Ctrl+A – Digital transformation, start-ups and business model [S02 E02]
Should big companies take start-ups as their source of inspiration?
Managers rarely take the time to examine their business model to find a way to generate more profit with the same number of customers.
When business is going well, managers generally tend to optimize their margins or costs and grow their market shares. It’s naturally a lot more rare for them to take time to rethink their business models and find ways to generate more profit from the same number of users.
It’s also particularly hard for an established business to move from developing an idea to putting it into effect, especially when the idea is disruptive to the company’s own business model by its very nature!
In this podcast, Edouard Reinach, a consultant in digital transformation strategy, shares his thoughts about the fundamental nature of start-ups, the aspects of start-ups that companies should try (or not try) to copy, and how to move from idea to action.
(In French only)
Would you rather read than listen? Here’s a transcript of the discussion:
Where should you find inspiration? Function before form
There are two ideas underlying the word “start-up”: form and function. When it comes to birds, for example, we can reproduce the function (of flying) without necessarily reproducing the form (of beating wings). Thus, we have planes, which are inspired by birds, but that function differently. The same thing should be applied to companies that aim to take their inspiration from start-ups.
A freelancer isn’t a start-up, and neither is a design firm.
A start-up has a very specific function: It’s a company looking for a business model with strong growth potential. As Marc Andreessen stated so clearly, “An awful lot of successful technology companies ended up being in a slightly different market than they started out in.”
Start-ups are therefore companies that by their very name concede their own high probability of fulfilling a tragic destiny—specifically death if they can’t find a viable business model. This destiny leads to an incredible operational bias: All their vital energy is mobilized in the search for optimal alignment between their value proposition, way of creating value and target market.
From this state flows certain inherent strengths that are particularly counterintuitive for an established business: speed, flexibility and a natural inclination to take risks and base decisions on highly partial and incomplete information. Anything that doesn’t kill the business necessarily makes it stronger. We even see the development of an organizational subculture at many start-ups whose purpose is to accelerate the fail fast and “return on error” process. The most high-functioning start-ups are those that most easily navigate through ambiguous situations and decisional incertitude.
In the stories about companies finding inspiration in start-ups, you first find examples of inspiration based on the form: open offices, horizontal hierarchies, #cool culture, business lingo, brand image, etc. While all this is more accessible and easier to borrow, the results, however, remain illusory, and some companies who have followed this path have paid dearly in terms of employee engagement and overall performance.
How to imitate function without form
First, you should take into account the current size of the business and its degree of technological maturity: size, first of all, since it’s related to the company’s momentum, and added to this is technological maturity because it’s absolutely necessary for taking advantage of economies of scale. The biggest companies will face issues with inertia, while smaller companies will have problems with resources.
Thus, big companies will be interested in decoupling the unit or project undertaking the transformation to suit its own pace, business objectives and usual evaluation systems, thereby ensuring the initiative has an essentially different nature than that of the holding company. In the same sense, we neither evaluate in the same way nor simultaneously train sprinters and ultra-marathon runners.
Small companies will gain more by using prototyping and testing phase methods, which are made possible by the simpler nature of their business model.
In both cases, being an established company represents a big advantage over start-ups in this world… given that the thinking and resulting actions can be undertaken relatively early! The famous disruption created by the arrival of start-ups in many industries isn’t so much a result of their speed as to the deep lack of self-questioning and business model evolution amongst established companies.
The human factor will also have a significant effect and, once again, it is possible to take constructive inspiration from the functionality of start-ups. While it’s sometimes necessary to go outside the business to find those oft-discussed “intrapreneurs” and ask them to lead an internal initiative, many textbook cases in the field have demonstrated that it’s even more important to create a structure around such individuals composed of people that are well-established at the company.
These intrapreneurs can then use their credibility and intuitive understanding of the teams within the organization to make efficient use of these resources, which have already proven their worth within the organization and therefore enjoy a higher degree of confidence on the part of upper management—this is important in a context that will be particularly ambiguous and uncertain, as already stated.
The use of these resources is the most paradoxical element of a radical strategy for evolution because these resources occupy their position precisely because of their ability to ensure the continuity and growth of the traditional business model.
This is the point at which the operational framework is also important. Asking people to act like entrepreneurs without the same risk and benefits structure is nonsensical, in my humble opinion. But the operational framework also requires a certain amount of guidance of resources in order to encourage them to change their behaviour related to their corporate traditions. At this stage, an exterior resource may be called upon to act as a leader within the organization, if necessary.
In any case, an excellent strategic posture to adopt is to consider the process as non-deterministic and to manage everything in a structured way through a cycle of hypothesis, preparation for measurement, experimentation and measurement assessment, and not according to a final result that is closed and already understood in advance.
To accomplish this, ambitious managers who’ve decided to launch themselves into this exploratory process have no other choice but to free up some time and change the contexts, tools and sites of reflection for the teams involved. They will also need to encourage some internal information gathering from various resources, such as product users or services, people handling customer relations or even line supervisors in manufacturing plants.
In the end, they’ll benefit from turning risk aversion into regret aversion, meaning they’ll encourage stakeholders to consider the long-term risks under the auspices of “If one-day things go badly, why? And what will we regret not having done?” as opposed to the more traditional “If one-day things go well, why? And how can we get there?”
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and on our website the series Ctrl+A | Digital Strategy Podcast.