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

by Eric Ries

So what was I doing there at GE in the summer of 2012? I’m not a corporate executive. My background is not in energy or health care or any of GE’s myriad industrial businesses. I am an entrepreneur.

GE Chairman and CEO Jeffrey Immelt and Vice Chair Beth Comstock had invited me to Crotonville, New York, that day because they were intrigued by an idea proposed in my first book, The Lean Startup: that the principles of entrepreneurial management could be applied in any industry, size of company, or sector of the economy. And they believed their company needed to start working according to those principles.

The goal was to set GE on a path for growth and adaptability, and for Immelt to leave a legacy that would allow t...

GE—like many successful companies—was looking to reinvigorate its culture with entrepreneurial energy so it could continue to grow. The startup I’d met with that afternoon was trying to figure out how to maintain its entrepreneurial culture as it grew up.

the ability to experiment rapidly with new products and new business models, the ability to empower their most creative people, and the ability to engage again and again in an innovation process—and manage it with rigor and accountability—so that they can unlock new sources of growth and productivity.

I made a claim that seemed radical at the time. I argued that a startup should be properly understood as “a human institution designed to create a new product or service under conditions of extreme uncertainty.”

I argued that entrepreneurs are everywhere—in small businesses, mammoth corporations, health care systems, and schools, even inside government agencies.

They are anywhere that people are doing the honorable and often unheralded labor of testing a novel idea, creating a better way to work, or serving new customers by extending a product or service into new markets.

“If you hate big companies so much, why are you trying to create a new one?”

What these founders wanted to know was: Could we use Lean Startup techniques to prevent our organizations from becoming lethargic and bureaucratic as they scaled? Thanks to the work I’d been doing with larger organizations, I could tell them the answer was yes.

Learning from the companies I have been working with, I began to evolve a new body of work about principles that apply beyond the “getting started” phase, particularly in established and even large-scale enterprises. It’s about how traditional management and what I call entrepreneurial management can work together. It’s about what startups need to do beyond Lean Startup—when they have the problems that come with rapid growth and scale. It’s about what an organizational transformation process should look like in order to move toward a leaner, more iterative way of working.

Visionary leaders across every kind of business are waking up to new possibilities, ones that blend the best of general management with the emerging discipline of entrepreneurial management.

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 require a distinct organizational structure to support them. 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 just as vital to their future success as marketing or finance. THE SECOND FOUNDING: Making this kind of profound change to an organization’s structure is like founding the company all over again, whether it’s five or a hundred years old. 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 transform, it can—and should—be prepared to do it many more times in the future.

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.

Scott Cook, co-founder of Intuit and now chairman of its executive committee, describes this change as one of perspective. It’s the difference between “playing Caesar” (deciding which projects live or die), and “playing the scientist” (being perpetually open to search and discovery). It will make your work more interesting and more effective.

Part One defines how “the startup” is a new atomic unit of work for highly uncertain terrain, and it lays out the conditions required to build a portfolio of startups within an organization.

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. We’ll explore how making the right accountability and process choices allows this new culture to thrive and grow.

We’ll examine how the internal functions of a corporation, including HR, legal, finance, IT, and procurement, can be transformed in order to facilitate rather than block innovation.

You might think an organization that measures its employees against strict quarterly deadlines, the way most companies currently do, would operate with a mindset that encourages rapid experimentation on an abbreviated schedule. But what actually happens is the opposite. Because of the short-term pressure, anything that can be done in one quarter has to be highly predictable in order to make future commitments based on its results.

I believe the new framework described in this book provides concrete guidance for how to move beyond this dilemma to a new, more sustainable system for creating long-term growth and flexibility.

“HYPERGROWTH FOR A COMPANY ALSO REQUIRES HYPERGROWTH OF THE PEOPLE INSIDE IT.”

In 2006, you probably never would have even thought of renting a stranger’s apartment instead of checking in at the Hilton. As of this writing, more than 100 million people have,1 thanks to Airbnb. 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?

Zadeh and Chesky realized that in order to come up with something completely new, they needed to give themselves the time and space to experiment—something they’d had when they launched the company, purely because of circumstance, but hadn’t been prioritizing as Airbnb grew.

It’s the philosophy behind being able to make bets that may or may not pay off, rather than to simply refine a current success, that I want to highlight here.

“Hypergrowth for a company also requires hypergrowth of the people inside it.”

“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.”

I think most business leaders recognize that the everyday challenges of executing their core business leave little time and energy for harnessing and testing new ideas.

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.

It’s important to see this as the change it is. For most of the twentieth century, growth in most industries was constrained by capacity. It was considered completely obvious what a company would do if it had extra capacity: make more stuff and then sell it.

Today, global communications means that new products can be conceived and built anywhere, and customers can discover them at an unprecedented pace.

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.

Incremental improvements to existing products or new variations thereof are relatively predictable investments, as are process improvements to increase quality and margins. The tools of traditional management—from forecasting to typical performance objectives—work fine in these situations. But for other parts of the management portfolio, where leaps of innovation are being attempted, the traditional management tools don’t fit. Most companies don’t have anything to replace them with—yet.

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. Miss it and watch out.

The startups I had always worked on and got to know in Silicon Valley couldn’t make accurate forecasts because they had no operating history at all. Because their product was unknown, their market was unknown—and in some cases, even the functionality of the technology itself was unknown—accurate forecasting was entirely impossible.

startups make forecasts, too—just not accurate ones.

Later in my career, I befriended more managers in traditional corporate jobs who were trying to drive innovation. The more corporate innovators I met, the more I heard about how much faith their bosses put in forecasts as a tool for holding people accountable—even senior managers who (I thought) surely would know better.

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. Sometimes, failure to hit the forecast means a team executed poorly. But sometimes it means the forecast itself was a fantasy. How can we tell the difference?

FAILURE IS NOT AN OPTION. Nobody in the startup world could have such a mug, I mused; it would be ridiculous. My experience is full of situations where reality proved too unpredictable to avoid failure.

I thought of the best, most successful entrepreneurs I know. What would their mug say? I settled on: I EAT FAILURE FOR BREAKFAST.

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.

Some companies, of course, are already working this way: They’re the ones who are most successful in today’s economy, and it’s because they know how to think long-term even as they’re acting rapidly and measuring results as they go.

Think of the Amazon Fire phone. Over the course of four years, the project went from an idea detailed in an aspirational mocked-up press release to almost universal disappointment after its launch in the summer of 2014. Initially priced at $199, the Fire soon cost only $0.99, and by the following winter, the company took a $170 million write-down based mostly on unsold phones.9 Where a more traditional company might have fired people and destroyed morale, Amazon used this opportunity to learn and reorganize.

“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.

For most leaders in established companies this requires new skills. This is true even of leaders who themselves are accomplished entrepreneurs, because it involves embracing a new role. It’s a surreal experience that involves unlearning habits and patterns that helped them earlier in their careers.

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?

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.

“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.” He explained that Toyota had become so advanced in its ability to efficiently produce existing products that it had lost something of its early innovative spirit. 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.

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.