The lean movement has caught fire with entrepreneurs, thanks to Eric Ries, Steve Blank, and Ash Maurya.  But how important are concepts such as minimum viable product, customer development and pivoting to larger growth companies?

Lean development means creating a successful offer before running out of resources — which is as important to growth companies as it is to startups.  As early stage companies mature, the process for creating new offers gets bogged down by internal processes:  market requirements documents (MRDs), product review committees, business plans and more.  Smart growth companies are using lean concepts to streamline their processes.

Being lean is not about being cheap – it’s about speed.  If an idea is going to fail it should ‘fail fast’, leaving the company with the market learning, time and resources to try a different approach.  The more at bats you can get with limited funding the greater the chance of getting a hit…even better, a home run!…before time runs out.

Growth companies can benefit from three important lean concepts:

• Minimum Viable Product:  Get to market quickly with a basic offer
• Customer Development:  Learn continuously from customer behavior
• Pivot:  Change the offer quickly if something is not working

Minimum Viable Product

The traditional new product development process has many steps: conduct market research, create a market requirements document (MRD), design and develop an offer, test a beta version with early adopters, limit feature creep, release Rev 1.0, and hope for the best.   The time from project launch to real market feedback can be a year or longer.

The concept behind the minimum viable product (MVP) is to get into the market as quickly as possible with the most basic offer so that customers can drive decisions about features and business model.  How ‘basic’ can this offer be?  Dropbox proved that the minimum viable offer can be as basic as a web landing page with a description of a new offer to capture interest and prospect names.  Inc Magazine describes a similar MVP approach used by TPGTEX solutions.

Customer Development

In the new lexicon of lean, customer development should happen in parallel with product development.  That is, companies need to focus more on developing new customers — through trial and error with new offers.  Steve Blank describes the Four Steps to the Epiphany:

The key is to iterate on Steps 1 and 2 to validate the new offer before investing resources in scaling a new business.  This critical step is called the pivot.

Pivot

What happens when customer feedback on your MVP does not support the business model?  You pivot.  That is, you make one or more changes, grounded in customer learning, to find a better business model.  These changes might involve features, market segments, pricing, channel, or other business model elements. A sophisticated version of the pivoting process involves market experiments, or A/B testing.  Each experiment provides feedback on what to keep and what to get rid of as the company pivots its way to success.

Pivoting is not just for startups.  Larger growth companies can also avoid failure by pivoting in time:

• The Nespresso coffer maker and its proprietary coffee capsules were too expensive for either offices or consumers; the business was nearly shutdown.  However, by targeting wealthy consumers with a personalized home delivery service (the Nespresso Club), Nespresso found a large growth market in a highly profitable segment.
• Nearly bankrupt in 2001, Amazon recovered from an over-investment in its worldwide logistics platform by recruiting other retailers such as ToysRUs as customers.  Ten years later the company has pivoted its platform business for online retailers into the marketing leading cloud computing service: Amazon Web Services.

Action Items for Growth Companies

What steps can growth companies take to become more lean?

1. Use customer feedback from Day 1 to design new offers.  Get members of the ‘new offer’ team out of the office and in front of customers.  In every new offer discussion ask, “What are customers telling us?”  (I continue to be amazed at the number of successful companies who don’t talk to their customers.)
2. Shift from MRDs to MVPs.  Challenge the new offer team to get into the market much sooner with a very basic offer.
3. Measure customer behavior versus expectations.  When it’s clear that the business model isn’t working, pivot while you have the time and resources.

What keeps a promising young business from growing?
In large companies, growth is dampened by maturing markets and inflexible organizations.  Private technology companies, on the other hand, are built for growth.  They operate in a world of innovation, disruptive technologies, and entrepreneurial energy.  These agile companies can zero on new markets and ride new growth curves.  For small businesses the challenge is not how to grow, it’s how to overcome the inevitable barriers to growth.

Some of these barriers may be out of a company’s control – technology that doesn’t work or regulatory hurdles.  But if entrepreneurs were better prepared to overcome the barriers under their control, more small businesses would succeed.  The stakes are high for the US economy — small businesses are the engines of GDP growth and job creation.

Here is my list of the ten the most important barriers to the growth of technology companies.  Because each of these barriers requires a different response it’s important to diagnose the problem before looking for a solution (like fixing a high performance car or a golf swing.)

1.  Market Market barriers take three forms:

• There is no market.  To have market you need a customer with a problem.  If the customer is really an innovator who mostly thinks your the technology is interesting, then you have what I call technology in search of a market.
• The market isn’t ready.  It’s important not to confuse a few early adopters with market traction.  If your product is a nice-to-have, no budget will be available.
• The market isn’t big enough. An interesting market needs to be big enough to:  allow for a company to recover from early mistakes; accommodate multiple competitors; and provide for 5+ years of 25%+ growth.  A good rule of thumb for potential market size would be at least $500M.

2.  Team For a small technology company, a business strategy is like a newspaper – it’s out of date the next day.  A team needs more than just the right skills –  it must also be a learning organization that can respond to change and adjust accordingly.  The team also has to be on the same page regarding customer priorities and operational challenges.

3.  Positioning Positioning is the high order bit in technology company strategy.  The same company with the same product can position itself to can create high shareholder value, or to hit a wall.  Compare the positioning of the iPod versus a generic MP3 player.  Getting positioning right is really hard work – growing a company without the right positioning is even harder.

4.  Value Proposition Why should someone buy your product?  What problem do you solve with what benefits in cost reduction, revenue enhancement or operational improvement?  The answer will affect product strategy, pricing, sales strategy and messaging.  Many companies fail to grow because customers don’t know that there’s a product out there that could help them

5.  Go-To-Market Strategies What market segments is the company targeting?  How does the company find and qualify prospects, using both traditional and digital media?  What mix of sales channels makes the most sense?  The largest component of operating expenses is usually Marketing and Sales.  Decisions about the efficiency of go-to-market strategies drive capital requirements and the sustainability of the business model.

6.  Pipeline If I could have one piece of data to gauge the health of a company, it would be the pipeline coverage ratio.  How much new business has the company identified and qualified compared with its committed revenue plan?  The predictability of the business model depends on the ability to build sufficient pipeline within a reasonable budget.

7.  Sales Productivity The Sales team is often not the cause of sales shortfalls.  Making quota matters, of course, as long as the quotas are reasonable and the sales tools are there.  But there are two other important measures of Sales effectiveness: one is the close rate (percentage of qualified deals that get closed) and the other is the win-loss ratio.   If these metrics look reasonable, it may be better to look at other parts of the growth engine such as the pipeline.

8.  Business Model Business models are not just for CFOs.  The only way to grow a business without relying on a perpetual infusion of capital is to find a sustainable business model – one that that generates the cash necessary to fund continued growth of the business.  This means attractive gross margins and of course positive EBITDA and cash flow.  Beware of the business that puts off the discipline of defining a sustainable business model while it pursues downloads, subscribers, and eyeballs in the interests of gaining critical mass.

9.  Capital If the business model defines a future stream of profits and cash flow, how much would you be willing to pay to own a piece of that business, considering the risks associated with getting there.  This is the question for venture capital and private equity investors.  A software business with $25 million in sales that gets acquired for $75-$100 million shouldn’t cost $50 million to build.  Today’s entrepreneur needs to show investors a capital efficient approach to getting to cash-flow-break-even and ultimately to an attractive exit.  Otherwise, capital availability will be the major barrier to growth.

10.  Customer Satisfaction If customers are not satisfied, there will no repeat purchases, no referrals to other prospects, and no feedback to guide product improvements.  Furthermore, one unhappy customer can be more costly than acquiring ten new customers.  The factors that determine customer satisfaction can be product, purchase process, customer support, and other company interactions.  The key is an early warning and response system.  Social media can help.

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In the middle ages, theologians debated the number of angels that could dance on the head of a pin. In the modern era, entrepreneurs debate whether innovation comes from technology breakthroughs or customer needs. In both cases, it’s the wrong argument. Those who argue that technology drives innovation will cite Henry Ford or Steve Jobs – two guys with a lot of credibility. Ford once said, “If I asked customers what they wanted they’d have said faster horses.” And Steve Jobs was famous for saying, “It isn’t the customer’s job to know what they want.”

UNDERSTANDING THE PROBLEM
The middle ground—which too many companies miss—is the enormous advantage of understanding what problem the customer needs to solve. In fact, Henry Ford made a big bet that customers wanted an automobile—the problem was that few could afford one. Steve Jobs believed that music fans wanted to bring their music with them, but none of the available options were attractive. Watch the public launch of the iPod and you’ll see Steve Jobs going through great pains to describe what consumers were lacking in the available choices: CD player, MP3 player, and flash drive.

If you understand the customer problem you dramatically improve your odds of successful innovation. Clayton Christensen, author of The Innovator’s Dilemma, underscores this point when he encourages innovators to understand the jobs customers need to get done. When Apple launched its ill-fated Newton device, no one understood what problem it was supposed to solve. Later, when Apple launched the iPhone we all understood that this was the way to carry one digital device instead of a separate phone, music player, and organizer.

WHAT’S MISSING
Companies don’t spend enough time understanding the changing needs of their customers. They spend too much time on product development and not enough time on what Steve Blank calls customer development. Ask any executive how many customers they talked with last month—not including sales situations and service problems. You may be surprised at the answer. One of the first things Lou Gerstner did when he joined IBM was to require his top executives to visit a certain number of customers per week and send him a write-up by end of day Friday. Most people got the message.

How did Amazon get into the cloud computing business? Someone in the company observed that Amazon’s retail customers, the thousands of small businesses that use Amazon’s eCommerce platform, were not sophisticated enough to take advantage of cheap computing and storage in the cloud. This Amazon renegade pitched Jeff Bezos on the idea of creating a new business that would make it easy for small retailers to lower their IT costs using a simple cloud computing service from Amazon. Today Amazon is the market leader in cloud computing – bigger than IBM, HP, Google, Microsoft, and other tech giants.

If innovation is your goal, by all means look to technology for opportunities to disrupt the current playing field. But if business success is also your goal, make sure your innovation lines up with a critical customer problem that no one has solved. And if you’re wondering what that problem is, ask your customers.

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In 1974, British industrial designer James Dyson was using his Hoover Junior vacuum cleaner and became incredibly frustrated by how weak the suction was, and how quickly it clogged up. From that moment on, he became convinced he could build a more efficient vacuum cleaner. It took many years and over 5,000 prototypes, but in 1993 he created the Dyson DC01. Within 18 months it became the biggest selling vacuum cleaner in the U.K.

Fast forward to the 2013 International Automobile Show in New York City. According to the Wall Street Journal, while many automobile manufacturers were showing off their models’ latest tech bells and whistles, it was a centralized vacuum cleaner in the Honda Odyssey mini-van that “stole the show.” The idea originated from an engineer at Honda who went on a road trip with his family and was frustrated by all the crumbs and trash that accumulated in his own minivan. His engineering team at Honda realized that a centralized vacuum system “would have a lot of value to their customers.”

While vacuum cleaners might not be the flashiest of products, they don’t need to be. Dyson and Honda succeeded because clearly they solved problems for their customers.  A flashier example may be Amazon Web Services.

Most people think of Amazon’s customers as the millions of consumers who buy books and other retail products online.  But Amazon also serves more than 100,000 retailers who use Amazon’s eCommerce platform for their online stores – from specialty retailers to Target.  In 2003, Amazon realized that its retail customers had a problem: they would never realize the costs savings of cloud computing because they lacked the technical sophistication.  An entrepreneurial employee proposed to Jeff Bezos that Amazon create a service business to provide their retail customers an easy way to access computing power and storage on demand.  Amazon got a head start in this emerging market and its Amazon Web Services business went on to become the market leader in cloud computing – bigger than the cloud computing businesses of Google, IBM, HP, and Rackspace.  And all because they started with a customer problem.

If you want to design a great product, find a good customer problem to solve.

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When it comes to sustaining growth, you need to find your company’s next S-Curve. And to do this in a way that’s predictable, you need an ongoing innovation process. After a thorough study of the best practices of innovative organizations and the advice of many innovation experts, I’ve found a way to simplify this continuous process, focusing on the four essential components which together will serve as your innovation power tools.

1. Learn – The first step in any innovation process is to uncover the unaddressed needs of your customers. You need to stand in their shoes to understand their business environment, and to learn what annoys them and what delights them, their aspirations, and what keeps them up at night. Learning from your customers requires listening to them and observing how they operate. The goal is to uncover an opportunity to solve a new problem for your customers – before someone else does.
2. Design – The customer problem identified in the first step becomes a design challenge that drives the creation of new solutions. In most cases, there are no existing solutions other than the customer’s own approach. This creates a greenfield opportunity – a new uncontested market. As with any greenfield opportunity, however, there is a lack of structure and an almost unlimited set of options. Therefore, this kind of problem solving requires a process that is different from traditional business planning. As a result, the most innovative new product teams are borrowing from the toolkits of designers and architects by using design thinking to explore a wider range of creative options.
3. Test – Once your team has designed a new solution, it needs to test its concept with prospective customers: Does it solve the problem it is intended to? Is it easy to use? Is something missing? Will the customer find the budget to pay for it? Too many companies bypass this step, but it’s better to get these questions answered before a company invests a significant amount of money in product development and launch. This testing phase enables you to glean valuable insight from customers and serve to prevent your company from discovering product design flaws the hard way.
4. Model – Once customers have validated a new concept, your company can focus on developing a more scalable commercial version. The company also needs to decide on key elements of the business or delivery model, including pricing, positioning, partnerships, and customer acquisition and retention. One can’t assume that the business model for existing products and services will necessarily work for the new solution. New business model designs can be as disruptive and forward-thinking as the new solution itself.

Lastly, remember that innovation can never be a fire drill. And the launch of your company’s new product or service is not the finish line, but as the start of a journey of learning from customers and improving the new offer over time. It’s just the beginning of another S-Curve!

For more insights like these, check out my new book, The Curve Ahead, which was featured in the July edition of the Business and Leadership section of Amazon’s “Best Books of the Month.” Copies are now available through Amazon and iTunes. An audiobook version will be available in the coming weeks.