1. The Business Case for Lean
Why Going Lean is Good For Business
Patrick Sheehy, PE, MBA
TheLeanPhilosophy
LinkedIn Profile

2. Why are we in Business?
Ever since the creation of the market economy, people have sold surplus to
make a profit and survive
May be goods, services, knowledge, time, or entertainment but every job and
occupation sells something for profit

3. What defines a business?
A business is where a good, service, or commodity is sold for profit
Profit is the difference between overhead and sales price
If profit does not exist then there is no reason for the business to exist

4. The Traditional Business Model
The traditional way
of looking at a profit
model is from the
business side. The
business incurs the
cost of overhead,
sets the price, and
manipulates the
profit.
Profit
Overhead
Price

5. The Traditional Business Model Cont.
Looking at it this way
makes it very easy
to increase profit, we
reduce overhead
and/or increase price
right?
Profit
Overhead
Price

6. The Traditional Business Model Cont.
WRONG! We can
only increase price
so much before
consumers refuse to
pay and at some
level, we hit a point
where overhead
becomes required to
do business. The
assumptions are
flawed.
Profit
Overhead
Price

7. The Traditional Business Model Assumptions
We know intuitively that this model doesn’t
hold true for all cases but let’s look at why.
Here are the big 3 assumptions behind the
traditional model.
Assumption 1- The business sets the price
Assumption 2- All overhead is the same
Assumption 3- The consumer is a non factor
Profit
Overhead
Price

8. Traditional Business Model Assumptions
Assumption 1 - The business sets the price
While it’s true that the business puts a sticker on a box with a number on it, It’s
the consumer who decides if that number matches the value they have for the
product.
Market value drives price, not the other way around. If price drove value, then
you would never see items on sale or hear about rates going up. Price is a
result and reflection of market value.

9. Traditional Business Model Assumptions
Assumption 2 - All overhead is the same
No matter what, there are certain costs and expenses that are unavoidable in
business. There’s always going to be licensing, tax, raw materials, equipment,
staff, real estate, and other costs associated with producing.
Treating all overhead the same ignores the fact that there is overhead that
produces value (cost) and overhead that is not required to produce value
(waste).

10. Traditional Business Model Assumptions
Assumption 3 - The consumer is a non factor
The traditional business model expresses terms from the business perspective.
While it’s known that market value is considered when price is set in the
traditional model, market value is treated as a secondary consideration to
price.
Pricing is often a “guess and check” game where companies with a new product
go through pricing iterations to see what the market will bear.
This means that market value is effectively an unknown constant. Price is the
variable we are trying to solve for.

11. A Better Model
How can we fix the business model? Well, first of all we should correct our
assumptions to be more in line with reality.
Assumption 1- Price is a function of market value
Assumption 2- There is value producing overhead (cost) and non-value producing
overhead (waste)
Assumption 3- The consumer (market) is the main influence on price and value

12. A Better Model
The New Model
Profit
Overhead
Price
Profit
Overhead
Market Value
Waste
Cost
The Old Model

13. The New Business Model
So here’s our new model.
We’re a business and we want to
increase profit. How do we do
that?
With this model we’ve
established that cost is
necessary so we can consider it
fixed. Looks like we can increase
Market Value or decrease Waste
Overhead.
Profit
Overhead
Market Value
Waste
Cost

14. The New Business Model
Where have we heard that
before?
The mantra of the Lean
Philosophy is that any action that
increases customer value or
decreases waste is good for the
company.
That sure sounds nice, but
what’s more important...
Profit
Overhead
Market Value
Waste
Cost
The Lean Business Model

15. We’ve just justified those pretty
words in a simple, and
universally applicable business
model.
To put it another way, we’ve just
shown that Lean isn’t just a nice
buzzword, it’s also good for
business.
Profit
Overhead
Market Value
Waste
Cost
The Lean Business Model

16. Wrapping Up
We deduced that the traditional, business focused profit model is flawed due to
3 key false assumptions
The business sets the price
All overhead is the same
The consumer is a non factor
We tweaked these assumptions to make them true
Price is a function of market value
There is value producing overhead (cost) and non-value producing
overhead (waste)
The consumer (market) is the main influence on price and value
We showed that our new model aligns with the Lean Philosophy and showed that
the Lean Philosophy is good for business!

17. Thanks for Listening!
Any Questions?
Patrick Sheehy, PE, MBA
My Website TheLeanPhilosophy
My LinkedIn Profile