Lean innovation management: Making corporate innovation work

I’ve been working with large companies and the U.S. government to help them innovate faster– not just kind of fast, but 10x the number of initiatives in 1/5 the time. A 50x speedup kind of fast. Here’s how.

Lean Innovation Management

In the last five years “Lean Startup” methodologies have enabled entrepreneurs to efficiently build a startup by searching for product/market fit rather than blindly trying to execute. Companies pursuing innovation can Buy, Build, Partner or use Open Innovation. But trying to find a unified theory of innovation that allows established companies to innovate internally with the speed and urgency of startups has eluded our grasp.

The first time a few brave corporate innovators tried to overlay the Lean tools and techniques that work in early-stage startups onto an existing corporation, the result was chaos, confusion, frustration, and ultimately failure. They ended up with “Innovation Theater” – great projects, wonderful press releases about how innovative the company is, but no real substantive change in product trajectory.

In working with Greg Hannon, the head of innovation at W.L. Gore, I’ve found two corporate strategy tools developed by other smart people helpful in bridging lean startups and corporate innovation. The first, the notion of the “ambidextrous organization” from O’Reilly and Tushman, posits that companies that want to do continuous innovation need to execute their core business model while innovating in parallel. In other words, in an ambidextrous company you need to be able to “chew gum and walk at the same time.”

The second big idea of corporate innovation is the “Three Horizons of Innovation” from Baghai, Coley, and White. They suggest that a company allocate its innovations across three categories called “Horizons.”

* Horizon 1 are mature businesses.
* Horizon 2 are rapidly growing businesses.
* Horizon 3 are emerging businesses.

Each horizon requires different focus, different management, different tools, and different goals.

The Three Horizons provided an incredibly useful taxonomy. However, in practice most companies treat the Three Horizons like they are simply incremental execution of the same business model.

While these theories explain how to think about innovation in a company, they don’t tell you how to make it happen.

Fast forward to today. To move innovation faster, we now have 21st century tools — Business Model Canvas, Customer Development, Agile Engineering – all adding up to a lean startup. We can adapt these startup tools for use inside the corporation.

To do so, we’ll keep the concept of three unique horizons of innovation but reframe and combine them with what we’ve learned about lean startups. The result will be:

* a new, lean version of the Three Horizons of innovation
* an ambidextrous company, and
* a way for existing organizations to build and test new ideas at blinding speed.

The Lean Definition of the Three Horizons of Innovation

In this new model, the Horizon level of innovation is defined by whether the business model is being executed or searched for.

* Horizon 1 activities support existing business models.
* Horizon 2 is focused on extending existing businesses with partially known business models
* Horizon 3 is focused on unknown business models.

Horizon 1 is the company’s core business. Here the company executes a known business model (known customers, product features, competitors, pricing, distribution channel, supply chain, etc.) It uses existing capabilities and has low risk in getting the next product out the door. Management in this Horizon 1 works by building repeatable and scalable processes, procedures, incentives, and KPIs to execute and measure the business model. (And if they’re smart, they’ll teach Horizon 1 teams to operate with mission and intent, not just process and procedure.)

Innovation and improvement occurs in Horizon 1 on process, procedures, costs, etc. Product management for Horizon 1 uses existing product management tools such as StageGate or the equivalent.

Above: Use traditional methodologies for Horizon 1 projects.

In Horizon 2 a company extends its core business. Here the company looks for new opportunities in its existing business model (trying a different distribution channel, using the same technology with new customers, or selling existing customers new products, etc.). Horizon 2 uses mostly existing capabilities and has moderate risk in getting new capabilities to get the product out the door. Management in Horizon 2 works by pattern recognition and experimentation inside the current business model.

Horizon 3 is where companies put their crazy entrepreneurs. (Inside of companies, these are the mavericks you want to fire for not getting with the program. In a startup, they’d be the founding CEO.) These innovators want to create new and potentially disruptive business models. Here the company is essentially incubating a startup. They operate with speed and urgency to find a repeatable and scalable business model. Horizon 3 groups need to be physically separate from operating divisions (in a corporate incubator, or their own facility.) And they need their own plans, procedures, policies, incentives, and KPI’s different from those in Horizon 1.

Product management for Horizon 2 and 3 uses existing Lean Innovation Management tools such as Lean LaunchPad, the NSF I-Corps, or the equivalent.

Using these tools internally, a company can get startup speed and urgency. Horizon 3 organizations organized as small (<5 person) teams can talk to 100+ customers in 10 weeks and deliver a series of iterative and incremental minimal viable products. Given the minimum size of these teams and expenditures, companies can afford to run a large number of these initiatives in parallel.

Get to Yes

Horizon 2 and 3 activities are not entirely separated from the corporate structure.

To help Horizon 2 and 3 organizations navigate all the processes, procedures, and metrics the company has built to support Horizon 1 activities, individuals from support organizations (legal, finance, procurement, etc.) are assigned to work inside Horizon 3 organizations. Their function is to help Horizon 2 and 3 organizations navigate to a “Yes” inside the company.

Horizon 1 operates on goals and incentives. And Horizon 1 managers need to be incented to embrace and support innovation going on in Horizons 2 and 3. Companies need their Horizon 1 managers to encourage mavericks to propose projects, as well as to support mavericks and then incentivize them for adoption and scale of Horizon 3 projects.

If supporting Horizon 2/3 is not part of Horizon 1 goals and incentives, then there is no real commitment to corporate innovation.

Oh no! Yes! We’ve Succeeded

What happens to successful innovations from Horizons 2 and 3? They either get adopted by a Horizon 1 organization (a division, P&L, functional organization), they reach a size large enough to become a standalone group, or they can be sold/spun out. To make this work, Horizon 1 execs and managers need incentives and job descriptions to support Horizon 2 and 3 activities.

One of the biggest complaints from Horizon 1 managers is that successful Horizon 3 innovation projects leave a mess of technical and organization debt that a Horizon 1 organization has to clean up.

This isn’t some exception; in fact it’s a natural part of corporate innovation.

What is missing is the realization that there needs to be a dedicated corporate group to refactor (cleanup) the debt from successful innovation projects.

Do it Again!?

When a Horizon 2 or 3 program finds success, it can either grow on its own (and hence become its own division) or the founders and early employees may get folded back into a Horizon 1 organization that will scale the program. Typically this is a bad idea for all involved. In short-sighted companies, the Horizon 2 and 3 innovators get frustrated and leave. In far-sighted companies, they get to start a new cycle of disruptive innovation.

Lean Is the Language of Corporate Innovation

We have a common language and process for execution — product management tools, financial reporting, etc. Yet we have no common language and process for innovation and searching for business models.

We can adopt the Lean vocabulary — Business Model Canvas, Customer Development, Hypotheses, Pivots, Minimum Viable Products, and Evidence-based entrepreneurship as the corporate language of “search versus execution.” And we can use Lean metrics (Investment Readiness Level and Technology Readiness Levels) and Lean portfolio management tools to provide rigor to go/no go funding decisions. Finally, we can use the open-source lean classes from the National Science Foundation I-Corps and the Stanford/Berkeley Lean LaunchPad classes to run Horizon 3 projects.

Lean is The Engine for the Ambidextrous Organization

An ambidextrous company runs large numbers of Horizon 2 and 3 projects simultaneously while relentlessly improving the way it executes its current business model and serves its existing customers. This happens when the C-level executives share a common strategic intent, a common vision, explicit values, and identity, and they are compensated for both execution of the current business model and the search for new ones. They also realize that operating at all three horizons will require them to tolerate and resolve conflicts.

Lessons Learned

* Corporate Innovation needs Lean tools
* When combined with the business model canvas, the Three Horizons of innovation provide a framework for corporate innovation
* Horizon 2 and 3 (new/disruptive innovation) are run with lean startup speed and organization
* Lean innovation management combines Three Horizons of innovation with the lean startup to deliver an ambidextrous organization
* The entire organization must be incented to value and embrace not only continuous improvement but also successful innovations
* Result: 10x the number of initiatives in 1/5 the time.

Steve Blank is a retired serial entrepreneur-turned-educator who has changed how startups are built and how entrepreneurship is taught. He created the Customer Development methodology that launched the lean startup movement, and wrote about the process in his first book, The Four Steps to the Epiphany. His second book, The Startup Owner’s Manual, is a step-by-step guide to building a successful company. Blank teaches the Customer Development methodology in his Lean LaunchPad classes at Stanford University, U.C. Berkeley, Columbia University, UCSF, NYU, the National Science Foundation and the I-Corps @NIH. He writes regularly about entrepreneurship at www.steveblank.com.