Date posted: 1/12/2016 6 min read

Leadership lessons from successful start-ups

Why large companies are looking towards their smaller compatriots for inspiration.

In brief

  • Good leadership is the key to retaining the best elements of entrepreneurialism.
  • The real insights into a company’s future starts with the customer.
  • A large organisation’s reluctance to take risks and experiment kills innovation.

By Leo D’Angelo Fisher

It has long been conventional wisdom that entrepreneurs should look to the leading companies of the day to learn valuable management lessons and techniques.

The reasoning goes something like this: entrepreneurs may be great motivators, innovators and lateral thinkers, but when it comes to leadership, staying the course and managing complexity, the big end of town has all the plays down pat. But something is changing. Increasingly it’s the big companies that are looking to their smaller, entrepreneurial counterparts for lessons on how to navigate a barely recognisable competitive landscape.

Rapidly advancing technology, changing consumer behaviours, whole industries in a state of flux and a global economy still adjusting to the tectonic shifts of the global financial crisis have inevitably made an impact on business models, strategic frameworks and, crucially, management styles. Smart CEOs know that the ability to motivate, innovate and think outside the square has never been more important.

And, more often than not, many of the lessons for success in this strange new world lie not in the executive suites of our biggest companies, but in the funky, open-plan offices of entrepreneurial start-ups.

Public stoush

Perhaps the starkest example of this phenomenon is the ongoing “feud” played out in the Australia’s business media between retail tsar Gerry Harvey and online retailer Ruslan Kogan.

The public stoush between the two men — unashamedly fuelled by the media-savvy Kogan — has all the elements of a modern David and Goliath parable: the brash young entrepreneur boasting that he is the future of retailing and that Harvey and his Harvey Norman chain are “dinosaurs” doomed to extinction, while the veteran Harvey insists that customers will always want to touch and feel the products they buy.

Speaking on ABC’s The Business in August this year, Kogan paid his respects to his elder, but could not resist portraying himself as the triumphant “challenger brand”.

“There’s no doubt that Gerry is an incredible businessman and built an awesome business model over decades … and I really respect that. [But] in 2014, is he doing things the right way and how they should be done? I don’t think so. I know that our business is growing fast and it’s only a matter of time before we catch up,” Kogan said.

“The whole point of being a challenger brand is that you’re seeing something in the marketplace and you’re saying, hang on a second, there’s a way to do that better.”

Kogan may have been premature in predicting the demise of Harvey Norman (with global sales of A$5.77b for 2014), but it’s also true that the “bricks and mortar” retailer has seen the light and stepped up its online business as part of its “omni channel” strategy. Kogan, meanwhile, debuted on the BRWRich 200 this year with an estimated personal wealth of A$320m. (Harvey, a Rich List stalwart, has a personal fortune of A$1.55b according to this year’s rankings.)

Productive failure

Silicon Valley wunderkind and Harvard Business School entrepreneur-in-residence Eric Ries, author of the best-selling The Lean Startup, has popularised the concept of entrepreneurial thinking in large organisations — that is, thinking like a start-up as a strategy for achieving breakthrough in a marketplace that is no longer responsive to tried and true approaches to success.

One of Ries’s golden rules is to never stop innovating. Yet many large companies, even those that pay lip service to being innovative, are uncomfortable with the risk associated with trying something new. Ries says management should embrace failure as a positive.

“We have to be willing to be wrong and fail, but modern management says, ‘failure means you get dinged’,” Ries says in a recent US interview.

Ries encourages companies to think in terms of “productive failure”: better to spend $100,000 on an experimental foray into a new market and prove conclusively that this market is not for you than spend $10 million on an all-out market push that was doomed to fail.

“Executive sponsorship of a start-up is about learning and supporting the team and going on the journey with them. It’s not about reviews and evaluation and go-kill decisions,” he says.

Brisbane organisational psychologist and principal of management consultant NovumAVI, Dr Robert Lake, says such a radical change in management thinking is not easily achieved.

Growth, he says, tends to change the way success is perceived and measured.

“As a business grows, performance measurement fragments from a fairly unitary measure of ‘are we succeeding?’ to a more complex measure of ‘how are we performing?,” Lake explains.

“The point is that managing the performance of a larger organisation does require a different set of skills.

“There tends to be a splitting of functions and roles because the entrepreneur is typically not the process- or management-minded person, so you have the CEO/COO phenomenon where one does the big picture stuff while the other keeps the place running, and perhaps also turns the big ideas into functioning reality.”

Lake says that in the case of a publicly listed company a CEO has a board and shareholders to answer to and must respond to the short-term demands of the market.

In this scenario, Lake says, “entrepreneurial” equates with risk taking, and the processes of a listed company tend to militate against risk.

“Having said that,” he adds, “it doesn’t have to be like that.”

Magic vanished

Chances are, however, that in today’s skittish and unpredictable economy CEOs who are disposed to entrepreneurial thinking or who possess an appetite for risk may cause squeamish board members more than a little anxiety.

Angel investor, company director and Sydney innovation consultant Dr Jeffrey Tobias, managing director of The Strategy Group, agrees that small companies tend to lose their ability to innovate as they become bigger — even though innovation was the key to their success in the first place.

“Most small companies, as they turn into large companies, start to lose their ability to innovate, they become hierarchical and inwardly focused, and suddenly they find the entrepreneurial magic that turned the small entity into a larger one has vanished,” he says.

“Fear of failure plays a great part in the demise of many large organisations.”

Tobias, a former innovation strategist with technology giant Cisco Systems, says it may appear counter-intuitive for the CEOs of large companies to look to smaller businesses for inspiration, but he insists that it can be rewarding to do so. “Organisations can gain a huge amount by looking over their shoulder to the small start-up organisation — agile, unfettered by hierarchy and able to make decisions quickly, whereas the large entity is simply unable to move quickly,” he says.

“The small organisation is often very much closer to the customer — simply because there are far fewer layers between management and the customer — and the real insights into a company’s future starts with the customer.”

Tobias says global companies such as GE and Toyota have adopted lean start-up methodologies in some of their business units as a strategy for “breaking away from the traditional, hierarchical way of doing usiness” and as a means of “getting back to their entrepreneurial roots”.

“These organisations realise that while might and mass may prevail, the risk of being disrupted is growing at a phenomenal rate, and once disrupted it is very difficult for a large organisation to recover.”

Innovation inspiration

The key to large organisations retaining the best elements of smaller entrepreneurial businesses as they grow, Tobias says, is leadership.

“What is necessary is exceptionally strong and inspirational leadership at the top and below that clearly defines the culture, focuses on the people and shapes the organisation in such a way that entrepreneurship and innovation are at the heart of the business,” he says.

Asked to nominate exemplars of such a leadership style, Tobias names two: Matt Barrie, founder and CEO of listed online services company Freelancer, for his “inspirational leadership” and Dr David Cooke, Managing Director of Konica Minolta Australia, for his “customer intimacy and team focus”.

The GE Innovation Barometer, based on a survey of executives from 26 countries, suggests Australian managers are becoming more attuned to the importance of innovation — and how to achieve an innovation culture: 82 per cent of executives in Australia agree that the key to successful innovation requires the “merging and combining” of talents, ideas, insights and resources.

And that realisation is bearing fruit, with 63 per cent of Australian executives reporting that the revenue generated by “collaborative innovation activities” in their organisations had increased from the previous year, compared with 55 per cent who thought so in 2013.

Head of Strategy and Growth for GE Australia and New Zealand, Suzana Ristevski, says businesses benefit greatly from adopting “disruptive behaviour” to drive innovation.

However, although the survey found that Australian executives have a growing awareness of innovation and the role of collaboration, in many cases “they don’t quite know how to activate programs to do so yet”.

But it seems many are starting to understand where they need to look for inspiration: the report found that almost half of the Australian executives surveyed believe SMEs and start-ups are driving innovation in Australia.

Appetite for risk

Dr Amantha Imber, an organisational psychologist specialising in innovation and consumer behaviour, and principal of Melbourne consultant Inventium, says there is a wide gulf between recognising the lessons that small businesses hold and implementing them in larger organisations.

“Large companies can absolutely learn from small companies about how to innovate more successfully — it’s just a bit harder for them to apply these methodologies due to the lack of appetite for risk-taking and experimentation,” says Imber, author of the book The Creativity Formula.

Helping large companies think like small ones is a big part of Inventium’s work, and in many cases applying Eric Ries’s lean start-up methodologies.

“In general, as companies grow, so do bureaucracy, red tape and stupid rules. All these things are innovation killers. It takes deliberate and diligent effort to maintain an entrepreneurial culture, if one existed in the first place, or to create one if it was never even there,” Imber says.

One of the first and most important things to tackle is creating a culture that supports risk taking. Risk taking, says Imber, is a critical driver of innovation. And that means accepting that failing can be healthy in a learning organisation.

Organisations that want to create an innovative culture need to send clear signals to employees and other stakeholders that it’s not only okay to fail, but in some cases important to do so as a precondition to success.

In general, as companies grow, so do bureaucracy, red tape and stupid rules. All these things are innovation killers.”
Dr Amantha Imber Organisational psychologist specialising in innovation and consumer behaviour, and principal of Melbourne consultant Inventium

Imber cites these examples of how organisations have done this.

Indian conglomerate Tata Group has “Dare to Try” awards. These are given to the teams behind innovations that fail but where there are clear lessons the company can learn from. Engineers Without Borders publishes an annual “failure report” to show that they are comfortable with failure. US company Etsy, operator of an online marketplace for handmade and vintage goods, holds “blameless post-mortems” when something goes wrong. The people involved meet and focus on identifying causes rather than culprits to avoid creating a blame culture and to ensure that the error doesn’t happen again. Dr Ken Hudson, a former product manager with Citibank and marketing director with American Express, has been advising some of Australia’s biggest companies on how to be creative and encourage innovation.

He has no doubt that large organisations “would be much better off studying smaller companies than looking over their shoulders to what the other big guys are doing”.

“Leaders are not going to learn anything new if they work at Telstra, for example, by studying Optus. By doing so they trap themselves into a particular industry mindset which is difficult to escape from,” says Hudson, the author of three books on creativity.

“My strategy recently is to help my clients to think smaller. It is a paradox but for established, medium to larger organisations, one of the most effective ways to keep growing is to follow what I call a ‘small wins’ innovation approach. Small changes can make a big difference.”

Leo D’Angelo Fisher is a journalist, editor and public speaker.

This article was first published in the November 2016 issue of Acuity magazine.