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As leaders of established businesses focus on becoming digital, they often embrace the mantra, act like a startup. Indeed, research at MIT CISR suggests that acting like a startup is a smart approach to a digital transformation. But what, exactly, does it mean to act like a startup?
A startup is, in effect, an experiment. An entrepreneur conceives an idea that seems worth trying. The startup is a test of the idea. An early goal is to learn — as quickly and inexpensively as possible — if the idea has merit and then, if it does, develop it into a business.
A number of the trappings typically associated with startups are mostly unimportant to digital success — ping-pong tables, free food, flexible work spaces. What is important is the ability to learn whether and how a new value proposition will create revenues and profits. Four characteristics of a startup facilitate that learning: (1) a structure as a small, independent organization; (2) a mission-driven design; (3) an embrace of frequent pivots; and (4) an acceptance of delayed profitability. Established companies that want to test ideas — lots of ideas — for new value propositions need to figure out how to nurture these traits.
Create a Small, Independent Organization
I’ve observed how one large financial services institution demonstrated its commitment to becoming digital by establishing a separate, 5,000-person digital business unit to deliver data-enriched customer services. That’s not a startup — it’s a big strategic initiative! Not surprisingly, this experimental unit had trouble gaining traction because it was burdened with the processes and culture of the mother ship. It functioned as one business unit of a big, old company.
This mistake is understandable. Established companies regularly introduce strategic initiatives, like new product launches, mergers, market expansions, and organizational transformations. Those strategic initiatives enhance, extend, and tweak their existing value propositions for purposes of growing revenues, profits, and shareholder value. Ultimately, however, these strategic initiatives introduce incremental changes. They do not redefine the company’s value proposition; thus they do not require that an established company act like a startup.
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In contrast, Toyota Motor Co. created a small, internal startup called Toyota Connected North America (TCNA). Born in 2016, TCNA leads development of Toyota’s telematics and big data services, as well as the company’s Mobility Services Platform. TCNA is experimenting with enhanced product features — for example, an automobile that detects parking spots — as well as new business models such as car-sharing and ride-sharing opportunities.
By setting up TCNA as a startup with its own CEO and a small team of data scientists and software engineers, Toyota was facilitating experiments with new technologies and customer value propositions. Because these people were not burdened with the formal processes and metrics needed to sustain the success of Toyota’s established automobile manufacturing business, they could focus on the task at hand. They could learn what worked.
Many business leaders are reluctant to set up independent digital units because they worry that independent e-commerce initiatives may be difficult to integrate back into existing businesses. That misses the point. Yes, a company’s digital startups can and should take advantage of the organization’s unique products, services, and data. However, the startups are separate businesses. They link back to established operations through APIs, not seamless end-to-end processes. If the independent digital unit ends up integrated into the old business, it’s not a new business.
Have a Mission-Driven Design
A mission-driven organization focuses people on outcomes rather than fulfilling roles. A focus on mission leads naturally to empowering people to solve problems. Startups typically focus on mission because they have no established ways of working. They simply address problems and opportunities as they arise. Doing so accelerates learning and, ultimately, business success.
Zack Hicks, CEO of Toyota’s TCNA, told me that his teams can meet with potential customers on Monday and deliver code on Friday. That kind of activity excites both customers and employees. Perhaps even more important, it creates a sense of urgency that moves a company quickly to identify whether an idea has promise or not.
Because they work to fulfill a mission, not an established role, people in startups invariably embrace agile methodologies, iterating quickly to build on what’s working and abandon what isn’t. This can be a cultural challenge for traditional leadership: Despite the success of agile methodologies and iterative approaches in meeting customer needs, leaders in large organizations often worry that empowering teams will lead to chaos. These leaders tilt toward established, formalized structures and roles to mitigate that risk. In mitigating the risks, however, they also reduce responsiveness.
It’s true that there’s no template that describes how hundreds of agile, empowered teams work effectively to deliver high-level goals. But startups offer a basic model: They start with only a few teams and add new teams gradually, which allows them to learn where missions aren’t distinct enough or where interdependencies require special attention. Mission-driven startups like Spotify are constantly adapting their organizational design to balance the autonomy and alignment of teams. They aren’t discouraged when things go wrong. They simply address issues daily to meet desired outcomes.
Embrace Frequent Pivots
One important characteristic distinguishing startup projects from strategic initiatives is an expectation that the idea might not work. This is an appreciably different mindset. Established companies that pursue major strategic initiatives invariably make big investments of resources, making the initiative both high profile and high risk. Leaders end up loathe to abandon struggling initiatives, usually choosing instead to revamp and reinvest.
Startups simply pivot. Because the initial goal of the startup is to identify a viable value proposition, most leaders of startups will be quick to jump ship if an idea is headed nowhere. They are eager to explore for ideas that work and are not possessive of those that don’t.
Admirers tend to pay most of their attention to the successful innovations at digital companies. But failures play just as important a role in the success of digital businesses. Airbnb’s founders learned early on that the market for renting an air mattress on a stranger’s floor was limited. Instagram couldn’t sell a complicated app designed for checking in, hanging out, and sharing pictures with friends. Twitter started as a podcasting platform, Odeo, which quickly succumbed to competition from iTunes. Audi AG abandoned a “share [a car] with five friends” app — one of the many startups that have emerged from established companies but never gained traction.
Successful leaders aren’t afraid of failed ideas. But they don’t want to associate with them for long. They see what didn’t work and use that learning to target a new idea with a fresh chance at success.
Accept Delayed Profitability
Quarterly financial reviews have pushed established public companies to have little patience for delayed profitability. In contrast, the venture capitalists who fund startups recognize that the reason entrepreneurs need venture capital is because it takes time to convert a bold idea into profits.
Established companies need to act as venture capitalists for their startups. They can provide seed funding for their digital ideas and give people time to experiment, pivot, and establish markets. By funding startups rather than strategic initiatives, the investments can be small enough to allow time for profits to accumulate.
At Toyota, the investment in resources in Toyota Connected is still small — as are revenues and profits. But, like any other successful startup, TCNA is growing. It now has 200 people, and Toyota is introducing a new (small) sister startup, Toyota Connected Europe, to explore mobility solutions tailored to the European market. Although Toyota Connected does not represent a significant percentage of Toyota revenues, the company president, Ako Toyoda, touted these startups in his annual letter as leading the way to next-generation mobility.
Digital business is daunting specifically because a company’s prior success does not provide a recipe for future success. The company is embarking into uncharted waters. That’s not the mandate of a strategic initiative: It’s a job for a startup.
Established companies sometimes make the mistake of trying to have it both ways: They set up a company within a company to give a project speed, but they also try to leverage their competencies around scale. Do that too soon, though, and scale gets in the way and works against them, not for them.
Eventually, though, scale matters.
When it’s time to push out a successful concept, internal startups don’t have the resources to go big. Just like other startups, they’ll be unable and maybe even uninterested in scaling — they’d prefer to sell themselves to a bigger company. That’s when an established company’s startups will fully appreciate the benefits of a being part of a big company: Their parent can cash in on an institutional ability to formalize and optimize core business processes, and they can run with the project and bring it into their world.