Lean startup: innovation builder or killer? Limitations of lean methodology

In my last article I provided a brief overview to Lean methodology as an approach to venture building. In this article I will explore two key limitations to this approach. If you haven't read the previous article, I suggest doing so for necessary context. To give a brief recap, Lean methodology is a scientific approach to the creation of startups. Lean relies on experimental learning by quickly testing falsifiable hypotheses, often using a series of ‘minimum viable products.’ When results are below hypothesized levels, entrepreneurs ‘pivot’ to a new business model or cease to continue with the venture altogether to avoid further wastage.

The fundamental steps involved in the Lean process are:

1.??????Entrepreneur has an idea

2.??????Entrepreneur develops a minimum viable product to test a hypothesis

3.??????Entrepreneur launches MVP

4.??????Entrepreneur learns key insights about viability of business model

Eric Ries, the author or The Lean Startup provides a simple maxim for the creation of MVP’s:

“As you consider building your own minimum viable product, let this simple rule suffice: remove any feature, process, or effort that does not contribute directly to the learning you seek.”

Lean is about learning fast by continuously testing what you think your customers might want and adapting based on the results. The key to success is speed - doing this quickly enough that you learn enough to create a solution the market wants before you run out of funds.

“The only way to win is to learn faster than anyone else.”

In August of 2020, I had the pleasure of joining the 5th Annual Lean Startups and Innovation Strategy workshop, hosted by Harvard Business School. It was during this workshop I was first introduced to several eye-opening limitations of Lean and the business model canvas.

If you’re not familiar with the business model canvas, it is a tool used in Lean as a practical aid to enable startups to map their hypotheses and search for a viable business model. The BMC features nine distinct boxes to fill in: key partners, key activities, key resources, value propositions, customer relationships, channels, customer segments, cost structure, and revenue streams:?

The hope is that by addressing the nine elements of the canvas that valuable hypotheses will emerge. These hypotheses are then to be tested through experimentation.

Before I provide an overview of Lean's key limitations, I would like to thank Professor Teppo Felin for providing me with several fascinating papers that he has co-authored on this topic. One of these papers: ‘Lean startup and the business model: Experimentation revisited’ by Teppo Felin, Alfonso Gambardella, Scott Stern and Todd Zenger, has greatly advanced my understanding of the limitations of Lean. The ideas within this article are a condensed version of that paper so full credit is due to its authors. In this paper, they highlight that:

“[Lean’s] heavy emphasis on readily observable feedback and immediately validated learning undersells the entrepreneurial scientist's central task of composing a novel theory and hypotheses, prompting instead a search for value and validation only where it is easy to observe it. Thus… lean inadvertently…promotes incremental experiments that, more often than not, only generate incremental value. Furthermore, the favoured hypothesis-generating tool of lean startup—the business model canvas—lacks specificity in helping startups craft unique, targeted hypotheses and critical experiments for testing their theories.”

Felin et al acknowledge that customer interaction can be a useful tool for learning. However they argue that the emphasis on customer feedback is overstated. There are two key problems with this emphasis on customer interaction:

1. Lean encourages entrepreneurs to orient towards ideas and products that can quickly and transparently be tested with customers
2. Lean is therefore likely to result in incremental innovation (building ‘faster horses’).

The fundamental problem is that Lean methodology favours low-cost startup ideas - where beta products can be rapidly developed and tested. Lean’s resultant products and services are more likely to be incremental as they are easier and cheaper to develop and test. Subsequently, Lean’s biggest limitation is that it may impede radical innovation. This is further compounded by the fact that Lean assumes that customers know what they might want in the future. The problem according to Felin et al is that the customers imagination is “delimited by what is presently there or what is presented to them.”

During the early stages of computer development, many struggled to comprehend a world in which computers are a mass-market consumer electronic device. In the 1970s, computers were large, clunky and expensive. Why would anyone want one? In 1977, Ken Olsen the founder of Digital Equipment Corporation stated:

“There is no reason anyone would want a computer in their home.”

Many simply could not comprehend a world in which this confusing technology was user-friendly, affordable, compact and useful. If Apple had relied on the type of customer interactions suggested by Lean, the company may have gone in an entirely different direction. However, Steve Jobs realised that customers may struggle to comprehend the value of something novel:

“It isn't the consumers' job to know what they want.”

Instead of relying on the type of customer interactions championed by lean, Apple instead relies on the judgment of key employees who share a common vision of the future they wish to generate. According to Felin et al, the most valuable entrepreneurial ideas require some kind of contrarian belief, vision about and commitment toward a counterfactual world that may not easily be recognisable to customers, competitors or investors.

Lean certainly has its merits and many startups would benefit greatly from adopting this scientific approach to venture building. Lean methodology can accelerate the process of identifying a viable business model and can minimise wastage as a result. However, as I have highlighted in this article, Lean is not perfect. For ventures looking to disrupt industries through radical innovation, Lean may not be the most appropriate methodological approach. In my next article, I will introduce you to ‘Value Lab’ – an alternative framework proposed by Felin et al in response to the limitations of Lean methodology discussed above. This tool enables startups to develop a unique ‘theory of value’ which helps identify the information and data startups should be sampling and using as the basis of their validation and learning in the first place.

Thanks once again to Professor Teppo Felin, Alfonso Gambardella, Scott Stern and Todd Zenger for advancing my understanding of Lean.?I thoroughly enjoyed the HBS workshop and have learnt a great deal from your papers on this topic.