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4 the Lean Start-​up
Approach

4.1 Introduction
In this chapter we introduce four concepts that have become increasingly
important to all those considering starting their own businesses: business
models, lean start-​ up methodology, design thinking and digitalization.
While the ideas underpinning these four concepts are extremely diverse,
we believe that they combine to provide a more effective and less risky
approach to business start-​up.
DaSilva and Trkman (2014) argue that the term ‘business model’
originates from a combination of the resource-​based view (RBV) and trans-
action cost economics (TCE). Business models are useful for identifying
the value creation potential of entrepreneurial firms (Chesbrough, 2010;
Chesbrough & Rosenbloom, 2002; George & Bock, 2011; Zott & Amit,
2010). It is crucial for new firms to have flexible business models that help
entrepreneurs to respond to environmental change (Baden-​Fuller & Morgan,
2010; Brettel, Strese & Flatten, 2012; Demil & Lecocq, 2010). Others argue
that entrepreneurs should modify their business models to suit the firm’s
life cycle (Andries & Debackere, 2007; Fiet & Patel, 2008). Adopting an
appropriate business model is essential if entrepreneurs are to create cus-
tomer value that leads to a source of revenue capable of supporting survival
and growth (Afuah, 2019; Chandler, Broberg & Allison, 2014; Doganova &
Eyquem-​Renault, 2009).
In Chapter 9 we introduce the role of ‘informal finance’ during business
start-​up. Another term for informal finance is ‘bootstrapping’, which refers
to the ways in which nascent entrepreneurs obtain additional resources that
are either free or well below market price (Jayawarna, Jones & Macpherson,

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2020; Jones & Jayawarna, 2010). Bootstrapping is also a way of thinking,

and it means making the most effective use of your resources whatever stage
of the business. For example, Harrison, Mason and Girling (2004, p. 308)
provide the following definition: ‘Bootstrapping involves imaginative and
parsimonious strategies for marshalling and gaining control of resources’.
Therefore, we suggest that the concept of bootstrapping has many parallels
with the principles underpinning the ‘lean start-​up’ approach (Ries, 2011).
In fact, Ries1 acknowledges the similarities but claims his ‘approach to
launching companies goes beyond bootstrapping’ (Ghezzi, 2019).
Adopting a lean approach to business start-​up also means having a
clear vision of your business model. Business models have been linked to
entrepreneurial firms since the advent of the ‘dot.com boom’ at the begin-
ning of the twenty-​first century (Cellan-​Jones, 2001; Hedman & Kalling,
2003; Massa, Tucci & Afuah, 2017; Osterwalder & Pigneur, 2005). In their
literature review, Amit and Zott (2001) suggested that business models
are important because they enable entrepreneurs to test the market by
examining the nature of opportunities. Business models are also useful for
analysing the value-​creation potential of new businesses and their longer-​
term sustainability (Chesbrough, 2010; Chesbrough & Rosenbloom,
2002). More recent literature has examined the role of business models in
the commercialization processes of small high-​technology firms (Pellikka
and Malinen, 2015). Therefore, when you have identified a business
opportunity, the next stage is to map out the key features on a business
model canvass.

4.2 Learning Objectives

• To understand the importance of a business model as the basis for testing
your ideas for starting a successful new business.
• To understand the principles of the lean start-​up approach as a way of
avoiding the risks associated with the traditional ‘business plan’ approach
to starting a business.
• To understand how the concept of design thinking complements both
business models and lean start-​up
• To understand the importance of digitalization in terms of the creation
of products and services as well as a start-​up firm’s interaction with
suppliers, customers and other stakeholders

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4.3 Business Models Supporting Start-​up

Most entrepreneurs have implicit business models in mind when they are
in the process of starting a new business. Our objective in this section of
the book is to encourage you to think about making your ideas explicit
by identifying the various components associated with a basic business
model.
Having a clear business model is essential if new firms are to realize
the economic value of technology-​based products or services (Pellikka &
Malinen, 2015). Several authors point out that new entrepreneurs have limited
financial, technological, human resources and managerial resources as well
as lacking the power to influence more established organizations (Ambos
& Birkinshaw, 2010; Burton & Beckman, 2007; Santos & Eisenhardt, 2009).
According to Andries, Debackere and Van Looy (2013) most entrepreneurs
make incremental changes to their business models based on trial-​and-​error
learning. Hence, entrepreneurs should make incremental, stepwise changes
as they experiment with closely related business models. This is likely to be
more effective than adopting radically new business models. The learning
curve effect as entrepreneurs gain experience describes the process by
which individuals improve their efficiency by regularly repeating a range
of tasks and activities (Andries & Debackere, 2013; Andries, Debackere &
Van Looy, 2020). As start-​ups begin to deliver products or services then
the business model becomes embedded in the firm’s basic organizational
routines (Cavalcante, Kesting & Ulhøi, 2011). Greater experience leads
to higher levels of productivity as well as more effective decision-​making
related to reducing internal costs, pricing and marketing (Shepherd, Douglas
& Shanley, 2000).
Amit and Zott (2015) claim that there are four antecedents of business
model design in new firms: goals, templates, stakeholders and environmental
constraints. As pointed out by Chesbrough (2010) rapid changes in informa-
tion and communication technologies (ICT) has enabled entrepreneurs to
fundamentally change the way in which they engage with customers and
suppliers. Business models are based on a system of interdependent activ-
ities associated with a firm and its various partner organizations. While
business model design is described (Amit and Zott, 2015, p. 332):

the conceptualization of boundary-​spanning activity that includes

the mechanisms that connect these interdependent activities and the

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identification of the party that carries out each of the activities within
the system.

Early-​stage business models are based on ‘entrepreneurial’ choices

about organizational activities including procurement practices, location
and assets (Amit & Zott, 2021; Casadesus-​Masanell & Ricart, 2010). Drawing
on the design literature (Boland & Collopy, 2004; Romme, 2003), Amit
and Zott (2015, p. 334) identify four business model antecedents: goals
to create and capture value; templates of incumbents; stakeholders’ activ-
ities; and environmental constraints. These four factors are underpinned by
four design themes: lock-​in; efficiency; novelty; and complementarities. The
conceptual model developed by Amit and Zott (2015, p. 346), supported
by ‘illustrative evidence from nine new ventures’, lays the foundations ‘for
future research on business models’.
The main elements of a typical business model have been described by
several authors (Amit & Zott, 2015; Landoni et al., 2020; Morris, Schindehutte
& Allen, 2005; Osterwalder & Pigneur, 2005). Morris et al. (2005) identify
six components which underpin a rudimentary business model: value cre-
ation (the offering); customers (the market); internal capabilities; competi-
tive strategy; economic factors (how to make money); and personal factors
such as motivation and ambition for growth (Andries et al., 2013). Afuah
(2019) contends that business models provide a framework for creating and
capturing value and have five main elements, which evolve and develop as
firms grow. The first element is the customer value proposition (CVP); this
refers to a firm’s offering in terms of the products or services provided to solve
customer problems and/​or satisfy their needs (Afuah, 2019). A key point is
that customers do not always know, in advance, what product or service
they need, which is described as ‘inchoate demand’ (Geroski, 2003). Thus,
according to Afuah (2019) an element of a firm’s value proposition is to edu-
cate, inform and help customers discover their latent needs for new products
or services. Afuah (2019) defines the second element of the business model
as the market segment which is crucial because entrepreneurs need to know
who will pay for their products or services. Market segment includes size
of the potential market; the ability of customers to pay; customer demo-
graphics and levels of competition. Thirdly, the revenue model concerns
those customers willing to pay a specific amount for a particular product or
service. The aim is to maximize the number of customers paying for a firm’s
unique value proposition. Fourthly, the growth model focuses on questions

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of how firms can grow profitably. Growth concerns what must be done
to increase the number of customers paying for a firm’s products/​services.
Costs should be minimized which involves negotiating with suppliers and
other stakeholders.
The fifth element, defined as the firm’s capabilities is the fulcrum upon
which the other four components hinge. Entrepreneurs create firms from an
initial idea and attract financial support in order to develop their value propos-
ition (Selden & Fletcher, 2015). Moreover, Afuah (2019) argues there are two
elements to the capabilities component, namely ‘resources’ and ‘activities’.
Resources are what a firm owns or has access to while activities are necessary
to transform resources into value capture (Mueller, Volery & von Siemens,
2012). A firm’s resources include finance, equipment, products, knowledge
and IPR as well as intangible assets such as social capital (Afuah, 2019).
A review of the business model literature identified three distinct groups
of business model components (Wirtz, Pistoia, Ullrich & Göttel, 2016):
strategy; customer & market (customer model, market offer model, revenue
model); and value creation (service model, procurement model, financial
model). The three ‘customer and market’ components overlap with three
components identified by Afuah (2019): customer value proposition (CVP);
market segment; and revenue model. The ‘value creation’ components are not
covered by Afuah (2019) but are present in the work of other business model
scholars (Hedman & Kalling, 2003; Johnson, Christensen & Kagermann,
2008; Osterwalder & Pigneur, 2005; Zott & Amit, 2017). Therefore, drawing
on the ‘integrated business model’ developed by Wirtz et al. (2016) our
proposed business model framework has two distinct blocks: ‘customer and
market’ components and ‘value creation’ components. We further suggest
that, unlike Afuah (2019), business growth will be an outcome of the other
elements (customer and market +​value creation) of the business model (see
Figure 4.1). A longitudinal study of a start-​up business is used to develop an
evolutionary perspective on business model change based on the two distinct
groupings: customer & market and value creation (Jones & Giordano, 2021).

Customer and Market Components

Customer Value Proposition –​products/​services that the entrepre-

neur supplies to his/​her customers to solve their problems and/​or sat-
isfy their needs better than existing competitors;

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Market Segment -​the groups of customers to whom a value propos-

ition is, or should be, offered (how many, ability to pay, attractiveness
of each segment etc);
Revenue Model –​calculation regarding how many customers pay
how much for what product or service, when and how.

Value Creation Components

Service delivery model –​the nature of relationship with customers

(transactional or relational);
Procurement model –​the nature of the entrepreneur’s relationship
with suppliers (transactional or relational);
Finance model –​financial control/​planning and longer-​term financial
structure of the business.

In the early stages of creating a business it is essential that inexperienced

entrepreneurs concentrate on the three customer and market components
of their business model. Hence, you should ask yourself the following
questions:

1. What is the distinctive nature of my product/​service and how will I out-​

compete existing businesses (CVP)?
2. Who exactly is my product/​service aimed at and how will I attract suffi-
cient customers willing to pay the asking price (market segment)?
3. What returns can I expect to achieve when I begin to trade (revenue
model)?

Focusing on these core components should help you decide whether you
have a viable business model. Our experience of student business plans
suggests that usually there is a very limited understanding of the nature of
their market segment. Therefore, it is crucial to the success of your business
that you have a clear idea of those who will buy your offering in the early
stages. We are not suggesting that service delivery and procurement are
unimportant in the early stages of a new business. Clearly you will have to
engage with suppliers and customers from the early stages of starting your
business. Our basic proposition is that these components, together with the

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finance model, will become more important as the business begins to trade
at higher volumes.
This evolutionary process is illustrated by means of Jazooli, a start-​up
company established by two young brothers while still at school (Jones and
Giordano, 2021).2 Jazooli was founded to sell cheap mobile phone acces-
sories to young people of a similar age to themselves. Initially, the basic
business model was to buy and sell as cheaply as possible making a small
turnover on each item. When they began the business, it was basically a
schoolboy hobby and revenue was a supplement to their pocket-​money. In
other words, Simon and Bill were not under any financial pressures in the
very early stages of starting Jazooli. Gradually, turnover increased after the
business was formally established in 2008 and within one-​year they had to
move activities from the family home to larger, rented premises. Gradually,
as the business increased in size and the boys became more professional
in managing Jazooli, then they paid more attention to the value-​creating
components of their business model.

1. Procurement model –​in the early stage of the business, the boys
simply obtained the cheapest products from suppliers in China.
As they gained experience, they began to establish longer-​ term
working relationships with the more reliable Chinese suppliers. Also,
streamlined their activities by using the Amazon hub in Germany to
deliver products directly to customers as well as introducing CRM
software (see below).
2. Service delivery model –​the introduction of sophisticated software
systems including customer relationship management (CRM) enabled
the boys to refine the relationships with both customers and suppliers
(see above). CRM helped automate responses to customers to enhance
their service by encouraging repeat purchases and responding quickly
to customer complaints.
3. Finance model –​while their business model was essentially focused
on maintaining a low-​cost base, they began to recognize the need
to develop a more strategic approach to the financial aspects of the
business. They employed a professional accountant who encouraged
them to reinvest their profits in business development (building a
stronger brand identity). They also began to manage financial risks
associated with currency fluctuations by making hedge-​payments to
their Chinese suppliers in US dollars.

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Business model focus:

value creation
Business model focus:
customer and market
Transition 3:
Entrepreneurial capabilities

Transition 2: stability
Transition 1: towards
early stability
Customer Value
growth Proposition (CVP)
Business Customer Value Market segment
Customer Value Proposition (CVP) Revenue model
start-up
Proposition (CVP) Market segment Procurement
Market segment Revenue model model
Revenue model Procurement Service delivery
Customer Value +
+ model
Proposition (CVP) Finance model
Procurement +
Market segment
model Service delivery
Revenue model

Business model evolution

Figure 4.1 Business Model Evolution

Figure 4.1 illustrates this evolutionary process, which involves a wider

range of entrepreneurial capabilities or competences as the business model
becomes more sophisticated. To summarize, in the early stages of start-​
up, you should concentrate on the three customer & market components
of your business model. Gradually, as the number of customers and
sales increase then the value creation components should be given more
attention. Professionalizing your links to both customers (service delivery)
and suppliers (procurement) should help you reduce your operating costs
while providing a better service. As transactions begin to stabilize, then
you can adopt a more strategic view of managing the financial aspects of
the business. The Jazooli case illustrates the importance of investing in the
appropriate business software to professional relationships with suppliers
and customers (Jones and Giordano, 2021). What we are suggesting here
is that as you (the entrepreneur) enhance your capabilities and gain more
experience of managing the business, you should be able to improve the
way in which your organization operates.

4.4 The Lean Start-​up Approach (LSA)

In their widely influential book, Womack, Jones and Roos (1990) introduced
the topic of ‘lean manufacturing practices’ to a wider audience of academics

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and managers. This work focused on a Japanese management philosophy

committed to reducing waste and constant incremental improvement
(Deming, 1982; McMillan, 1992). There are clear links between the lean
start-​up approach and established management theories including the lean
philosophy (Womack et al., 1990), organizational learning (Easterby-​Smith,
Araujo & Burgoyne, 1999) as well as key entrepreneurial theories such as
effectuation (Sarasvathy, 2012) and bricolage (Baker & Nelson, 2005). In
this section, we concentrate on the practical lessons associated with the
lean start-​up approach to those of you seriously considering setting up a
new business.
The lean start-​up approach was initiated by Eric Ries who authored a
book about his practical experiences as a young entrepreneur. The Lean
Start-​up (Ries, 2011) was responsible for changing the approach to starting
a business: ‘hundreds of thousands of copies were sold in short time, and his
theories became known and used worldwide, becoming a reference among
entrepreneurs’ (Bortolini, Danilevicz & Ghezzi, 2018, p. 1766). Lean start-​
up also incorporates ideas developed by Steve Blank, about the importance
of regular engagement with customers (Blank, 2013; Blank & Dorf, 2020).
Traditionally, teaching entrepreneurship and business start-​up concentrated
on the preparation of detailed business plans. Ries (2011) rejects this static
approach in favour of what he described as ‘business model validation’
(BMV) based on incremental improvements to your basic business model.
The original vision and associated business idea are usually developed prior
to engaging in the lean start-​up methodology. Hence, why we discuss the
approaches to idea generation in Chapter 3.
Lean start-​up begins with entrepreneurs transforming their business
ideas into a basic business model (focusing on CVP, market segment and rev-
enue as discussed in Section 4.2). The lean approach is intended to reduce
the time and resources invested by the prospective entrepreneur (i.e., you!)
in a non-​viable business idea. The lean approach to start-​up means minim-
izing time spent on product development and in favour of obtaining early
customer feedback (Ries, 2011). Having established a basic business model,
you should then generate hypotheses that can be tested by obtaining feed-
back from potential customers. This approach to business start-​up can be
summarized in what Ries (2011) describes as ‘build-​measure-​learn’. In the
case of a service, rather than a tangible product, build may refer to spe-
cifying the nature of the offering. For example, in the case of Jazooli, the
younger brother began the business buying and selling mobile phones and

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accessories on eBay. While these ‘hypotheses’ were not explicitly stated, the
underpinned Sam’s approach once he realized that he could make money
from his eBay activities (see Box 3.1, Chapter 3, Section 3.3).

CVP

I believe that young people (aged between 15 and 21) will buy mobile
phone accessories (cases) online if they are cheaper than they can buy in
high street stores.
I believe that customers are more likely to make a repeat purchase if
their orders are delivered promptly
I believe incentivizing customers by offering a 10% reduction on their
next purchase means they will provide positive feedback on our website

Market Segment

I believe that our offering will be most attractive to IT literate young people
(15 to 21) who are in school or further/​higher education.
I believe that keeping prices below our direct competitors will be the
most important factor in attracting and retaining customers in our chosen
segment

Revenue model

I believe that in the first month of trading we will attract a total of 200
customers making and average purchase of £10 equating to an income
of £2000.
I believe that by the sixth month of trading we will attract 1000
customers per week spending an average of £10 equating to a weekly
income of £10,000.
Your hypotheses should then be tested by talking to potential customers
about the product/​service and obtaining useful feedback. Ries (2011) refers
to this stage as ‘build’ as he is focused on technological products. In terms
of services, ‘build’ refers to the way in which you test your hypotheses by
talking to customers. This might appear relatively straight-​forward but if you

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are to obtain reliable results about how to proceed then you must adopt a
rigorous approach. Therefore, you should consider how you will identify
your sample, how many potential customers you will engage and how you
will decide whether to accept or reject your hypotheses (i.e., the level of
support –​70%, 80%, 90%, 95%). The latter issue falls into the category of
‘measuring’ your results and Ries (2011) suggests the use of statistical tools
to assist analysis of the data. We believe that this is unlikely to be neces-
sary unless you are anticipating large numbers of responses. This could,
of course, be possible if you use social media (survey monkey) to elicit
responses. Clearly the disadvantage of using social media is that you will
have to reveal your business ideas to a very large audience. Given that you
are unlikely to be able to protect your intellectual property as you could
with a tangible product this is probably an unnecessary risk.
The final stage, ‘learning’, is when you consider whether, based on the
data collected in stage two, you should accept or reject your hypotheses
(Berends, van Burg & Garud, 2021). According to Ries (2011), there are three
decisions you can make [persevere, perish or pivot]: a) accept the hypotheses
and proceed with your existing business idea; b) reject the hypotheses and
abandon the business idea; c) partially accept the hypotheses and
modify your original business idea/​model. For the majority, it is likely that
option c) will apply and that the next stage means that you must identify
the weaknesses in your idea and consider how they can be eliminated. The
cycle should then be repeated until you are satisfied that your data indicate
that you should proceed with your business idea (Figure 4.2). As illustrated
in Figure 4.2, there are two distinct learning processes associated with the
lean start-​up model. Feedforward learning is based on the entrepreneur’s
cognition as the hypotheses associated with their business model are tested
by engagement with customers. According to Berends, Smits, Reymen and

Feedforward
learning

Business Perish
Building Measure Learn from
Ideation model + Persevere
experiments results your data
hypotheses Pivot

Feedback
learning

Figure 4.2 Business Model Development

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Podoynitsyna (2016), this form of learning is based on ‘forward-​looking

processes’ in which entrepreneurs pursue actions based on cognitive
representations (Mackay & Burt, 2015). Secondly, experiential learning is
‘backward-​looking’ as feedback from customers is used to make decisions
about the validity of the original business model (Berends et al., 2016; Jones
and Giordano, 2021).
In line with lean start-​up, the main point of the process illustrated in
Figure 4.2 is that you learn quickly without investing a substantial amount
of resource (time and finance) until you have obtained positive customer
feedback (minimum viable product). This direct engagement with customers
enables you to make incremental improvements to your business model
enhancing the likelihood of a successful launch. As we will discuss later,
this approach to business start-​up has strong similarities to effectuation
theory and bootstrapping. Mansoori (2017, p. 818) describes the business
model development process as ‘validated learning through purposeful
experimentation’. The importance of the model is that it describes a ‘cyc-
lical process’ as the business model is refined through regular engagement
with customers. It is, of course, possible that the original business model is
welcomed by customers and no modifications are required. However, in
our experience this is an unusual occurrence. In summary, the outcome of
the process is that you (the entrepreneur) must decide whether to persevere
(continue with your existing business model), pivot (adjust your business
model considering learning from customers), perish (decide your business
model is not viable and abandon the start-​up) (Berends et al., 2021).
Even if you decide that you are not going to pursue your original idea,
we believe that the learning process will be valuable and should provide
useful insight into your own abilities as an entrepreneur as well as the
potential of your business idea (Andries et al., 2020).

4.5 Role of Design Thinking in Start-​up

It is claimed by Garbuio, Dong, Lin, Tschang and Lovallo (2018, p. 45) that
‘the practice of entrepreneurship education, the lean start-​up approach and
the business model canvas practice both build on the management discourse
of design thinking’ (Blank, 2013; Blank & Dorf, 2020; Ries, 2011). As we
discuss above, the lean start-​up approach is based on ideas associated with
lean manufacturing: enhanced quality through incremental improvement

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and regular customer feedback. The concept of a ‘minimal viable product’

means that entrepreneurs can discuss their ideas with customers and ‘pivot’
the business model based on responses obtained from the marketplace.
Similarly, the business model canvas approach shares several characteristics
with design thinking: a focus on identifying users’ needs, a cross discip-
linary view of the business model and its customer value proposition (design
of the product or service).
According to Tim Brown a leading proponent of design thinking in
business, innovation (in this case, new business ideas) ‘is powered by a
thorough understanding, through direct observation, of what people
want and need in their lives’ (Brown, 2008, p. 85). Note, the direct link
with the lean start-​up methodology discussed above (via early contact with
customers). Traditionally, design thinking has been associated with tan-
gible consumer durables such as cars, television sets, hi-​fi equipment and
sporting goods (training shoes, tennis racquets, golf clubs etc). In recent
years Apple3 products have been successful largely because of the pleasing
design of their personal computers, tablets, mobile phones and portable
music devices (ipod). Design thinking influences not only the look of
Apple’s products but also their ‘usability’ in term of the interface between
device and user. In fact, most electronic manufacturers follow the Apple
template for the look, feel and operation of their smartphones. Swedish
furniture company Ikea are also well known for the distinctiveness of their
designs. Ikea adopts an approach it describes as ‘democratic design,4 which
is based on five principles: form, function, quality, sustainability and low
price. Increasingly, design thinking has been applied to a wide range of
services as well as products. You could, for example, think about websites
you regularly use and consider the ones that are well-​designed and those
that fail the good design test. Brown (2008, p. 87) goes on to outline the
profile of a design thinker:

• Empathy –​ the ability to see the world from multiple perspectives

including friends, colleagues, end users and customers. Taking a ‘people
first’ helps design thinkers to imagine solutions that are desirable and
meet customer needs. Design thinkers are good observers and they
notice things that others do not see.
• Integrative thinking –​using analytical processes is important in design
but it is also essential to try and see the ‘bigger picture’. In other words,
try to develop the ability to see how your potential product or services

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fits with other elements of the lives of your target customers. Are there
complementary products and services for example?
• Optimism –​design thinking, similar to starting a new business, is
a challenge and you should be prepared to consider a wide-​range of
alternatives rather than settling for the first solution that comes to mind.
Remaining optimistic means that you always believe that you can find a
better solution to a problem.
• Experimentalism –​design thinkers should be prepared to pose questions
and explore various constraints in creative ways that could proceed in
entirely new directions.
• Collaboration –​the increasing complexity of products, services and
experiences has replaced the myth of the lone creative genius with the
reality of the enthusiastic interdisciplinary collaborator. Therefore, it is
important to share your ideas with other people so that you can obtain
useful feedback.

Garbuio et al. (2018) explicitly link design thinking to entrepreneurship

education by suggesting that both disciplines encourage students to look
at the world in new ways. They begin by suggesting that several recent
developments support the need to adopt design thinking in entrepreneur-
ship education. First, the wider recognition that opportunities are created
rather than discovered as suggested by earlier entrepreneurship theorists
(Shane etc). Secondly, opportunity creation is essentially a cognitive skill,
which can be learnt and practised in the classroom. Thirdly, as we dis-
cuss in Section 4.3, there is an increasing awareness of the lean start-​up
approach with its focus on the generation of hypotheses. Fourthly, design is
recognized as a cognitive construct rather than a process-​based construct.
What this means in terms of entrepreneurial education is that students
should be encouraged to develop their cognitive skills (different ways of
thinking) rather than instructed about design processes and tools (Garbuio
et al., 2018, p. 43). The authors go on to propose that there are four cogni-
tive foundations to design thinking related to entrepreneurship and oppor-
tunity creation.

1. Framing –​is the foundation of creative thinking, which is associated

with the need to resolve ‘problematic situations’ such as developing a
new business idea. Framing means that you need to think more broadly
about a problem related to opportunity identification and creation.

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In practice, you should consider opportunity creation from extreme

or opposite positions. A common business idea suggested by students
is a second-​hand book shop on campus, which might involve talking to
potential customers who would primarily be other students. Taking an
extreme position might suggest that most students no longer buy books
(second-​hand or otherwise). Alternatively, you might hypothesize that
buying books becoming more popular among some young people. The
recent revitalization of the market for vinyl records and cassette tapes
is an example of the re-​emergence of so-​called obsolete technologies.
What are the implications of these competing ‘hypotheses’ for the idea
of a second-​hand bookstore?
2. Analogical Reasoning –​focuses on the importance of using analo-
gies to help identify new opportunities. You might recall some appro-
priate knowledge from previous experiences (as a student or customer)
and apply it to a new situation or problem. For example, the low-​cost
airlines such as EasyJet took the basic principles of fast-​food delivery
(McDonaldization) and applied those principle to air travel (no frills
service and payment for extras such as seat reservations). Garbuio
et al. (2018) give the example of Apple’s iPod, which was based on
the analogy of ‘music on the move’ as provided by the Sony Walkman
(personal cassette tape player). However, Apple replaced the limited
cassette tape with the flexibility of digital music storage.
3. Abductive Reasoning –​adopting a logical approach to explain some
unexpected data or phenomena; the differences between what people
say they do and what they do in practice. Individuals may say that they
care about the environment and worry about global warming –​but at
the same time –​take long-​haul flights to distant holiday destinations.
You could hypothesize that individuals feel that aircraft would con-
tinue to fly long-​haul routes even if they chose not to travel. Hence,
their decision would have no impact on lessening the environmental
damage. Clearly such tensions can provide entrepreneurs with oppor-
tunity creation in terms of holidays in ‘green’ resorts that care for the
environment and establish real jobs for local people.
4. Mental Simulation –​this refers to the testing out of ideas related to the
operation of a new business opportunity based on an untried business
model. As we discussed in Section 4.3, mapping the essential elements
of your business idea onto the business model canvass helps test out its

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potential. In other words, having identified a potential business oppor-

tunity you should ‘mentally simulate’ the idea by asking the following
questions:
• How will your idea work in the marketplace?
• How will you scale the business?
• How will competitors react when you start your business?

In responding to a) you should concentrate on the core elements of the

business model: customer value proposition, market segment and your rev-
enue model (how are you going to make money?). You should then con-
sider how you will scale the business by selling more to existing customers
or acquiring more customers (different market segment or expanding geo-
graphically). Point c) refers to an issue which is rarely addressed by most
inexperienced entrepreneurs. It is unlikely that any competitor will wel-
come new entrants into the marketplace and existing organizations will
generally have more resources to deter start-​up businesses. For example,
the owner of a small, local grocery store in Newcastle (UK) decided to use
the name Singhbury’s for his business and was issued with a legal challenge
by Sainsbury’s. Not able to afford the fees to take on the supermarket he
changed the name to Morrisingh’s (which was not challenged by the owners
of Morrison’s supermarkets). McDonald’s have regularly taken legal action
against small businesses using Mc in their trading names. For example,
McCurry, a small Malaysian restaurant, did eventually win the right to con-
tinue using the name after a legal battle that lasted more than six years.
Dziadkiewicz (2017) draws on the work of Blank (2013) to stress
the importance of customer development based on the design thinking
approach. As outlined above, following the ‘ideation’ stage, entrepreneurs
use the business model framework to map-​out the essential elements of
the business idea. Paying particular attention to the customer value propos-
ition (CVP) so that you can articulate the features that differentiate your
product or service from existing competitors [see point a) above]. The
ability to ‘empathize’ with customers gives greater insight into their needs
and helps entrepreneurs design products/​services that are attractive to those
consumers. The approach we are describing here differs from the conven-
tional ‘business plan’ approach because of the focus on early interaction
with customers. Consequently, entrepreneurs can make adjustment (pivot)
to their product/​service before they have invested too much in terms of

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Test Refine
Transform
hypotheses offering in Move
business
with response to business
idea into
customers and customer from start-
business
decide: feedback; up mode by
model +
Persevere marketing and extending
hypotheses,
Pivot sales to build capacity
create MVP
Perish demand

Customer Customer Customer Company

discovery validation creation building

Figure 4.3 Customer Development Model

their resources (time and finance). These early activities are summarized in
Figure 4.3 (customer development and customer validation), as the entre-
preneur engaging the customer in a learning experience, which informs
their decisions about the next stage (pivot, persevere or perish). In other
words, should you proceed with the original idea (persevere), redesign your
product/​service (pivot) or decide to abandon your existing idea (perish).
Once the idea has been validated by customers, then the final refinements
are made to the offering and the entrepreneur then focuses on sales and
marketing to build future demand [point c) above]. You should then be in
a position to move from start-​up mode into a fully operational business
delivering products or services to the marketplace (customer creation and
company building).
In summary, Garbuio et al. (2018, p. 55) suggest that there are several
benefits to ‘would-​be’ entrepreneurs of adopting a design thinking approach
during the early stages of business start-​up. First, experience in using the
foundational tools (framing, analogy, abduction and simulation) helps indi-
viduals develop their cognitive abilities. Secondly, the interaction of framing
and observing demonstrates the dynamics of consumer choices. In other
words, it is important for students to recognize the constantly evolving nature

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of the marketplace as new products and services are constantly introduced.

Thirdly, practice using cognitive tools helps ‘demystify’ the designer as
‘creative genius’ or the entrepreneur as having unique abilities to identify
new business opportunities. Finally, early exposure to the importance of
cognition in entrepreneurship helps build students’ self-​ confidence and
develops higher levels of resilience through the process of learning from
experience. In other words, creativity is a skill that can be acquired with
regular practice in the classroom and in your daily lives (thinking about how
you could design a better service in your favourite café, bar, restaurant or
even in the university library!).

4.6 The Role of Digitalization

In this section we discuss the relevance of digitalization to those of you
who are seriously considering starting your own businesses. The emergence
of digital technologies in the last 25 years has opened-​up a wide-​range of
entrepreneurial opportunities as well as making starting a business quite
straight-​forward for anyone with a mobile phone or a computer. Elsewhere
(Section 4.4) we discuss a company started by an 11-​year-​old schoolboy
who began trading mobile phones on eBay and gradually built-​up a sub-
stantial Internet-​based business with his brother. Therefore, setting up a
digital business is an effective way in which you can incorporate the ideas
discussed earlier in the chapter: business models, lean start-​up and design
thinking.
The links between digitalization and entrepreneurship came to public
attention at the end of the C20th with the emergence of the so-​called dot.
com boom (Cellan-​Jones, 2001). Entrepreneurs making use of e-​commerce
to establish new firms also led to the emergence of academic interest in
the concept of business models (Baden-​Fuller & Morgan, 2010; Hedman &
Kalling, 2003; Morris et al., 2005; Osterwalder & Pigneur, 2005; Zott &
Amit, 2017). It was quickly recognized that digital businesses (clicks) had
very different business models than traditional organizations (bricks). Taking
retail as example, the emerging new businesses no longer had to invest in
expensive stores to sell their goods. This trend has been accentuated during
the recent Covid-​19 pandemic when high-​street retailers have lost-​out to
their online rivals (Kuckertz et al., 2020). Most existing retail business have
responded to threat of e-​commerce by investing in digital offering –​the

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so-​called ‘bricks and clicks’. Certainly prior to the pandemic, some com-
panies such as John Lewis in the UK had been reasonably successful in
combing their traditional stores with goods sold online.
Digital entrepreneurship refers to businesses in which some or all the
activity takes place online: the creation and/​or distribution of products/​
services or in some cases the workplace itself (Fossen & Sorgner, 2021).
Digital entrepreneurship fits neatly with the earlier themes of lean start-​up
and design thinking because of the focus on dynamic customer needs (Hull,
Hung, Hair, Perotti & De Martino, 2007). Initially, the key enabler of elec-
tronic commerce was the Internet itself, hence the dot.com boom of the late
1990s. Subsequently, a wide range of digital technologies (mobile computing,
cloud computing, social media, 3D printing, data analytics/​artificial intel-
ligence (AI) and gaming) provide numerous entrepreneurial opportunities
(Landoni et al., 2020; Xu & Koivumäki, 2019). Nambisan (2017) suggest that
there are three distinct categories of digital technologies that are important
to entrepreneurs. First, digital artifacts, which are components, applications
or media content that form part of a product/​service and offer value to end-​
users. Because knowledge is stored digitally, it can be incorporated into a
range of devices including PCs, tablets, mobile phones, smart watches as
well as home appliances such as refrigerators, cookers, washing machines,
toasters and even toothbrushes. Secondly, the term digital platform refers
to a shared set of services with a common architecture that host a range
of complementary offerings. The most widely used platforms are Apple’s
iOS, Google’s Android and Microsoft Windows. These digital platforms pro-
vide entrepreneurs with opportunities to create specialist apps that are then
widely available to consumers. Thirdly, the digital infrastructure including
the Internet, broadband networks, mobile telecommunications, cloud com-
puting, data analytics, online communities, social media and 3D printing,
all provide complementary capabilities for entrepreneurs. For example,
the emergence of crowdfunding and crowdsourcing would not have been
possible without creation of the digital infrastructure (Boudreau, Jeppesen,
Reichstein & Rullani, 2021; Landström, Parhankangas & Mason, 2019).
Equally, digital makerspace and data analytics enable entrepreneurs to get
rapid feedback on their product/​services (Nambisan, 2017).
An important aspect of digitalization is that it can substantially reduce
the time it takes to enact the entrepreneurial process. Ideas can be fleshed-​
out onto the business model canvass and hypotheses tested, modified and
reintroduced (as per the lean start-​ up model). Digitalization also offers

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opportunities for entrepreneurs to rapidly scale-​ up in size once their

business model has been validated. Another important aspect of digitaliza-
tion is that it places more focus on opportunity creation rather than oppor-
tunity identification. The latter is associated with the traditional approach to
starting a business based on the creation of a detailed business plan (Shane,
2003). Consequently, we suggest that digital businesses fit closely with the
key themes on which this book is based: bootstrapping, effectuation and
learning. We discuss these links in more detail in Chapters 5 and 9.
Digitalization has reduced the barriers to entry for those considering
starting a business. The revolution in ICT (Information and Communication
and Technologies) means that communicating with suppliers and customers
is no longer constrained by geographical boundaries (Xu & Koivumäki, 2019;
Zhao, Barratt-​Pugh, Standen, Redmond & Suseno, 2021). Consequently,
your business could be ‘global’ from the moment you begin to trade. Even
in the quite recent past, most start-​up businesses would have been focused
on their local market and, if successful, would gradually have expanded
their activities to offer products/​services nationally, internationally and glo-
bally (Ben Youssef, Boubaker, Dedaj & Carabregu-​Vokshi, 2021). In terms of
the start-​up business, digitalization is associated with several activities (Hair,
Wetsch, Hull, Perotti & Hung, 2012; Hull et al., 2007). Any entrepreneur
establishing a new company will almost certainly have a website as a basis
for the company’s digital marketing. Engaging in digital marketing is likely to
be more effective and substantially cheaper than using traditional marketing
media. In addition, social media has become increasingly widely used as
a marketing channel for new businesses. Secondly, digital sales refer to the
ability of customers to buy a company’s products/​services directly via their
PC, tablet or mobile phone. For example, during the pandemic lockdown
when conventional restaurants began to offer ‘click and collect’ services (or
home delivery by Deliveroo/​Justeat etc.), customers paid electronically for
their food at the time of ordering.
Thirdly, digital distribution describes the delivery of products/​services
electronically rather than in traditional ways. Most software packages (such
as computer operating systems, computer games etc.) are now paid for and
downloaded directly from the web. Whereas, ten years ago, the majority of
software products were delivered by means of a physical artifact (CD-​Rom),
which customers would download to their PC or laptop. Also, the emergence
of services such as Amazon Marketplace allow small business to sell and
distribute their products and services using the power of the Amazon brand

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name. Fourthly, and closely related to digital distribution, digital operations

describe the ‘modes of interaction’ within the business itself. Increasingly,
digitalization means that many new businesses can operate based on what
might be described as a network model. What this means in practice is the
entrepreneur may be able to establish their business without the need for a
conventional office or storage facilities. Clearly if your business is based on
a complex physical product (personal computer) or requires sophisticated
processes (chemicals) you will certainly need a building with all the
associated services. However, the majority of student start-​ups (unless you
are an engineer or a scientist) are unlikely to require anything more than a
computer and a mobile phone to get the business started. This has numerous
advantages because it minimizes many of the traditional risks associated
with starting a new business. Digitalization lowers the financial investment
required to start a business, reduces the transaction costs associated with
developing both marketing and distribution channels. Digitalization also
minimizes transport obstacles and eliminates the physical limitations of
time and space, which helps new entrepreneurs to enlarge their customer
base (Saridakis, Lai, Mohammed & Hansen, 2018).
Digital start-​ups are important because they have their potential to
create value and wealth to consumers (Ratzinger, Amess, Greenman &
Mosey, 2018). Knowledge creation is the basis of the growth in digital start-​
ups and that focuses attention of university departments such as computer
science and business schools (Kollmann, 2006). Ratzinger et al. (2018)
attempted to examine the links between human capital (university edu-
cation) and the creation of digital start-​ups. Using a crowdsourced data-
base known as Crunchbase, the authors obtained a sample of almost 5000
digital start-​ups. They were able to confirm that human capital, measured
by university education, was statistically significant in terms of reaching the
‘investment milestones’ measured on the following scale: self-​sustaining,
external funding and exit the business (Ratzinger et al., 2018, p. 767).
Unsurprisingly, those with a technical education were the most successful in
reaching their investment milestones. Less obviously, students with degrees
from the humanities/​social science were more successful than those with a
business education. The level of higher education (BA/​BSc, MSc and PhD)
was also positively associated with entrepreneurial success, although the
impact was fairly marginal (between 2% and 4%). Ratzinger et al. (2018,
p. 774) summarize by say that that ‘increased formal business and tech-
nical education within founding teams increases the probability of reaching

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investment milestones for digital ‘start-​ups’. The links between human cap-
ital and entrepreneurship are considered in more detail in Chapter 7.

4.7 Summary and Key Learning Points

In this chapter we have introduced four related concepts: business models,
lean start-​up, design thinking and digitalization. The majority of recent
graduates who are thinking of starting a new business are likely to have
very limited resources –​particularly finance. Therefore, any initiative that
helps minimize the risks associated with the failure of start-​ups is worth
considering. All new entrepreneurs considering starting a business should
reflect on the role of digitalization. As discussed in Section 4.6, digitaliza-
tion has made it much more straight-​forward to set-​up a new business par-
ticularly in terms of relationships with customers and suppliers. Most digital
businesses will not need to invest in costly physical infrastructure such as
a building or specialized equipment. This minimizes risks during the early
stages of operation and also makes it easier to scale-​up business activity. We
suggest that digitalization fits neatly with the underlying principles of the
lean start-​up methodology. Similarly, lean start-​up is based on the business
model canvass in which the basic business idea is mapped out. We suggest
that, initially, the focus should be on developing a clear understanding of
the customer value proposition (CVP), market segment and the revenue
model. Establishing how your offering will add value to existing products/​
services in the marketplace is an essential first step. This should be followed
by identification of the customers you will target and calculation of how
you will make a profit. In the lean start-​up approach, the next stage is to
engage potential customers to obtain feedback on their response to your
offering. Consequently, you must then decide on your next step: perish
(give-​up on the idea), persevere (continue with your original idea) or pivot
(make modifications to your original idea). The latter case is the most likely
outcome and this early engagement with customers means that you can
modify your ideas without having made a major financial investment. The
concept of design thinking ties the other three topics (business models,
lean start-​up and digitalization) because a well-​designed product or ser-
vice with features that are attractive to consumers will have more chance of
succeeding in the marketplace. Good design skills are central to the pivot
outcome as illustrated in Figure 4.3, because you will be required to modify

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your offering in response to feedback from potential customers. Therefore,

the key learning points from this chapter are as follows:

• You should have a clear understanding of the key elements of a basic

business model and be able to distinguish between the three customer
and market components and the three value creation components.
You should also be clear about why it is important to focus on the cus-
tomer and market components at the early stages of start-​up.
• We believe that understanding the lean start-​up approach to business
creation is key to minimizing your investment and the associated risks
for new entrepreneurs. The principle underpinning the LSM is that you
should learn from early engagement with customers as you attempt to
validate your business model.
• There are two complementary learning processes associated with the
lean start-​up approach (Figure 4.2), feedforward learning as you test your
ideas with customers and feedback learning as you reflect on what you
have heard from those customers.
• Design thinking is a useful business skill that can be developed with
practice rather than an attribute only associated with gifted individuals.
You can improve your design thinking by exercises in the classroom but
also by considering the strengths and weaknesses of existing products/​
services (websites for example).
• It is almost impossible to think about the creation of new business
ventures without considering the impact of digitalization. Even craft-​based
businesses will attract more customers if they have a well-​designed web-
site. But in developing your business model it is essential to think about
how you can make use of the digital infrastructure to minimize costs as
well as enhancing the links to customers, suppliers and other stakeholders.
• Finally, you need to take a ‘holistic’ view of the four concepts introduced
in this chapter and think seriously about how they fit together in the
development and operationalization of your business idea.

4.8 Discussion Questions and Call to Action

1. Why is it important to distinguish between the three customer &
market components and the value-​added components of your business
model?

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2. How would you describe the core features of the lean start-​up model
and how does it differ from conventional approaches to starting a new
business?
3. What are the activities that link lean start-​up to your business model?
4. What are the three possible outcomes associated with business model
developing and the testing of your hypotheses?
5. Why is early engagement with customers central to both the lean start-​
up methodology and design thinking?
6. What are the differences between analogical reasoning and abductive
reasoning and how these two concepts are linking in design thinking?
7. What are the most significant ways in which digitalization will impact
on your business model?
8. What are the advantages and disadvantages associated with the use of
crowdfunding?

The belief that entrepreneurs are born is one of the most persistent myths
associated with business and management. We acknowledge that some
individuals may have a predisposition to certain careers. Some may be very
good at sport, others attracted by the arts or the sciences. Equally, there
may be some people who appear to be ‘natural’ entrepreneurs such as
Sam Wilson (Box 3.1, Chapter 3), who began his entrepreneurial careers
in primary school. Clearly you do not need a BSc, MSc or PhD in business
and management to become an entrepreneur. However, as we discuss in
Chapter 7, there are strong links between higher levels of human capital and
the success of start-​up businesses.
In this chapter, we have introduced four apparently disparate concepts
and it is our belief that they are strongly linked together. Therefore, developing
a business model using the principles of the lean start-​up approach, design
thinking and digitalization is certainly something that you can practice. For
example, in Section 4.2 we discuss the role of ‘mental simulation’ in testing-​
out your business ideas. Answering these three questions is a worthwhile
exercise, which will benefit from discussion with your classmates and your
teacher:

• How will your idea work in the marketplace?

• How will you scale the business?
• How will competitors react when you start your business?

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Notes
1 www.inc.com/​live
2 At the time of this study, Jazooli was described as ECessori for reasons of commer-
cial confidentiality as the company was undergoing a trade sale.
3 www.clever​ism.com/​why-​apple-​des​ign-​suc​cess​ful/​
4 https://​about.ikea.com/​en/​life-​at-​home/​how-​we-​work/​dem​ocra​tic-​des​ign

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