Lean start-up thinking for all

My Financial Times Column 10/25/10

Not so long ago, management theorists and manufacturing scientists drooled over Toyota. Its production system represented scientific management at its best, the climax of a century that began with Frederick Taylor’s time-and-motion studies, passed through Henry Ford’s River Rouge plant, Alfred Sloan’s General Motors and finally reached perfection in Toyota City, the vast complex of manufacturing and assembly plants east of Nagoya.

A spate of recalls has recently dented Toyota’s reputation. But its management principles are finding new life in a very different corner of business: technology start-ups.

At the core of Toyota’s philosophy is the idea of “lean” processes. The term is often misunderstood to mean cheap. In fact, a lean production system is one in which every step of every process is transparent and considered ripe for improvement. Thinking lean is about constantly measuring all you do, and being able to change quickly as fresh evidence emerges.

Apply this to starting a company or launching a new product within an existing company. The classic method is to look at the market for an opportunity, establish a business case, develop your product, test, validate and finally launch. At each stage, you gather resources, establish criteria for the next step and try to adjust as you go. The challenge these days, though, is that technology and customer tastes are moving so fast that the classic method is no longer adequate.

Eric Ries, a Silicon Valley entrepreneur who has coined the phrase “lean start-ups”, happens to drive a new Toyota. While he’s delighted with the car, he says its GPS system encapsulates the problem. Here you have a car packed with technology, but the GPS system is primitive compared with what he could download to his phone. The reason is that the innovation cycle time for car manufacturing is much slower than that for GPS software. So one part of the car will seem dated long before the rest of it.

Mr Ries hit on the idea of lean start-ups after suffering one failed technology start-up and enjoying one success, the 3D instant messaging company IMVU, as well as observing the peculiar fortunes of many others as an investor and adviser. The classic start-up methods, built on linear management and innovation processes, he found, were not working for him or his peers. “They kept blowing up in my face,” he says.

Such methods offered too little flexibility to deal with changes in available technology and in customer needs. Imagine that today you decide to launch a new product. You size the opportunity, talk to potential customers, gather the resources and set to work. By the time you’re ready to launch, what are the chances your product is still relevant?

Mr Ries and other new management thinkers – notably Steve Blank, a former entrepreneur who now teaches classes at Stanford and the Haas Business School at Berkeley – say the risks in any start-up can be reduced by constant interaction with potential customers during product development.

Rather than waiting until you have all your ducks in a row, you iterate early and often by finding customers willing to help you refine your product and even buy it in its most primitive form. You don’t waste your money by investing in an unproven product, but rely on customer feedback to tell you where to spend.

The ideas owe much to “agile software development”, an adaptive process that values customer collaboration, responsiveness and individual input over strict product road maps, tools and marketing plans. For the traditionalists, agile development may smack of ill- discipline, when in fact it is just a different kind of discipline.

Technology companies are the most obvious seeding ground for these ideas. Facebook began with profile pages and a basic messaging service and has been adding features over time based on feedback from users. But Mr Ries says his ideas are equally applicable to larger companies. He recently returned from a trip to the UK and Ireland, during which he says he advised multinationals on their innovation processes. “My own definition of a start-up is an institution asked to create something new under conditions of high uncertainty,” he says. “This has nothing to do with company size.”

One counter-argument to this is that some risks are better taken than minimised. Customer development may increase your chances of certain revenue, but not your chances of maximum revenue. Great product innovators, like great film-makers or novelists, can develop in isolation, deposit their products on an unsuspecting market and still triumph. But that is a high-risk route. Not everyone can be Steve Jobs or James Cameron. For the more ordinary among us – who have not founded Apple or had a 3D movie hit – lean is a far better way to go.


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