This blog post was co-written by Yngve Dahle and Mark Robinson.
Lean is a term that seems to confuse entrepreneurs around the world. It is hardly surprising. Lean has become a popular buzzword. It is used all the time for very different things, and different people are assigning different meanings to it.
We want to try to help clarify it a bit by giving a very brief description of three different uses of the term. Lean Manufacturing, Lean Startup and Lean Business. The three terms mean totally different things, but are related to each other. In the Lean family, you can say that Lean Manufacturing is the Californian/Japanese grandparent, Lean Startup is the child that lives in Silicon Valley, and Lean Business is the grandchild who lives in Palo Alto.
The term “Lean” was first used by John Krafcik in an article from 1988 called “Triumph of the Lean Production System.” Krafcik worked as a quality engineer at NUMMI, the joint Toyota and GM facility in California, before getting his Masters degree at MIT. He used the term lean manufacturing to refer to a production methodology for products and services that focuses on eliminating waste and improving the customer's experience, rather than reducing the production cost. The goal is to be more profitable by creating more value using fewer resources.
A related term from the Toyota Lean-project is Kanban. This Japanese word means short or sign/signal. The main idea behind Kanban is to avoid starting more activities than you can finish. All the activities are organized in a queue, and you begin with the activities with the highest priority. After you reach the limit for started activities, you can’t move new activities out of the queue until you complete one of the activities you already started.
So – Lean Manufacturing is about eliminating waste in production processes, and is mainly concerned with managing tasks or activities. Working in an incremental way, while trying to learn and improve is one of the underlying principles of Lean Manufacturing.
The “Lean Startup” movement argues that these underlying principles can be used to improve entrepreneurship processes. The most important contributors to the lean movement so far are Steve Blank with his “Customer Development Method” (2005), Eric Ries with his “Lean Startup” methodology (2001), Ash Maurya with “Running Lean” (2012) and Alexander Osterwalder/Yves Pigneur (2009) with “Business Model Generation”.
The main concept behind the Lean Startup movement is that innovation in companies is linked to considerable uncertainty. Therefore it is not wise to employ major resources to commit to a product and a business model before you have tested your assumptions out on the market.
To avoid wasting time and resources on creating products that the market simply does not want, Eric Ries suggests that you develop a Minimum Viable Product (MVP). This is a prototype that has sufficient functionality to be tested by the market, but does not cost a great deal to develop. The prototype is then released into the market with the aim of testing the fundamental premises for its success.
Next it is developed gradually via a series of improvements, based on feedback from your initial customers. This is based on the assumption that you measure feedback continually, preferably in the form of experiments in which various groups of customers are presented with different solutions and business models. If there are indications that the first business idea does not function, you can carry out what Eric Ries refers to as a pivot. A pivot is a clear change of the business idea based on what you learned from your initial customers.
Steve Blank’s “Customer Development Method” (2005) maintains that you have to develop your customers and product at the same time. This is accomplished in four steps:
- Find the customer, or select a small group of target customers.
- Confirm the customer by finding out which solution to offer the selected target group, and how you will sell and get paid. If you find a business model that works in practice, you have proved that the selected target group functions.
- Scale your business by selling to more representatives of your customer group. As you define and test out the optimal business model, there is less chance that you will waste money on unsuccessful marketing.
- Invest in the company. It is at this stage that you alter the company from the initial learning and searching modus into a more formal and structured organization.
The term Business Model was introduced by Alexander Osterwalder and Yves Pigneur. The core of the term is “Business Model Canvas (BMC)” which is a “canvas” comprised of nine building blocks:
As we can see from the illustration above, the nine building blocks are connected and influence each other. We will describe each of the building blocks in more detail:
- Customer segment describes who your company creates value for
- Value proposition describes which problem you solve and what type of value the solution brings to the customer
- Key channels describe how you contact customers and how you reach them
- Customer relations describe which type of relation you have through your channels
- Revenue streams describe how you are paid
- Key resources addresses what type of resources the company needs to be able to create value for the customer
- Key activity describes the activities you must carry out to fulfil the value proposition
- Key partners are allies who help to make the value proposition possible
- Cost structure addresses the most significant cost drivers in order to operate the business model
One of the most important contributions of the book "Business Model Generation" is the use of a common language for you and your team to discuss and understand business models across traditional professional disciplines. In this way managers and board members of different backgrounds can jointly develop a commonly understood business model.
“Lean Business” is born out of the experience based realization that the business model is an important, but not entirely comprehensive tool for Lean business development in Startups.
To help the practical entrepreneur in the daily management of his/her company, the business model needs help from other tools. We have created a powerful model combining eight of these tools.
Simply put: You start by defining your overall competence and resources. Based on this you chose one or many business ideas that you extend into business models. You find the gaps between your current situation and your desired situation, and risks that may occur. Then you set a number of objectives for your project and define the tasks that need to be accomplished to reach these objectives. The revenues stated in the objectives and the cost generated by the tasks will give you a forecast overview. By continuously changing and improving these eight elements, you will be able to manage your company in a truly lean manner, with a permanently updated Lean Dashboard.
So the Lean Startup thinkers drew inspiration from Lean Manufacturing, and Lean Business builds on the Lean Startup model. You should find out which of these concepts fits your need the best, and try to learn more about it.
We hope that this blog post may inspire you, and perhaps start a discussion. If some of the entrepreneurship terminology we used is new to you, you can find more details about it in the Introduction chapter of our Lean Business Planning book. Please download a free PDF of the chapter here.