Corporate Business Building with Frank Mattes

Our latest Innovation Room Podcast episode dives into the topic of a new business building inside established organizations and the culture that surrounds it all. I was lucky enough to have this conversation with none other than the expert on the topic himself – Frank Mattes.  

Frank is an expert in corporate business building, an innovation advisor to corporates, and an author. He has published two books on creating new businesses from corporate startups, with a third book on the topic now in the making.

Frank co-created the Lean Scaleup framework together with more than 20 companies and two business schools, offering best practices for creating profitable businesses, he is a founder of the Lean Scaleup consulting agency, and he is simply passionate about helping corporate innovation practitioners to improve their business-building capabilities.

Let's start with the basics – could you tell me about your professional background and how did you end up with Lean Scaleup?

Frank: In essence, I’ve been working in a space that people nowadays like to call innovation for over 20 years. It all started when the term didn't even exist. Back then it was called new product development.

Around 10 years ago I got interested in the out-of-the-box space. At that time, open innovation was the hot topic of the day. I became interested in helping companies with finding solutions to technical problems.

Finally, around five years ago, a few of my clients, which are large global companies like BP, Bosch, or Telefonica, brought up a new problem. Their issue was not in the early stages, not in lacking ideas, they had more ideas than they could ever implement. But the problem was the business impact that comes out from these innovation activities. And they asked if there is any way I could help them with this.

That made me curious. I looked around and I found... nothing. There was only academia, which was saying that you have to split operations and innovation (ambidexterity). But academia didn't say how you bring things together at the end of the journey. On top of that, large consulting companies didn't have a  viewpoint on the topic either.

So, I gathered together 20+ companies, a few business schools and said that we need to stick our heads together - the wisdom of the crowd - to understand why is it so hard for companies to build new businesses inside of the existing business and how could the solution look like.

That's where the whole journey started and out came the framework that has been branded Lean Scaleup. But let me make this clear - that's not Frank, it's Frank moderating a process with brilliant minds from leading companies and leading business schools.

There are many different names for new business building, such as corporate venturing, entrepreneurship, corporate business building, and so on. How do you see this landscape and what kind of terminology do you use?

Frank: As you said, there are tons of definitions and the following are the ones that I use, but I am not claiming that these are the right ones.

For me, new-business building means bringing new business models to scale. If you look at business models - we all have seen the business model canvas - some things are different. New customers, new channels, new value proposition, you name it, so the goal is implementing these elements and taking it to scale which obviously implies that there  is someone who is willing to pay for that kind of solution.

You also mentioned corporate venturing. I don't like to use that term because it just sounds too similar to corporate venture capital and joint venture.

I prefer to speak about corporate startups. It is when a company sees potential for a new business model and it decides to gather and fund a team and set them on a mission to build this new business - that is in my terminology a corporate startup.

Finally, I use the term corporate venture. It's when there is an external Greenfield startup, backed with VC money, and the corporate commits to acquire a minority stake, 5%, 10%, 25% what they typically take. But they do it with the idea to take this external startup in and make it big fast because they have got the assets and capabilities to do so. For instance, BP has a scaling-up factory called Launchpad for such ventures. 

Another piece of terminology is exploitation. It's really important to understand where the problem comes from. Maybe we will touch upon this later on, but at the end of the day there are two systems under one corporate roof and you need both systems to future-proof the company.

There's the NOW system or the Red Shirt system, as I call it. 99% of the company's staff work in this system. They are running the day-to-day business, which is highly competitive and is in the red ocean, meaning the company battles with the usual suspects for the same customers using comparable value propositions and channels, and so on.

And there's a second system -  the innovators, the NEW system. They're looking for the blue oceans. They are exploring what could become in the future a significant, sizable business that runs on the same process and structural paradigm as today's business.

Source: Lean Scaleup, Frank Mattes

When should a business look for opportunities inside to start new businesses and when to look for them outside?

When the business is a burning platform’ it is usually too late – think about Nokia vs Apple or Blockbuster vs Netflix. What I discovered is you need to do both. And there are success stories of that.

The prime example of a corporate startup is Amazon Web Services which as we speak right now is an 80 billion U.S. dollars [revenue generated in 2022] business. Obviously, that's a huge success. It started off when Amazon at the turn of the century recognized that their existing IT structure was not scalable, so they had to revamp and remodel everything. And they got the brilliant idea - why not have our customers pay for that IT transformation?

And if we look at the case of BP that I mentioned earlier, one of the external Greenfield startups that they took into Launchpad is Photek. Photek uses optical fibers to sense the environment, which could be applied for instance to monitor railway tracks or to monitor national borders, to sense if there are people trespassing. Photek is on its way to becoming a Unicorn. So success stories are everywhere. If you make it right, that's the point.

What are the barriers that entrepreneurs face in established organizations?

Frank: It's a system problem.

98%, 99% of the people are working in the NOW system, in the day-to-day business. Their goals and bonuses are tied to flawlessly executing the past's successful recipe, so to speak. They run processes and get their bonuses when they squeeze out 0,1% more productivity in a manufacturing process or gain 0,5% more customers in sales and marketing. They are completely focused on the flawless execution of what has already been built in the past. And I don't mean this in a disrespectful way.

Innovators come with different missions. They say that it's good what the company has built in the past, but they are tasked with creating something new. And new always means that there is no standard, there's no process.

So this is what I see as the brick wall that these innovators run in. It is the NEW System versus the NOW System. Here you can find a couple of, what I call, areas of tension. It's about say the culture that people say you don't belong to them. Day-to-day business people are process people and innovators speak about experiments. But the people in NOW system do not do experiments. They run processes, which are repeatable, they are predictable and productive.

Or let's look at governance. Many of the stakeholders who made their career in the Red Shirt world, look at the new business building as if it was a part of the established business. They assemble large committees, that bridge the silos as they are used to in the Red Shirt system. But this is not how you create new businesses.

Many of the stakeholders who made their career in the red-shirt world, look at the new business building as if it was a part of the established business.

To illustrate, when you talk about AI these days, there are a handful of people who fully understand what's going on. You cannot have a governance committee that is not firm on the topic that is being discussed - it simply does not work.

Source: Lean Scaleup, Frank Mattes

How do you build internal trust between completely different departments once a corporate startup has been launched?

Frank: When I started to co-create the Lean Scaleup, one of the companies I worked with brought a brilliant insight to the table - to be able to see the progress in innovation, we must look at it in three dimensions.

• The first one is customers' willingness to pay, which reflects the product or service's desirability.
• The second explores the feasibility of making and industrializing the product or service.
• The third dimension evaluates the business potential, focusing on profitability and margins to ensure its viability.

But here's the big BUT: he whole corporate context in which new-business building unfolds is not represented.

So it's funny we talk about corporate startups and corporate business building and corporate-whatever as we alluded to initially, but we do not see corporate represented in the new-business building frameworks that these companies use.

In the Lean Scaleup framework is the fourth dimension that we called contextuality. It relates nicely from a language point with desirability, feasibility, and viability.

Source: Frank Mattes

Establishing that corporate context runs along the whole innovation journey. It starts with alignment and determining meaningful search fields for the company. Then, you typically get thousands of ideas about what you could do in that space. But again, what is a meaningful idea relating to the company's capabilities? Or what new capabilities must the company build?

Then the corporate startup is charged with building those capabilities. Finally, it all comes to the question of how, in a corporate context, you actually validate it. And what I typically find in these situations is that all of the validation frameworks have a product-centric perspective. They talk about the minimum viable product, about product-market fit, and so on. They don't talk about building a business.

If a company wants to create a new business, its focus is on the business and not on the products they carry. Once you have done your validation, you prepare the corporate startup for scaling up, and this is where the rubber meets the road, this is where the Red Shirts need to provide funding and resources, like access to customers, and prepare for reintegration further down the road. And only then do you do the scaling up.

Once you have done your validation, you prepare the project for scaling up, and this is where the rubber meets the road.

Organizations established decades ago, in my opinion, tend to be more resistant to change, as things they did years ago still work well today. Is that a wrong assumption and do you have some tips on how to approach this?

Frank: There are two systems, and each of those systems is right in its own way. The challenge is to make this one plus one equals three: running the day-to-day business, producing the margins needed to keep the stakeholders and the shareholders happy, and, at the same time, funding the search for tomorrow's businesses. On top of that, the customer should be happy too, so it should be a win - win - win situation.

In my view, culture is an artifact that reflects everything happening within a company, how the company sees its mission, defines the degrees of freedom for individuals, determines what behaviors are rewarded or penalized, and much more.

But you are perfectly right, Lean Scaleup says that in order to solve the system problem between today's business and tomorrow's business, you need to have a system solution. And this system solution has three parts:

• First, it's leadership - balancing NOW and NEW.
• Second is looking at the process from the right perspective.
• And finally - and here we are, it's culture, people, and collaboration.

In order to solve a system problem, you need a system solution made up of three parts: dual leadership, the right process, and the balance between culture - people - collaboration.

These three elements need to be  congruent in the overall setting.

How to determine whether a corporate startup is a value-generating opportunity instead of an innovation theater?

Frank: It's the art of validating and the art of killing in the corporate context. A typical Red Shirt senior manager would say well, we launch a project focused on a new business building. They would set up a large governance board, secure funding, they would nominate a dedicated individual, pat them on the shoulder and say "you are building the future, good luck". That's not how you run such projects.

You have to run experiment after experiment, and you have to build these experiments into a solid validation framework. This framework should validate the customer side, product, tech, IP, corporate context, and capability. All at the same time.

To determine when something is done and validated, you need to establish thinking tools.

You also need to be transparent here and admit "hey, we did not achieve the expected key results from the customer side and it is time to kill this one start-up, but the good news is we've got seven other ideas from it that we are testing and validating".

So it's about the entrepreneurial mindset, it's about taking - as Jeff Bezos would tell us -  small, rapid, and effective experiments and then letting the data speak.

If you were able to pick one message that you would like our listeners to take from this conversation what it would be?

Frank: Companies need to build new businesses, but the world outside is volatile, it's unshaped, it's complex, it's dynamic, it's ambiguous.

If you look at the statistics, only 3% of the attempts to build new businesses will win, which means that 29 out of 30 fail. The reason for that is that we have a system problem - there's today's business and there's tomorrow's business. And how do you solve that, how do you bridge and connect these systems, so that you would future-proof the company, today and tomorrow?

And it turns out that you need to work on three levels: the leadership level, the process level, and the people/culture/collaboration level.

And there is a framework for that. It takes the good things from the lean startup, but it makes it broader and extends it to the corporate context. And it makes it longer, it looks at the end-to-end journey. Source: Frank Mattes

When can we expect the revised, third book to be published?

We're currently co-creating the book with more than 100 practitioners and half a dozen of business schools. So if some of the readers are interested in joining the process please - ping me by clicking on the pop-up.

I am expecting the book to be finished after the summer break, sometime in September or October [2023].

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