Updated June 2019: How Enterprises Can Avoid Startup Growth Disruption

In late 2017, I wrote an article on “How Enterprises Can Avoid Startup Growth Disruption.” Since that time I’ve gained a lot more insights from helping companies overcome the challenges of growth transformation and also from collaborating with others who are addressing this challenge. I now spend the majority of my time working on growth transformation, so figured this article was due for an update

Until very recently, established enterprises held all of the advantages over startups when it came to driving growth. Enterprises had leverage in channels, huge marketing budgets, strong brands and the purchase habits of existing buyers. There was an adage in the startup community that your startup’s new solution needed to be at least 10X better than the incumbents’ solutions to have a chance at success.

Some of these advantages were so strong that they led to anti-trust hearings. For example, Microsoft came under anti-competitive scrutiny for leveraging their operating system to require hardware companies to bundle their other software offerings. This competitive advantage was nearly impossible for other companies to replicate.

It would be easy to confuse the recent discussions about breaking up Facebook to those of Microsoft 20 years ago. But unlike Microsoft, most of the power that Facebook wields is the result of their growth process and company-wide growth culture. They’ve used these advantages to disrupt many businesses that seemed to have strong network-effect moats around them. The first competitor to suffer was MySpace, but more recently we’ve seen Facebook putting the hurt on Snapchat (via Instagram) and Craigslist (via Facebook Marketplace). Now Facebook is moving into payments and dating and will likely see similar results. Fortunately, Facebook’s competitive advantage is much easier to replicate than Microsoft’s was. More on that later…

Startups Disrupting Retail, Travel and Entertainment

The story of Facebook is being repeated in many other industries by companies that have a deeply rooted growth culture and cross-functional experimentation process.

Jeff Bezos highlighted the importance of experimentation to Amazon’s culture when he said: “to invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment.” This culture of experimentation drives new product development, value enhancement in existing products and improvements in new and existing customers’ ability to discover products and experience value. Amazon is now one of the most valuable companies in the world.

Airbnb has used a similar approach to leveraging data and cross-functional experimentation to disrupt the travel space. First Marriott acquired Starwood to help their ability to compete with Airbnb and now they are entering the home sharing market. But to be successful, they’ll need to go beyond just replicating the Airbnb business plan and work toward a full company cultural transformation to adopt a cross-functional experimentation process.

Another recent disruption is happening in entertainment, where Disney’s acquisition of 21st Century Fox is said to be the direct result of both companies challenges competing with Netflix. Before producing content, Netflix had already used its data-driven approach to disrupt Blockbuster in the DVD rental business and had put pressure on cable companies. Netflix now has more US subscribers than all of the cable TV companies combined.

How have these relatively new companies grown so big, so quickly?

Companies such as Airbnb, Facebook and Netflix have gone beyond simply understanding data, to organizing their entire businesses around growth opportunities presented by the data. Unlike older enterprises, these newer companies are not stuck in their functional silos. They have baked into their early DNA cross-functional growth habits to manage coordinated growth experimentation across the entire customer journey.

Netflix is a great example of this new approach to growth. Much of their agile cross-functional culture can be traced to these two factors:

1. Netflix was built as a subscription business from the early days. Unlike many other entertainment businesses, this meant that growth was as much a function of retention and engagement as new customer acquisition. The responsibility for driving growth extends deep within the product team, which has continuously experimented with improvements to the recommendation algorithm as well as evolving to new ways of distributing content.
2. Netflix was the first entertainment business to stream a high volume of professionally produced content over the internet. This gave them deep insights into how people actually engaged with the content — both their own content and that produced by other studios. This further improves its recommendation algorithms, driving better engagement and retention. And it also helped their studio determine which programs to develop and fund.

Using this approach, Netflix’s market cap has now reached $151B, up more than 3000% since 2013.

The Cross-Functional Trap for Enterprises

Older enterprises are taking notice and are trying to replicate these cross-functional agile teams to improve growth. It is relatively easy to understand the theory of why cross-functional, agile growth teams make sense. But unfortunately, efforts to transform established enterprises always face organizational resistance.

One typical mistake is that they try to implement cross-functional changes gradually. This usually results in team members reverting back to their old siloed habits. Often this is a sign that the initiative lacked enough up front buy-in from functional team leaders.

Another common mistake is sending a single team member to a class or program to learn the theory of cross-functional agile growth and tasking them with driving the change. Rarely is the person senior enough to convince the rest of the organization to actually implement the theory. And even if they are senior enough, the majority of their time is spent cajoling functional leaders to run important experiments rather than channeling their energy into finding new growth opportunities and designing effective experiments. Even a CEO would struggle without the buy-in of the broader team.

Requires Clear Vision for Success and Deliberate Cross-Functional Effort

I recommend that companies take a more deliberate, dare I say “big-bang”, approach to growth transformation. If an incremental approach is preferred, start with a single product line. But either way, you should get all functional team leaders together in a focused all-day meeting to define a shared cross-functional vision and their respective roles and responsibilities. Trying to do it over an extended period of time leads to an approach that eventually stalls.

And be prepared to challenge deeply rooted cultural norms. Outdated assumptions will need to be replaced with hypotheses that can only be validated through testing. The higher the velocity of testing, the faster your team will learn how to accelerate growth. And your team will learn that many of their long-held assumptions were wrong. Experimentation is a humbling experience that eventually leads to the required growth mindset of the most effective teams.

The entire customer journey should be open to experimentation, from activating new customers to optimizing engagement and referral loops. Otherwise, teams will gravitate to lower resistance areas like customer acquisition and miss the high leverage opportunities that lead to breakout growth. Expanding profitable customer acquisition will be severely restricted without a significant amount of focus on improving the overall customer journey. To effectively prioritize and execute this testing, you’ll need to adopt the same proven growth process used by today’s fastest growing companies.

While it’s difficult to jumpstart this cross-functional habit of testing, each winning experiment will help you build momentum and drive more organizational buy-in, especially if you communicate these wins across the organization. Eventually, cross-functional agile growth habits will replace the long-entrenched habits that are holding back your growth.

One enterprise that has made surprising progress with growth transformation is IBM. At the 2019 GrowthHackers Conference, the person leading this effort explained that his team works to enable cross-functional growth for one product line at a time. They drive alignment up front, help the teams retool their analytics and testing infrastructure and then coach the process until a growth mindset and culture takes root. They have used this approach to drive transformation across 25 different product groups and now have a waiting list of other groups who want their help.

I have found similar success through my growth transformation workshops. I start by driving up front alignment in how the cross-functional team should approach and measure growth and then work with the team to understand and start improving their value delivery engine. This program has been refined continuously since I began offering it in 2017 and I’m sure it will continue to improve over the next few years. Probably the most important learning is that it is essential to get cross-functional team leaders in a room together for a full day to transform how they work together to drive growth. You can learn more about my growth transformation workshops here.