Small Business: Lean thinking

Dan Khan, a technology entrepreneur and startup advisor.

The management philosophy "lean" is centered on making obvious what adds value by reducing everything else. This week we look at Kiwi companies' lean strategies and how it works for them.

Mention the term 'lean' and many will think it's a topic that applies to big manufacturing companies. But it's also a concept that's being embraced by smaller and mid-sized Kiwi companies, and in a variety of sectors and contexts.

For the uninitiated, Wikipedia states that "essentially, lean is centered on making obvious what adds value by reducing everything else" and is a management philosophy derived mostly from the Toyota Production System.

Trish Wilson, founder of the CICE network for New Zealand's lean and continuous improvement community, says there's some great work already being done by those embracing lean around the country, but there's a big opportunity for more firms to do so.

"Rather than the relatively small size of many of our businesses here being an impediment, I think that offers us a real opportunity because we can more easily network, learn from each other, and overall create a greater push with these ideas," she says.

Marina Hirst Tristram is executive director of operations at Tasman Bay Food Group, which kicked off its first lean initiatives almost a year ago.

"It really came after the whole organisation got together and worked out a clear purpose and values. It turned out some of those values included 'continuous improvement' and 'striving for excellence'. So we had that direction and I felt that lean would give us the framework to get there," she explains.

One of the first activities the firm instituted was daily, five-minute morning meetings that include the whole team and follow a set agenda. Another lean technique they learned straight away was '5S', standing for sort, straighten, shine, standardise and sustain.

"We were already pretty proud of our site because it's only eight years old, but once we learned about 5S we've taken ourselves to the next level. I can now say that everything on our site is there because we need it. Our space is used for 'value adding', everything is in its place and there's no junk lying about."

Another context where we're hearing about lean is in the technology community, where the 'lean startup' philosophy is increasingly being embraced.

Dan Khan, a technology entrepreneur and startup advisor, says it's a concept that's used by tech giants like DropBox and Groupon, as well as smaller startup firms.

"The key tenet espoused by the lean methodology is to eliminate waste at all parts of the process. With early-stage startups being such an unknown quantity - you don't know who your customers are, what product will satisfy them, or what business model needs to support it - there's lots of opportunity to waste precious time and money building the wrong product or service," he says.

"So lean startup provides a process to structure that uncertainty to reduce future risk of failure. It does this by focusing companies on what the biggest risks are, and then provides a method to systematically test those risks through experimentation and validation, before scaling up the team, resources and funding."

Q&A: Dan Khan

Dan Khan is a technology entrepreneur and startup advisor. He currently helps large organisations to innovate by applying startup thinking to accelerate the development and growth of people and ideas.

You're a keen advocate for lean thinking in startups. Why?

The key tenet espoused by the lean methodology is to eliminate waste at all parts of the process. With early-stage startups being such an unknown quantity - you don't know who your customers are, what product will satisfy them, or what business model needs to support it - there's lots of opportunity to waste precious time and money building the wrong product or service.

So lean startup provides a process to structure that uncertainty to reduce future risk of failure. It does this by focusing companies on what the biggest risks are, and then provides a method to systematically test those risks through experimentation and validation, before scaling up the team, resources and funding.

It's all about changing your mindset as an entrepreneur to understand that the real unit of progress in a startup is validated learning: about your customers, product, distribution, and business model - ultimately allowing you to change from a startup into a company faster. And that's essential when you're operating on limited cash reserves.

Is it a concept you're seeing a lot of startups embracing?

The concept was on the fringes of the technology world for a number of years before Eric Ries published his book Lean Startup, but now I'm seeing more people realising that it's the smartest way to build startup companies. But I do see a difference in those who say they're using lean startup versus their level of commitment to the process.

While the companies I work with focus on key metrics like their number of customers and monthly recurring revenues, few, if any, really reflect this kind of 'innovation accounting' by reporting on the outcomes of their learning and progress towards becoming a real company. But it's a deficit I see in experienced board members and investors that sit around these companies as they develop too.

How are people being introduced to the concept here?

I personally use lean startup as one of the tools in my coaching toolbox, and so do some of the others I work with, but we need more surface area to raise awareness of the real benefits.

That's why when we launched StartupWeekend in New Zealand a few years ago, I made sure lean startup was at the heart of that process, and also to bake it into the curriculum for more formalised training at startup accelerator Lightning Lab. For people who are interested in learning more about lean startup there are active meetup communities in Wellington, and to a lesser degree, Auckland too.

What are some examples of startup companies that you think have used this kind of thinking to good effect?

Lean startup is used by some of the biggest companies in the world like DropBox, Groupon and Intuit - both to create new products and services, and to innovate inside the enterprise. One of the positive effects of using it is you can invalidate product ideas sooner rather than later. The outcome of this invalidation results in a 'pivot' of one part of the business model, adapting to what the market or customers are telling you, and building a better product.

I've seen exactly this in products I've built myself, pivoting a startup we were building from an advisory/matchmaking product for startups into a paid micro-consulting service. We've also seen this with companies in accelerators, who within the first week of working with the methodology change direction significantly once they became explicit about testing their assumptions with customer feedback and by building quick, disposable 'minimum viable products'. In three of those cases companies killed their idea entirely and started a completely different business.

Is this kind of thinking for everyone?

There's a bit of a hype-cycle around people who discover lean startup for the first time; they often think it's a panacea and evangelise it as the only way to build startups. Without seeing its place alongside other models, it's easy to get very focused on making small incremental advances rather than making larger more disruptive iterations.

I think lean startup is great when you're operating in environments of extreme uncertainty, but when everything is known other models can be more applicable. I've talked to people who consider lean startup isn't as appropriate for growth- or network- enabled businesses, but I think those people don't really understand the core concepts behind it.

While people call it 'lean startup', I think it's really just a label for a common sense reminder to break down the biggest assumptions that could kill your business, put some rigour into testing those early, and have a mechanism to review and incorporate those learnings fast, to end up building a better business faster.