NoteThis is a piece I wrote originally for The Irish Times on Business Innovation. Full article is at The Irish Times.
I spoke to Steve Blank, Alex Osterwalder, and the man who coined “Lean”, John Krafcik. But before hearing from them, read this from Twitter:
“U should apply Lean Start-up Strategy in everything u do. Even ur personal & love relationship. Think about it & makes sense.”
Thus tweeted an excitable San Francisco tech entrepreneur (whose Twitter profile notes that she is one of Business Insider’s 27 “most impressive Harvard MBAs”).
Idea 1: Customer development
A sizeable proportion of the hype surrounding “lean” is overwrought, but a sound kernel of logic lies at the heart of the “lean start-up” craze sweeping entrepreneurial circles. The lean method of building start-up companies and products emphasises customer research and tactical tweaking over execution of strategic business plans.
Stanford professor Steve Blank, the father of lean start-up strategy, says the big idea of lean strategy is “stupidly simple”.
“The first thing an entrepreneur should do is get outside the building and start talking to prospective customers.” They must grasp what the customer needs before building anything. “There are no facts inside the building”, he adds.
Blank’s focus on “customer development” is the first of the three main principles of lean start-up strategy.
Lean thinking arose in circumstances of dire necessity. During the dot-com boom, start-ups spent investors’ cash with abandon, building inflated brands without the substance to support long term growth. However the dot-com bust forced start-ups to be frugal.
Idea 2: MVP
This frugality is at the heart of the second principle of lean strategy, which was defined by Erik Reis. Reis audited Blank’s Berkeley course and realised that he could build bare-bones versions of products with a minimum of effort for the start-up in which he was involved, and that he could use these rough prototypes to gather customer input on how he should proceed.
Idea 3: Business Model Innovation
The third factor is the business model itself. Lean guru Alexander Osterwalder introduced a “business model canvas” that builds on the Blank and Reis approach and adds a focus on refining the business plan.
The trio, Osterwalder, Reis and Blank, created a methodology that engineers could understand and use to launch their own technology start-ups.
Although lean thinking had existed before, the focus on start-ups is only 10 years old this year. Steve Blank had been an entrepreneur and venture capitalist for two decades before returning to academia. He was “appalled” by what he found at Berkeley in the 2000s.
“For 20 years, the mantra was that start-ups are just small versions of large companies. So they were told they needed extensive business plans and had to hire marketing executives on day one – but start-ups are not small version of big businesses. They are searching for a business model, not executing one,” he says.
As a result, Blank says, the business schools were “producing functionaries for the corporations, people suited to administrating established businesses”.
Working with start-ups is different and it needs the kind of people who can search for new business models rather than maintain existing ones.
The irony though is that the lean start-up strategy is now being embraced inside large corporations.
“Nowadays, business models expire like a yogurt in the fridge,” Osterwalder says. “Corporations that can’t manage their existing models while reinventing themselves risk disappearing.”
While corporations were once primarily concerned with refining their production process, now they face business model disruption.
Osterwalder points to several examples: pharmaceutical leaders once dominated by developing and selling blockbuster drugs, but now have to find a new business model. Kodak, which failed to do so, has already closed its doors. Dell, which once disrupted its industry, now risks following Kodak.
The large corporations need a methodology to reinvent their business models, and are turning to the lean start-up strategy that early stage companies use. For example, in Ireland UCD’s Smurfit Business School now teaches lean principles to all of its students, and Enterprise Ireland’s lean programme has trained more than 6,000 people since 2009.
The origins of lean
Lean principles have long applied in the corporate world, although the focus has been on process improvement. In 1988, John Krafcik first used the term in a study me wrote in the MIT Sloan Management Review.
Krafcik says the “continuous improvement method was proven on the factory floor other the last several decades. Now, the focus on testing and iterating products at the heart of lean start-up strategy.”
He coined it first to describe the innovations that Toyota had been developing over several decades. Krafcik, then a graduate student at MIT, had worked at a joint Toyota-GM venture and witnessed the profound contrast between Japanese and American production methods.
His article, “Triumph of the Lean Production System”, described how Japanese manufacturers adopted a “fragile” approach that kept inventory to an absolute minimum, just in time, and errors and problems with parts could be quickly detected and solved. They were prepared to stop production in order to fix problems as they arose.
At its most simple the idea is kaizen, a Japanese word that means improvement. As a result, Japanese plants radically outperformed their US counterparts in throughput and quality. The Japanese approach was the antithesis of the General Motors focus on “robustness” and “buffering”, which built up redundancy that enabled production to continue but also allowed problems to be ignored.
Krafcik ultimately rose to become chief executive officer at Hyundai US and doubled its market share in five years. He stepped down last year and announced this month that he had joined the board of a start-up called TrueCar.
Bringing both sides of the lean story together, he says lean thinking is at the heart of the TrueCar business model, from consumer need to the internal business processes the company uses to deliver to it.
Companies large and small are going lean.