And Cue the Lean Startup

Whether you are a startup or a big business trying to revitalize growth or save your business or protect against the future; whether you are high-tech, low-tech, or somewhere in between; whether you are business-to-business, business-to-consumer, or business-to-business-to-consumer, you are at the mercy of the value-creation economy.

To succeed, grow, thrive, you must be focused on creating real value for known customers. You must be fast, agile, quick thinking, and quick acting. You must not only continuously improve your output; you must continuously improve the process of outputting. You must be a leader and a fast follower. You must be like a basketball point guard defending your counterpart, anticipating moves, and reacting fast. You must be the mirror image of a butterfly, mimic an octopus, be your customer’s shadow.

You must be able to innovate sustainably and disruptively.

Clearly, this is no small task. The methods and processes differ greatly at opposite ends of the spectrum. Although lean startup principles can be applied across the spectrum, they are geared toward entrepreneurial endeavors tending toward the disruptive side. Most how-to business writing, academic research, and business school instruction tends toward the sustaining side.

The lean startup is a method developed by Eric Ries to increase the success of entrepreneurial endeavors wherever they might be attempted, but that is focused primarily on the disruptive side. Ries describes five core principles:

1. Entrepreneurs are everywhere—anyone creating new products or services in the face of extreme uncertainty.

2. Entrepreneurship is management—one can use processes to navigate uncertainty, and so these processes must be managed.

3. Validated learning—startups exist to learn how to build a sustainable business.

4. Build-measure-learn—a feedback loop used to validate in the marketplace that business activities (including but not limited to product, distribution, delivery, marketing, sales) are the right ones.

5. Innovation accounting—how to measure the progress of learning.

Based on our experiences—entrepreneurial quests, advising and mentoring, interviews with countless entrepreneurs past and present, friends, academics, and investors—we have developed how to think about and implement the lean startup. The principles of lean startup aren’t new. You can find similar elements in “design thinking,” user experience (UX) design, discovery-driven planning, to name a few. This poses problems for some. But to reject lean startup is to reject principles that have led to huge, successful businesses. To reject lean startup is to accept the Myth of the Visionary.

myth of the visionary: The cultural myth based largely on a narrative fallacy that suggests some can predict the future and then bring it to fruition. In reality, the visionary is likely someone who is NOT committed to a specific scenario, but rather seeks change and seizes present opportunities and relentlessly pursues the change.

You may very well ask, if not new, what’s the point?

The power of the lean startup language should not be undersold. The language is what brings together first-time entrepreneurs and those with experience, those inside and outside tech, those who seek to make significant change in nonprofits, government, and big business, as well as startups.

What is also true, we believe, is that the meta changes we witness in today’s world that we discuss above, make these principles more learnable, applicable, and measurable than ever before. Furthermore, lean startup happens to arrive at a time of great need.

Lean Startup, Please Meet the Lean Entrepreneur

Our goal is to help entrepreneurs apply lean startup. To do so, let’s take a quick step back and make sure we’re starting from a common point.

The lean in lean startup does not mean small startup, or a startup with no money or no vision.

It comes from lean manufacturing as represented by the Toyota Production System. Basically, lean manufacturing is about optimizing efficiency in all value-added activities and minimizing or eliminating all non-value-added activities, where value added means providing value to customers. Customers include both the final user of the product and internal customers who link activities through the lifecycle of product development and delivery.²⁸

Critically, optimization that adversely affects value being provided is not lean. Also inherent in the Toyota Production System is the concept of continuous learning and continuous improvement.

Many discussions about lean fail to capture several key points:

• You cannot deliver value without marketing and selling it.

• The complexity of value creation means lean processes are often more efficient than traditional methods.

• Aiming at perfection is not a fluffy or spiritual platitude.

It’s interesting that, whereas most lean discussion and implementation focuses on product development processes (manufacturing, for example), if you look at the product from the customer’s point of view, they couldn’t care less about the product development process. Hopefully the customer’s experience is improved via lean methodologies, but the fact that lean led to that is irrelevant to them.

Marketing, sales, services, support, aspects of operations, partners, and so forth often have a direct relationship with the customer and a direct effect on their experience. The experience might look like the diagram below.

In long form, if everything goes swimmingly, a customer becomes aware of a product, goes through a courtship process during which he or she decides whether to purchase the product, makes the purchase, receives it, and then has an experience with the product.

Moreover, there are infinite activities a business might conduct that both directly and indirectly affect the customer’s experience above and beyond their relationship to the product. This is called the company’s brand. (Yes, when it comes to brand, you must think beyond branding elements such as company name, logo, and tagline.)

In existing successful businesses, the value being created for the customer is known. It has already been validated that product x solves problem y for customer profile z. The business has already grown or is growing rapidly. Dilemmas facing such companies belong in Steve Blank’s third customer development epiphany, company creation.²⁹ The chaos that reigned in the startup phase needs to quickly turn into orderly execution. The better and more efficient the execution, the faster the growth, limited only by the values of the founders or investors and the number and size of distinct customer profiles for whom value is being created. The dilemmas that such a business faces are numerous, difficult, varied, and, to the point, fundamentally different than those faced by startups.

company creation: The third part of Blank’s The Four Steps to the Epiphany, when companies seek to prove they have a scalable business model.

Those that choose to be high-growth businesses aspire to be monopolies. If they are to accomplish this objective using free market tactics, many of the branding activities will be employed. Once you leave the comfort of manufacturing or other product development methodologies, which activities are value-added activities and which are not?

Traditionally, as growth accelerates, multi-hatted early-stage startup employees are organized into silos based on function. Whereas startup marketing and sales were once tightly integrated or even one and the same, they are now separated with carefully controlled integration points, as are manufacturing and testing, legal and financial, facilities and operations, and so on.

Value to the final customer is often lost when managers attempt to optimize efficiency inside the silos. Integration points between the silos grow into bureaucracies as silos seek to protect their members. The objectives of the silos often dwarf those of the company as a whole. Silos can turn into fiefdoms in which power and prestige are measured by size of staff and budget. Management team meetings devolve into departments competing with each other over vision, strategy, budget, and ego.

Lean attempts to offer solutions to this siloing inefficiency. Organizing activities into groups providing value to the end customer reduces activity-based silos. You do not measure waste by looking at what people are doing, but rather what’s wrong in the process, from product demand to product delivery to passionate product experience.

What lean uncovered was that there’s likely a lot of waste if it takes two months to deliver a chair needing only two days (of actual building) to make. The early manufacturing belief that batch-and-queue activities are the most efficient process is turned on its head.

The batch-and-queue process is where a product manufacturing process is broken down into stages of production. Each stage will typically have an input queue, which was produced by the upstream stage, and an output queue, which is produced for the downstream stage. Each stage can be optimized so that theoretically, the product itself can be produced more efficiently.

The idea of a division of labor has been recognized for centuries and was fundamental to industrialization. The idea of comparative advantage, which refers to the ability of one country to produce a particular product at a lower marginal cost than another, is dependent on the division of labor and is a fundamental precept of modern international trade.

The thing is, although what’s good for the goose may be good for the gander, what’s good for the gander may not be good for the gander’s descendants.

In what may be another sign of the changes coming, increasing product complexity combined with increased demand for customization limits the benefits of organizing production around the specialization of labor. Batch-and-queue processing is more optimal when:

• Customer is known and established. Value being created is known and established. Value created is less varied.

• Production requires fewer parts, fewer stages, and less labor. Complexity is low.

Although the trend toward increasing complexity and customization has been going on for decades, advances in factory automation and workarounds have masked some of the inefficiencies of organizing company operations around batch and queue. Painting cars different colors does not pose much of a problem. Changing equipment to produce different car models turns out to be a huge inefficiency, which the Toyota Production System overcomes.

That nonengineering departments are organized around the same batch-and-queue principles strikes us as insane. It’s no wonder that corporate efforts to build teams, align objectives, optimize, streamline, innovate, <insert management consultant buzzword here> have failed dismally.

Lean Startup and Disruption

What does all this have to do with disruptive innovation? It’s not hard to imagine how building product systems based on division of labor does not lead to profound new ideas that might change the world. The process is meant to increase productivity and lower costs in the production of a known product for a known customer.

Lean advances the cause, but not sufficiently. Lean talks about employee empowerment, learning about your customers, cross-functional teams, and increased agility, but the system remains focused on producing a known value for a known customer.

This is where lean startup comes in. So although lean manufacturing presumes value and that the customer and product are known, this isn’t the case for startups. Startup founders have plenty of hypotheses regarding their startup idea and the products necessary to solve problems for specific market profiles, but these are only known to be true to the extent they’ve been validated in the marketplace, as measured by paying or engaged customers. In other words, they only think they know.

It bears repeating: A startup does not know what value it is creating or for whom. Put another way: if the innovation you are bringing to market has a predictable effect on a known market, you are sustaining an existing market and are, therefore, not disrupting anything.

This begs the question: If in a lean startup you don’t know what value you are creating and for whom, how do you know what’s wasteful and what isn’t?

To measure waste in a lean enterprise, you can’t look at things like unused raw materials, unused product features, inventory, and the labor to produce, test, release, and market all that’s not purchased, used, or desired by your customers.

To measure waste in a lean startup, Ries introduces the concept of validated learning. Waste in a lean startup are those activities that do not produce learning.

Since what the startup is all about is unknown, one can’t organize let alone optimize employee activities around executing the creation of customer value. Instead, one must organize around learning. One must learn what the core value is; what solution provides that value; to whom it provides value; and how to market, sell, and deliver it so that the value is realized.

We propose and, therefore, lay out for you in the pages ahead, a path you can take toward discovering the value you are to create and for whom.

Although the customer experiences a product in the order shown in the diagram previously this isn’t the order in which a startup discovers the value. It’s important to note that there is not one way to learn such things, nor is the process of discovery linear. Also, before finishing the discovery and validation of the value and its delivery, one shouldn’t be overly concerned with process optimization. So we’re not going to spend as much time trying to make sure each learning activity is efficient as we will on eliminating or reducing activities that are nonlearning.

Notes

1. Seth Godin, Linchpin: Are You Indispensable? Kindle Edition (Penguin Group, 2010), 8.

2. http://startupdigest.com.

3. http://lean-startup.meetup.com.

4. http://startupweekend.org.

5. http://gigaom.com/2011/12/01/its-time-for-startup-founders-to-think-bigger.

6. http://online.wsj.com/article/SB10001424053111903480904576512250915629460.html.

7. Brad Feld notes come from personal interview.

8. David ten Have greatly helped our understanding of emerging digital-fabrication trends.

9. Mark Frauenfelder thoughts come from personal interview.

10. Mike Maples thoughts come from personal interview.

11. http://articles.businessinsider.com/2012-03-21/tech/31218762_1_zynga-app-mobile-game#ixzz1yRwEPJ24.

12. Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It (Crown Business, 2010).

13. http://online.wsj.com/article/SB10001424052748704509704575019032416477138.html.

14. www.nbcsandiego.com/news/local/Feds-Set-to-Release-Power-Outage-Report-149584875.html.

15. Ryan Holiday, Trust Me, I’m Lying: Confessions of a Media Manipulator (Portfolio Hardcover, 2012), 150–151.

16. www.wired.com/wired/archive/14.06/crowds.html.

17. Bill Gross thoughts come from personal interview.

18. See this incredible New Yorker discussion of Philip Tetlock’s book, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton, 2006). www.newyorker.com/archive/2005/12/05/051205crbo_books1#ixzz2Em3VFcMC.

19. For an amusing and eye-opening read on the frailty of human rationality, please read Nassim Nicholas Taleb’s, The Black Swan: The Impact of the Highly Improbable, (Random House, 2007).

20. Spirited conversations with Venkatesh Rao contributed to our thinking here. Please see: www.ribbonfarm.com.

21. Thanks to Paul Kedrosky for his contribution to this discussion and helping our understanding of what’s actually going on in the world today.

22. Chris Guillebeau, The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future (Crown Business, 2012), 7.

23. Godin, op. cit., 9.

24. Donald E. Vandergriff, “Today’s Training and Education (Development) Revolution: The Future is Now!” The Associate of the United States Army, 2010.

25. Dr. Stephanie Cooper is author Brant Cooper’s sister.

26. Comments by Tim McCoy from personal interview.

27. Eric Ries, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (Crown Business, 2011), 8–9.

28. Jeffery Liker, The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer (McGraw-Hill, 2003).

29. Steve Blank, The Four Steps to the Epiphany (Cafepress.com, 2005).