Eric Ries on The Lean Startup Approach and Implementing the Startup Way for Sustainable Innovation and Growth


Joining me again for episode 290 is a three-time guest, Eric Ries. When we first talked, in episode 115 six years ago, his New York Times bestselling book The Lean Startup was being published. In 2012, we discussed the impact of Toyota's Taiichi Ohno on his work, in episode 142. This time, we're talking about his new book, The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth.

In this episode, Eric talks about how “Lean Startup” concepts came from “Lean” and the Toyota Production System and how Toyota then approached him about applying Lean Startup concepts in the development of a new in-dash electronics system. In recent years, GE and other large companies, in their efforts to be more innovative and entrepreneurial, have adapted these approaches into what Eric calls “The Startup Way.” Will modern companies embrace a formal “entrepreneurship” function as they earlier embraced finance and marketing? Why is The Startup Way a “management discipline” and not just a set of tools? We'll discuss that and more.

Below, you'll find the full audio podcast, a 7-page PDF summary, and a complete transcript. The Startup Way is set for release tomorrow, October 17. Learn more at I had a chance to read the book in advance and enjoyed it very much. I hope you'll also join me at Eric's annual Lean Startup Week, where I'll be a speaker and lunch-and-learn session facilitator.

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Episode Summary:

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Mark Graban: Eric, hi. Welcome back to the podcast. Thanks so much for joining us again.

Eric Ries: It's terrific to be back.

Mark: There's a lot to catch up on. You've got a new book. When we talked first off six years ago, The Lean Startup was coming out, and you've been doing a lot of work since then. A lot of my listeners work for large companies, health systems.I was wondering if you could talk about how the ideas from The Lean Startup started to become introduced into bigger companies, as you cover in the new book, The Startup Way.

Eric: Sure, yeah. I remember those interviews fondly. What's been interesting, if you go back in time to 2011 when The Lean Startup came out, I had written in that book that the best way to think about entrepreneurship was as a management discipline because my definition of a startup was the following:

It was a human institution designed to create something new under conditions of extreme uncertainty.

I had written this book and I laid it out.

Here's the definition, and the deductive consequences of that definition are, if it's institution building, then it's necessarily managerial and, if it's about uncertainty, then it necessarily is not about industry, or size of company, or sector.

Therefore, I wrote with some confidence but not a lot of experience, “It should be equally applicable to companies of all different sizes.” I didn't know, frankly, if anyone would take me seriously. My experience at that time was really concentrated in the venture-backed startups you'd imagine here in Silicon Valley.

On the other hand, I felt like I was drawing on ideas, including Lean manufacturing and a bunch of others, that certainly had plenty relevancy in other contexts. I felt like what's nice about working from first principles is that things become transferable across domains because thinking conceptually, not just extrapolating naively from a direct experience.

Anyway, so I put it out into the world as an experiment to see what would happen. I was actually very surprised how many large companies reached out to me, really starting right as soon as the book was published, saying, “We'd like to take you up on this challenge to put these ideas to the test in a really wide variety of situations.”

It's been fun. It's been a crazy ride, almost like a backstage pass to the world of business. I've been in every region, every geography, every kind of company, every order of magnitude of size company, from two founders in a garage up to multi-hundreds of thousands and everything in between.

It's been one challenge after another to try and figure out, “Hey, have we found the limits of where these ideas could be applied yet.” So far, not yet.

Mark: It's interesting. You were talking about transferring methods, ideas across industries, as we talked in the last podcast. You cite Taiichi Ohno and give a lot of credit to Toyota in your books. That was probably that first leap back from large companies to figure out — How do you adopt Lean principles to a startup setting?I imagine early with your work in startups you had some pushback of people saying, “Oh. Well, we don't build cars, we're not Toyota.” I imagine you heard something like that.

Eric: Oh, yeah. I can't tell you how many software engineers were like, “Why are we talking about manufacturing?” so I always try to talk about batch size. We had the technological equivalent — the andon cord and all of that stuff.

I had to learn to stop using the manufacturing metaphors in the Japanese lingo, because people in Silicon Valley thought I was really weird. Then it was fun. Having been through that translation once, it was fun, now go the other way and one of my proudest moments as we were doing this really massive transformation inside of GE.

We started with very hard core industrial-type products because we wanted to demonstrate that these ideas could work across the whole company, so health care, energy, extraction, manufacturing industrial heavy products, aviation, serious stuff.

Anyway, but because GE going through this really massive digital transformation themselves, eventually we started to touch the rest of the company. We did the internal functions and including IT, HR, finance. Then we started to touch even their more cutting edge, actual digital products that they make as part of what they call the industrial Internet.

In one of the trainings I was doing, I'm doing my typical Q&A with skeptical executives. One of the executives says, “OK, hotshot. Obviously these ideas are going to work in a staid and boring domain of manufacturing, but how's this going to apply to the world of high tech digital technology?”

I was like, “Oh man, step into my office. This is the first time in two years that anyone has come and has asked me a question that I actually know something about, so this will be terrific.”


Eric:  Of course, this poor executive walked into a Howitzer, totally not having done his homework on what it was.

My experience has basically been that, no matter what people are doing, they will fixate on any difference between what they do and what the speaker is doing as a reason not to listen if they possibly can.

Please share these image quotes on your favorite social media platform…

Down to the level where people will say, “Well, sure. That worked for GE, but we're in a different industry,” or, “That's not going to work in healthcare,” or [laughs] people will say, “Well, that'll work for medical devices, but it won't work in a hospital.” It's like, “Well, it'll sure work in an American hospital, but not in a rural hospital or whatever.” I'm sure you've lived through that.

Mark: I've heard all of that, yep.

Eric: Yeah, you've heard it all. I remember one time I was with a packaged goods company. They were like, “Well, sure. That's gonna work for this…” I worked with a very close competitor on something that was on a different aisle of the grocery store. They were like, “Sure, it's going to work for…” I can't remember… “packaged foods, but it couldn't possibly work for packaged soaps.”It was like, “OK, now we're down to this is sold in the same store, but you have to walk three aisles over, so therefore it doesn't count.” Like, “Come on.”

What's funny is I believe that the foundation of all these theories is a scientific method and really willing to apply empiricism to business problems, which you would think would be an uncontroversial and fairly obviously idea given that all of the improvements in living standards and just about everything else has happened in the last 500 years.

We owe to this very basic conceptual framework and, yet, businesses often seemed as exempt. Anyway, what I always tell people is:

“Look, if this is a scientific theory, then I don't want you to take it from me or any other expert on faith. You should run the experiment yourself to find out if I know what I'm talking about. Forget these theoretical objections. Let's go try it out.

“If I'm full of it, it'll teach me something, so what do we have to lose?” That's when the real conversation starts.

Mark: I'd like to come back and talk more about GE because you notice I've followed what you're doing, attended Lean Startup Week most every year. There have been a lot of stories on stage from GE. One that stood out to me in particular a couple years was the back and forth of ideas coming from Toyota production system and Ohno and Lean manufacturing into startups. Then engineers from Toyota taking [laughs] Lean's start-up methods and applying it to some of their work. I think my audience here, I think, in particular would be really interested in any stories you can tell about Toyota's embrace of this.

I was reading just earlier this afternoon an article by Jeffrey Liker, the author of The Toyota Way, who was making these same points about, “Well, yeah. The Toyota approach, it's really about this way of thinking and structured scientific problem-solving cycles.” That's good stuff, but can you talk about Toyota a little bit and how this came full circle?

Eric: Yeah, I've had a lot of these full circle moments, and it's been really fun. Sometimes at the Lean Startup Conference, as part of Lean Startup Week, we'll have a traditional Lean manufacturing expert come and we give him briefing. “Listen, you're about to go to an audience of 2,000 people who don't know that Lean has an origin in manufacturing.”So they don't understand what you're talking about. Just an FYI,” [laughs] “heads-up, be prepared that they think Lean is about startups.” They're always like, “What? What are you…What? This is crazy!” I definitely like when we have opportunities to foster collaboration between these otherwise sometimes very siloed groups.

Mark, if you write about Lean topics, getting an email from Toyota is a little bit like getting called in the principal's office. At least that's how it felt to me. I got an email out of the blue from an engineer at one of the Toyota divisions that is based in the United Stated. He said, “Would you come in and talk to us about Lean Startup?”

I was torn. I was like, “Am I being summoned in to be called to account for distorting the idea or are they actually interested in what I want to say?” My view was our debt as Lean practitioners to Toyota is as close to unlimited as you can get, so, whatever they want, I'm there, even if it's just to reprimand me. Anyway, it turns out that was not the purpose of the conversation.

It was a really terrific experience because, first of all, of anyone who could be defensive about someone from the outside talking to them about something Lean, they would have every right to say, “Hey, what the hell do you know? You've never manufactured a car a day in your life or anything.”

At the point that I first met them, I'd rarely ever set foot in a factory of any kind, so skepticism was totally warranted, but they were really very open and transparent about it and very interested, as I was saying before, in running those experiments.

The issue that they were having, I don't think I'm speaking out of school here to say that they have historically treated the consumer electronics and the IT components of a car as if they were just regular parts. The design and manufacturing of which can be outsourced to specialized vendors just like you would with any other kind of part.

As a result, they have historically done the digital part of car manufacturing on the same cycle times as the physical part of manufacturing, which made sense at a time when software development cycle times were not that different from physical production cycle times. Now, that's really not true so it puts them at a real disadvantage.

Their software always looks and feels really clunky compared to what people are used to in their smartphone or what have you. I remember telling them the story that really offended them at that time. It's not the initial folks who I talked to but later, as I was meeting some of the engineers and executives from Japan.

I told them a story that I personally drove a Toyota Prius, and I had bought it in the year of the [unintended acceleration] scandal, if everyone remembers that. Was that 2010? I remember the news had just broken that the cars were defective. I remember my wife saying, “Are you sure we can buy this car?” I said, “Listen, it's Toyota. I don't believe the story. There's no way there's an [unintended acceleration] problem.”

I was just like, “That's not true. We don't have to worry.” I had such confidence in the quality of the products that we bought, and I feel more vindicated. The car's been terrific, but I said, “I paid a lot of extra money to get the in-car navigation system installed direct from Toyota.

“Within a month of buying this brand new car, I noticed that the $250 Garmin crappy GPS I had used before, which I thought was gone for my life forever, was back on the dashboard.” My family found the GPS in the car unusable. Not just hard to use but actually unusable. I remember saying to them, “That's a massive quality problem. This car is defective.”

Mark: It doesn't meet customer needs, at least.

Eric: It doesn't meet the customer needs, and so we should see it as a… the idea that I'm suggesting that Toyota product is defective in quality was really offensive, but that's my point of view. The quality needs to be defined in the eyes of a customer. If we're building a product that customers don't want, that's nothing to be proud of. The fact that we happen to be in a historical moment where the manufacturing quality of the car still supersedes the customer requirements because of the overall purchasing decision, every year it's a little bit less important compared to these other user experience elements to the point where we know that, in the future, those elements are going to be absolutely dominate.

It was a conversation on how could we treat the car development to take into account the need for this kind of innovation. Of course, the people who had brought me into the company were part of the IT and research arms of the company, and they would have been long trying to push the company in this direction.

Lean Startup gave them a framework to have the conversation with their colleagues in Japan, and then the rest of the organization, under a framework that everybody understood, which is a really important part of Lean Startup.

It's a really important part why I tried really hard to develop it out of existing theoretically sound framework, so that we could find those points of compatibility and, therefore, integrate it into organizations more easily.

I'll tell a little bit of the story of the specific products and experiments we ran together in the book, including one of these meetings with Tomoyama-san, one of the senior executives who's really one of the people in Japan who's been pushing Toyota to be more innovative now for many years.

He was on one of his periodic tours of the different Toyota outposts. When he was in California, he and his entourage met with me. It was one of these very funny culture clash moments where it's me… I don't have any staff. I don't run a consulting company. It's not like I brought 40 associates to the meetings.

Just me, a few of the American engineers who had instigated this project, and we're looking to him to sponsor them in doing this transformation. He, of course, traveled with a significant entourage from Japan. The book had just been translated into Japanese, so I got the sense that the entourage had read the book.

He didn't speak of course for most of the meetings, so I had no idea what was going on — if he was pleased, if he didn't like it. He was totally stoic and I'm doing my best to make myself understood.

Finally, the meeting gets to a moment where somehow everyone else knows that you had stopped talking, and he speaks. He said, “This is the missing half of the Toyota Production System.”

I'll never forget that. It was one of those incredible moments where he was really focused on, “How do we develop a system as a company that's as good for discovering what to build, what the new customer preferences are as it is, and once we know what those answers are then building it with high quality.”

That was really the framing of our whole collaboration which was to do this stuff, to build those two systems together so that we could be discovering and executing, experimenting and executing together. Just to cap the story with a recent thing that I've discovered that's not in the book.

I recently met a group called Toyota AI Ventures, which is part of TRI here in Silicon Valley. They are both investing in external entrepreneurs and startups that are related to, obviously, they need to bring autonomy and AI into vehicles, but they also have a mandate to drive innovation in the company.

As we were talking, they were talking to me about how the transformation that we started with these very simple, small projects on the research side of the organization had had all this impact out through the company, and how there's this real mandate from the very senior leadership in Japan to try and drive this transformation.

Get the company to think in a more innovative way, and to adopt startup and venture-backed items that, of course, Tomoyama-san has his fingerprints all over it. It was bad, [laughs] but no coincidence. He is once again pushing us. He's really been the champion of several related initiatives now that I think are having a big impact to the company.

It's been really cool to see those ideas make their way back into the mothership, as it were.

Mark: I'll post a link in the blog post for the episode here. There's a video. I just checked. It's still online from the 2013 Lean Startup Conference. Those two engineers telling the story about development of the in-dash unit. It would be disappointing, I think, as a Toyota observer to see if Toyota was not willing to improve the way they are… [crosstalk]

Eric: …exactly that.

Mark: …as much as they talk about continuous improvement. Maybe we'll bring it back to the scientific idea here when you say this thought process of discovering what to build is different than a thought process of knowing what to build with the high degree of certainty.

This seemed like the stories from GE and others at the conferences have been stories about coming to grips with [laughs] the idea that we don't know, but we can go and discover, and test, and iterate, and is basic as that seems, that's a phenomenal difference.

Eric: The think I would add it's OK not to know. It's not a mark of shame.

It's a fact of life that the world we live in is highly uncertain. We often are either the victims of that uncertainty because the industry we're in it starts to change around us, or we are the instigators of that uncertainty.

I think what people forget is that whenever we're trying to do something fundamentally new, we're trying to upend the status quo. We're trying to create uncertainty for our competitors, but also for ourselves, because we don't know if it's going to work or, if does work, how it's going work.

Being honest about those facts actually creates a huge opportunity to get away from a bunch of corporate habits of thinking that are fairly…What's the right word? They prevent us from being honest, they prevent us from taking risks. They prevent us from thinking creatively.

I feel the same way as you. As an observer of Toyota, as someone who knew them only from the outside, and from books, and what I had read, it was such a treat to see them live their values up close, even in an area where they were struggling. This is a controversial issue within the company and it's just causing a lot of conflict.

Unlike a lot of companies I have seen try to grapple with these issues, they also really did it their way. This project could easily have been…It would either be too junior, the people who introduced the idea were too small, too unimportant to matter, so it wouldn't be funded at all.

Or, if they did convince senior management to do this, the project would be managed centrally from Japan, and fancy people would be in charge of it because now it has a budget. This was just a really classic Toyota example, where they did have to work hard to build consensus and work up and down the chain of command to get this project approved.

Once it was approved, the control of the project and the budget was really allocated locally to the people doing the actual work. They really had a lot of freedom to design and implement it and kicked off more and more ways of that kind of consensus building to figure out what to do with the results of the learning that they got. It was neat to see it in action.

Mark: Yeah, and I think there is a good lesson there of them making it their own the same way any health care system might take what they've learned from Toyota or another health system, and making their own, giving it their own branding. Maybe you can talk a little bit more about GE and what they've dubbed FastWorks, was their internal branding. I assume it was their way of making it their own as well?

Eric: Yes, this is definitely a pattern I noticed — that the people that do this successfully make it their own, and that includes building their own branding for it, often using their own terminology or modifying existing terminology. Of course, people forget. I would often remind people about Lean manufacturing at Toyota. They call it the Toyota Production System.

They're not bound by some abstract theory that somebody else invented. They think it's their own and, of course, they understand that what Toyota Production System looks like is different in different places, and in different divisions, and in different geographies.

They really understand that it's a mindset, a set of principles, not some rote formula that you just execute step-by-step.

The companies like GE, I remember when they first told me they were going to brand it FastWorks. I thought it was a goofy name.

No Silicon Valley company would use that kind of branding, but as I got to learn the culture and history of the company, it made sense.

It tied into past things that they had done, like Ecomagination, and Six Sigma, and Workout. It had a certain kind of hokeyness to it that was actually consonant with their corporate culture. That was really what I learned, is that this has to be an indigenous transformation. You can't do it because some outside consultant told you to do it. You have to really want to do it.

You have to kind of walk this balance where you are bringing expertise from the outside just like you think about the original Lean manufacturing senseis and the role that they played in so many Lean transformations. There's external expertise being brought in, but it's coming in at the invitation of insiders who are going to own the program.

Usually, I think a smart thing that the CEO did from very early on with this, we ran some initial experiments together.

The experiments were overseen at a very high level, so that we did these workshops where they would have a lot of senior vice presidents in the room just to observe, which is not exactly the greatest environment for a workshop about failure and openness to learning and whatever, but the idea was that they really wanted to make sure that this works, so run the experiment, really be sure.

Then, if it works, really task the senior leaders with rolling it out. When this became a formal program inside the company, there was an initial steering committee, like a board of directors, to oversee it. It was comprised of head of marketing, head of technology, head of the global research, executive of the CTO of the company, head of HR, IT, and finance.

The most important functions and the most senior leaders of those functions were overseeing this personally and they were jointly accountable to the CEO for executing it. That just made such a big difference. It meant that this was going to get senior level championship from the very beginning.

It also meant that it was not going to run into the typical functional silo problem where people say, “Well, it's just a marketing initiative, so why the hell do I have to do it in engineering?” or, “It's just a technology initiative, why do I have to do it in HR?” or whatever.

This really allowed us to work cross functionally and to build cross functional teams to demonstrate that that's what's required in order to do the kind of work we're talking about.

Mark: There are parallels, what you're talking about to what I've seen in health care and other settings. The idea of breaking down silos, creating cross functional teams. There are common themes here where I think maybe there's a balance. Organizations should make it their own, but there are, maybe, certain boundaries.If an organization in health care said, “We've embraced Lean and we've given it our own flavor, but we're not trying to engage everybody in continuous improvement.”

Eric: Oh, right, totally.

Mark: It gave me pause and, sadly, that happens. Bringing it back to the startup way, there's a parallel of not just getting everybody involved in continuous improvement, but the idea that innovation and entrepreneurial methods are something that anybody can use in the organization. Do you get push back on that? That no, we need an innovation center for that.

Eric: Oh, people think I'm crazy.

If you think about how radical it was to suggest that factory workers and line managers could be involved using their own creativity in the improvement of the work process that they executed, I don't know if it's just as crazy or more crazy, but people find it so bizarre. I feel like there's still organizations that find that idea difficult.Here I am saying that you might already employ the next Steve Jobs. Not only that. You might be on the verge of firing them because they're not important to you. They might have a business card and be paid badly. They might be this insignificant figure in your organization, which people forget describes the actual Steve Jobs in real life.

People always say, “I really want to have the Mark Zuckerberg work for me,” or whatever, but if you go back to the creation of Apple, I think Jobs [laughs] was unemployed at the time, but Wozniak was working as an engineer at HP. He begged HP to commercialize the prototype that he and Jobs were making.

He was going to give it to them for free out of his feeling of loyalty to them because he worked there. But, he was not an important person, so nobody cared. He took it to every division where he knew someone in the company. He was rejected everywhere and was like, “Fine, we'll go create the world's most valuable company on our own, and HP will get nothing out of it.”


Eric: “Eventually we'll be part of what causes HP to have a near bankruptcy experience.” People can't believe that. It's just too crazy to think. Yet, I really have seen it with my own eyes. I tell in the book a story of one of these projects that is just classic corporate death ball type projects. It was a joint venture between an IT and finance group.When I talk to product people, and I start telling this story, they start groaning in the audience, like, “Oh God.” This is a 25-person committee. No one's on the project full time. Everyone's part time, 5 or 10 percent of their time to do this committee to, over the course of 18 months, develop a new global standard for one of the company's internal IT finance processes.

It had to do with the corporate consolidation and chartered accounts by which they do the annual reporting. At the time that I got them involved, the process that they're trying to improve consumed…Let's see if I get this number right. I believe it took one percent of the company's global workforce one month every quarter to do this process.

It's just a fantastically expensive thing that's being done every quarter, and because it's implicated in the quarterly reporting. Because of Sarbanes-Oxley, executives go to jail if this information is not accurate. Yet, it was loaded up with manual steps, and Excel spreadsheets, and just people going outside the work.

There were 92 different IT systems that didn't talk to each other and required all this…It was just like your definition of a giant corporate mess. The way that they were planning to go about it was your very standard corporate project.

This is not really considered normally a place where you need innovation, you just need to get everybody on the same page, build consensus, come up with a standard, and then implement it. The plan when I met them was this 25-person committee would meet for 18 months, do what they called requirements gathering.

I really hate the words requirements, because the laws of physics are required, everything else is optional. This was a requirements gathering, which means asking all their different customer stakeholders — they never used the word customer by the way, they're stakeholders — “What do you want in this system?”

Everyone gets to load it up with all their feature requests and things that they want, including all the people who don't really want this project to succeed, who are like, “Well, it has to give me a new pony, and wash my car, and blah, blah, blah.”

You take all that stuff, you basically put it in a binder. You print it out, put it in a binder, and then they were going to hand this specification document to the CIOs of all the P&Ls in the company, and insist that they implement this same one global standard, which will then take another 18 months.

The theory was, 36 months from now, the company will have this incredible productivity savings, because we will simultaneously roll out this one single IT system across every division, and everything will be standardized and perfect.

If I tell any normal employee of any company what they think the probability of success of this project is, they just start laughing. We all know what's going to happen. We've lived through this so many times. There's going to be a corporate mandate handed down from headquarters. By the time anything gets implemented, it's going to be completely wrong.

There's going to be absolutely no accountability because this committee will have been disbanded for 18 months by the time anything actually shifts. All the committee members have to say to any of the CIOs who are pissed off about it is say, “Well, did you implement my recommendations exactly as it's in the binder?”

Of course not. Of course changes had to be made to accommodate local conditions, or sometimes the binder is full of contradictory instructions. [laughs] It couldn't possibly…”Well, whatever the difference is, well that's the reason why. If you'd only done what I…” so we're all going to be blaming each other.

We're going to spend tremendous money on this, and we're not going to get a productivity savings, we all know it. First of all, why do we do this? Why do we do these projects if we all know for sure that they're going to fail? That's maybe a conversation for another day.

Even if you say, “OK, we're going to do it,” why do it this way? This was a project… came into one of my training's. We taught them the Lean Startup method. I thought I would be assassinated by the people in this room. They were so resistant to the idea that we had to take a customer service mentality.

I remember they said to me, “We don't have customers. The employees in this company have to use this. It's not optional. They are required to do it.” It's like, “Well, how is your compliance rate so far? You just told me that you have thousands of people working at this company who are working around your existing mandates, so sounds to me like they have a choice.

“Why is this time going to be different? Let's treat them like customers. Let's admit employees always have a choice.” We just went through this very basic stuff and, “Let's treat this like a startup.

“If I was trying to tell you you should invest in my brand new IT-based startup here in Silicon Valley, and what we're going to do is sell to corporations and get them to totally revamp their IT, HR you'd be like, ‘Well, that's a really risky thing. Are you sure you know?'

“We would treat that one like a high risk, high reward startup with tremendous upside if it works, but tremendous risk that it might not. Why is it any different because the people happen to work for us already? It's the same dynamic.” After three days working with them, they came up with a new plan.

The new plan was so shocking to the people in the company who saw them present it that I was accused on more than one occasion of slipping something into the water that produced psychedelic effects because, “What did you do? What was the trick to this?” All of a sudden, this 25-person committee asked if they could be consolidated down to a five-person full-time team.

They got rid of 20 people voluntarily. In corporate settings, you never decrease your headcount. That's suicide. They said, “Instead of rolling this thing out over 18 months, we're going to go try to find a CEO-level, a P&L leader customer.

“We will offer to each potential customer that, if they say, “Yes,” to be a pilot site for this new software, we will take our entire team, put them on a plane to their headquarters, wherever they are in the world, and we will camp out in their headquarters till this project is done to their satisfaction.

“First MVP will be shipped within 30 days, and every 90 days we will voluntarily offer them a new version of the software to see if we can get them to switch over. They don't have to switch over till they actually believe it's better than what they have now.

“And, on top of that, we will not leave their headquarters until we prove to them, with real metrics, that we have achieved a productivity improvement in their work process.

“Then, and only then, will we attempt to take it to a second site, do the same thing over, reconcile the difference, refactor, take it to four sites, eight sites, sixteen sites, and eventually scale it up through hyper-growth of the whole company.”

Here's the kicker. When I tell this story, this is the part that nobody believes. I say, “These five people who did this project, they struck me as every bit the passion, creativity, intensity, hunger, scarcity mindset, innovation as the true startups I meet here in the South of Market neighborhood in San Francisco.

“If you looked at their resume, you just can't believe it. These are people who've never done a creative thing in their life, so far as the resume says. These are lifetime IT finance corporate people.”

No one can believe that…They're not entrepreneurs. An entrepreneur is supposed to be wearing a hoodie, went to Stanford, and he's 21. This guy's 45 and he's got really good health benefits and he's got a family, and did I mention he spent 20 years as an IT lifer? How could he be an entrepreneur?

I try to make the case in the book, of course, about why this is true, but the most important thing I can say is, you've got to believe me because I've seen it with my own eyes. I've witnessed it first-hand, multiple times.

I try to tell those stories and get people to see that there's this incredible latent energy and creativity available in our existing organizations that we absolutely squander today.

Mark: I hope that sounds very familiar to people who are listening. In other organizations, having that discussion about latent creativity that's being wasted around not engaging people in continuous improvement, there's a parallel theme there.

Eric: Yeah, it's really the same issue, but applied to the new domain. There's a time and a place for optimizing an existing workflow that we know creates value but has some waste embedded in it, and there's a time and place for building a new value stream from scratch, where we don't know… Forget the idea of whether it has any waste in it or not.We don't really know if it creates any value at all. It's not like no one's ever done that. It's just that I think our attention has not tended to be drawn there because, to be fair, in the 20th century, most business value came from the scaling of existing and probably well-understood products and supply chains.

I don't mean this as a criticism of what came before but, rather, a new extension of our older management ideas into a new world. We live in a world that early 20th-century management pioneers that we all revere would have found absolutely unrecognizable.

Mark: Yeah, and one of the other things from your story that makes me think of other types of organizations, you talked earlier, it's OK not to know. I think there's a dynamic in big companies that they want perfection, and maybe… Is there a similar thought of, “It's OK not to be perfect, because we will learn, and iterate, and improve, and…”That should be freeing in a way, but I could see where the discomfort would come from.

Eric: Yeah. It's actually tricky. I used to say exactly what you just said, that it's OK not to be perfect. It was such a problem because people would say, “Well, I don't…” It sets up continuous improvement against perfection.We don't seek out perfection, and it allows the people who want to delay, and work in large batches, and sit in their cave, and just think great thoughts as if those work processes deliver perfection ever.

I got used to telling people, “Listen, if I interviewed your customers right now, would they tell me your product launches are generally perfect?” “Sure they would. We all agree they came in way late, way over budget, but are they perfect, at least, to compensate us for these massive delays?” “Oh, what's that you say? Your customers hate your new products?

“OK, so can we admit, first of all, the status quo is not delivering perfection, and that's, of course, because…When was the last time you met with someone who was working on a project, and they said, ‘I have an idea. In order to make my project more perfect, I'm going to go slower, think harder about it, but by myself, with no customer input. I'm going to have more politics and bureaucracy and meetings.'”

What is the evidence that that produces perfect outcomes? The thing that produces perfect outcomes is to measure, and learn, and improve. That's an old Lean idea going back to [W. Edwards] Deming. We just want to apply that same thing here. That this is the pursuit of perfection, but in order to make something more perfect, you have to admit that it ever was imperfect.

This is just being honest about the fact that the products we make are imperfect, and the best way to make them better is to ship them to some customers with a limited scope at the beginning so that we don't embarrass ourselves too widely, learn what we can, and improve with each iteration.

In fact, for physical products especially, a factory that is set up for single-piece flow is especially well-adapted to do this, because we can use the same ability to make every product to custom order. We can use those same capabilities to run more experiments by diversifying the specifications set at low volume.

I remember, I was in a factory where — this is such a classic situation — I was meeting with the union leaders as well as the floor people of this factory. They were having this problem that the product they made there hadn't changed in like 10 years, and volume that was being purchased by consumers was decreasing.

They couldn't convince the company to invest in a whole new revamp of this product, because that's a multi-year expensive process, and the very fact that customer demand was dwindling made their budget too small to justify it. That's totally perverse. They're caught on this classic corporate catch-22 that, because no one's buying their product, they can't make it better.

I remember saying to them, “Well, one of the issues, clearly, is that this product is superficially old. This is a consumer product still. Yes, it's industrial. Yes, it requires manufacturing, but it's still something that individual consumers buy in a store. It looks old, because you haven't even refreshed the design. The superficial elements haven't been refreshed in a long time.

“So why don't we go get a sense of whether there's an opportunity to run some experiments? Would an improved design or some better usability at the surface, would that make a difference?” “Well, we don't have permission to run those experiments.” I was like, “Permission from who?” They looked at me like, “What do you mean, permission from who? We just know that that's not our job.”

Of course, it was helpful to actually have a union leader there, because I was like, “Listen, are you comfortable with all the people who work in this factory being laid off? Because that's the…If I draw you a straight extrapolation line from where we are to five years from now, none of you are going to work here anymore.”

They were like, “No, we really don't want that.” So we started to say, “All right, let's go find out whose permission we have to get.” I'm only there at the invitation of management, so it's easy for me to be like, “Let's go call up the senior people, and tell them the story, and see what they think.”

Of course, as soon as they heard what we were talking about, they were like, “Well, we don't want to do an expensive program. We can't afford it.” I said, “Well, that's OK. Do you mind if we use our existing resources?

“Because, remember, there's all this waste in this factory, especially because it's not running at optimal volume anymore, so you've got union workers sitting around doing nothing but being paid to be there. So could we use some of that excess capacity to run some exp-?”

They're like, “OK, whatever. As long as it doesn't cost any money, do whatever you want.” “Including selling products to customers in stores?” “We don't care. Whatever.” [laughs] “Get out of my office, I don't want to talk about this anymore.” I was like, “Listen, you got freedom to do it.”

Then it actually had to go to product designers and the product management organizations. “Hey, we want to run these experiments.” They were all like, “Well, you'll never get the union guys to do that. Forget it. Those guys are lazy and they don't want to do anything different. They just do what…” I'm like, “Well, look who I have behind door number two. Surprise.”

Mark: We could test that hypothesis.

Eric: Right, exactly. Guess who's sitting right behind me in this meeting? Did you even pay attention? You start to be like, “OK, if we get all this bullshit out of the way, pardon my language, can we actually run the experiment?” People will say, “Well, it doesn't matter. It's not going to make a difference, so it's not worth running the experiment.”It's like, “OK, so you concede that, if it did make a difference, that might change your answer. So, can we run the experiment?” Anyway, after we get through all these corporate politics, which was annoying, but it took a couple days, this is not like rocket science. Then, finally, we're like, “OK, what do you want to do?”

They said, “Can we start with something simple? Can we try a couple units with a different color? Can we try different configure-?” They started to brainstorm about what was possible, and they were like, “Well, we don't really know what's possible until we bring some people from the floor into…” We had to find out what was the extra capacity that we had, and what…

Luckily, this factory had gone through a traditional Lean transformation, so we actually had Lean experts right there who we could go to and say, “Hey, listen. Could we repurpose some of these changes you're making for the purpose of doing low batch size experiments? I want 50 bespoke units, or five, sometimes, to a new custom order.”

Everyone thought it was a weird request. No one was used to thinking that way, but we had the capabilities right on hand. Then we could start to figure out — What is the problem? Why is it, really, that demand is dwindling, and what can we do about it? Of course, as was often the case, it had nothing to do with what anybody thought it was.

They made all kinds of very unusual discoveries and they were able to get back on track. It was like we unlocked this new way of thinking right from the factory floor. I like that story because…They were already doing a Lean transformation, so they were already bought into continuous improvement, and using the creativity of every person.

They were on board ideologically, but they were not accustomed to using those capabilities in a new domain, so that part of it was really cool. I feel like that illustrates the difference between continuous improvement and continuous innovation.

We're not just trying to come up with one new product at one time, and then it's an innovation and we're done. It's seeing that just like you might try to improve the margins of a product at all times by making it more efficient to produce, there's another way to improve margins on a continuous basis, which is to make the product more desirable to customers.

We should treat them equivalently, continuously.

Mark: There's, to me, an interesting parallel between continuous improvement of existing process, continuous innovation of new products, or services, or process approaches. In the book, you also talk about continuous transformation. Can you touch on that a little bit, and how those thoughts extend to the idea of trying to transform an organization with Lean or The Startup Way methods?

Eric: Yeah. This really requires a bit of taking the argument piece by piece. Either way, this is how it mentally fits in the landscape for me, I really see The Lean Startup as trying to take a reader from the idea that maybe they would like to do innovation, and eventually to this more avant-garde idea that they should do continuous innovation. The Startup Way picks up the baton, starting from a premise that we want to do continuous innovation and work entrepreneurially. We see that as a source of new growth and revitalization down the road. Then wants to walk the reader from that to this more avant-garde idea of continuous transformation.

The steps of the argument go like this. If you want to do innovation, then you need a tool in your toolbox to attack those problems on a regular basis. I call it the startup as an atomic unit of work. You have to be willing to say that, like that 25-person IT finance committee, that's the wrong structure to get the work done. We need a startup.

What is a startup? I lay out practices from Silicon Valley, how it works. A small, cross-functional team with a scarcity mentality, with what we call metered funding that they have a fixed resource budget to apply that's accountable to a board of directors.

It's not governed by your usual corporate review process, which is just not at all suited to innovation. Building a minimum viable product using a system we call innovation accounting to measure results, etc.

It's like a special kind of tool in your toolbox, and companies like Amazon do this all the time. They have what they call the two-pizza team — a team no larger than you can feed with two pizzas. It's just one of their corporate rules that, when they're trying something new, they're going to throw a two-pizza team at it.

That's how AWS started. That's how all kinds of their internal initiatives started. They don't always succeed. They had a two-pizza team that built the Amazon Fire phone, which was one of their big disasters. They failed very expensively, very publicly.

Very embarrassing for Jeff Bezos, personally. He has all these quotes in the press where he's like, “Yeah, it's my job to make sure that we fail enough,” so, yeah, it happens. If you look at the history, many of the people that were involved with the Fire phone went on to create all kinds of successful products for Amazon, including Alexa, Fire TV, and all the stuff.

You just got to be willing to treat this as a tool in your toolbox. Then, now you have a new problem after you do that. Oh, go ahead.

Mark: I was just going to say that the Fire phone was a very public failure, it got to market. I wonder if there were opportunities to have anticipated some of those failures in more private ways. I think about continuous improvement, and I think there's similar discussion in the startup world.Failure is good if you learn from it. That's not to say failure fetish. It's not carte blanche to go do all sorts of crazy, irresponsible things. It's a structured, but not horribly bureaucratic approach to making… I've heard Toyota people say, “You make lots of small mistakes to avoid big mistakes.”

Eric: That's right, or no problem is a big problem. If we pretend that there's no failure in our process, then we're lying about it, or we're being so conservative as to be getting non-optimal results. Although it's much more likely that we're lying about it if we're being really honest.A minimum viable product in the internal startup has to come with really strong liability constraints, so there's a whole discipline to this to make sure that we've really anticipated the worst case scenario and we've thought it through.

The nice thing about it is this allows them two different styles of working to coexist within the same organization, because we can still do traditional product management. We can still do traditional manufacturing.

No one's suggesting that, for a product that we market for over 25 years, we're producing at massive scale, but we do have good ability to forecast demand in a seasonal way. That's fine to continue to use traditional management techniques, including Lean manufacturing techniques, for that. That's totally fine.

We just have to be able to coexist with a totally different situation, which is this more internal startup. Then, once you have two different things happening within the organization, it starts to raise organizational problems, because, now, what function are these new entrepreneurs in? It's a classic issue that comes up all the time.

Who on the org chart is responsible for managing work of this type? Who comes into work thinking every day about the risks of disruption and the ability to act as insurance against them or to harness them for future growth?

In most organizations, it's either everybody's responsible for that — in other words, nobody — or it's, maybe, if you're really lucky, it's some executive's part-time job. The head of IT, head of marketing, head of engineering tend to be the lucky winners of the innovation sweepstakes, and it's on the list of things they worry about every day.

Number 20 out of 20 is, “Oh, we should probably innovate, too.” Neither of those is really adequate to the task ahead of us, especially if any of these startups start to succeed. Yeah, it starts as a two-pizza team, but it tends to then metastasize into something larger.

Sometimes you'll have 25 two-pizza teams now, all of a sudden, working on something that's found product market fit. You don't want the organization to treat that like a tumor to be excised. You really want it to be seen as a new source of growth and, therefore, maybe even a new division of the company.

In order for that to happen, we have to solve the problem I call the missing function — that there is no place on the org chart for entrepreneurship. I think, in the future, that's going to look just as silly to everyday managers as it was before the invention of marketing or finance as an independent discipline. Can you imagine a modern international company without marketing?

Mark: It's hard to imagine, yeah. [laughs]

Eric: Yeah. That's crazy to imagine, and yet there were not always chief marketing officers. It's a relatively recent phenomenon. My favorite part, reading the early books about scientific management and all that stuff, is these guys were managing machine shops. We're not talking about General Motors here. We're talking about machine shops — multi-product, relatively small businesses.They didn't have enough accounting sophistication to know which products made them money and which ones they lost money on. They didn't have good marginal accounting. They didn't know what their marginal profit was. They had a really hard time with statistics. They didn't have the basic statistical theories that we take for granted, so it was really difficult to run business without finance.

We're so lucky to have inherited this incredible functional discipline that…You'll never meet an organization of any size without a CFO. It's considered odd, absolutely necessary. Wise entrepreneurship is different.

We had to develop that as a new corporate form that is both responsible for overseeing the company's internal startups and, therefore, the continuous innovation program, but is also required to integrate entrepreneurial-type thinking across the whole rest of the organization in the same way that Lean can't be confined to the factory floor.

It starts to grow out to the adjacent functions and eventually touch the whole organization and touch the whole supply chain. The same thing is true here. Now I can finally get around to answering your question, because you say, “OK. If we're going to adopt a new and more modern corporate form to add entrepreneurship as a function, how the hell are we going to do that?” [laughs]

They'll go, “Now what?” You say, “OK, we have to do a corporate transformation.” This is a very particular kind of corporate transformation with a very particular kind of difficult challenges that I try to outline in the book. I try to make the case that transforming the structure of an organization is also an entrepreneurial challenge.

It has to start small. It has to scale quickly once it's proven. It has to have a certain kind of funding and accountability structure. Then, finally, if you buy my argument all this way that transformation is a kind of entrepreneurship, doesn't it sound stupid to just do it once?

I feel like there's always management gurus that are like, “I have the best ideas of all time. If you just follow me, your organization will be permanently in a fine spot and you never have to do anything else again,” and so everyone wants to be the last management guru, or whatever.

I just feel like… I'm of the Peter Drucker school of gurus. He used to say, “People call me a guru because I can't spell charlatan.” I don't want to be anyone's guru. Just give me a break. This is not the one true management system for all time. This is, at best, the first management system that contains within it the seeds of its own evolution.

What that says is that we should anticipate the need to transform again, and again, and again throughout the 21st century, but we shouldn't treat those like the old top-down 20th century reorgs to nowhere, where we're just shuffling the deckchairs on the Titanic.

This is going to be experimental, and scientific, and really driven by the needs of workers on the ground. That's my idea. We should treat corporate transformation as a corporate resource, a discipline that we have to master in order to be able to handle the waves of disruption that are coming our way.

People feel like the 21st century, so far, has been rocky, and difficult, and confusing, and uncertain. You ain't seen nothing yet.[laughter]

It's going to get so much worse. This roller coaster is about to start going awfully fast, and I just don't feel like our organizational forms are ready for it.

Mark: A lot of thoughts come to mind. One is the idea of organizations and health care who complained about the uncertainty out there in the political and health reform environment. They say, “Well, we're going to put out continuous improvement efforts on hold until that gets sorted out.”I'm thinking like, “Well, yeah.” It's hard to challenge people that doing nothing is a good strategy in times of increasing uncertainty. It's only going to get more uncertain and more crazy in the future. It seems like that same advice that you're saying. Start small, learn, iterate, scale quickly.

Organizations I work with don't flip a light switch and suddenly get a culture of continuous improvement. They start somewhere and they get successes and they take their lumps, but they do that on a small scale instead of something that is a problem company-wide. Then you go from there. I'll get off my soap box.

Eric: You got it better than I could. I could not agree more. The idea that being rigid and static is the best way to surf a wave and you got to deal with constant, gyrating change. It's appealing in that it's comforting if it was true, but that's absolutely no evidence to suggest that it's a rational strategy under any circumstances.

Mark: One of the other things that comes to mind when you talk about this entrepreneurship function, it seems squarely different than — this has been trending in healthcare — the “Innovation Center” where we will put innovative people in a department to do some design thinking.

Eric: In a box.

Mark: They will innovate. It seems like this entrepreneurship function is more a parallel to organizations that have an internal Lean, or process improvement department, or whatever they label it.It's not that that group is responsible for doing it but that group trains, coaches, pushes, [laughs] hopefully it doesn't turn up the heat too high in terms of embedding, as you were saying, entrepreneurship, we're embedding Lean all throughout the organization.

Toyota, even internally, has a small group that is the owner of some of these standards and even though that's… Their intent is that's the way they do things every day. They still need someone who is their true north to point out, “Hey, we're kind of losing discipline around standardized work,” because they're human, they're complex organization, these things happen. That seems like a…

Eric: If people understand what the term standard work means, then we should have a standard work for innovation, and people find that very counterintuitive. There's a way to do innovation well and there's a way to do it poorly, and every venture capitalist agrees.They don't necessarily agree on what the standard work should be, or even that it should be the same check list for every company, but they know it when they see it. They know what good innovation looks like, and they know that there's a certain mindset, a certain culture, a certain way of going about things that works and ones that don't.

Any company in the corporate adventure arm is already investing on that basis already. They already believe it. They just have to admit it to themselves. Can you imagine, if we had a finance center or a marketing center?

You're like, “Yes, this organization does do finance. Absolutely, but only in this room over here, and if you have any finance issues, go take them over there, they'll do them for you.” [laughs] It's like “What the hell you talking about?” Finance implicates every single thing that we do in the organization and innovation is absolutely no different.

Because of my role in the ecosystem, I meet these innovation center directors all the time. I get the phone call. I'm the guy they call and they always have an 18 month mandate from the CEO that they got this budget, and they're always 9 months in when they call me, for some reason.

It's like, “So, hypothetically speaking, if I had a friend who was an innovation center director, and his teams were getting absolutely no results, [laughs] what would you recommend? How do I talk to the CEO about that?”

If you're not clear what the objectives are, if you don't change people's mindset, if you don't train them in a new way of working at the culture and the innovation center is the same, or it's just we throw bean bags chairs at the same old thing if people's bonus system, if the incentive structures are the same, if the HR policies are the same.

I was working with one innovation center where they couldn't even get permission to build the environment different. They couldn't even get physical plant to let them have open office space or anything, and they are getting the same results. It's just doing the same old thing but calling it innovation. It doesn't get you anywhere.

God forbid you have a success. This is the thing I never understand about the innovation center. What if the next Steve Jobs happens to be working in the innovation center and they come out with the iPhone while they're sitting there?

They're like, “Listen, I've had a breakthrough discovery that's so radical, it means everything else we do as an organization is going to become obsolete, and we have to…” They completely transform. We had to throw away the printing presses and become a digital newspaper.

Just pick your favorite pivot moment from business history. We have to get out of the memory manufacturing business and the semi-conductor…It's something really dramatic that has to happen. What's the Innovation Center director supposed to do with this information?

Does the company have a plan for how do we create a new division? My favorite question for CEOs — How do you create a new division of your company? They're all like, “Uh, I just draw it on a piece of paper and say, ‘Now we have a new division.'” There's no process and, therefore, there's no standard of work and, therefore, there's nobody thinking about how to do it well.

No one even knows if we did do it well. We wouldn't accept this kind of loosey-goosey lack of standard and accountability in any other kind of work that we do. Why should innovation be an exception?

Mark: Great question. I feel like we've just scratched the surface. I want to thank you for taking the time to talk today. This makes me get me more excited about Lean Startup Week. I find it really fascinating just the intellectual stimulation and the energy that's in the Lean Startup community, even though I feel like I'm just on the edges of that community.There's a lot of thought-provoking stuff and a lot of great people. I think for those and lots of other reasons, I would encourage people, if they can, to go to Lean Startup Week. Can you tell the listeners a little bit about Lean Startup Week and what some of the plans are for this year?

Eric: Sure, thank you. It is now a whole week long and we try, really, as much as possible to learn by doing. We try to have hands-on immersive experiences as well as just people just talking about it.If you've never actually seen a Silicon Valley style startup up close and you'd like to see what it looks like, we do site visits and you can see the animal in its native habitat as well as, of course, talking all this theory about the things we have to learn between startup founders and leaders in large companies.

It's probably the only conference in the world that has such an unusual combination of company sizes and industries all mixed up together. You rarely see startup founders and the CIOs in the same room, let alone all learning together.

Of course, we have tremendous speakers and faculty like Mark who help us and bring these roles together. One of my dreams has been to have people in the startup community play the Red Bead Game, so I'm very excited about that for this year. I guess the other thing I would say is this is not a conference full of speakers that you can hear anywhere else.

We really try hard to get unheralded voices right from the trenches so that we can speak candidly about what's actually going on with these projects. It's not a lot of rah-rah PR-driven announcements. It really is people who are willing to talk about the challenges that they're facing right now and, therefore, it has a raw energy that most business conferences just don't.

Mark: I appreciate there's so many reasons. It's great that your team putting it into the conference really does make an effort to reach out, inviting people to submit applications to come tell their story. That leads to so many more diverse voices and perspectives part of the conference. I think that makes for a stronger event.I applaud what you and your team have done in that way, and everything else, putting together a great event.

Eric: Thank you. I think any people will have a good time. You and I have spoken before. I forget now who, somebody had a blog post recently about the challenge of a certain kind of lethargy and lack of energy that had sunk into the Lean manufacturing movement and the need to seek out new voices and new sources energy.I was like, “Hey, over here! Look over here!”


Eric: “We got something pretty exciting going on here.” I don't mean that in a boastful way.

Mark: No, it's true.

Eric: I really view us as not really distinct communities. We share an intellectual foundation, and there's a real opportunity to learn from each other. If we can be a source of energy and excitement, if you want to talk to people who think Lean is just a new, fresh, bold thing that is cutting edge, come meet our folks there. They're pretty excited to be there.

Mark: Yeah, and I think there's just serendipity, and it reminded me of a story real quick. It was during one of the networking sessions, I met a woman whose background was social work, who was doing a non-profit startup in that area.We were talking and she suggested, “Oh, I bet you'd be interested in something called motivational interviewing.” This is a methodology that had its roots in, of all places, addiction counseling, addiction therapy.

Reading about this and seeing connections to the workplace, I've discovered recently people at, guess what, Toyota, have been teaching this methodology to their managers for the last 20 years. There's a former Toyota manager who's out there teaching this to other organizations. We've been talking about getting him on the podcast soon.

Just being there, the serendipity of being at the event, a random conversation with somebody opened my eyes to a different, exciting frontier around understanding people, managing change.

Eric: Absolutely. The unexpected collisions and different worlds colliding is both really fun and provides a lot of intellectual stimulation. I know you and I both believe, hearing from more diverse voices, that it leads to a more creative outlook overall. We're really proud of that aspect as well.

Mark: Yeah, I would encourage people, go to Eric's new book, The Startup Way, October 17th, I believe, is the release date. You can preorder that. Sometimes books sneak out a day or two early through [laughs] the Amazon supply chain.Again, the new book, The Startup Way, and our guest today, again, has been Eric Ries. Eric, thank you so much for talking with us today.

Eric: It's always a pleasure.

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Mark Graban
Mark Graban is an internationally-recognized consultant, author, and professional speaker, and podcaster with experience in healthcare, manufacturing, and startups. Mark's new book is The Mistakes That Make Us: Cultivating a Culture of Learning and Innovation. He is also the author of Measures of Success: React Less, Lead Better, Improve More, the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, and the anthology Practicing Lean. Mark is also a Senior Advisor to the technology company KaiNexus.



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