from " The Lean start-up : Business model canvas analysis and application"
di Francesco Checcarelli Betti - Università Bocconi
Innovation is the creative response of companies and not the simple adaptive reaction to the changing economic environment, it takes place both in small as in large enterprises, the size is neither necessary nor sufficient to drive it. Therefore, in business, innovation is the fuel to growth. The rapid advancements in transportation and communications over the past few decades, in particular Internet, have dramatically modified the concepts of key resources and comparative advantage typical of the old war.
Many important founders of nowadays greatest tech companies gave their opinion on why it is important to innovate in business. For example, when Steve Jobs said with no fear that “Innovation distinguishes between a leader and a follower ”, he wanted to remark that companies face everyday a fork, to be the leader, creating innovative businesses, or to be the followers trying to adapt to the leader’s changes. With even more direct words, Robert Noyce (Intel Co-Founder) said: “Innovation is everything. When you're on the forefront, you can see what the next innovation needs to be. When you're behind, you have to spend your energy catching up.” So, for having competitive advantage in a company, one of the necessary skills is the ability to bring innovation as a first mover or in the “best way” for the targeted market, investing resources without wasting them to catch up competitors.
WHEN THE FAILURE LEADS TO SUCCESS
Innovation becomes even more critical when it is the time to launch a new enterprise, both that it is a new tech company or an initiative within a large company, since it has always been a hit‐or‐miss proposition. For decades the formula which leads to success has always been the same: write a business plan, pitch it to investors to collect money, organize a team, develop the product/service and start selling it as hard as possible.
But recent researches show that most of the start-ups fail. Carmen Nobel, Senior Editor of HBS Working Knowledge, says in his web article “Why Companies Fail and How Their Founders Can Bounce Back” (Harvard Business School, 7 March 2011), that “the statistics are disheartening no matter how an entrepreneur defines failure”. In fact, he adds, if failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-ups is 30 to 40 percent, according to Shikhar Ghosh, a senior lecturer at Harvard Business School who has held top executive positions at some eight technology‐based start-ups.
If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 percent. “
The reasons behind this discouraging data can be summarized in two key concepts. From one hand Ghosh explains that most start-upsfail due to lack of foresight, lack of wiggle room in the business plan, bad timing, or lack of funding. But from the other one, he also adds that too much funding for an unstable business model can take what would have been a small failure into a huge one.
In such a high‐risk environment, where the probability to fail seems much higher than the one to success, an innovative approach, called “the lean start-up ”, has been developed by the contribution and support of many relevant characters of the Silicon Valley. In particular three techniques have been realized to lead new ventures to a less-risked path. In 2005, Steve Blank, who has moved from being an entrepreneur in high-tech start-ups to teaching entrepreneurship at U.C. Berkeley, Stanford University, Columbia University, has formalized the Customer Development methodology in his book “The Four Steps to the Epiphany”. Then, Alexander Osterwalder and Yves Pigneur have provided the Business Model Canvas, a visual framework to define a company business model. At last but not least, Eric Ries has applied the theories of the lean thinking to formalize the agile development. Before analyzing the methodologies it is important to understand what are the assumptions that have been used as driver.
THE LEAK OF THE PERFECT BUSINESS PLAN
In his article “Why the Lean Start-up Changes Everything” (Harvard Business Review, May 2013), Steve Blank explains that the typical approach entrepreneurs have used, due to the conventional methodologies, is first to write a business plan, a static document that describes the size of an opportunity, the problem to be solved and the solution that the new venture will provide.
It is a quite complex document with a lot of pages enriched by marketing analysis and financial forecasts from three to five years. Even if it is very useful to be presented to stakeholders and potential investors, due to its complexity and its visual nature (the “small book” format), it does not fit well to its strategic planning function. In fact, reviewing the company strategy through the business plan is rather complicated, since it is divided by all the functional areas typical of a company‐like marketing, operations, sales ‐ and it lacks of a visual framework, which could easily let to change parts having a general view on how those changes will modify the entire business strategy.
Blank criticize the business plan, focusing on the digital industry, for three main reasons.
First, saying that “No Business Plan Survives First Contact With A Customer”, he stress the fact that typically entrepreneurs, once having raised the necessaries funds, start building and launching their product before having a real feedback from the customers they are serving, and that, too often, they learn too late that customers do not need or want many of the product features. In fact, the business plan is typically used by companies to present the existing strategies and operations to be performed, for example in the case of a line extension of a product. But in this context, customers, market and product are known. By contrast, the entrepreneur who creates a start-up faces a number of unknown elements. In this situation, writing a static document is not efficient in a dynamic phase, in which the primary objective is to research, through a repetition of hypothesis and tests, the more effective business model. Second, he observes that a five‐year financial forecast is quite an ambitious prevision for a business that does not have a track record and, even if the forecast is an useful way to understand the revenue model, it usually becomes a waste of time, since the revenue model it is not tested yet. Third, he remarks the difference between large companies and start-up s: while existing companies are big organizational complexes which follow a master plan, executing a business model, start‐ups rather are looking for one. This distinction shapes the lean definition of start‐up: “a temporary organization designed to search for a repeatable and scalable business model”.
BUSINESS PLAN VS BUSINESS MODEL
Having defined what a start‐up is, it is necessary to focus on the key concept of business model. According to Alexander Osterwalder “a business model describes the rational of how an organization creates, delivers and captures value.” In other words it is the set of organizational and strategic solutions through the company acquires competitive advantage. Basically, a company creates value when helps its costumers doing a “critical” task, satisfying a need and/or solving a problem. The success or failure of a business strictly depends on the ability of the company to create value for its customers. So, the first activity when creating a new start-up , or re-designing an existing business, should be searching for a proper business model, in order to know what to do, how do to it and for which customers deliver value.
Rather than planning and researching for months “inside the building”, writing a document that explains the execution of an untested business model, the lean method suggests as a key principle that on day‐one entrepreneurs accept to have only a series of hypothesis about their business model. This series of hypothesis need to be tested through a process called Customer Development which is going to change day‐by‐day the framework designed on day one. Therefore, a business model is designed to change rapidly, adapting to what is found “outside the building” in talking to customers, as Blank explains. Since it is a very dynamic element, also its representation must be done with a model that reflects this nature. The Business Model Canvas in this context is more effective than the Business Plan. First of all, what is usually explained in 30‐40 pages is summed up in a board. In addition it is easy to change, since in the areas of the Canvas , elements are summarized. Finally, it offers an overview that allows to highlight connections and critical factors between the areas.
The business plan can be considered a good exercise to implement and refine the various parts of a business model, especially when the financial part is developed in order to plan what actions need to be implemented to make the organization profitable. However the business plan of a start-up does not contain real facts but assumptions, which needs to be validated through a direct comparison with the market. Indeed, the lean method consider the business plan as a “final document", which must be drawn up only after the validation of the business model. In this way, takes place its main function, the fund-raising, especially if paying attention to adapt the plan according to the audience who is going to read it (banks, business angels, venture capitalists, partners, prospective partners, etc..).