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THE LEAN SERIESERIC RIES, SERIES EDITORJez Humble, Joanne Molesky & Barry O’ReillyLEANENTERPRISEHow High PerformanceOrganizationsInnovate at Scale

Praise for Lean Enterprise“This book is Reengineering the Corporation for the digital age. It is destinedto be the classic, authoritative reference for how organizations plan, organize,implement, and measure their work. Lean Enterprise describes howorganizations can win in the marketplace while harnessing and developing thecapabilities of employees. Any business leader who cares about creatingcompetitive advantage through technology and building a culture ofinnovation needs to read this book.”— Gene Kim, co-author of The Phoenix Project: A NovelAbout IT, DevOps, and Helping Your Business Win,founder and former CTO of Tripwire, Inc.“This book is a godsend for anyone who’s tried to change their organizationand heard: ‘It’s OK for the little guy, but we’re too big/regulated/complex towork like that here.’ Humble, Molesky, and O’Reilly have written an easy-toread guide that demystifies the success of Lean organizations in a way thateveryone can understand and apply. Lean Enterprise provides a pragmatictoolkit of strategies and practices for establishing high performingorganizations. It should be required reading for every executive whounderstands that we’re all in the technology business now.”— Stephen Foreshew-Cain, COO,UK Government Digital Service“To thrive in the digital world, transformation must be more than technologydriven—everyone within the organization must collectively work together toadapt. This book provides an essential guide for all leaders to change the waythey deliver value to customers.”— Matt Pancino, CEO, Suncorp Business Services“This is the book I’ve been waiting for—one that takes on the hardestquestions in bringing Lean approaches to the enterprise. The authors providesolutions that are valuable even in low trust environments.”— Mark A. Schwartz (@schwartz cio)

“This book integrates into a compelling narrative the best current thinkingabout how to create great software-intensive products and services. Theapproach in this book is both challenging and disciplined, and someorganizations will be unable to imagine following this path. But those whomake the journey will find it impossible to imagine ever going back—and ifthey happen to be a competitor, they are well positioned to steal both yourmarket and your people. Ignore this book at your own risk.”— Mary Poppendieck, co-author of The Lean Mindset andthe Lean Software Development series“My job is to support people in practicing a scientific pattern, to help reshapethinking and working habits in business, politics, education, and daily life. The21st century is increasingly demanding a way of working that’s cognitivelycomplex, interpersonal, iterative, and even entrepreneurial. With LeanEnterprise, Jez Humble, Joanne Molesky, and Barry O’Reilly explain howsoftware can and is leading the way to transforming our ways of working,which can change our ways of thinking and help us adapt to the emergingworld around us.”— Mike Rother, author of Toyota Kata“Nearly all industries and institutions are being disrupted through the rapidadvance of technology, guided by the inspired vision of individuals and teams.This book clearly explains how the disciplines of Lean, Agile, Kata, LeanStartup, and Design Thinking are converging through the unifying principles ofan adaptive learning organization.”— Steve Bell, Lean Enterprise Institute faculty,author of Lean IT and Run Grow Transform“Building software the right way is a challenging task in and of itself, but LeanEnterprise goes beyond the technology considerations to guide organizationson how to quickly build the right software to deliver expected business resultsin a low risk fashion. This is a must read for any organization that providessoftware based services to its customers.”— Gary Gruver, VP of Release, QE, andOperations for Macys.com

“To compete in the future businesses need to be skilled at understanding theircustomers and taking the validated learnings to market as quickly as possible.This requires a new kind of adaptive and learning organization—the leanenterprise. The journey starts here in this book!”— John Crosby, Chief Product and Technology Officer,lastminute.com“Rapid advancements in technology are creating unparalleled rates ofdisruption. The rules of the disruption game have changed, and manyorganizations wonder how to compete as new giants emerge with a differentapproach to serving their customers. This book provides an essential guide tothose that have come to the realization that they have to change to regain aninnovative competitive advantage but are unsure where to start.”— Jora Gill, Chief Digital Officer, The Economist Lean Enterprise was the book I gave my leadership team to get everyone onthe same page about how we can challenge the status quo, remove roadblocks,and out-innovate our competition. By leveraging the continual insights we getfrom co-creating with customers, our people, and data, we now have so manyadditional new ways to grow our business.''— Don Meij, CEO, Domino’s Pizza Enterprises Ltd.“While agile and lean methods have had a big impact on software delivery,their true potential only comes as they have a broader impact on enterprises ofall sizes. In this book, Jez, Joanne, and Barry have set out what those changeslook like—a realistic vision of how future companies will make today’s looklike cassette tape players.”— Martin Fowler, Chief Scientist, ThoughtWorks“This is an important book. It takes an informed and informative look at thefundamentals that need to shift to start building organizations capable ofcontinuous learning and improvement. It moves well beyond the technical tothe organizational. Lean Enterprise is a must-read for existing and emergingleaders seeking to ensure their company’s ongoing success.”— Jeff Gothelf, author of Lean UX,and Principal of Neo Innovation

“I was telling everyone to get this book for a year before it was finished. Itdocuments the path being taken by the leading lean enterprises and the fatones will be wiped out by the lean ones in the years to come.”— Adrian Cockcroft (@adrianco)

Lean EnterpriseJez Humble, Joanne Molesky, and Barry O’Reilly

Lean Enterpriseby Jez Humble, Joanne Molesky, and Barry O’ReillyCopyright 2015 Jez Humble, Joanne Molesky, and Barry O’Reilly. All rights reserved.Printed in the United States of America.Published by O’Reilly Media, Inc., 1005 Gravenstein Highway North, Sebastopol, CA95472.O’Reilly books may be purchased for educational, business, or sales promotional use. Onlineeditions are also available for most titles (http://safaribooksonline.com). For more information, contact our corporate/institutional sales department: 800-998-9938 or [email protected]: Mary Treseler and AngelaRufinoProduction Editor: Kara EbrahimCopyeditor: Dmitry KirsanovProofreader: Alina KirsanovaIndexers: Dmitry Kirsanov and AlinaKirsanovaInterior Designer: David FutatoCover Designer: Ellie VolckhausenIllustrators: Rebecca Demarest and PeterStaplesRevision History for the First Edition2014-12-01:First ReleaseSee http://oreilly.com/catalog/errata.csp?isbn 9781449368425 for release details.The O’Reilly logo is a registered trademark of O’Reilly Media, Inc. Lean Enterprise, thecover image, and related trade dress are trademarks of O’Reilly Media, Inc.While the publisher and the authors have used good faith efforts to ensure that the information and instructions contained in this work are accurate, the publisher and the authors disclaim all responsibility for errors or omissions, including without limitation responsibility fordamages resulting from the use of or reliance on this work. Use of the information andinstructions contained in this work is at your own risk. If any code samples or other technology this work contains or describes is subject to open source licenses or the intellectual property rights of others, it is your responsibility to ensure that your use thereof complies withsuch licenses and/or rights.978-1-449-36842-5[CW]

This book is dedicated to all of you who have (to paraphrase Admiral GraceHopper) asked for forgiveness, not permission, in the pursuit of perfection,and to all the leaders committed to creating organizations where everybodyknows what the right thing is, and you don’t need anyone’s permission to do it.

ContentsPreface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIIIPART I: ORIENTChapter 1Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Chapter 2Manage the Dynamics of the Enterprise Portfolio . . . . . . . . . . . . . . . . . . . 21PART II: EXPLOREChapter 3Model and Measure Investment Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Chapter 4Explore Uncertainty to Detect Opportunities . . . . . . . . . . . . . . . . . . . . . . . 63Chapter 5Evaluate the Product/Market Fit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87IX

PART III: EXPLOITChapter 6Deploy Continuous Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Chapter 7Identify Value and Increase Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133Chapter 8Adopt Lean Engineering Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155Chapter 9Take an Experimental Approach to Product Development . . . . . . . . . . 171Chapter 10Implement Mission Command . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189PART IV: TRANSFORMChapter 11Grow an Innovation Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209Chapter 12Embrace Lean Thinking for Governance, Risk, and Compliance . . . . . 231Chapter 13Evolve Financial Management to Drive Product Innovation . . . . . . . . 245Chapter 14Turn IT into a Competitive Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265Chapter 15Start Where You Are . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283XCONTENTS

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303CONTENTSXI

PrefaceSoftware is eating the world.— Marc AndreesenIn an industrial company, avoid software at your own peril . . . a software company could disintermediate GE someday, and we’re better offbeing paranoid about that.— Jeff ImmeltYou are a fool if you do just as I say. You are a greater fool if youdon’t do as I say. You should think for yourself and come up with better ideas than mine.— Taiichi Ohno, Workplace ManagementIn this book we show how to grow organizations which can innovate rapidlyin response to changing market conditions, customer needs, and emergingtechnologies.Companies live and die on their ability to discover new businesses and createongoing value for customers. This has always been true, but never more sothan in the past few years. Competitive pressure is increasing, fueled by rapidchanges in technology and society. As Deloitte’s Shift Index shows, the averagelife expectancy of a Fortune 500 company has declined from around 75 yearshalf a century ago to less than 15 years today. Professor Richard Foster of YaleUniversity estimates that “by 2020, more than three-quarters of the S&P 500will be companies that we have not heard of yet.”1 The long-term survival of1 http://www.bbc.co.uk/news/business-16611040XIII

any enterprise depends on its ability to understand and harness the culturaland technical forces that continue to accelerate innovation cycles.First, the Internet and social media have provided consumers with powerfultools to inform the decisions they make. These tools also give smart organizations new ways to discover and engage with users and customers. Enterprisesthat use design thinking and user experience (UX) design strategically todelight customers at each step of their interaction with the organization havethrived: research shows companies which apply UX design in this way experience faster growth and higher revenues.2Second, advances in technology and process have made it possible to build,evolve, and scale disruptive products and services rapidly and with little capitalinvestment. Small teams across the world prototype new software-based products in days or weeks, using free or cheap services and infrastructure, and thenrapidly evolve those that gain traction. In the near future, the ubiquity ofcheap, powerful networked embedded devices will enable us to prototype andevolve a wider variety of products cheaply on similarly short cycles. As 3Dprinting becomes cheaper and faster and begins to handle a wider variety ofmaterials, we will create and deliver an enormous variety of customized products on demand.Software has three characteristics which enable this kind of rapid innovation.First, it’s relatively inexpensive to prototype and evolve ideas in software. Second, we can actually use such prototypes from an early stage in their evolution. Finally, in the course of creating these prototypes, we can discover a greatdeal about what customers find valuable and incorporate it back into ourdesign—accelerating the rate at which we can test new ideas with users, collectfeedback, and use it to improve our products and businesses.Meanwhile, the relentless march of miniaturization (embodied in Moore’sLaw)3 has enabled incredibly powerful computers to become tiny and find theirway into everything, with software at center stage. In a Forbes article titled“Now Every Company Is A Software Company,” David Zanca, senior vicepresident for information technology at FedEx