twenty-first-century growth and innovation. In service to this goal, it would be crazy to throw away the hard-won managerial lessons of the past. It would be even crazier to allow ourselves to be trapped in rote conformance to past ideology in the face of change and disruption. Instead, it’s time to start building on them.

To someone who writes about lean processes, Toyota possesses near-mythical status, as that’s where lean principles were first employed at scale.

I hoped in The Lean Startup to show how lean ideas could be applied in a new domain—the entrepreneurial soil of extreme uncertainty—and find new relevance for a new generation of managers.

Toyota has become world-leading in its ability to mass-produce high-quality products on time, on budget, and with industry-leading cost. The company has had some very successful innovations, like the Prius hybrid drive technology, but at the time of my meeting, they had not had the same level of success incorporating digital platform–style innovations into their products. As consumer preferences and autonomous vehicle technology both evolve, this threatens to become a company-defining vulnerability.

When he finally broke his silence, he said something I will never forget: “This is the missing half of the Toyota Production System. We have a system that is outstanding at producing what we specify, with high quality, but we don’t have a corresponding system for discovering what to produce in the first place.”

Certainly the company had a method for discovering new ideas, but it was in need of improvement and integration with the company as a whole. To say I was honored by this comparison would be an understatement.

A modern company is one that has both halves, both systems. It has a capacity to produce products with great reliability and quality, but also to discover what new products to produce.

A modern company is one in which every employee has the opportunity to be an entrepreneur. It respects its employees and their ideas at a fundamental level.

A modern company is disciplined at the rigorous execution of its core business—without discipline, no innovation is possible—but it also employs a complementary set of entrepreneurial management tools for dealing with situations of extreme uncertainty.