The Four-Way Fit

By Tom Mohr and Tien Tzuo

My purpose in writing The Four-Way Fit is to advance the science of innovation-- in ways both practical and actionable; for entrepreneurs and business leaders; at every stage of company-building.

For the past fifteen years, innovation theory and practice have been dominated by the Lean Startup Model. This innovation era was first ushered in by Steve Blank, with the publication of Four Steps to the Epiphany in 2005. Eric Ries built on Blank's seminal work in his 2011 book The Lean Startup. These two luminaries are the grandfathers of the lean startup movement, which has transformed innovation worldwide. Phrases like "minimum viable product", "agile development" and "build / measure / learn" are rooted in their work. Companies in all corners of the globe are today more customer-centric, more scientific, more incremental, and more agile-- directly because of their work.

But still, today we are in need of a new and better innovation model. Fully half of all small businesses launched in the US this year will be gone in 5 years. Half of the companies on the S&P 500 list today will not be on the list in 10 years. For all the good the lean startup model has brought us, time and experience have taught us its gaps. Over the past fifteen years, we have come to learn that to traverse the journey from early-stage startup to iconic global enterprise, lean thinking is certainly key-- but it is not sufficient.

The path to greatness begins with an initial value breakthrough, achieved in a large market. Great companies then go on to perfect and extend that value, while simultaneously building pathways to sustainable competitive advantage. This requires work in four domains: Market, Product, Model and Team. At every stage of company-building, they figure out what it takes inside these domains to move on to the next stage-- and then they execute. Through the embrace of design thinking, lean thinking, strategic thinking and systems thinking, they methodically build up, sustain and extend customer-defined value.

It all requires more than just product / market fit. It takes a Four-Way Fit-- found at the juncture of Market, Product, Model and Team.

To find this fit, you need a framework and a method. The Four-Way Fit framework helps you to clarify the domains and subdomains that matter most in charting the innovation path. Within them, you can then differentiate between those assumptions you are confident are true, and are therefore immediately actionable; versus those that require testing and verification before investment and action. The difference between these two types of assumptions is important; understanding it helps you avoid waste of money and time.

The job of the method is to help you march from your current stage to the next with efficiency and effect. It helps you strike the right balance between planning steps and action steps. It clarifies what to do if a key assumption proves flawed. It helps you test, iterate and optimize, so you can narrow in on truth, reach the next value inflection point and by so doing reach the next stage.

The Four-Way Fit is organized into three parts. Part One addresses the framework. Part Two addresses the method. And Part Three addresses the unique requirements presented by each company-building stage.

• Language: English
• Publisher: BookBaby
• Release date: Jan 19, 2022
• ISBN: 9781667824222

Book preview

Introduction

Has your company achieved such a big value breakthrough in such a big market that you are on a growth rocket ship? As you zoom up towards the stars, have you figured out how to steadily add to your value, widening your advantage over all competitors? Or have you found a way to shut these competitors out entirely, freeing you to dominate your market for many years? If so, you don’t need to read this book.

All others should keep reading.

Seventy-five percent of all VC-backed startups fail to return investor capital.¹ Of all small businesses launched in the United States, half are gone within five years.² And the odds of iconic success are witheringly small. Of all the 31 million businesses in the US, just 159 went public in 2019.

Even for the VC-backed startups that show initial promise, far too many bump against a growth ceiling they can’t crack through. A disappointing exit follows. Even for those that do become large public enterprises, many falter. If the past predicts the future, fully half the companies on the S&P 500 list today won’t be around in ten years.

The failure to create and extend customer-defined value exacts a staggering toll. For the entrepreneur who has poured blood, sweat and tears into a multi-year dream, it shatters joy. For the investor, the direct financial loss pales in comparison to the loss in self-confidence and, too often, an imperilled career. For employees, job dislocation and disillusionment may follow. And then there is the customer — still stuck with a problem your company couldn’t solve. Failure to innovate hurts everyone.

If we are to make progress in attacking failure and underperformance, we must address the problem in all its variations:

Perhaps you can’t create value in the first place, so you fail

Or you discover a value improvement, but can’t turn it into a decisive breakthrough — so you sputter along and cap out

Or you discover a value breakthrough, but it’s in a small market — so you cap out

Or you discover a value breakthrough in a large market, but can’t effectively extend and optimize that value — so you cap out

Or you discover a value breakthrough in a large market and continue to optimize that value, but you can’t build a competitive moat — so competitors rise, arbitraging away your profits, and you cap out

This is our puzzle: can we devise a better model for innovation — one that more effectively overcomes these problems? In other words, can we show companies how to more effectively enter a large market within which they achieve a significant value breakthrough (to avoid failure); then optimize that value and gain sustainable competitive advantage (so that they don’t cap out)?

That’s the purpose of this book: to share a new innovation model. We have all heard that to build a great company, you must find product / market fit. But that alone is not enough. Great companies discover fit between four domains: Market, Product, Model and Team. That’s the Four-Way Fit. And they must do so time and again as they scale.

The Four-Way Fit model is made up of a framework and a method. The Four-Way Fit framework defines the domains that matter most in creating, optimizing and sustaining value. Within these domains, you are asked to state key assumptions about the business, so that they can be critically evaluated and, where appropriate, tested. The Four-Way Fit method organizes company building into its natural stages. Then, by leveraging the framework, it guides teams as to how to progress from stage to stage. To see the power of this framework and method, consider the story of Netflix.

The Netflix Story

As of this writing in May 2020, Netflix boasts 180 million paid subscriptions worldwide — including 69 million in the US. It is a motion picture powerhouse and a darling of Wall Street. But it wasn’t always that way.

Immerse and Ideate

In the summer of 1997, fresh off the sale of his company Pure Atria for $700M in one of the biggest tech exits up to that time, Reed Hastings started Netflix with friend Marc Randolph. Hastings was an engineer by training. Rudolph had been co-founder and head of marketing at a computer mail order startup.

At the time, the internet was rising and entrepreneurs were staking out land grabs. With Hastings’ technical acumen Rudolph’s understanding of mail order businesses, they sought a large category into which they could sell products online. As they pondered opportunities, they took inspiration from a fledgling company named Amazon. First they considered VHS tape sales and rentals, but eventually concluded they were too expensive to stock and too delicate to ship. Next, they tried DVDs. To test the concept, they sent a DVD via the mail to Hastings’ home in Santa Cruz. When it arrived undamaged, they decided to pursue the concept. They would sell and rent DVDs online.

Minimum Viable Concept

At the time, annual video sales and rentals were $16B. The market was dominated by Blockbuster. They focused on DVDs, to be made available to order online with postal service delivery. They copied the Blockbuster business model: charge-per-rental, with late fees for rentals. DVDs would be sold at a flat price. Hastings put $2.5M into the company to get it started. Soon he had hired thirty employees. It was a bold move. They brought together a team that possessed the competencies they needed to test this concept — people in product and engineering, marketing and in warehousing and distribution.

Initial Product Release

They stocked up, and soon the netflix.com website was offering for sale or rental all 925 titles that were available in DVD format at that time. At first, the company struggled to gain traction. DVD sales lagged. Soon the company decided to abandon sales and double down on rentals.

Minimum Viable Product

At the time, DVD players were expensive. Home penetration wasn’t yet high. Furthermore, sending DVDs through the mail was a slower way to pick up a movie than it was to just walk into a Blockbuster store and rent one. Since Netflix had copied Blockbuster’s business model, there was little to differentiate it — except selection. The DVD selection Netflix offered was superior to most Blockbuster stores. The company began to build a small following.

Minimum Viable Repeatability

In 1999, Netflix introduced an alternative to the charge-per-rental model. Now consumers could choose a monthly subscription in lieu of a per-rental charge. This differentiated Netflix from Blockbuster. For Blockbuster, late fees were a critical component of its business model, so it made no changes to its own pricing in response. In early 2000, Netflix abandoned the charge-per-rental model entirely. Now consumers could purchase a monthly subscription, at a flat price, without due dates, late fees, shipping and handling fees, or per-title rental fees. It soon became clear that the elimination of late fees had become a powerful source of competitive advantage vs. Blockbuster.

Minimum Viable Traction

By 2000 Netflix boasted 300,000 subscribers, but was still losing a lot of money. It proposed a sale to Blockbuster for $50M, but Blockbuster turned Netflix down. After 9/11, when subscriptions slumped, Hastings was forced to lay off a third of his 120 employees. It was a painful time.

Minimum Viable Scaling

But soon the cost of DVD players began to fall. By Thanksgiving 2002, they were selling for $200, and consumer adoption rose significantly. Netflix grew in parallel, with subscriptions rising sharply in early 2002. By 2005, Netflix had 35,000 titles available, had 2.5M subscribers and was shipping out 1 million DVDs a month.

Minimum Viable Expansion

As successful as the DVD subscription business had become, Hastings eyed the rise in internet bandwidths and knew that video on demand would eventually become possible. Instead of having to wait days for DVDs the consumer would be able to order up a movie in ten seconds. Hastings knew that if he could tie together all the dependencies (gaining access to the digital rights of content producers and solving the technical problems of distribution), it would be a game changer.

But this was not just an organic extension of the existing service. It was new in every respect. In a sense, at least as it pertained to streaming, Hastings was starting over. He would have to choose his path. How would he gain digital rights? What would be the business model? Would he build his own Netflix set top box for the TV set, or place his fate in the hands of other manufacturers?

To pursue the vision, Hastings realized he needed to create a whole new team — completely separate from the core business. The capabilities required to build a world class streaming video subscription service were completely different from those needed to build a mail-order DVD subscription service. Project Griffin was launched, initially with a vision to build a set top box. But at the last minute Hastings realized that if he participated on the hardware side he would alienate all other hardware players. So he abandoned that plan, became Switzerland and pursued partnerships with the various device manufacturers. It proved to be a pivotal decision.

To make video on demand work, he now had two key product dependencies: he needed the support of content producers like Disney and MGM Grand, and consumer device manufacturers like Apple, Sony and Samsung. Netflix succeeded in establishing those relationships. Eventually, once Netflix became embedded into the value propositions of these content producers and device manufacturers, these dependencies became secure and sustaining — delivering Netflix another brick in its rising competitive moat.

Organization design decisions were also key during this time. Since the competencies and objectives were different, the technical team that worked to create video on demand was walled off from the technical team that maintained the DVD business. Video on demand would inevitably rise at the expense of the DVD business. Hastings dealt with that reality by keeping the teams separate.

Minimum Viable IPO Path and IPO

Netflix went public in 2002 and posted its first profit in 2003 on revenues of $262M. Video on demand came to market in 2007, initially offered for free alongside DVD rentals. In 2011, Netflix announced separate pricing for DVDs and video on demand, requiring that consumers pay for both if they wanted both. Consumers initially rebelled against the move, but the company weathered the storm and significantly increased profitability.

Around this time the company came out with its now-famous Netflix Culture Deck, defining what Netflix looks for in its employees. In it, the company committed to seeking, hiring and retaining only top tier, high-accountability talent — people they called 10Xers. As was said in the deck, the only antidote to the rising complexity of scale is to increase the density of 10Xers in our company.

Hot Public Company

Then Netflix made a change to its business model that sharply increased its profitability. Content is king. The big movie producers owned the digital rights, so they had lots of leverage. The resulting revenue share agreements cut into profits. It was clear to Hastings that with the rise of alternative channels for streaming video distribution, their leverage would inevitably grow — costing the company competitive advantage and threatening profits further. So in 2012 Netflix made another bold move. It began to produce its own content via Netflix Originals. The strategy was validated with the launch of the House of Cards series in 2013, which became a huge hit. Since then, the percentage of content that has been produced by Netflix has steadily grown. This business model shift transformed profit margins; it remains to this day a major source of sustainable competitive advantage.

Today, Netflix is a dominant player in a hot, worldwide streaming video marketplace. It is also one of the world’s largest and most successful movie producers. As of this writing, its market capitalization is $191B.

Lessons

In retrospect, we can see that at every stage, the Netflix top team made tough choices that set the arc of the company’s future. Time and again, these decisions emerged in four domains: Market, Product, Model and Team. Each stage was different, presenting its own unique riddle. To crack that riddle, leaders at Netflix needed to think things through holistically, and then test all their assumptions — adjusting as they went along. The leaders at Netflix certainly made their share of mistakes. But they caught them quickly and adjusted. And that made all the difference.

What can Netflix teach us about innovation? What did they do that others failed to do? Winners think holistically. At every stage on the journey of company-building, they figure out what must be achieved to prove they’ve reached the next stage. Then they think through issues in the four domains that matter. They come up with a set of integrated claims that, if proven true, will cause the company to complete their current stage and move on to the next one. They proceed iteratively, testing and verifying unproven claims before accelerating investment in them. That is the essence of the Four-Way Fit model. It offers a new innovation framework, one that posits all the right questions in the domains of Market, Product, Model and Team. And it offers a new innovation method, one that helps you progress from stage to stage on the journey of company-building. In it, you will alternate between mountain-top moments (in which you review your current position and identify the next mountain to climb) and valley journeys (the disciplined continuous testing, iterating, optimizing and executing). At each stage you must consider the riddle that stage presents, apply the framework and follow the method.

To be worth its salt, any new innovation model must be much better than its predecessors. It must significantly increase the odds your company will survive, thrive and advance towards iconic success as a global enterprise. That is the standard against which the Four-Way Fit model, put forward in this book, must be judged.

The Four-Way Fit Framework

The purpose of an innovation framework is to clarify the domains and subdomains that matter most in the creation, optimization and sustainability of value. Once you clarify the performance outcomes you must achieve to move from your current stage to the next, the framework helps you organize the comprehensive set of claims that, if true, will get you there.

Our Four-Way Fit framework can be expressed in two views: the canvas and the spreadsheet. The canvas presents a high-level abstraction of the domains and subdomains that matter. The canvas is used during Phase I of company-building, the discovery of a value breakthrough phase. It is a valuable tool to help you think through your product and business model. The spreadsheet is more detailed. The spreadsheet comes into play in Phase II, once fundamental claims are proven and your initial value breakthrough has been achieved. This is the value optimization and sustainable advantage phase of company-building.

Here is the canvas view of this Four-Way Fit framework. It’s made up of four domains (Market is shown below in green, Product in orange, Model in blue and Team in teal). Each domain is made up of subdomains, as shown below. There are a total of fourteen subdomains:

It’s the job of the top team to develop claims within these domains and subdomains. These claims, once proven true, will lead you through Phase I. Some of these claims, the ones you are sure are true, can be called settled assumptions. The rest — the ones you think are true but you’re not sure — need to be treated as hypotheses (testable claims) until they are proven.

Once you move into Phase II, there are just too many key assumptions across the domains and subdomains to contain them in a canvas. You’ll need to use a spreadsheet, in which each domain is represented by a separate tab.

Whether you know it or not, you create claims in these four domains already. The claims you come up with may not be formally defined. You may call them strategies, leading you to act on them before you test them. But if you’re running a company, you are encountering issues and coming up with plans in all of these domains. The Four-Way Fit method simply helps you address these issues in a more holistic and systematic way.

The great contribution of the lean startup model was to bring the scientific method into the innovation process. Lean startup luminaries such as Steve Blank (author of Four Steps to the Epiphany) and Eric Ries (author of Lean Startup) were the first to argue that hypotheses should be formally stated and systematically tested. Hypotheses must be specific and measurable; for each hypothesis you must identify the key performance indicators that will be measured to verify it.

The Four-Way Fit framework makes new contributions to innovation by bringing scrutiny to more than just the Market and Product domains. It elevates two domains underrepresented in the lean startup framework: Model (business model) and Team. Then underneath these domains, at the subdomain level, it does the same — highlighting subdomains not adequately addressed in the lean startup framework. These include Market Viability, Product Dependencies, Unit Economics, Cash Flow, Competitive Moat and Competencies. By filling these gaps, the Four-Way Fit framework replaces previous frameworks with one that is more comprehensive — addressing all the domains and subdomains that matter in innovation.

The Four-Way Fit Method

If the innovation framework is static (like a balance sheet), clarifying which domains and subdomains matter, the method is dynamic (like payments and spending). The method addresses when to update your claims (leveraging the framework), and then how to test, iterate on and verify them so as to progress from stage to stage on the journey of company building.

As with the lean startup method, the Four-Way Fit method celebrates validated learning. By testing the claims that are still just hypotheses (i.e. you think they’re true but you’re not sure), and then iterating on and optimizing them until they become settled assumptions (you’re confident they’re true), you advance in small steps towards customer-defined value. Successful execution of sound settled assumptions yields growth; as you hit your next value inflection point you earn the right to move on to the next company-building stage.

This focus on continuous experimentation and validated learning is the seminal contribution of the lean startup method. It aligns with agile software development methods. Through small-batch development executed in sprints, following a build / measure / learn cycle, product feature hypotheses can be verified one at a time. Slowly but surely, you build customer-defined value.

In his book Lean Startup, Ries rightly argues that a company must prove two essential hypotheses: first a value hypothesis, then a growth hypothesis.Similarly, in the Four-Way Fit method, company building progresses in two broad phases: discovery of a value breakthrough; followed by value optimization and the building of sustainable advantage.

However, the Four-Way Fit method makes three new and important contributions to innovation science:

1. The two phases of company building (discovery of a value breakthrough and value optimization with sustainable advantage) are so different from each other, they require fundamentally different approaches to the way claims are developed, and how they are tested and verified

2. Within these phases reside distinct stages — each of which presents unique characteristics and exit criteria. These stage-to-stage differences are important for leaders to appreciate. At the outset of each new stage a top team must stare down what it will take to exit the current stage and progress to the next.

3. The process of progressing through a stage requires that top teams oscillate between a heads up motion (the mountaintop view, where you plot the path forward) and a heads down motion (the work to get down the mountain, through the valley and up to the next mountaintop). Both are important.

Phases and Stages

In the beginning, discovery of a value breakthrough is all that matters. This is the job of Phase I. Once this breakthrough is accomplished, a company earns the right to focus on value optimization and sustainable competitive advantage. This is the job of Phase II.

At a more granular level, these two phases are characterized by unique sequential stages. The first two stages, in light grey, must be traversed even before an initial product is built. To get through each phase you must progress through its stages.

Eventually, both phases may operate simultaneously in a company — the discovery of a value breakthrough phase for new product initiatives, and the value optimization / sustainable advantage phase for the original core product. This usually begins in the Minimum Viable Expansion stage.

This stage-by-stage company-building journey looks linear. But of course it is rarely a uni-directional stroll down a yellow brick road. The reality is more like hopscotch. Just one flawed assumption can force a company backwards from its current stage to a previous one. A significant market shift, such as the rise of a new competitor, can send it all the way back to the beginning.

Heads Up / Heads Down

Different from the lean startup method, the Four-Way Fit method places great importance on strategic planning — what I call the heads up motion. Teams must think things through, considering all four domains and, within them, the fourteen underlying subdomains. If you don’t think everything through in an integrated way, you end up with internal inconsistencies and incomplete planning. By thinking through all of the domains and subdomains, you end up with a set of claims that is comprehensive, integrated and internally consistent. This is a significant difference from the lean startup method. The latter does not focus on, and in fact is distrustful of, this heads up motion.

In the Four-Way Fit method, every stage begins with this heads up motion (except the first stage, Immerse and Ideate, for reasons I will describe later). Your team starts by clarifying what must be achieved so as to progress from the current stage to the next. Then you must define a set of testable claims within the domains and subdomains that, if true, would get you there. This set, if proven true, earns you passage to the next stage — but only if these claims are proven true. After you come up with your claims, rank each (on a 1–5 scale) by its impact on business outcomes, and then by the team’s certitude it is accurate. The highest-impact claims with the lowest levels of certitude are those to be tested first. Claims with high levels of certitude can be considered settled assumptions; these can be counted on and invested in.

With the heads up motion completed (at the beginning of the stage), you can then move into the heads down motion (to progress through the stage). Here, your team tests claims through some mix of evidence-gathering and experimentation. The goal is to discover a flawed claim as early as possible, so as to reduce waste. Whenever a flawed claim is discovered, you must replace it. This brings you back to the heads up motion, because when you replace a claim you have to reconfirm that all other claims in the set still hang together — that they remain comprehensive, integrated and internally consistent.

Like this:

By oscillating back and forth between the heads up and the heads down motion, you slowly but surely narrow in on truth — which allows you, eventually, to progress to the next stage. Then you must do it all over again. That, in a nutshell, is the Four-Way Fit method.

Why a New Framework and Method?

Steve Blank (Four Steps to the Epiphany, 2005) and Eric Ries (Lean Startup, 2011) deserve great credit for the lean startup model they sparked. A generation of investors and entrepreneurs has embraced the scientific method as a critical success factor in discovering customer-defined value and in scaling a company. Concepts such as rapid experimentation, minimum viable product, KPIs, innovation accounting and actionable metrics have entered the everyday lexicon. Agile practices such as scrum and Kanban have taken hold, leveraging the lean principle of data-driven continuous improvement. Lean practices have, without question, improved products in a way that saves both time and money. This has accrued to the benefit of many customers, entrepreneurs and investors. The world of innovation owes them a deep debt of gratitude.

Their work has advanced the cause of innovation— but it is incomplete. The time has come for a new, more comprehensive model, made up of a framework and a method, that fills certain gaps left by that of the lean startup model.

Lean Startup vs. Four-Way Fit: Framework

At a high level, the lean startup model’s greatest gap is in its framework. This is undoubtedly because its focus is on method (not framework). The method for defining and testing claims is, for lean advocates, way more important than creating precise definitions of the domains for which claims are required. But that’s a problem. If you don’t know where you’re going, any road will get you there. Leading lean advocates don’t separate framework from method — but they should. And when you conduct the necessary surgery to do so, what you end up with is a framework that lacks coherence and completeness.

The lean startup framework is incoherent in the sense that after the surgery we end up with multiple framework variations. In his book Four Steps to the Epiphany, Blank stipulates six domains of interest (market type, customer, product, channel and pricing, demand creation and competitor). But then he encourages entrepreneurs to use Alexander Osterwalder’s business model canvas (with its nine domains — some of which overlap with his six, some of which don’t). In his book Lean Startup, Ries notes that a company must begin with a vision and a high-level strategy — but then he doesn’t define what should be in it (except to say that the two things that matter are value and growth). In fact, he implores entrepreneurs not to spend too much time on strategy, for fear they would devise an elaborate construct that proves flawed at the starting gate. However, Ries’ leading disciple, Ash Maurya, advances the lean canvas (with its nine domains).

All of these different schemas present varying levels of abstraction and exhibit significant conceptual divergence. The net result (for those seeking one straightforward lean startup framework) is incoherence.

The framework is also incomplete. Once again, this is due to the lean startup model’s bias towards method over framework. Within the domains of Market and Product, key subdomains such as Market Viability and Product Dependencies are not adequately addressed. Within the domain of Model (business model), there is no revealed understanding of Unit Economics, nor its impact on Product Features and Customer Acquisition Method, nor any reference to a business model’s Cash Flow implications nor the importance of building a Competitive Moat. And as to the vital domain of Team with its three subdomains (Competencies, Structure / Roles / Objectives and Culture), it is not addressed as a first-order priority. These are big gaps.

These gaps aren’t just a theoretical problem. They can lead entrepreneurs astray. If an entrepreneur is encouraged to be distrustful of excessive upfront planning, she might rush business concept development and claims creation, leading to internal inconsistencies and fuzzy logic. She might focus on too small a market, or pick one with insufficient disruption to create meaningful openings. She might fail to build a competitive moat, leading to rising competitive threat. Or she might fail to adequately ponder the competencies, roles, structure, teams, objectives and culture the upcoming stage of company building requires.

The Four-Way Fit framework addresses these gaps. It is comprehensive and logically organized. It provides clear guidance for entrepreneurs as to how to develop properly defined, integrated claims.

Lean Startup vs. Four-Way Fit: Method

The lean startup method teaches entrepreneurs the importance of validated learning, with its rapid live product experimentation. It promotes the build / measure / learn cycle, which drives continuous iteration and aligns with agile methods and continuous delivery. This is significant and important. But it exhibits two gaps. First, it doesn’t adequately expose the different demands presented by the different phases and stages of company building. And second, it exhibits an excessive aversion to upfront planning — what I call the heads up motion.

The first gap pertains to the two phases, and their different requirements.

In Phase I, the discovery of a value breakthrough phase, the Four-Way Fit method calls for deep immersion in the customer’s world. The first stage in this phase is called the Immerse and Ideate stage — for a reason. Entrepreneurs must find visionary customers and immerse deeply in their worlds — sometimes for years — until the gaping problems and screaming needs of customers are thoroughly understood, and solution options have emerged with which customers will resonate. Without taking the time to deeply immerse, there is great risk you will miss the most important things. At this stage, learning must be anthropological. It requires human factors analysis — leveraging human observation and anecdotal evidence. With less than a handful of customers, data is scant. Design thinking is much more applicable at this stage than lean thinking.

Of course, once a pulse is found, you can move towards development of a minimum viable product and your first customers will sign on. At that point, lean thinking does indeed kick in. But to get to that point requires that you understand the problem, which requires immersion. In Four Steps to the Epiphany, Blank calls for entrepreneurs to get out of the office. Ries echoes this call in Lean Startup. This is a woefully insufficient standard. You must do much more than just get out of the office and talk to customers. To build a great company you must live together with customers, immersing in their world. In Part Three of this book, I will describe the eleven stages of company-building by telling the stories of eleven great companies — such as Deputy, Canva, DispatchTrack, Bumble, Airtable, Zuora, Airbnb and Zoom. For all of these companies, their founding CEOs spent significant time in the Immerse and Ideate stage, immersing in their customers’ worlds.

Once MVP is proven and a company begins to scale, lean thinking steadily rises in relevance. Through lean startup methods, value can be continuously optimized. That’s especially true in Phase II: the value optimization and sustainable advantage phase. Value is optimized via lean methods.

But even here, in this second phase, it’s not enough just to optimize value. Teams must also focus on building a sustainable value advantage. This happens at the intersection of the product and the business model. It requires strategic thinking more than lean thinking. As the example of Netflix shows (such as with the shift to its new subscription pricing model without late fees, and the launch of Network Originals to gain bargaining power over content producers and improve profitability), the pathways to sustainable advantage often open up in big strategic leaps, not in small steps.

The second gap pertains to the merits of upfront planning.

The lean startup method emerged as a reaction to the business plan method. In this latter method, now discredited, teams were told to think everything through up front, build a comprehensive business plan and then blindly execute it. This method, along with its software development twin the waterfall method, was and is hopelessly flawed. This explains why, for lean advocates, upfront planning is viewed with such distrust. But in their distrust, lean advocates throw the baby out with the bath water. It is based on two flawed assumptions. The first is that thinking through a comprehensive, integrated and internally consistent set of claims within the Market, Product, Model and Team domains will waste time. The second is that the result will be a strategy that creates a rigid, non-negotiable contract. Neither of these assumptions is accurate.

As to the first flaw, the conceiving of a comprehensive, integrated and internally consistent set of claims within the four domains doesn’t take much time. What takes time — and it is unavoidable — is immersing and ideating enough within the marketplace, and inside the world of visionary customers, to be able to conceive of credible claims in the first place. That use of time is not wasteful. In fact, it’s the most efficient possible use of time, in the sense that it occurs while the team is still very small. The more you can learn while little or no money is being spent, the better. The lessons learned at this stage become invaluable time-savers as the company moves to later stages of company building. As the saying goes, it is far better to crawl, then walk, then run — than it is to run and crawl back again.

As to the second flaw, it’s simply not true that an upfront plan must become a