Lean Principles in the Digital Economy

Lean principles is the name given to a group of production techniques developed by Japanese manufacturing companies around the 1970s-1980s to maximize customer value while reducing wasteful resource.  Lean production methods have also been described as aiming “to combine the flexibility and quality of craftsmanship with the low costs of mass production.”  Such methods include quality control of the processes involved in production; just-in-time production to reduce the costs associated with excess inventory; and continuous improvement involving everyone in the organization in the quest for new, easy to implement ideas. 

More recently, lean principles have been playing a key role in a variety of industries beyond manufacturing which must now adapt to the fast changing technologies and markets of the Internet age.  Lean software development, for example, can be viewed as the agile reaction to the highly structured, heavyweight waterfall-based software methods of the past.  In Lean Software Development: An Agile Toolkit published in 2003, Mary and Tom Poppendiek translated the principles of lean production into 7 key lean software development principles: eliminate waste, amplify learning, decide as late as possible, deliver as fast as possible, empower the team, build integrity in, and see the whole. 

As companies transition from the industrial to the digital economy, lean philosophies are influencing just about every aspect of their operations, strategy, organization and culture.  Lean’s core idea, - maximize customer value while minimizing waste, - feels particularly applicable to our times, as organizations must better understand what customers truly value; organize their work activities to efficiently develop and deliver the appropriate products and services; and continuously improve customer value and efficiency based on real marketplace feedback.  Such a pull approach to business is quite different from the push approaches of the past.

In their 2010 book The Power of Pull: how small moves, smartly made, can set big things in motion, John Seely Brown and John Hagel defined pull as “the ability to draw out people and resources as needed to address opportunities and challenges.”  To best appreciate what the pull economy is about, it’s best to contrast it with the push economy of the past hundred years.

In the industrial economy, firms were mostly organized around push approaches, including detail forecasts, operational plans and standard processes that attempted to specify and mobilize the resources required to meet anticipated demands.  It was the right way to organize the fast growing industrial-age companies and industries.  While public and private institutions were experiencing major changes, those changes were relatively incremental and predictable. 

The key challenge was to manage the growing means of production in the most efficient way possible.  Institutions embraced hierarchic organizational structures to help scale their production of goods and services.  It served them well in a relatively deterministic world where the same actions yielded (more or less) the same results, and models could make (relatively) accurate predictions.  It was a remarkable achievement of management and engineering. 

But, this push economy is fading fast in our complex, integrated, fast changing world.  Such a world, - with its large number and variety of components along with their intricate interrelationships, - exhibits all the properties of dynamic, complex systems, including unpredictable and counter-intuitive behaviors.  “Companies are discovering that their best employees leave in dissatisfaction if the company is not in tune with the changes taking place; their customers prove ever less loyal to their brands as new brands emerge with exciting new features,” write Brown and Hagel. 

Improving customer loyalty was the key theme of Digital Transformation - Why and How Companies are Investing in New Business Models to Lead Digital Customer Experiences, a report published earlier this year by Altimeter, - a research and advisory firm.    Rather than looking at the enterprise-wide impact of digitization, the report found that the better performing companies are tackling their digital transformation through a simpler, more focused and leaner lens: the customer experience. 

A company can differentiate itself from competitors in one of two key ways: by providing a superior customer experience or by offering the lowest prices.  For companies that prefer the former, - and want to avoid the relentless low price pressures of the latter, - digital technologies are the best means of engaging with customers and providing them a superior value at affordable costs.  The Altimeter report succinctly observes: “Digital transformation represents the quest to understand how disruptive technology affects the customer experience.” 

But, providing such a superior experience to their increasingly empowered, - and fickle, - digital customers is getting harder.  New offerings are hitting the market faster than ever, brand loyalty keeps decreasing, and the increased competition is continuing to shift power from institutions to individuals.  Consumers have more choices than ever in virtually every category of products and services as well as in the channels used to acquire them.  Customers are taking advantage of all the information they can now access to search for the best possible values.

This increased choice and transparency adds to the pressures on business.  A few leading edge companies are able to keep up, but the vast majority of more traditional firms are lagging behind.  While working harder than ever to achieve greater efficiencies and predictability, they keep trying to fit new technologies and practices into old business models.  This is a holdover strategy that worked well in the relatively stable business environments of the industrial economy but falls short in the faster changing digital economy. 

Companies must pay more attention to their own digital transformation to better keep up with their increasingly digital customers.  To help them do so, we are seeing lean principles now being applied to the management of existing institutions as well as startups.

For example, The Lean Management Enterprise, a recent McKinsey report, lists four lean management disciplines practiced by the best performing organizations they’ve worked with over the years.  “When leaders design systems that enforce these disciplines effectively - and when they ensure they’re followed every day, at every level of the organization - the disciplines reinforce one another to create what lean has long envisioned: an adaptive organization that consistently generates the most value possible for all stakeholders from all of the resources it can bring to bear.”

Not surprisingly, “Delivering value efficiently to the customer,” is the first discipline. “The organization must start by understanding what customers truly value - and where, when, how, and why as well.  But it then adds three additional management disciplines: 

• “Enabling people to lead and contribute to their fullest potential, - enable employees to own their own development, without leaving them to figure it out by themselves”;
• “Discovering better ways of working, - the whole enterprise must continually think about how today’s ways of working and managing could improve;” and 
• “Connecting strategy, goals and meaningful purpose, - a vision of what the organization is for, which in turn shapes their strategy and objectives in ways that give meaning to daily work.”

All lean philosophies emphasize the concept of continuous improvement, an ongoing effort which systematically seeks to achieve incremental changes that over the long term will significantly improve all products, services and processes, as well as the overall management of the organization.  And, perhaps, it’s this never-ending cycle of listening, responding, experimenting and learning that best accounts for the growing importance of lean principles in the digital economy.  

Comments

[Archie]

Irving - Thanks for your article, found through reference by NAW web site. I reviewed the links re "Pull" power, and read the full document on Digital Transformation. Recently have returned to this topic and hope to make better progress - got distracted by other things for a couple of years :) It's just past midnite! Got to get some sleep so I'm productive at work tomorrow - valve and actuator inside sales. Regards, Archie