Entrepreneurs who lead newly formed companies are often required to maximize the value they create for the business by using a minimum amount of resources.
This practice is called Lean Organizational Strategy.
Traditionally, this approach was only applied to manufacturing, but today Lean Strategies are adopted across all sectors of the economy.
Lean Organizations place customer value above everything and focus on refining their operational processes to continuously increase it over time. The objective of lean methodologies is to maximize the possible value offered to customers while incurring zero waste.
Here, we examine what defines Lean Organizations and how the methodology can meaningfully impact startup growth.
Lean Strategy Defined
Lean strategies have been developed in response to the traditional high-risk and investment heavy start-up formula. For decades this framework involved constructing a business plan, pitching the idea to investors, assembling a team, introducing a product and building sales as soon as possible.
The challenge was that under this model approximately three quarters of business suffered dramatic setbacks and failed.
Lean methodologies attempt to offer a process approach for building a company that reduces the risk of failure.
The lean startup methodology favors experimentation over elaborate planning, collecting customer feedback over intuition, and iterative or incremental design improvements over up front design-to-release approaches.
Under the lean approach, business work to develop and release a minimum viable product on a cyclical basis, routinely pivoting the solution to meet market demands until the right balance is achieved and traction gained.
Leaders who adopt Lean Strategies transition their focus from optimizing separate technologies, assets, and departments vertically, to optimizing the flow of products and services through value streams that flow horizontally.
This approach more effectively harmonizes the business' technologies, assets, and departments by allowed for more cross-functional communication and collaboration.
The lean methodology is framed according to three basic principles:
A. Lean Canvas Framework
Entrepreneurs frame their business planning around a series of hypotheses that can be actionably tested. The hypotheses are typically summarized in a business model canvas that illustrates how each activity of the company creates value for the business and its customers.
Lean Canvas Framework
Lean Canvas Examples
B. Customer Interactions
Under the lean framework, entrepreneurs test assumptions, develop solutions and grow business models based on the feedback they receive from customers, potential users, purchasers, and/or partners. They keep their approach nimble and focus on acting as quickly as possible to iterate their minimum viable product as often as they receive meaningful feedback.
C. Agile Development
Entrepreneurs who follow the lean methodology embrace agile development practices. Originating from the software industry, agile methodologies complement customer interactions by developing solutions incrementally with iterative improvements or pivots based on the collected feedback. The practice aims to eliminate wasted time and unnecessary resources spent on premeditated plans that yield poor results.
Agile Development Cycle
As the diagram illustrates, the process is highly cyclical. Specific processes are repeated again and again based on the collected feedback from customers until the best possible solution is developed in the most efficient way possible.
Central to the adoption of lean methodologies is abandoning 2 traditional preconceptions about the creation and development of a new business.
The first preconception is that startups should operate in a "stealth mode", to prevent potential competitors from duplicating a company's solution or beating the company to a new market opportunity. The second is that customers should only be exposed to prototypes in controlled environments, typically referred to as "beta" tests.
The lean startup methodology makes these preconceptions obsolete because it advocates that in most industries customer feedback is more valuable than secrecy, and that constant transparant feedback yields better results when compared to controlled tests.
Lean vs Traditional
Following the lean-startup methodology, startups have a better chance to avoid failure and bankruptcy compared to traditional methods. Fundamentally, rather than beginning with a defined business model, lean entrepreneurs search for the right business model through frequent experimentation and data collection.
With the right effort and mindset, trial and error ends up revealing the business model that works, which entrepreneurs can then focus their energies on executing.
The benefits of the lean methodology on startups and the venture capital industry can be encapsulated by the following 5 points.
1. Lowering Customer Acquisition and Product Development Costs.
2. Shortening Technology and Development cycles.
3. Lowering Risk Aversion to New Ventures.
4. Widening the Scope of Venture Capital to Invest Smaller Sums in a Greater Variety of Potentially Rewarding Companies.
5. Diversifying Venture Expertise Across New Environments and Markets.
By encouraging business leaders to develop solutions that customers actually want in a more efficient and cost effective way, lean entrepreneurs have a better chance to succeed early on when the stakes are the highest and build lasting companies.
Similarly, by diversifying investments and expertise, the venture capital industry lowers it's risk exposure across a variety of business opportunities, and increases it's potential return on investment.
The highly experimental approach of the lean strategy demands that entrepreneurs develop a scientific approach to their business. Each element must be rigorously defined and defended according to how much value it offers the company.
To reap the benefits of the lean methodology, entrepreneurs must implement the following strategic framework:
Lean processes begin by gathering knowledge across three key areas: potential customers, the industry or market the company operates in, and the competitive landscape.
Business leaders should leverage existing data, new research studies, pilot programs as well as interviews with potential customers and other relevant stakeholders to gain actionable insights for their company. The more information is gathered, the more likely entrepreneurs will make sound strategic decisions.
After gathering insights, entrepreneurs must develop ideas that frame the company and it's solution. Any and all items that fail to directly serve or add value to potential customers and the business should be illuminated.
The list of elements should then be prioritized according to what can be most easily accomplished and what adds the most value. Next, entrepreneurs must identify the people, processes, partners and technologies to deploy that support the solution's development.
Every process and action must align to the strategic short-term objective of the business. Long term objectives can also be defined, but they must be flexible enough to account for changes or pivots in product design and development.
With the most valuable opportunities and resources identified, the final step involves developing and actionable plan that leverages the company strengths to develop and distribute its solution to the marketplace. This includes projecting resources use, costs, production time-lines, iterative cycles, customer acquisition costs, and possible returns on investment.
Once the metrics are established, entrepreneurs must assign teams to pursue specific achievable objectives, and provide a process of measurement that will help redefine the corporate strategy during the next iterative cycle.
These three steps should be repeated until the company discovers the right solution that meeds market demands, as well as the right operational balance that yields an efficient production process.
Pursuant to that goal, entrepreneurs should avoid several pitfalls. First, don't fall prey to the shinny new object syndrome. Examine the available technological resources and make a calculated decision on which option is the best to employ. Don't choose the technology based on it's looks or potential impact. Choose the tech that provides the greatest impact in the present.
Sometimes an audience cannot express what they really want, particularly when a product represents a new category. In these cases, entrepreneurs should study customer actions and reactions to available solutions in order to develop a perspective of what customers need.
Lastly, entrepreneurs should not build a lean framework that is too rigid. Providing space for creative thinking so that stakeholders can innovate is important. People must be able to evaluate a wide variety of different ideas to frequently iterate the business solution.
Lean Strategy Environment
As with any business methodology, a gap always exists between understanding the method and implementing the strategy. Identifying where a company's purpose, it's processes and people can be harmonized is the first meaningful step entrepreneurs must take to implement lean ideas.
However, implementing a lean organizational strategy that cultivates a work environment where the methodology's strengths are maximized is a challenge. Because it can test individual characters and professional relationships lean methods should be strategically implemented with grace.
The effort demands that entrepreneurs embrace the following practices.
1. Embrace Broad Contribution
Entrepreneurs must be interested in learning about and providing an impact on all aspects of the company's operations. Business leaders should have a foundational understanding of each corporate function, and a sound perspective of how each component of the business contributes to the short and long-term objectives of the company. The goal is to build an informed team that can contribute on a wide variety of important business topics.
2. Carefully Articulate Assumptions
Entrepreneurs must scientifically define the assumptions that the company is founded upon with clear, easy to understand language. Similarly, allocating substantial resources to developing and testing the hypotheses is essential for defining a sound direction, building meaningful momentum, and fulfilling the company’s strategic objectives.
3. Prioritize Assumptions
Operating a company requires balancing urgency and uncertainty. Because many different, yet intertwined objectives must be achieved to bring about successful outcomes, entrepreneurs must ruthlessly prioritize what should be done first and last. Similarly, business leaders should recognize and avoid potentially harmful distractions that slow down processes or perpetuate uncertainty.
4. Observe, Observe, Observe
Initiating & leading a company represents an extraordinary learning opportunity. Navigating new market territories demands continuous observation of the competitive environment and reflection on how the company fits into its market. Entrepreneurs should cyclically re-examine whether or not the company’s mission is relevant to the company's target market.
When observations mis-match or disprove one or more key assumption, entrepreneurs must be ready to revise their assumptions, adapt to the market and change the business strategy. Agility is a key competitive advantage that business leaders should embrace and actively seek to reinforce wherever and however possible.
To summarize, cultivating an lean organization requires balancing observational facts, implementing procedures to support leveraging the observed market opportunity, and practicing flexibility to continuously adapt to market changes.
Effectively balancing these three components meaningfully contributes to sustaining the company's relevance over the long term. Overtime the methodology builds sustainable feedback loops that naturally harmonize a company's procedures and people.
To make sure an efficient lean approach is sustained, entrepreneurs should beware of two common pitfalls:
A. Iteration, Not Perfection
It is important not to speculate too much about potential customer demands or probable feedback. Entrepreneurs should encourage their product development teams to launch frequent updates in short cycles to find out exactly what customers want quickly and adapt the solution accordingly.
B. Analysis, Not Paralysis
Entrepreneurial teams should listen and learn from customer feedback, but they should not dwell too long on the collected data. Teams should quickly assess customer feedback, develop actionable strategies and allocate the required investment to sustain the company's momentum.
Achieving this outcome rests on entrepreneurs cultivating the right mindset. With the right attitude and approach the lean methodology can have a profound impact on bottom line of any business in the present, and greatly enhance its potential in the future.
When lean strategies are effectively implemented overtime they allow entrepreneurs to harmonize the processes and procedures of each business function along common guidelines.
Under this approach, entrepreneurs can eliminate waste across entire value streams of their business rather than at specific isolated points.
Harmonizing value streams across every business process reduces the human effort, space, capital and time required to build solutions. Lean methods effectively lower costs and reduce the potential for defects compared to more traditional operative business systems.
Moreover, by embracing Lean strategies, companies can quickly adapt to changing market environments and respond customer needs with flexibility. With greater process controls, businesses can increase their standards of quality, implement greater cost controls, and build faster throughput times.
These are the fundamental ares where lean strategies make businesses significantly more competitive, which in an increasingly dynamic economy is essential for a company's long term relevancy.
To build the right mindset that can embrace lean strategies, entrepreneurs should embrace the following entrepreneurial themes to guide their company's evolution.
Entrepreneurs should focus on what customer problems the enterprise will solve to achieve its strategic purpose or vision, as well as through which means the company aims to prosper. Sometimes Labeled “Product”.
Business leaders should examine how the company will assess each major value stream to make sure that each process is valuable, capable, and flexible, and that every business function is coherently and efficiently linked together.
Lastly, entrepreneurs should reflect on how the company distributes talent to share responsibilities and continually evaluate the value stream in terms of its business purpose and lean process. The goal is to make sure that every person touching the value stream is actively engaged in operating it correctly, and vested in improving it.
Purpose, process and people are inextricably intertwined in effecting the overall performance of a business. This cannot be stressed enough, particularly in lean environments.
When a purpose is lacking, processes deteriorate and people lack focus and motivation. When a process is broken, the underlying purpose becomes lost and people fail to adequately manage their time and resources. When the wrong people are involved in the business the company's purpose becomes disfigured and its processes lack cohesion.
To successfully build a lasting business, entrepreneurs must recognize this important reality and allocate the necessary time and energy to harmonizing each component of their company towards a defined strategic vision.
Sometimes this goal demands allocating resources for professional development exercises and learning. No matter the cost in time and resources, work towards a more effecient environment is essential and will substantial investment in the future.
A harmonious environment not only ensures the sustained economic success of the business, but it produces a positive and rewarding working environment that maintains a high level of engagement among all stakeholders.
Lean Strategy Mindset
To effectively implement lean methodologies across a company's operations, entrepreneurs must embrace broad collaboration. The different company stakeholders must have the freedom and confidence to voice their opinions on all aspects of the business.
The underlying purpose of the lean organizational method is to boost efficiencies and sustaining an open dialogue is a central tenant to achieving that goal. Nimble companies leverage open dialogue to quickly identify problems wherever they exist, and streamline the process to develop actionable solutions.
People, particularly in the startup ecosystem are independent thinkers and want to proactively engage on all levels of the business. They typically possess a powerful drive to challenge assumptions, contribute to the company's strategic direction, and in a variety of capacities work towards overcoming challenges to process the business.
A collaborative work environment that embraces different perspectives, skills and human strengths will easily discover impactful solutions for the business. These character traits should be embraced and supported, not diminished.
Entrepreneurs who actively build collaborative environments improve the levels of mutual understanding between different stakeholders, which more easily aligns the entire company towards a unified vision or objective.
The Lean Mindset
The result is a positive feedback loop that sustains collaboration and cross-functional focus on executing specific incremental objectives.
Work environments that do not support collaboration produce costly communication gaps that slow down operations and misallocate time, energy and resources. Businesses that do not value open dialogue miss ideas to improve their processes and fail to seize new market opportunities.
Part of sustaining a collaborative environment is making sure that individuals in leadership positions have enough humility to recognize when a particular approach or process needs improvement, and when another individual's ideas offer a better solution.
Although this can be a challenge to put into practice, early-stage entrepreneurs must keep in mind that the most important outcome is the continued growth of the business. Where good ideas come from, and who dictates their implementation should always come second to successfully executing a strategic objective.
Lean methodologies bear no mind to hierarchical structures and decision making. The only thing than matters is incrementally improving the solution to surpass customer expectations.
To build a lean environment that cultivates the right mindset, entrepreneurs should cyclically reflect on the following questions:
A. How Have We Planned Out The Business ?
B. How Do We Measure Our Success ?
B. What Specific Techniques Are The Most eEffective ?
C. What Things Do We Wish We Had Done Differently ?
D. What Resources Helped Us Along Our Way ?
By asking these questions on a quarterly or semi-annual basis, entrepreneurs can ensure that the internal mechanisms of the business are frequently improved to meet new market demands and aligned to corporate mission.
The outcome is a operational framework that efficiently sustains the viability and growth of the company without becoming complacent.
Lean Strategy Evolution
Setting aside the focus on product or service adaptation, lean methodologies also affect the natural evolution of a company's development from start-up to established market player.
A practical way to understand this evolution is to map out how actions, participants and outcomes will change as the business grows. The exercise will help entrepreneurs develop a good perspective of how short-term goals fit into a long-term strategy.
The following diagram represents a chain of events following the lean strategy.
The diagram illustrates that as the business grows the underlying assumptions which challenged early stage actions become increasingly solidified. Outcomes become progressively focused from proving assumptions and building mechanisms to support them to sustaining the businesses performance.
Outlining events and processes in this way can help entrepreneurs prioritize the requirements that yield the best operative results in the most efficient and economic ways possible.
The ultimate goal of Lean Strategy is to improve there operative policies in such a way that the least amount of resources, energy, and effort are required to yield the best possible results.
As with all things in business, achieving a lean organization requires balancing the requirements that can bring about successful outcomes with the means to achieve it.
With the right team and a collaborative mindset, lean strategies can dramatically increase the likelihood that a startup will achieve its short-term targets and build incrementally towards economic sustainability.
All it takes is the right impetus and the courage to overcome any and all obstacles.
For entrepreneurs who are unsure how lean methods can directly impact their business, a great way to build perspective is to examine other similar companies or competitors who have a successful track record from employ lean strategies.
As new technologies continue to proliferate every part of the economy, the adoption of lean methodologies will accelerate. Entrepreneurs of all backgrounds would be wise to educate themselves on the the strengths of the method, and implement them wherever possible.
After all building a strong team and saving the amount of time and effort required to achieve early-stage goals is every entrepreneurs top priority.
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