Entrepreneur Eric Ries rose to prominence by teaching ¬startups how to adopt the best practices of big, global ¬companies. Today he’s also teaching huge companies how to behave more like the upstarts.
He began his entrepreneurial career while still a Yale undergrad, and his mixed track record at multiple companies stoked his curiosity about what ideas separated the winners from the losers. His exploration of that topic led Ries to embrace “lean management”—the concept, made famous by Toyota and other Japanese manufacturers, that any business process that isn’t focused on delivering value to the customer is, ultimately, a waste of resources.
In his 2011 book, The Lean Startup, Ries applied lean-management thinking to entrepreneurship. He urged founders to spend less time chasing funding and building epic-scale business plans, and more time soliciting feedback and harvesting data to make sure the product they were building met a real need that would drive customer demand. Ries also went a step further—arguing that big, bureaucratic companies needed to adopt similar approaches to evolve and sustain their own growth.
The Lean Startup became a business-school staple and a blockbuster—it has sold more than a million copies—and Ries has gone on to advise dozens of companies of all sizes. In a new book out this month, The Startup Way (Currency/Penguin Random House, $30), Ries draws on his experience to describe how Fortune 500 companies can adopt a culture of “entrepreneurial management.” In this edited excerpt, he recounts how he persuaded managers at General Electric (GE, -0.77%) , a 125-year-old, 300,000-employee behemoth, to embrace a different kind of thinking. —Matt Heimer
On a summer afternoon, a group of engineers and executives at one of America’s largest companies met in a classroom deep in the heart of their sprawling executive training facility to discuss their multi–$100 million, five-year plan for developing a new diesel and natural-gas engine. Their goal was to enter a new market space; excitement was running high. The engine, named Series X, had broad applications in many industries, from energy generation to locomotive power.
All of this was very clear to those assembled in the room. Except to one person, who had no prior knowledge of engines, energy, or industrial product production and was therefore reduced to asking a series of questions Dr. Seuss might have posed:
“What is this used for again? It’s in a boat? On a plane? By sea and by land? On a train?”
The executives and engineers alike were no doubt wondering, “Who is this guy?”
That guy was me. The company was GE, one of America’s oldest, most venerable organizations. 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.
But GE’s then–chairman and CEO Jeffrey Immelt and then–vice chair Beth Comstock had invited me to Crotonville, N.Y., that day because they were intrigued by an idea proposed in my first book: that the principles of entrepreneurial management could be applied to 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, to build a legacy that would allow the company to flourish long term.
My journey to that meeting was an unlikely—not to mention unexpected—one. Early in my career I trained as a software engineer, after which I became an entrepreneur. If you’ve ever pictured a stereotypical tech entrepreneur as a kid, laboring away in their parents’ basement—well, that was me. My first foray into entrepreneurship, during the dotcom bubble, was an abject failure. My first published writing, 1996’s scintillating The Black Art of Java Game Programming, is, last time I checked, available used on Amazon.com for 99¢. None of these projects seemed like harbingers of future years that would be spent advocating for a new system of management.
After I moved to Silicon Valley, though, I started to see patterns in what was driving both successes and failures. And, along the way, I started to formulate a model for how to make the practice of entrepreneurship more rigorous. Then I began writing about it, first online beginning in 2008, and then in a book, The Lean Startup, published in 2011.
In the book, 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.” This definition was purposefully general. It didn’t specify anything about the size of the organization, the form it took (company, nonprofit, or other), or the industry or sector of which it was a part. According to this broad definition, anyone—no matter the official job title—can be cast unexpectedly into the waters of entrepreneurship. 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.
That idea helps explain why, for the past five years, I’ve been living a double life. I’ve had plenty of days when I met with the leader of a mammoth, market-leading organization in the morning and then, in the afternoon, spent time with startups—from massive hypergrowth Silicon Valley success stories to tiny seed-stage hopefuls. The questions I’m asked are amazingly consistent:
How do I encourage the people who work for me to think more like entrepreneurs? How can I build new products for new markets without losing my existing customers? How can I create a culture that will balance the needs of existing business with new sources of growth?
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 entrepreneurial management can work together.
It is informed by case studies and wisdom from a variety of sources: iconic multinationals like GE and Toyota; established tech pioneers like Amazon, Intuit, and Facebook; the next generation of hypergrowth startups like Twilio, Dropbox, and Airbnb; and countless emerging startups you haven’t heard of—yet.
Working with them, I have seen that entrepreneurship has the potential to revitalize management thinking in the 21st century. This is no longer just the way people work in one industry. It’s the way people everywhere work—or want to work. I call it the Startup Way.
It was no accident that GE’s leaders had picked Series X as the first project to test. The thinking was that if we could get this huge, multiplatform engine project operating in a new way, there would be no limit to Lean Startup applications companywide, which aligned perfectly with the company’s desire to simplify its way of working across its many businesses.
Hours after my first meeting in Crotonville, I found myself in a business school–type classroom elsewhere in the building, along with engineers representing the businesses involved in the Series X engine development, the CEOs of each of those businesses, plus a small cross-functional group of top-level executives who had orchestrated my visit.
We had gathered to try to answer one of Jeff Immelt’s most persistent questions: “Why is it taking me five years to get a Series X engine?”
I kicked off the workshop by asking the Series X team to walk us through their five-year business plan. My role was to ask questions about what the team actually knew vs. what they had guessed. What do we know about how this product will work? Who are the customers, and how do we know they will want it? What aspects of the timeline are determined by the laws of physics, vs. GE’s internal processes?
The team proceeded to present the currently approved business case for the Series X, including a revenue forecast with graph bars going up and to the right with such velocity that the chart showed this as-yet-unbuilt engine making literally billions of dollars a year as far into the future as 30 years hence. Beth Comstock recalls: “It was like all the business plans we see, with a hockey stick that is going to grow to the moon in five years, and everything is going to be perfect.”
Things got more complicated, of course, as we dug deeper. But the biggest question looming over the room remained: Why does it take so long to build this engine?
I don’t want to undersell the technical challenges involved: The specifications required an audacious engineering effort that combined a difficult set of design parameters with the need for a new mass-production facility and global supply chain. A lot of brilliant people had done real, hard work to ensure that the plan was feasible and technically viable.
But a large part of the technical difficulty was driven by the specifications themselves. Remember that this product had to support multiple distinct uses in very different physical terrains (visualize how different the circumstances are at sea, in stationary drilling, on a train, for power generation, and in mobile fracking). The uses were based on a series of assumptions about the size of the market, competitors’ offerings, and the financial gains to be had by supporting many different customers at once.
These “requirements” had been gathered using traditional market-research techniques. But surveys and focus groups are not experiments. Customers don’t always know what they want, though they are often more than happy to tell you anyway. And just because we can serve multiple customer segments with the same product doesn’t mean we have to. If we could find a way to make the technical requirements easier, maybe we could find a way to shorten the cycle time.
There were also many questions about the plan’s commercial assumptions. One of the executives present, Steve Liguori, then GE’s executive director of global innovation and new models, recalls, “We had a whole list of these leap-of-faith assumptions around the marketplace and the customer. What percentage gains is the customer looking for? Are you going to sell it or lease it or rent it? Are you going to pay for distribution? We had about two dozen of these questions, and it turns out that when we asked the team how many they thought they could answer, it was only two of the 24.” Liguori recalls this as the “aha moment.” The company had been so focused on the technical risks—Can this product be built?—that it hadn’t focused on the marketing and sales-related risks—Should this product be built?
Since the best way to test market assumptions is to get something out to customers, I made what was, to the room, a really radical suggestion: an MVP diesel engine. The MVP, or “minimum viable product,” is a concept I explored in The Lean Startup. An MVP is a product with just enough features to satisfy early customers; producing one quickly, and making it available in a small, controlled way, can generate feedback that guides the next steps in a product’s development.
The Series X team was trying to design a piece of equipment that would work in multiple contexts. As a result, it was caught up in the budgeting and political constraints that accompany such a multifaceted project. What would happen if we decided to target only one use case at first and make the engineering problem easier?
The room went a little wild. The engineers said it couldn’t be done. Then one of them made a joke: “It’s not literally impossible, though. I mean, I could do it by going to our competitor, buying one of their engines, painting over the logo, and putting ours on.” Cue the nervous chuckles.
Of course, they never would have actually done this, but the joke led to a conversation about which of the five uses was the easiest to build. The marine application had to be waterproof. The mobile fracking application needed wheels. Ultimately, the team arrived at a stationary power generator as the simplest technical prospect. One of the engineers thought this could cut their cycle time from five years to two.
“Five years to two is a pretty good improvement,” I said. “But let’s keep going. In this new timeline, how long would it take to build that first engine?” This question seemed to once again cause some irritation in the room. The participants started to painstakingly explain to me the economics of mass production. It’s the same amount of work to set up a factory and supply chain, no matter how many engines you subsequently produce.
I apologized once again: “Forgive my ignorance, but I’m not asking about one line of engines. How long would it take you to produce just one single unit? You must have a testing process, right?” They did, and it required that the first working prototype be done and tested within the first year. When I asked if anyone in the room had a customer who might be interested in buying the first prototype, one of the VPs present suddenly said, “I’ve got someone who comes into my office every month asking for that. I’m pretty sure they’d buy it.”
Now the energy in the room was starting to shift. We’d gone from five years to one year for putting a real product into the hands of a real customer. But the team kept going. “You know, if you just want to sell one engine, to that one specific customer,” said one engineer, “we don’t even need to build anything new. We could modify one of our existing products.” Everyone in the room stared in disbelief. It turned out that there was an engine called the 616 that, with a few adjustments, would meet the specs for just the power generation use.
This new MVP was literally an order of magnitude faster than the original plan: from more than five years to fewer than six months. In the course of just a few hours—by asking a few deceptively simple questions—we had dramatically cut the project’s cycle time and found a way for this team to learn quickly. And, if they decided to pursue this course, we could potentially be on track to save the company millions of dollars. What if it turned out that that first customer didn’t want to buy the MVP? What if the lack of a service and support network was a deal killer? Wouldn’t you want to know that now rather than five years from now?
I’ll be honest: I was getting pretty excited. It seemed like a perfect ending.
Or was it? As the workshop wound to its conclusion, one of the executives in the back of the room couldn’t stand it anymore. “What is the point,” he asked, “of selling just one engine to one customer?” From his point of view, we had just gone from talking about a project potentially worth billions to one worth practically nothing. His objections continued: Even putting aside the futility of selling only one engine, targeting only one customer use effectively lowered the target market for this product by 80%. What would that do to the ROI profile of this investment?
I’ll never forget what happened next. “You’re right,” I said. “If we don’t need to learn anything, if you believe in this plan and its attendant forecast that we looked at a few minutes ago, then what I’m describing is a waste of time. Testing is a distraction from the real work of executing to plan.” I kid you not—this executive looked satisfied.
And that would have been the end of my time at GE, except for the fact that several of his peers objected. The executives themselves started to brainstorm all the things that could go wrong that might be revealed by this MVP: What if the customer’s requirements are different? What if the service and support needs are more difficult than we anticipate? What if the customer’s physical environment is more demanding? What if the customer doesn’t trust our brand in this new market segment?
When the conversation shifted from “What does this outsider think?” to “What do we, ourselves, think?” it was a whole new ball game.
Mark Little, who was then senior vice president and chief technology officer of GE Global Research, was the person the engineers in the room most looked up to, and whose skepticism—voiced quite clearly earlier in the day—had them most worried. He ended our workshop by saying something that stunned the room: “I get it now. I am the problem.” He truly understood that for the company to move faster, he, along with every other leader, had to adapt. The standard processes were holding back growth, and he, as a guardian of process, had to make a change.
“What was really important,” Little recalls, “was that the workshop changed the attitude of the team from one of being really scared about making a mistake to being engaged and thoughtful and willing to take a risk and try stuff, and it got the management team to think more about testing assumptions than creating failures. That was very liberating.”
The Series X team turned into one of the many pilot projects for the GE program we came to call FastWorks. The team got the test engine to market dramatically sooner and immediately got an order for five engines. During the time they would have been doing stealth R&D in the conventional process, waiting for what Mark Little calls “the big bang,” they were gaining market insights and earning revenue from their MVP.
I want to dwell on an important fact. During this workshop—and the months of coaching that followed—no one had to tell these engineers what to do. Not me, not Beth Comstock, not Mark Little, not even Jeff Immelt. Once presented with the right framework for rethinking their assumptions, the engineers came up with the new plan through their own analysis and their own insights. It became obvious to everyone in the room that this method had worked and that the team had arrived at an outcome that the company would not have been able to get to any other way.
The reason GE was able to tackle changes at this level, at this stage, was because the transformation was driven very early on by people completely dedicated to making it happen. I’ve told you this story because it’s one I saw firsthand. But it’s not only a story about GE. It’s about how dedicated founders are the engine that powers entrepreneurship within an organization. Every company has levers that make it run. All it takes to pull them is courage.
Adapted from The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth. Copyright © 2017 by Eric Ries. Published by Currency, an imprint of Penguin Random House LLC.
A version of this article appears in the Nov. 1, 2017 issue of Fortune with the headline “Teaching a Tech Giant to Think Like a Startup.”