What Does It Take to be a Lean Enterprise?

Written by Jory Weissman

November 27, 2019

If you’ve seen the movie Moneyball, you may remember the following quote from Jonah Hill’s character Peter Brand, based off the real-life Paul DePodesta.

“Your goal shouldn’t be to buy players; it should be to buy wins. And in order to buy wins you have to buy runs.”

If you haven’t, here’s a synopsis. Going into the 2002 season, the Oakland Athletics lost star players Johnny Damon, Jason Giambi, and Jason Isringhausen to free agency. They needed to build a competitive team with a limited budget. Athletics GM Billy Beane meets Peter Brand, a young Yale economics graduate with radical ideas about how to assess player value. Rather than building a team around players, they build around runs created. Spoiler: They make the playoffs with one of the lowest payrolls in the game.

While this team was pieced together out of baseball’s economic reality, the movie does present some lessons for companies regardless of size.

Understanding the Lean Enterprise

The Oakland Athletics were (and still are) a lean organization. Like any small-market team, they need to extract value from every single dollar they spend. The term “lean enterprise” or simply “lean” takes a similar approach to the strategies employed in Moneyball, in which companies minimize waste and focus on maximizing value.

Definition: Lean Enterprise

So, what does it mean to be a lean enterprise? According to Investopedia,

“Lean enterprise is the production and management philosophy that considers any part of the enterprise which does not directly add value to the final product to be superfluous. Lean enterprise focuses on value creation and the elimination of waste and non-essential processes. Foremost, it considers the product or service from the consumer’s perspective to determine what is of value (i.e. what the consumer is willing to pay for), then examines at the process with the aim of reducing all of its aspects except for the value-adding ones.”

A Leaner Definition

In the spirit of lean, let’s break that down.

  • Lean enterprise: If it doesn’t add value, it can be cut.
  • Value: Whatever the customer will pay.

Of course, it’s never this easy—there’s no “lean button” you can push or switch you can flip. Books have been written about the topic, MBA courses have been taught on this topic, and consultants charge millions of dollars to show companies how to be lean.

However, there are some fundamentals that go into being a lean enterprise and many examples to follow.

From Assembly Line to Mass Production to TPS: The Beginnings of Lean

The term ‘lean’ all depends on the environment it exists in—but it all started with manufacturing.

The Assembly Line: Standardization Delivers Speed and Affordability

Henry Ford’s assembly line was lean by 1913 standards. Rather than grouping general-purpose machines by process, Ford lined up fabrication steps in process sequence. However, after 19 years of the same vehicle (and 19 years of competition emulating the methods), the value dried up.

Mass Production: Scale and Variety

By the 1930s, customers placed less value on the standardized process. Now, it was up to someone else to disrupt the status quo. Alfred Sloan of General Motors further developed the concept of assembly line production by building a process called mass production that allowed scale and variety. This process enabled large amounts of standardized products to run through assembly lines while still being able to produce more variety and compete against Ford’s single offering.

Toyota Production System: The New Definition of Lean

However, one company put such emphasis on the lean mentality, that they were able to go even further.

Throughout the 30s and 40s, Kiichiro Toyoda, Taiichi Ohno, and others at Toyota saw a series of simple innovations that make it more possible to provide both continuity in process flow and a wide variety in product offerings. They therefore revisited Ford’s original thinking, and invented the Toyota Production System. Still in use today, Toyota’s lean lessons go well beyond manufacturing.

From Machines to Electronics

While Toyota still retains an incredible commitment to lean manufacturing, the 1980s and 90s brought a new era and a new push. Building off the Toyota model, Motorola introduced a management technique called Six Sigma, a concept which took even more focus on minimizing variability.

The Dot-Com Bubble Introduces Lean to the Tech World

New innovations in lean enterprise moved away from electronic manufacturing to internet and software technology. Prior to the dot-com bubble, there was little emphasis on lean principles due to the sheer amount of money being thrown around by investors.

However, the Agile Manifesto changed all that. Placing extreme focus on four concepts—individuals and interactions, working software, customer collaboration, and responsiveness to change—the Agile Manifesto was a shot across the bow.

Related: How Business Software Helps Controllers Pivot Faster

Along with the application of agile, companies incorporated lean enterprise principles into their operations, allowing them to pivot faster, deliver what customers wanted, and ultimately remain competitive.

Today: Lean Startup Mentality Affects Everyone

Today, these principles remain, with more and more companies adopting lean enterprise and lean startup methods. Even for non-internet companies, lean enterprise principles enable organizations to enter in new markets or offer goods and services in new form factors with less time, labor, and capital. In fact, the lean mentality is part of the reason digital transformation exists.

Related: 5 Real Life Examples of AI in the Enterprise

Five Principles of the Lean Enterprise

According to Lean Thinking: Banish Waste and Create Wealth in Your Corporation by James Womack and Daniel T. Jones, lean enterprise is characterized by five main principles—the same ones you may know from lean manufacturing. An ongoing cycle of continuous improvement, this process is often tougher than it seems.

Value

This pertains to how end customers value a certain product or service as it relates to their wants or needs. To do this, companies need to specify value from the standpoint of the end customer.

Related: How Modernizing the Accounting Function Creates Value

Value Stream

An understanding of the full arc of the life cycle of a product or service (from the acquisition of raw materials, production of a good, sale and delivery to the customer, use by the customer, and the end of the product’s life cycle).

This is a key step in the process and is often one where companies miss the mark. Waste exists in the entire value stream, but too often, companies take an isolated approach at this stage rather than taking a holistic approach.

Related: Top 10 Collaboration Software Options

Flow

If any part of the value stream is stagnant it is considered wasteful for not providing customer value. Value-creating activities need to take place in tight succession to allow products and services to reach the customer more smoothly.

Related: Drawing Processes Closer with Automation

Pull

This is the directive that nothing should be produced until it is demanded or ordered by the customer. In this, customers derive value from each activity as it reaches them.

Related: Seeing the Entire Picture with Business Analytics and Intelligence

Perfection

This is the ethos that all causes of sub-par quality should be eliminated from the manufacturing process. As value is specified, value streams are identified, wasted steps are removed, and flow and pull are introduced, begin the process again and continue it until a state of perfection is reached in which perfect value is created with no waste.

Related: 3 Tips for Building a Culture of Digital Innovation

It’s All about the Customer: Three P’s of Lean Enterprise

According to the Lean Enterprise Institute, a lean organization understands customer value and focuses its key processes to continuously increase it. The ultimate goal is to provide perfect value to the customer through a perfect value creation process that has zero waste.

Every step in the list of principles is designed to understand how the customer perceives value, steer processes toward the customer need, trim off the edges, and repeat. This is built on the following concepts defined by Womack and Jones:

  • Purpose: What customer problems will the enterprise solve to achieve its own purpose of prospering?
  • Process: How will the organization assess each major value stream to make sure each step is valuable, capable, available, adequate, flexible, and that all the steps are linked by flow, pull, and leveling?
  • People: How can the organization ensure that every important process has someone responsible for continually evaluating that value stream in terms of business purpose and lean process? How can everyone touching the value stream be actively engaged in operating it correctly and continually improving it?

How Are You Creating Value for Customers?

Like any transformation effort, becoming a lean enterprise is a massive change that an organization may undertake. That said, an effective transformation effort, one that produces tangible strategic and financial benefits, is within reach for every company.

As technology continues to improve, companies may be able to become even leaner than they are today. Autonomous things, hyperautomation, and advanced AI capabilities are just a few of the technology trends coming to organizations—all of which could be the next era of value creation and waste reduction.

At the intersection of technology and process, it pays to know what works. We invite you to download our benchmark guide titled the C-Suite Software Sentiment Study, and sign up for our free enewsletter, BizSoft NEWS for all the latest.

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