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

by Eric Ries

THE PIVOT TO OBLIVION Sometimes, one pivot leads to another pivot, and then another, until the team runs out of pivots and realizes that their vision, great as it might have seemed, cannot find successful footing.

“We are a technology company. Our approach has been to focus on how to do things, to look at technical challenges. Everybody is happy to work on that.”

Would customers like this new product enough to pay for it?

“exchange of value was mainly about information—to share and collect information about the process with the different customers.”

It was a mix of feelings. On one side, the team was sad because an exciting, potentially great product turned out to be not as great as it initially seemed. On the other side, they were happy and proud to have discovered that much earlier and more cheaply than they would have after developing it. They recognized that they had saved the company’s money and people’s time, which have since been invested in more profitable activities.

In the Lean Startup methodology, one of the most important things a leader has to do is ask questions of the people doing the build-measure-learn work. The most important questions for the leaders to ask are: What did you learn? How do you know?

One of the hardest assumptions to dispel is the idea that the leader is the supreme expert: The leader makes the plan, and subordinates execute it. When there is uncertainty, the leader provides definitive answers. And if any subordinate fails to deliver, the leader metes out appropriate punishment—because failure to execute the plan is a sign of incompetence. By now I hope you see how many situations in the modern world defy this older paradigm. Many failures are caused not by incompetent execution but by reality failing to live up to the assumptions built into the plan.

Therefore, part of the new leadership paradigm is changing this older paradigm to a learning orientation. Scott Cook calls it “setting the grand challenge” and creating the platforms for experimentation that teams need to get the answers for themselves.

Surely, then, the blame lies with the product managers? When asked, they, too, vigorously deny responsibility. “We’re simply responding to what the customer wants!” How could consumers want extra buttons that they don’t push? I can’t remember the last time I heard someone bemoaning the fact that a user interface was “too simple—if only it had more buttons!”

It turns out that when the product managers told me the customers wanted more buttons, they weren’t actually talking about the consumer, because the consumer is not their customer. “The customer is the category buyer at the big-box retail stores where we sell most of our appliances,” they explained. “Our sales team spends extensive time with the customer to find out what they want us to build.”

On the other side of the divide, Silicon Valley startups have a problem that is caused by their own successes: scale. No startup wants to structure itself, as it grows, along the lines of a gigantic company with functions so siloed that they don’t even come into contact with one another. Yet that’s often what happens when startups get too large to be managed as a single team. The systems that work so well for small companies don’t translate into the larger ecosystem that a growing company needs, so the company eventually stalls.

Entrepreneurial management is a leadership framework designed specifically for twenty-first-century uncertainty. It’s not a replacement for traditional management. It’s a discipline designed to help leaders become as rigorous in the entrepreneurial part of their management portfolio as they are in the general management part.

Just because innovation is decentralized and unpredictable doesn’t mean it can’t be managed. It just requires different tools and different safeguards than the ones we’re accustomed to seeing in traditional management settings. The power of the Startup Way lies in the fact that it combines the strengths of two different ways of working.

The foundation of the Startup Way is made up of these same elements, beginning with ACCOUNTABILITY: the systems, rewards, and incentives that drive employees’ behavior and focus their attention. What are people compensated for, promoted for, celebrated for, or fired for in the organization? What performance objectives really matter for employees’ careers at the end of the day? Accountability systems must be aligned with the goals—both long- and short-term—that the company wants to achieve.

PROCESS concerns the tools and tactics that employees habitually use every day to get work done, such as project planning, management, team coordination, and collaboration. Process flows out of accountability, because every company’s accountability systems constrain its choices. Most teams, given the right incentives (or, more specifically, the absence of harmful incentives), can self-organize around new tools and tactics. If, for example, an accountability system punishes any kind of failure, it’s going to be impossible to implement processes for rapid experimentation and iteration (which always involve a whole lot of failing).

Over time, these habits and ways of working congeal into CULTURE: the shared, often unstated, beliefs that determine what employees believe to be possible, because “that’s just the way things are around here.” Culture is the institutional muscle memory, based not on how the organization aspires to operate but on how it really has in the past. You cannot change culture by simply putting up posters that exhort employees to “Be more innovative!” or “Think outside the box!” Not even Facebook’s famous “Move fast and break things!” spray-painted on your w...

Every culture attracts certain kinds of PEOPLE: the ultimate corporate resource. A toxic or old-fashioned culture repels innovative talent. Ultimately, the success of any organization depends on the caliber of the people it is able to attract and retain. Think back to Jeff Immelt’s dramatic statement from Chapter 1 about how no company wants to be perceived as “old-fashioned,” since that label makes it harder to hire great people. Or the sto...

To incubate a new culture requires individual teams to self-organize. New cultures come from the lived experience of seeing a new way succeed. These teams can become the seeds of ...

Even within a single organization, entrepreneurial principles and general management principles share common foundations—especially the importance of long-term thinking—and common values—a need for rigor and discipline in execution.

Even as the tools of entrepreneurial management are used throughout the organization for projects that require innovation or that operate in contexts of uncertainty, entrepreneurship also needs its own dedicated home within the organization. Once we acknowledge that entrepreneurship requires a specialized set of skills and its own distinctive best practices, we can give it its own home in the org chart, as a peer function to engineering, marketing, sales, IT, HR, finance, etc.

the entrepreneurial function changes how other functions operate by introducing entrepreneurial techniques into purely internal projects and processes. It even offers the possibility of incubating whole new company divisions and functions,

“Wait a minute,” you might say. “If this requires changing the org chart, the other functions, the culture of the company, who we hire and promote—that sounds very difficult.” That’s right, it is. I don’t want to sugarcoat this. It requires building a new kind of organization in response to a new blueprint, and doing so is especially hard because everyone involved has muscle memory and habits formed in the old order.4 But I believe the benefits are worth the pain.

THE OUTCOMES OF TRANSFORMATION

1. It provides many more opportunities for leadership

2. It helps keep innovative people in the company instead of incentivizing them to leave

When talented people leave to form their own company, this is—on average—a good thing for the overall economy.5 But to their former company, it’s a loss.

3. It reduces wasted time and energy

The Startup Way focuses management effort on figuring out the right things to build in the first place.

4. It’s a much better way to kill projects

Middle managers are forced to act like executioners—when they do have to kill a project, it’s usually quite painful.

Taking responsibility for that failure is harder in the short term, but failing with honor is a skill.9 And it takes advantage of the most important lesson of the scientific method: If you can’t fail, you can’t learn. Experimenting rapidly, teams learn for themselves what’s important, and the lessons teams learn—about customers, about the market, about themselves—are much more profound than they would be otherwise.

5. The ability to solve heterogeneous problems with speed and agility

There are certain problems that, when they arise, require the whole organization to reinvent itself to solve them, like a massive product recall or some other highly visible crisis.

Today’s management system struggles to bring attention and resources to bear in these situations. A more entrepreneurial approach offers a better answer: Put a startup on it. Run an experiment. Measure the results. Scale it up—maybe even bring it to the attention of senior leadership—if and when the results merit this treatment.

By the time the organization needs to have a strategy conversation about whether to double down on the new idea, it can have a rational discussion—complete with actual customer data.

Every day there is a team of operators who are cross-trained with the equipment. No one specializes so each person can work on a variety of experiments, depending on the requests and clients. Requests come through an online system through a server, data is generated and put back on the server, and investigators can look at it and move on to the next step. This system allows the industry, and particularly the data, to grow exponentially. Every time a problem is solved, it’s solved in code and exists for the next generation. It doesn’t need to be redone every time a new lab is set up.

6….Profit?

By addressing uncertainty and helping companies build more new products, the Startup Way of working allows managers to be more adaptive and agile in the marketplace.

Either way, this knowledge is immensely valuable: either to pursue a new business opportunity or to give the people working on the product true certainty that their work matters to customers. The point is that in the grand scheme of things, this is a problem too small to rise to the level of the CEO or senior leaders. In order to solve it, the ability to experiment and pivot and learn has to be embedded in the fabric of a company. It has to be available to every employee. And yet, to most managers I meet, this new way of working sounds like science fiction. We take the wastes of our current paradigm for granted. If we are going to change, how on earth do we get from here to there?

When people tell me they don’t think these methods will work in their organizations, I like to tell them the story of HealthCare.gov. I mean, sure, your organization may be political and bureaucratic. But compared to the Department of Health and Human Services (roughly 80,000 employees and counting1)? The political maelstrom of Obamacare? Is your situation really more challenging than that?

In October of 2013 Mikey Dickerson, a site reliability engineer at Google, made a phone call that changed not only his life but the lives of millions of Americans. He had worked on President Barack Obama’s 2012 reelection campaign and had been watching in horror the recent news about HealthCare.gov, the technological centerpiece of the Affordable Care Act, which the Obama administration had launched on October 1. The online marketplace, built at a cost of $800 million over three years by a collection of fifty-five different contractors,2 had immediately crashed. At the end of its first day, only six people had managed to sign up for insurance. By the end of the second day, the number was up—to an equally unimpressive 248.3

RULE 1: The war room and the meetings are for solving problems. There are plenty of other venues where people can devote their creative energies to shifting blame.

RULE 2: The ones who should be doing the talking are the people who know the most about an issue, not the ones with the highest rank. If anyone finds themselves sitting passively while managers and executives talk over them with less accurate information, we have gone off the rails, and I would like to know about it.

RULE 3: We need to stay focused on the most urgent issues, like things that will hurt u...

Part Two tackles the real and difficult details of how to move an organization to a more effective, entrepreneurial way of working, and it answers three fundamental questions:

What, exactly, are the systems and structures we need to implement?

How, exactly, do we convince managers and employees alike to try something different than what they’ve known their whole careers? (Remember, even in a hypergrowth startup, most employees...

When, exactly, is a company ready to make this trans...

Part Two is structured around three common phases of transformations I’ve observed.

Phase One is about laying the foundation through experimentation, adaptation, and translation. It is about preparing for the moment when decisive change becomes possible by building a critical mass of success stories and demonstrating that the new way of working is not only viable but preferable. In the government, a committed group of technologists was already in place, making this first phase work, collecting data, and preparing for a bigger role.