The Japanese company Toyota started a new process they called the Toyota Production System which became known as lean manufacturing. In his book, “The Lean Startup”, Eric Ries formalised the application of the lean framework to software Start up companies – that is companies that have been formed by a small group of people to exploit a new software idea or innovation. The concept of Lean is straight forward but dramatic in its consequences. As Ries reveals, he has worked at many failed startup companies before applying his new learning which resulted in his next company, IMVU, becoming a tremendous success.
There are five principles of Lean Startup: 1. Entrepreneurs are everywhere; 2. Entrepreneurship is management; 3. Validated learning; 4. Build-measure-learn; and 5. Innovation Accounting. And there are three stages that an innovative company has to traverse to be successful: 1. Vision; 2. Steer; and 3. Accelerate. To see how these fit together let’s consider the example timeline for an innovation as indicated in the diagram below.
Before we even start the time line, the first thing that a Founder must have is a vision of what the benefits of their innovation or invention will have on the world at large. Who will be the people who would use and buy the product? What problem are they expecting to solve? How can it be made?
The Founder or Co-Founder is responsible for steering the development of the solution through the Build-Measure-Lean feedback loop. At each stage there are specific actions that need to be taken. In the first instance, the Founder establishes the Minimally Viable Product (MVP) and works out how he will measure the success (or otherwise) of the product. The MVP is the product with the minimum features that will work for the company’s first customer. We have allowed the company four months to build the MVP which results in a product which is supplied to the first customer. The company spends the next month collecting all the data required to determine the success of the product. Once all the data is collected a further month is spent converting the data into information then into knowledge before it can learn and make wise decisions about the future of the product (this is a traditional DIKW cycle). The Entrepreneur needs to decide which of the eleven options for change he must take before the next build cycle starts. 1. Zoom-in; 2. Zoom-out; 3. Customer Segment; 4. Customer Need; 5. Platform; 6. Business Architecture; 7. Value Capture; 8. Engine of Growth; 9. Channel; 10. Technology; or 11. Persevere. (These will be covered in a separate paper in more detail). This decision will drive the next build cycle – in our hypothetical example we’ve allowed just two months for the next build phase.
In this example building the MVP took 4 months and the second build took just 2months. The Build-Measure-Lean cycle is followed as quickly as possible in order to ensure that the product is kept closely aligned to the emerging customers’ needs. At each stage one of the eleven options are considered allowing the company to concentrate on the most successful strategy. As the process matures the revenue increases as the company hones in on the needs of its current and new potential customers more effectively than its competition.
While this summary is brief it is obvious how Toytoa’s Lean Manufacturing system has been modified to dramatically increase the success of start up companies everywhere. It is time for this methodology to be applied to the process of Commercialisation which we will look at next week.