It is undeniable that the world around us is changing. Technology and software have transformed business, and continue to do so in more and more dramatic ways. This process of change will continue and have far-reaching consequences. The average lifespan of companies is getting shorter. Forecasts show, among other things, that 70% of Midcap companies will lose their listing over the next ten years. Moreover, at a churn rate of 75%, it is predicted that the entire S&P 500 index will be replaced by 2027.
We have also seen the emergence of startups that quickly become billion dollar companies such as Microsoft, eBay, Google, Amazon, Facebook, Twitter, Dropbox, Uber and Airbnb. Driven by technology, these companies have transformed traditional industries and business models. In contrast, traditional long-standing companies appear to be struggling. It seems that being an already successful company can be the Achilles’ heel for innovation. There are several reasons for this:
1 – Corporates rely on previous success
Corporates often see the changes in the market but deny their relevance to the company. This denial is most intractable when the weather is good. In most successful large companies, the focus is on the high revenue – high profit cash cow products. If the company is currently making large profits from these products, then the hubris that comes with that success can create blind spots.
2 – Corporates avoid new developments
New products and services can have a negative impact on existing revenue streams. The management and shareholders disagree with this development and discourage innovation. Such a move can mean your own bankruptcy, as in the story of Kodak.
3 – Corporates must meet shareholders’ profit expectations
For publicly traded companies, the executives also feel the pressure to meet short-term profit expectations, while corporate innovation projects require a long-term investment.
Do corporates have to act like startups?
It is too simplistic to advise established companies to act like startups. After all, a startup is a temporary organisation with the aim of finding a sustainable and profitable business model, while a corporate is mainly concerned with running an already successful and profitable business.
Established companies are very good at optimising their processes so that their business model becomes an increasingly well-oiled machine. However, large organisations spend most of their time optimising their well-oiled machines, leaving hardly any time left to look for new opportunities to remain relevant in the future. If established companies want to innovate successfully, then they have to find a way to search while executing models business models at the same time.
Many corporates do say they are innovative, while they are actually setting up an innovation theatre. For example, they say that they develop Minimum Viable Products and work with the Business Model Canvas, but a corporate can only speak of success if new products and services are developed with sustainably profitable business models. To achieve this, large companies need to learn how to successfully apply the Lean Startup methodology. That is why I wrote this article.
What does a corporate need in order to innovate?
To innovate successfully, you first and foremost need top managers who are on your side. These top managers are well versed in company policy and can pave the way for innovation trajectories. A top manager can ask people for a favour and get things done. Together with a top manager you go through three different phases:
Problem-solution fit: are we doing the right things? Either we first have to demonstrate that our idea solves a relevant problem and that the solution is relevant to the intended target group.
Product-market fit: is our proposition really going to be sold? Or we will first have to demonstrate that we can serve our target group satisfactorily.
Scaling: is our business model sufficiently scalable? Or will we succeed in convincing not only the first customers, but also the mass market, of our product?
A tip is to accommodate your innovation team at a location outside the head office, such as in an incubator. Ideally, this would be under the supervision of a Lean Startup facilitator.
Why do corporates tend to develop products too quickly?
Many corporates are familiar with the above Build-Measure-Learn cycle from the book The Lean Startup by Eric Ries. Most innovation managers expect that a prototype is needed to validate the business model. As a result, they will develop a prototype at an early stage, while the market need has not been sufficiently identified.
But Eric Ries did not mean by the Build phase that it is about building prototypes. It’s about companies coming to new insights about customer needs in the most effective and efficient way. With every innovation, this can be done by conducting interviews with potential customers.
Interviews help you to find a relevant problem of the potential customer. You find the problem by asking the target group about past behaviour. In this way, you learn what the potential client thinks, what causes his behaviour and why he has a specific problem. You also learn how to solve the problem. This ensures that based on these insights you can come up with a solution that fits in very well with the wishes of the target group.
When you have sufficient knowledge about the target group, you can start thinking of a solution. Is your target group enthusiastic about your solution? Then you can ask money for it. And no, you don’t need to have built a product for this yet. Because you know what is going on in the head of the potential client through the interviews, you can hold a pitch that perfectly matches the needs of the target group. As a result, potential customers are prepared to declare their intention to buy, even before the product has been developed.
How can you sell a product without developing a product?
At Millstone, we sell products before the real development starts. We do this by pitching the solution to the target group and then having a letter of intent signed. Let a sales pitch consist of these four parts:
The problem: Make it clear which problem you have found. Explain how much money and time the problem wastes.
The promise: Show what the specific promise you make to your target group is. In this you make clear what is the difference with existing solutions. Make sure that the promise is never about technical matters, but only about the advantages that your technique provides. You do this to avoid the discussion about technical feasibility.
The solution: Explain exactly what your solution is. Tell how your solution is better, faster or cheaper than what they already have. Only talk about the practical added value of the solution.
The price: People experience paying a price as a physical pain. Therefore, make it clear that your solution is a greater pain reliever. Your product should be worth more than the price they pay.
Is the potential customer satisfied with your pitch? Then always have him sign the letter of intent. A letter of intent is about one-pager containing the following components:
- Party A provides solution X to solve problem Y of party B.
- Solution X consists of functionality 1, 2, and 3.
- When solution X is delivered, party B pays amount X.
- Solution X is delivered by party A within a period of X number of months.
If the potential customer does not want to sign the letter of intent, the problem to be solved may not be big enough. It may also be that the price is too high. Therefore, it is important to ask why the customer does not want to sign the letter of intent. In this way, you discover what to do.
Has your potential client signed the letter of intent? Then put his details including e-mail address in a CRM system. This gives you an overview of all your customers. Moreover, you can regularly send them an e-mail with updates about your solution. A CRM system with e-mail automation doesn’t have to be expensive. It’s free at HubSpot.
Which target group should a corporate focus on first?
In order to find a scalable and sustainable business model, it is important to focus on a hyper-specific problem for a hyper-specific target group. Only at a later stage, when the business model has been validated, can you start thinking about entering a broader market. This will ensure that you have the scaling up under control. To map out this adoption process, many corporates use the Rogers model below.
In the model above, there is a large gap (‘The Chasm’) between the Early Adopters and Early Majority. The cause of the gap is that Innovators and Early Adopters are not the right target group to scale up. These people want innovation because it is fancy and new, and not because it solves an actual problem for them. When the products are no longer “cool”, you immediately lose your first customers.
It is difficult to attract a product to the wider target group when it does not have the pragmatic added value. For this reason, Innovators and Early Adopters are not the target group you should be looking for as a corporate. Instead, you look for the earlyvangelist. These people meets the following characteristics:
- has a problem;
- is aware of having the problem;
- has already actively looking for a solution;
- has put together a solution out of piece parts;
- has or can acquire a budget.
If you manage to get letters of intent signed by your earlyvangelist, you can put your solution on a landing page. By advertising online, for example, you can scale up the sales of the solution. Dropbox did this, for example, with a video on their landing page. As a result, they have grown enormously in a short period of time, without having to build a product.
Letters of intent can be used to show colleagues the success of your innovation project. In this way, you build more ambassadors who support your project and there may be more parties willing to invest money when needed. In addition to scaling up your solution by putting a landing page online, you can also build a pretotype to validate buying intentions.
What is a pretotype?
The term pretotyping was coined by Alberto Savoia in 2009 when he worked as Engineering Director & Innovation Agitator at Google. Pretotyping also stands for “fake it and test it before you make it”. With pretotyping, you use smart techniques to test your idea cheaply with your target group. Through pretotyping you quickly learn what the market is waiting for and you do not build a product or service that nobody wants to buy.
Standard prototypes are elaborate ideas that are very similar to the end product and often involve high development costs. This is in contrast to pretotypes where the development costs are minimal. With a pretotype you have a less elaborate idea, while at the same time the user experience remains high. With a pretotype, you can quickly identify the customer’s needs by experimenting.
To better understand a pretotype, here is an example. Imagine: McDonalds wants to market McSpaghetti and will spend millions of euros on making the best spaghetti with the best recipe. They invest a lot of money and time in making the perfect pasta. Eventually, they will sell it in their restaurants and nobody seems interested. The invested time, money and energy are lost.
With pretotyping McDonalds was able to prevent this. Do people want to buy McSpaghetti from the McDonalds? You don’t know that in advance, so don’t invest money and time in coming up with the perfect pasta. Instead, you can offer McSpaghetti at the McDonalds in the menu (both in the restaurant and on the mobile application) and see if people buy it. If someone decides to buy it, you can indicate that it is currently unavailable and offer a free burger as an apology. With this, you have validated that there is demand for the McSpaghetti in a simple, quick and cheap way.
The trick of the McSpaghetti is called the Fake Door technique. With this technique you discover whether potential customers want to buy a new product, while it is actually not yet available. On the internet, there are several techniques of pretotyping that you can use to validate your solution.
What are good tools for innovation projects?
A common mistake that corporates make is to start with the Business Model Canvas to capture their innovations. This canvas is a great tool when you have an existing business, but not suitable for innovation projects where many parts are still uncertain. For example, what use are partners if you don’t even know what problem you are solving for the potential customer? That is why Ash Maurya designed the Lean Canvas.
As you can see, the Lean Canvas above focuses on different questions than the Business Model Canvas. The Lean Canvas asks you to think about the problem you want to solve with your product. The physical product mainly disappears into the background: the problem that exists among the target group is the guiding principle. The very first step is to understand the Problem of the Customer Segments. Once you have validated these parts through interviews, you will start looking at your Value Proposition and Solution.
After conducting interviews and pitching your solution, certain assumptions may not be true. Then don’t grieve but make a pivot. The term pivot comes from basketball and means dribbling with one foot on the ground. A metaphor for redefining the course. If you have proved that one or more hypotheses does/do not work, a pivot can be chosen to adjust based on the newly acquired knowledge. The hypotheses are adjusted. These can then be tested again.
A corporate can, for example, use the validation board to make strategic pivots and set the course for innovation projects. The validation tool helps you to test your idea easily and quickly so that you do not have to waste time or money. This video explains exactly how to use the validation board.
When can I scale up my innovation project?
If you have signed the first letters of intent, corporates generally have a larger budget available to roll out business models. This is an advantage when the money is injected at the right time, but a disaster when it happens too early to scale up. Many innovation projects fail because of premature scaling. There are four different factors that we always take into account when scaling up innovation projects:
Team – First of all you need to have a sufficient number of suitable people in your team when scaling up. These people must have the qualities to run the business model. It is important that your team is able to hold its ground in the event of setbacks. Many of your ideas will fail. The team needs to learn from such experiences without giving up.
Traction – The market size must be large enough and, more importantly, the market demand must be sufficiently established when you start scaling up the product. Traction at an early stage is an important indication that your product is going to be successful. You can agree that certain ratios must be achieved. For example, that 20% of a part of the target group must be prepared to pay before you launch the product.
Technique – Technical feasibility is also a good indicator that determines whether you need to scale up. The team must be able to build the product within a short period of time. If your product gets a lot of users in a short period of time, then the technology must be able to handle this.
IP – Finally, it is important to record intellectual property (IP). You have to be able to protect the product, otherwise, the competitor will run away with it. If the product cannot be legally recorded, vendor lock-ins must be looked into in order to retain users for as long as possible.
Ultimately, the aim of any innovation project is to integrate a validated business model into the current organisation, become a stand-alone entity, or be sold. Reporting and regularly pitching the progress to the top management is of great importance for support within the organisation. This facilitates the process when the product is actually ready to be scaled up.
In every company, you have people talking about the need for innovation. In this article, I have also been guilty of this. Nevertheless, I wrote this article because I became convinced that corporates, in particular, are very capable of benefiting from the Lean Startup movement. It is often assumed that startups have the future when it comes to developing groundbreaking products and services. But that is not as obvious as most people claim. Try to get support from the top management and start interviewing potential clients. Find out where the main pain points of your target group lie, pitch your solution, and have letters of intent signed. This way you will create successful innovations within your organisation!