Here is an excerpt from an interview of Eric Ries conducted by Michael Chui for McKinsey & Company. As Ries indicates, companies are all too aware of the disruptive power of technology. The author of The Lean Startup argues that the competitive reaction of many organizations remains fatally flawed. To read the complete transcript, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Digital technology has enabled the creation of new industries and upended many more. In this video interview, Silicon Valley entrepreneur and author Eric Ries explains how individuals with minimal funding can now challenge incumbent companies, and he argues that the response of most organizations to this threat is flawed because they continue to measure—and reward—the wrong performance. This interview was conducted by McKinsey Global Institute partner Michael Chui. An edited transcript of Ries’s remarks follows.

Renting the means of production

I have spent a lot of time with major companies where I’m considered some kind of innovation expert, whatever that means. Is that an oxymoron? I don’t know. Is that a contradiction in terms? Can you be an innovation expert? I don’t know. But anyway, I get the phone call now from companies who want to know, “Why should my big company innovate?”

And I always tell them the same thing: “Because your company will die otherwise.” And they get so offended. Like, “We are a 100-year-old company. We’re the leader in our . . . ” I’m, like, “Hey, listen. Listen. You called me. I’m just telling you what I think.” And then I try to tell them stories about a kid with a credit card—with a $1,000 budget—I just saw build a product that, from the consumer’s point of view, is indistinguishable from your highly polished, multiyear-generation, established product.

And their first reaction is always the same: “Well, we’ll just buy that kid if his product is successful.” And I’m, like, “You’re not understanding the moral of the story. It’s not that this one kid with a credit card could do this; [begin italics] anyone with a credit card [end italics] can rent the means of production and compete with you on a first-class basis in their market. And so you’re not dealing with one potential competitor but with thousands or millions. Are you really geared up for innovation at that pace?” And that’s usually when they hang up the phone and say, “I’m going to call a different expert to tell us what posters to put on the wall. We’re looking for easy answers, not that kind of stuff.”

But I think that is what is so exciting about technology today. It’s like putting Karl Marx on his head. Anybody can rent the means of production, which means entrepreneurship is becoming truly democratized, which means nobody is safe.

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Here is a direct link to the complete article and the video that accompanies it.

Eric Ries is a Silicon Valley entrepreneur and the author of The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (Crown Business, 2011). Michael Chui is a partner at the McKinsey Global Institute and is based in McKinsey’s San Francisco office.