More than 90% of high-growth tech startups fail, while most of the less than 10% of startups that succeed experience several near-failures. 74% of high-growth tech startups fail because of premature scaling, according to UC Berkeley and Stanford research. Furthermore, CB Insights reports that 42% of startup founders consider the lack of a market need for their products as the main reason behind their business failure. To avoid this scenario, David Collis, Professor of Business Administration at Harvard Business School, gives simple advice: “Know what not to do.” He thus highlights the importance of developing a strong strategy.
Paradoxically, Collis observes that strategy and entrepreneurship are often defined in opposition to each other. Strategy is considered as the pursuit of clearly-defined goals in advance through carefully selected activities, while entrepreneurship is mainly perceived as an opportunistic business activity. Collis notes that in fact there is no such a sharp contrast between them but rather strong interdependence: “Strategy without entrepreneurship is central planning. Entrepreneurship without strategy leads to chaos.” To strike a balance between them, Collis suggests utilizing the potential of lean strategy, based on the following principles:
- “The opportunity cost of doing A is that you cannot also do B.” Due to limited resources, enterprises need to decide which projects they should pursue. As Collis notes, “[…] choices are mutually exclusive”. For example, the decision to customize a product for a new client will inevitably delay the release of version 2.0 of the product.
- Every choice yields a different outcome, and has unforeseen implications. If you choose to do A, you cannot simply do B next as circumstances will no longer be the same. Once you are ready to work on version 2.0 of the product, it might turn out that your competitors have already launched their own version 2.0. Consequently, you need to rethink what to do next.
- “Decisions are interdependent.” Organizations need to ensure that employee time – the scarcest business resource – is spent on tasks that are critical to the entire organization, not just to one of its departments. Organizational activities are restricted by various constraints such as market positioning or a shared sales force, which help ensure that all initiatives and innovations correspond to organizational goals.
- Market tests do not always provide useful information. Although rapid testing has been recognized as an effective way to maximize product-market fit, it does not apply to truly innovative products and services. Those innovations require long-term investments or even building their own ecosystems. Furthermore, some businesses mature slowly as customers need more time to appreciate the value of new products. In such cases, market tests might fail to capture their true business potential.
According to Steve Blank, a serial entrepreneur and educator, the lean startup approach is based on a distinct approach to business strategy: in contrast to existing companies, startups do not simply execute a business model, but are in the process of developing “a repeatable and scalable business model”. Blank distinguishes 3 key principles of lean strategy:
- Focus on educated guesses. Instead of investing time in planning and extensive research, entrepreneurs accept that they only have untested hypotheses. Thus, instead of writing a detailed business plan, they summarize all their hypotheses using the business model canvas template.
- Listening to customers. Entrepreneurs ask for customer feedback on their business hypotheses. Then they revise their hypotheses by making small or considerable adjustments, and test them again.
- Agile development. Entrepreneurs launch minimum viable products (MVPs), which have only key features, collect customer feedback on them, and then refine their products based on that feedback. During the agile development process, products are built in short, repeated cycles.
Having studied Toyota’s production system, James Womack, Founder and Senior Advisor at the Lean Enterprise Institute, and Daniel Jones, Founder and Chairman of the Lean Enterprise Academy, have identified 5 principles of lean manufacturing, used as a framework for improving workplace efficiency across industries:
- Value. First, organizations need to define customer value. This approach helps focus on the aspects of a product or service that customers most appreciate, understand what they are willing to pay, and using that information, lower production costs. That in turn eliminates waste, and ensures a leaner production process, thus maximizing profit.
- Value stream. To eliminate waste, organizations need to thoroughly examine the lifecycle of a product or service, including product development, materials, transport and customer usage. That helps identify areas which create value or waste during the production process and properly address problematic issues.
- Flow. To create lean processes, organizations need to ensure an uninterrupted flow of the value stream. If there are no disruptions in the production process, and all activities are perfectly synchronized, no waste is created, and thus efficiency is maximized.
- Pull. To avoid waste, organizations do not produce anything in advance. Production volume is based on customer orders. To ensure prompt delivery, production systems are designed to be fast and flexible.
- Perfection. Lean-oriented organizations strive for perfection and continuous self-improvement. This approach boosts innovation, creativity and solutions, thus giving a competitive advantage.
References: Startup Genome Report Extra on Premature Scaling (2011) | Erin Griffith, Fortune | David Collis, Harvard Business Review | Steve Blank, Harvard Business Review | Reverscore.com