In the world of business, it’s no secret that minimizing unnecessary expenses can forge a sure path to success. Although many business models approach this dilemma in different ways, one of the most efficient strategies is the lean business model.
What is the Lean Business Model?
The Lean business model describes a business philosophy centered on the idea of minimizing waste to maximize profits and efficiency. Where other business models differ in their approach to improving profitability, the lean business model reduces business processes to the bare essentials. Leaving little or no room for unnecessary tweaks.
Key components
Multiple factors need to be considered in order for the lean business model to be executed properly. Every step of your business process, from design to manufacturing to marketing and finally the actual transaction, should be as condensed and simplified as possible, not only for you but also for your customers.
Minimum Viable Product (MVP)
One of the first and most important steps in the process of developing a Lean business model includes designing and creating what is called minimum viable product, or an MVP.
The basic philosophy behind this business model is to spend as little investment as possible while maximizing return. This investment does not always have to be money, as other resources such as labor, time and real estate also play an important role.
One way to minimize investment, especially early in the startup process when risk is highest, is to develop an MVP. An MVP is a simplistic, prototype version of the product you want to sell. An MVP should be the version of your product that is the least polished and requires the least amount of money, time, and manpower to produce.
Designing an MVP is critical, especially in the early stages of a startup. Often, during this phase, important information is revealed through public comments. For example, if your MVP turns out to be unpopular with one group but surprisingly loved by another, you can use that information to pivot. This puts you in a position to receive valuable input from consumers. Also, you have only invested a minimal investment.
It’s important to remember that your MVP won’t be perfect. This product is intended to be defective so that it initiates a dialogue between you and the consumer. If you’re a little embarrassed to show people, you’re probably on the right track.
The Learn, build and measure cycle
As your MVP receives feedback from consumers, you can use that data to improve the initial product behind the scenes. At this stage of the Lean business model, your goal should be to improve the product as much as possible. This is so that it successfully solves a customer’s need while incurring minimal expenses.
This is where the“Learn, build, measure” cycle. come into play It refers to the cyclical process by which you internalize information about your product, use that information to try something new, and test it with the general public.
Sounds simple on paper. But putting it into practice is a bit more complicated. First, you need to be open-minded to hear customer complaints, not just praise. The business world is cutthroat, and if you refuse to accept outside opinions on your ideas, you’re not going to get anywhere.
This cycle works in such a way that one step cannot be successfully completed without the others. For example, let’s say you design and demo an MVP that performs poorly because it’s not portable enough for consumers. If you didn’t know this earlier, you could have made a much higher investment in a product that lacks something your target audience prioritizes. wow
Importance of the construction step
However, this knowledge is also useless on its own. Once you know why your MVP isn’t impressing, you need to take the time to improve it. This is where the Build step comes into play. This step is the longest and requires the most patience. You may come across this step again and again as you work on the MVP.
Every time you come across the “Create” step of the cycle, you want to add quality to the MVP in some way. All without breaking the bank. Product development can take months or even years, so be prepared for a lot of tweaking. After each build improvement, re-introduce the MVP to the audience to gauge their response. Once the MVP performs well consistently, you can finalize your product.
The Lean business model tends to be very forgiving during the product development phase. This is because, at each turn, you invest in the product only the minimum necessary to give customers what they want. This saves many small businesses from creating a never-ending black hole of expenses before they’ve even made a profit.
Understanding value
In the lean business model, your goal as an entrepreneur should be to cut fat wherever possible and reduce business processes. Ideally, you shouldn’t invest in anything that doesn’t add value to your business. In this business model, there is 3 types of values that your efforts can create.
Validated learning
One form of value is validated learning. Validated learning occurs when you receive feedback from your MVP, implement it in a second design, and the results are an improvement between your product and the consumer. Going back to the example above, if you redesigned your MVP to make it portable and therefore more accessible to customers, you might see an increase in interest.
Validated learning is seen as valuable and not a waste of investment. This is because without going through this process, your product would not have reached its highest potential. And therefore it would not succeed. Remember, negative feedback doesn’t mean your product is a failure! Instead, it creates an opportunity for improvement.
Customer value
Another type of value in this business model is customer value. This refers to the benefit your investment brings directly to the customer experience. If you invest in adding a mobile app, for example, you’re adding value to the checkout experience by making it simpler. Customer value is important because consumers recognize these efforts and respond to convenience.
Investments in customer value must achieve at least one of the following:
- Add something to the MVP that customers want
- It contains something that customers are willing to pay for
- Give a competitive advantage
- Improve customer engagement/generate leads
- It makes the MVP more attractive to customers
- Increase the chances of returning customers
Business value
Business value refers to investments that contribute to the rationalization of business processes. In some cases, these investments and expenses are required by law. Other times, these costs can be attributed to keeping staff well compensated, having the necessary machinery, etc.
Enterprise value investments must achieve at least one of the following:
- It adheres to a legal mandate or regulation
- It reduces the risk to the company
- It plays an irreplaceable role in production
Waste minimization
Anything beyond what is considered “value” in the Lean business model falls into another category: waste. Waste refers to any investment that produces little or no return or is not required for business processes to take place. In the Lean business model, waste is where you want to cut corners because your MVP can still thrive without these extra expenses accruing.
Ultimately, you are responsible for deciding whether something is absolutely necessary. Remember that wasted investments aren’t just about money either. It can also indicate a waste of time or labor.
Here are some things that are often considered waste in the Lean business model:
- Shipping/Delivery
- wait (waste time)
- Unused facility space
- Part-time workers
- Overproduction
- mistakes
Benefits
There are many benefits of using the Lean business model. With the pace at which modern technology continues to evolve, it is increasingly important to stay abreast of changing customer demands. Through the lean business model, you are putting customer needs and opinions at the center of your empire. If your product works well and you stay on top of feedback, you can go very far.
This business model also appeals exclusively to startups that rely on minimal or no funding available to them. Using these tactics, almost anyone can jump into the world of entrepreneurship as long as they strategize and respond to customer input.
challenges
The lean business model is not for those who can’t take the heat. If you are stubborn or naturally resistant to criticism, this business model will not be a good fit. You must be willing to constantly adapt and grow to take full advantage of all that this business strategy has to offer.
Also, there is a lot of trial and error involved in this process. You have to be resilient and persistent in the face of what can be months or years of setbacks. If you follow this business model with very little capital, you can also expect the product development phase to last much longer. This is because you will need to be meticulous about where you invest at all times.
conclusion
While not for everyone, the Lean business model has a lot to offer. Especially for the most determined and flexible entrepreneurs. It provides an excellent, low-risk opportunity to get the most out of a product before committing to a final design. If you can handle the pressure and are committed to your dream, this business model may be perfect for you.
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The business world is quickly embracing the lean business model to improve efficiency, cut costs, and increase profits. At Ikaroa, we understand that many entrepreneurs and business owners are being asked to make the transition, but may not be sure what the lean business model is all about. In this article, we’ll help you understand the fundamentals of the lean business model and how it can help your business progress.
The key concept of lean business is that you should produce only the necessary output required to meet customer needs, avoiding any over-production. That way, you can reduce waste, maximize resources, and keep production costs as low as possible. To achieve a lean business model, companies must first understand the market they are operating in and face the uncertainties that come with it. This involves both data-driven analysis as well as more traditional qualitative research. Utilizing both types of research, companies will be able to identify their customer needs and develop the necessary process to fulfill that need.
Once a company has the data and has identified their customer’s needs, the lean business model can be set up using various tools such as lean manufacturing, value stream mapping, and the Kaizen approach. Lean manufacturing focuses on streamlining the production process. This includes using quality management tools such as 5S and six sigma to reduce errors and increase efficiency. Value stream mapping looks at the process from end-to-end to identify any unnecessary steps that can be removed to maximize time and resources. The Kaizen approach is a systematic approach to improvements that involve small, incremental changes.
At Ikaroa, we understand that the transition to the lean model can be daunting to many businesses, but the results are worth it. Companies that adopt the lean model have seen improved production output, fewer defects, and faster lead times. Through the lean model, businesses can reduce costs, improve quality, and increase profitability. Here at Ikaroa, we are committed to helping entrepreneurs, business owners, and companies make the transition to a lean business model in order to unlock their business’s full potential.
