THE LEAN STARTUP
In this book, Eric Ries explains The Lean Startup method to help people boost their chances of success when starting a business or launching a new project. The key is continuous innovation to attract more customers.
By Eric Ries, 2011, 337 pages.
The author’s journey, Eric Ries
To start his talk, Eric Ries shares his journey as an entrepreneur, recounting his experiences founding startups, facing failures, and learning valuable lessons. Along the way, he encountered various influences such as lectures, mentors from Silicon Valley, and innovative ideas from business partners willing to try new approaches.
Reflecting on his entrepreneurial challenges, Ries realized that applying lean manufacturing concepts to his ventures could provide a framework for analysis. This realization laid the foundation for Lean Startup, where the principles of lean philosophy were applied to the innovation process.
Ries initially shared this concept on his blog, Startup Lessons Learned, and discussed it at conferences, engaging with companies, startups, and investors. With the support of fellow authors, thinkers, and entrepreneurs, he refined and advanced the Lean Startup theory. While Ries’ entrepreneurial background was in high-tech software, the Lean Startup movement has since expanded across various industries, with thousands of entrepreneurs applying its principles.
Recognizing the impact and potential, Eric Ries decided to fully commit himself to the Lean Startup movement.
The principles of Lean Startup
Throughout the pages, Eric Ries explains the five principles of The Lean Startup:
1. Entrepreneurs are everywhere
An entrepreneur includes anyone who runs a startup as defined by the author: a business structure designed to create new products or services under conditions of extreme uncertainty. As a result, the Lean Startup approach is suitable for any business, regardless of size or industry.
2. Entrepreneurship is a form of management
In the book, Eric Ries breaks down The Lean Startup into five key ideas:
- Entrepreneurs Are Everywhere:
Anyone running a startup, which is a business creating new things in uncertain conditions, is considered an entrepreneur. The Lean Startup method can be applied to businesses of any size or industry.
- Entrepreneurship Is a Form of Management:
A startup is not just about its product; it’s a unique business structure. Managing it effectively requires a different approach due to the high level of uncertainty involved.
- Validated Learning:
A startup’s main goal isn’t just about making products, earning money, or serving customers. It’s primarily about learning how to establish a sustainable business in the long run.
- The Build-Measure-Learn Feedback Loop:
The core activity of a startup is turning ideas into products, measuring how customers react, and learning from the results. This continuous loop helps decide whether to make changes (pivot) or continue with the current path (persist).
- Innovation Accounting:
Startups need a specific type of accounting to measure progress, define milestones, and prioritize activities effectively. This approach is known as innovation accounting.
The “Vision” part
In this segment, Eric Ries advocates for a novel approach to assess startup progress: validated learning. Grounded in scientific experimentation, this method assists startups, whether in their infancy within a garage or within an established company, in discovering how to establish a sustainable business.
The “Steering” part
Here, Eric Ries delves into the Lean Startup method, outlining the build-measure-learn feedback loop. He details:
- Crafting a minimum viable product (MVP) to rigorously test fundamental assumptions.
- Assessing progress through a new cost accounting system.
- Deciding whether to pivot, i.e., change course, or persist on the current path.
The “Acceleration” part
In this part, Eric Ries shares techniques for startups to expedite the build-measure-learn loop. He also addresses:
- Lean manufacturing concepts applicable to startups, such as small batch production.
- The startup’s organizational structure and growth mode.
- Extending Lean Startup principles beyond the iconic garage setting, even within large multinational corporations.
Part One: The Vision, according to the concept of Lean Start-up
Chapter 1: Start
Lean Startup gets its name from Lean Manufacturing, a transformational approach Toyota adopted in the 1950s, thanks to Taiichi Ohno and Shigeo Shingo. Lean principles revolutionized how companies managed their production processes and supply chains. This method emphasizes:
- Showcasing Employee Skills and Creativity
- Reducing Batch Sizes
- Adopting Just-in-Time Production
- Cutting Down on Inventory
- Speeding Up Production Cycles
Now, when it comes to Lean Startup, it encourages a different way of measuring productivity. Developing a new product is seen as an ongoing process with key elements such as:
- Quick Iteration
- Considering Customer Feedback
- Having a Big Vision and High Ambition
Startups rely on what the author calls “the engine of growth.” Most of their time is spent refining this engine, making improvements in product development, marketing, and operations.
Lean Startup offers a way for businesses to continuously adjust their course through what’s known as the “build-measure-learn feedback loop.” This helps startups figure out when it’s time to make a significant change (pivot) or stick to their current direction.
Chapter 2 – Define
The Lean Startup comprises a series of methods aimed at boosting the likelihood of success for entrepreneurs in establishing a thriving business. A startup, regardless of its size, industry, or field, is essentially an organizational framework led by individuals seeking to create a novel product or service under highly uncertain conditions. What distinguishes a startup is its focus on innovation, with activities ranging from recruiting imaginative personnel to coordinating their roles and fostering a distinctive corporate culture.
Chapter 3 – Learn
The primary goal of a startup is to develop a business structure in an environment of high uncertainty, with its key focus being progression.
The Lean Startup introduces the concept of learning through what Eric Ries calls “validated learning.” This is a precise method to showcase a startup’s advancement in the face of significant uncertainty. The core idea is to understand what customers genuinely desire, not just what they say or assume they want.
In the Lean Startup philosophy, value is defined as something that brings benefits to the customer, and anything else is considered wasteful and should be eliminated. The key question for Lean Startup followers is, “What part of our efforts adds value, and what is unnecessary?”. Any effort not essential to understanding customer needs should be removed, but accurately determining those needs can be challenging. Validated learning relies on real data collected from customers.
The pertinent questions are not only about the possibility of creating a product but whether it should be created and if a sustainable and successful business can be built around a set of products and services. To address these questions, a method is needed to break down a business plan into its components and then test each empirically.
In essence, a scientific method is required. According to the Lean Startup model, every product, feature, and marketing campaign is seen as an experiment with the ultimate goal of achieving validated learning.
Chapter 4 – Experiment
4.1. From Alchemy to Science
Within the Lean Startup methodology, startups engage in experiments to identify valuable elements and areas for elimination. These experiments adhere to a scientific method as they:
- Align with a vision (similar to following a theory);
- Formulate hypotheses that predict expected outcomes;
- Serve as tests grounded in tangible evidence.
4.2. Think Big, Start Small
According to Eric Ries, the key is to have grand aspirations but begin with modest steps. To illustrate this concept, Ries revisits the story of Zappos, considering it a remarkable e-commerce success. Zappos effectively met customer expectations on a small scale while still realizing the ambitious vision of its founder, Nick Swinmurn.
Ries also points to the experience of Hewlett-Packard (HP). In his view, HP could have avoided significant waste by opting for immediate and modest experimentation rather than relying solely on assumptions.
4.3. Break it Down
The process involves breaking down an expansive vision into its distinct components. The two pivotal assumptions made by entrepreneurs are:
- Value Hypothesis: To assess whether a product or service genuinely provides value to its users.
- Growth Hypothesis: To examine how new customers discover a product or service, and once the program is defined and implemented, how it will propagate.
In the Lean Startup philosophy, the verification of these assumptions necessitates the execution of experiments. Unlike conventional strategies or market studies, an experiment in the Lean Startup model is more than a theoretical inquiry; it is, foremost, a product. The approach focuses on understanding what works today through direct customer feedback, avoiding speculative anticipation of future success. This process can be completed within a few weeks, a fraction of the time typically required for traditional strategic planning.
Part Two: Steering Vision to Optimization, according to the Lean Startup Model
A startup acts as a catalyst, transforming an idea into a product. As customers engage with these products, they offer feedback and data, encompassing both qualitative and quantitative aspects. This process can be illustrated in three sequential steps: build, measure, learn. At the core of the Lean Startup methodology lies this iterative build-measure-learn feedback loop. According to the Lean Startup model, none of these steps holds greater importance than the others. The objective in guiding a startup is to minimize the overall duration of this feedback loop.
Chapter 5 – Changing Gear
According to the Lean Startup method, every business plan initiates with a set of hypotheses that should be swiftly tested. As emphasized in the preceding chapter using Facebook’s example, two fundamental assumptions take precedence: the hypothesis of value creation and growth.
To examine these assumptions, the Lean Startup advises direct engagement with customers for better understanding. This principle aligns with Toyota’s production system known as Genchi Genbutsu, translating to “going to see on the ground to understand the situation.” Eric Ries encourages us to follow a similar approach, urging us to step away from our desks and connect with potential customers, drawing inspiration from the actions of Yuji Yokoya. Yuji, an engineer at Toyota, traveled extensively in North America to design a new minivan that could precisely meet customers’ needs.
The primary objectives of these initial interactions with potential customers are:
- To confirm that the customer indeed has a problem worth solving.
- Not to seek definitive answers but rather to develop a customer archetype, humanizing the targeted clientele.
Chapter 6 – Test
At the start of this chapter, Eric Ries revisits the early days of Groupon. This instance effectively underscores a crucial concept of the Lean Startup: the minimum viable product (MVP).
6.1. The Role of The Minimum Vital Product (MVP)
In contrast to conventional product development approaches that involve extensive contemplation and striving for perfection from the outset, the Minimum Viable Product (MVP) aids startup creators in initiating their learning process swiftly through rapid feedback, ensuring that the learning cycle remains ongoing. The MVP efficiently traverses the build-measure-learn method with minimal effort, serving as the product designed to assess fundamental assumptions.
6.2. Quality and Design in an MVP
Before reaching the mass market, products often need to be embraced by early adopters—those forward-thinking customers eager to be the first to adopt new products or technologies. While many entrepreneurs envision their revolutionary products as perfect and ready for the broad market, presenting an incomplete or flawed product early on can be challenging. It requires departing from traditional professional standards and embracing a validated learning approach through feedback.
Throughout the MVP development, a simple rule should guide the process: eliminate any feature, procedure, or effort that doesn’t directly contribute to the intended learning. The MVP serves as a tool to emphasize that any work beyond what’s necessary for initiating the learning process is deemed wasteful, regardless of its initial perceived importance.
The minimum viable product can manifest in various forms. Eric Ries illustrates this with examples such as Dropbox, Food on the Table (FotT), and Aardvark startups.
6.3. The Brakes on MVP
- Concerns and legal considerations:
These primarily involve the risks associated with patent filings. The author recommends seeking guidance from a specialized law firm to comprehensively address all potential risks.
- Competition anxiety:
Eric Ries clarifies that the actual risk of competitors stealing one’s idea is nearly impossible.
- Brand-related apprehensions:
When deploying a low-quality MVP, there’s a legitimate concern about tarnishing the overall brand image. The author suggests a straightforward solution: introducing the MVP under a distinct brand name.
- Effect on morale:
The MVP often delivers unfavorable news, yet it frequently offers a necessary dose of reality.
Chapter 7 – Measure
7.1. Innovation Accounting: to Measure Growth Rate
Startups, due to their inherent unpredictability and lack of clear benchmarks, find conventional cost accounting impractical. What they require is a unique form of accounting management specifically designed for disruptive innovation. Eric Ries terms this innovation accounting.
Innovation accounting serves as a tool for startups to objectively showcase sustained long-term growth. The growth rate hinges primarily on three factors:
- The profitability associated with each customer,
- The cost incurred in acquiring new customers,
- The rate at which customers renew their purchases.
7.2. Innovation Accounting: Three Stages of Learning
Innovation accounting involves three key stages:
Step One: Define Your Frame of Reference
As discussed in the previous chapter, this stage revolves around using a minimum viable product (MVP) to gather real data on the current state of the company. A startup can:
- Develop a comprehensive prototype of its product and offer it to real customers through regular sales channels.
- Launch multiple MVPs to gather customer feedback for each assumption independently.
- Conduct a preliminary test through marketing materials, allowing customers to pre-order a product not yet on the market. While this test assesses customer interest, it alone is insufficient to validate an entire growth model. Nevertheless, it provides valuable feedback on key assumptions before further investment.
Step Two: Perform Engine Adjustments
The startup aims to fine-tune its operations, moving from basic functionality to full capacity. This process may involve multiple attempts. Once all adjustments are made, reaching the ideal RPM, the startup faces a crucial decision point: the pivot.
Step Three: Pivot or Persist
A successful company learns from its experiences and effectively applies those lessons. In such cases, it is natural to persist. However, if progress is unsatisfactory, the management team must acknowledge shortcomings in the current strategy, leading to a comprehensive revision.
When a company pivots, essentially starting anew to achieve its objectives, it redefines its foundation and adjusts its operations. Success in the pivot becomes evident when activities related to engine adjustments become significantly more profitable.
7.3. Cohort Studies
The cohort study stands out as one of the most potent analytical tools in the Lean Startup framework. While its application is sophisticated, the underlying principle is simple: rather than concentrating on overall figures like revenue or the total customer count, it assesses the performance of specific customer groups (cohorts) engaging with the product at a particular time.
This funnel-type analysis resembles the conventional sales funnel employed for converting prospects into customers. In the Lean Startup model, startups leverage this approach for their product development, offering a quantitative comprehension of the customer and more dependable predictions compared to traditional metrics.
7.4. Decision-making and Illusory Metrics
Innovation accounting becomes ineffective when startups are misguided by misleading metrics, such as the total number of customers. Eric Ries, using the example of the company Grockit, highlights several decision-making metrics that offer meaningful insights:
- Agile Development Method:
This approach enables rapid reorientation. Its flexible and lightweight operation facilitates responsiveness to changes requested by the product owner.
- Comparative A/B Tests:
A/B tests involve presenting two versions of the same product to two customer groups simultaneously. By observing behavioral differences between the groups, valuable insights into the impact of various variants can be deduced.
In the Lean Startup model, startups often seamlessly integrate comparative testing, sometimes referred to as split tests, directly into their product development phases. These comparisons aid teams in refining their understanding of customer preferences.
- Principle of Kanban:
Derived from the Japanese automotive industry, the Kanban method is a crucial component of the Lean Startup approach. It utilizes a pull system, driven by customer demand, rather than a push system commonly employed by many companies. Following this principle, a company produces a product only when requested, and in the quantity requested.
The Kanban approach also allows for the interruption of the production process at any time to address identified issues, enhancing adaptability and problem-solving in real-time.
7.5. Triple A (Action, Accessibility, Audit) in innovation accounting
For an analysis to drive action, it must unambiguously establish cause-and-effect relationships. Otherwise, it risks being a deceptive metric.
To effectively utilize the numbers in decision-making reports, they should be:
- Simplified to the utmost extent, making metrics understandable to everyone through concrete and tangible units of measurement.
- Grounded in cohort studies, which transform complex human behaviors into quantified reports.
- Accessible to everyone, shared via email or posted on the website in an organized and easily readable format. Each experiment and its results should be explained in simple language, ideally presented on a single page summarizing the outcomes.
Entrepreneurship is not solely about having a groundbreaking idea; the big idea constitutes merely 5% of the journey. The remaining 95% involves less glamorous tasks, meticulously measured by innovation accounting: prioritizing development, identifying target customers, selecting customers to engage with, and courageously subjecting visionary ideas to continuous testing and feedback.
Chapter 8 – Pivot (or Persist)
At some point in the product development journey, every startup creator encounters a significant dilemma: determining when to alter their course and when to persevere. A pivot, or a change in direction, involves shifting the trajectory to test a new fundamental assumption about the product, strategy, or growth engine.
Contrary to common belief, there is no objective and rigid formula for deciding whether to pivot. It is impossible to eliminate the human element—comprising vision, intuition, and judgment—from entrepreneurship. Moreover, such elimination wouldn’t be desirable.
8.1. Innovation Accounting Allows You to Pivot Faster
In exploring the concept of pivoting, Eric Ries shares the narrative of David Binetti, CEO of Votizen, illustrating how innovation accounting played a pivotal role in steering clear of pitfalls during shifts in direction. Eric Ries goes on to elucidate the various phases and types of pivots that Votizen experienced.
Furthermore, Votizen’s journey unveils certain recurrent patterns, with a notable one being the accelerated development of the minimum viable product (MVP). Notably, the timeline for developing successive MVPs reduced significantly—from eight months for the first, down to four months for the second, three months for the third, and finally, just one month for the fourth.
8.2. Room for Maneuver of a Startup is Measured by the Number of Pivots it is Still Capable of
Typically, a startup’s room for maneuver, indicating the time it has left before either taking off or discontinuing operations, is calculated by dividing the remaining cash in the bank by the monthly liquid asset consumption (burn rate). The startup can enhance its room for maneuver in two ways: either by reducing costs or by securing additional funding.
However, according to the Lean Startup methodology, the genuine metric for gauging maneuverability is the number of pivots a startup can still execute—the number of times it can fundamentally alter its business strategy. Essentially, the startup needs to find a method to attain the same amount of validated learning at a reduced cost or within a shorter timeframe.
8.3. Pivoting Requires Courage
Numerous entrepreneurs, upon deciding to change their course, often express regret about not making that decision sooner. According to Eric Ries, this reluctance stems from three main reasons:
- Illusory Metrics:
Entrepreneurs may be influenced by misleading metrics that lead them to draw inaccurate conclusions and confine themselves to a distorted reality. This hampers effective decision-making as teams may not perceive the necessity for change.
- Unclear Hypotheses:
When the hypotheses formulated by an entrepreneur lack clarity, the potential for experiencing failure diminishes. However, the absence of awareness of failure typically eliminates the impetus for significant and necessary changes.
Fear is a prevalent factor among many entrepreneurs, acting as a barrier to embracing change. The fear of the unknown or the fear of failure can hinder the courage required for radical shifts in strategy.
8.4. Meetings to Decide to “Pivot” or “Persist”
Recognizing the need for change often becomes apparent through:
- A diminishing effectiveness in experiments conducted on the product.
- A general sense that the product’s development could be more productive.
The decision to pivot or persist is inherently delicate and laden with emotions. Eric Ries suggests a structured approach by scheduling regular meetings in advance to decide on “pivot or persist.” Each startup should determine a suitable frequency for these meetings, involving both the product development and sales teams.
When opting for a change in direction, the intention is not to discard everything and start anew. Instead, it involves adapting and leveraging the existing knowledge and creations to chart a more advantageous course. Eric Ries exemplifies this with the case of Wealthfront, illustrating a remarkable pivot that propelled the company to become one of the top ten most innovative entities in the financial sector today.
8.5. A Whole Range of Pivots
TThe pivot entails more than a mere change; it involves testing a new fundamental hypothesis concerning the product, business model, and growth engine. Various types of pivots, or changes in direction, include:
A feature of the initial product transforms into a standalone product.
The initial product evolves into one of the features of a much larger product.
- Customer Segment Pivot:
The company realizes that the product effectively addresses a real problem faced by actual customers, but not the initially targeted ones. The hypothesis solves the right problem but is aimed at a different clientele.
- Customer Need Pivot:
Through intimate customer engagement, the company discovers that the problem it seeks to solve is not crucial to them. Instead, it identifies other related problems of greater concern, which it can address by repositioning the existing product or introducing an entirely new one.
- Platform Pivot:
The change involves transitioning from an application to a platform or vice versa.
- Business Architecture Pivot:
Typically, this entails a shift between a “high margin / low volume” model (common in B2B companies or complex sales cycles) and a “low margin / high volume” model (common in consumer products).
- Value Capture Pivot:
The change occurs among different methods of monetization or revenue appropriation.
- Engine of Growth Pivot:
The company alters its growth strategy by changing growth drivers, such as moving from a viral approach to a loyalty-based or acquisition-based one.
- Channel Pivot:
The company decides to change the distribution channel, the means by which it delivers its product to customers, if it believes it can deliver the same product more efficiently through an alternative method.
- Technology Pivot:
A company discovers a way to achieve the same solution by employing a completely different technology.
Part Three: Acceleration, according to the Lean Startup Method
In the third section, Eric Ries introduces techniques designed to empower companies following the Lean Startup model, facilitating their momentum while preserving agility, a learning mindset, and an innovation-centric culture.
Chapter 9 – Batch Size
9.1. Reduce Batch Size
In the opening of this chapter, Eric Ries shares an anecdote from the book “Lean Thinking” by James Womack and Daniel Jones. The anecdote revolves around a mail route activity they performed with their children. The task involved addressing recipients, attaching stamps, placing letters in envelopes, and sealing them. Two methods were employed for completing this task:
- Folding all the letters, sealing them, and then attaching the stamps.
- Sequentially performing all four tasks for each mail one after the other.
Surprisingly, the latter method, tackling each envelope individually, proved to be faster. Numerous studies, including one featured in a video, support this finding. Through this example, Eric Ries aims to illustrate that small-batch production is ultimately quicker than mass production.
Furthermore, even if both methods took the same amount of time, small-batch production remains more appealing. It allows the output of a finished product every five to ten seconds, whereas in mass production, all products are completed simultaneously only at the end of the process, which could take hours, days, or even weeks.
The great advantage of small-batch production is that it allows:
To promptly identify quality issues: Eric Ries cites the example of the Toyota Andon alarm system.
- To respond immediately if, in the interim, the customer decides not to purchase the product.
- In summary, reducing batches proves to be a time-, cost-, and effort-saving strategy that eliminates potential unnecessary expenditure. To illustrate this point, Eric Ries shares various examples of companies, including SGW Design Works, specializing in swift industrial production techniques.
9.2. Replace the Push System with the Pull System
In manufacturing, the “pull” system involves aligning production with the actual volume of customer demand. Without such a system, factories may end up producing either excessive or insufficient parts that align with customers’ true preferences.
According to the Lean Startup concept, the ideal approach is to implement small batches throughout the production chain based on this “pull” system. In essence, each step in the production chain pulls the necessary parts from the preceding step, mirroring Toyota’s renowned “just-in-time” production method. Transitioning to this production mode promptly depletes warehouses, as the stocks held “just-in-case” (also known as “work-in-progress”) are significantly reduced. This shift resembles putting the entire production chain on a diet, hence the term “Lean Manufacturing.”
Consequently, all the efforts invested in developing the minimum viable product, until the day of delivery, represent a stock of work-in-progress.
Chapter 10 – Growth
In this chapter, Eric Ries outlines the metrics that are essential for a startup to depend on when assessing its growth, especially as it acquires new customers and explores emerging markets.
10.1. Where does growth come from?
The engine of growth is the mechanism through which startups achieve sustainable growth, excluding one-off actions that generate a sudden influx of customers without a lasting impact, such as a singular advertising campaign aimed at temporary growth.
New customers originate from the actions of past customers.
Sustainable growth adheres to a straightforward rule: new customers result from the actions of former customers. These former customers contribute to sustainable growth in four ways:
- Word of Mouth: Products naturally grow through word of mouth, driven by the enthusiasm of satisfied customers.
- Product Usage: Certain items like fashion or prestige products, as well as viral products like Facebook and Paypal, attract attention through usage.
- Contributing to Funded Advertising: If the acquisition cost of a new customer (marginal cost) is lower than the revenue generated by this customer (marginal income), the difference (marginal profit) can be employed to acquire more customers. Higher marginal profit leads to faster growth.
- Renewal of Purchase or Usage: Some products are designed to be purchased or used repeatedly, either through subscriptions (e.g., cable television) or voluntary purchase renewals (e.g., food, light bulbs).
10.2. Three Types of Engines of Growth
Sustainable growth hinges on three types of engines: paid, viral, or loyalty. Each engine requires a specific focus on metrics to assess the success of a new product and determine subsequent experiments. Employing the innovation accounting described in the previous section, these metrics enable startups to recognize when their growth might plateau and decide to pivot accordingly.
Loyalty-Based Engine of Growth:
This engine aims to attract and retain customers over the long term. Companies relying on this engine closely monitor metrics such as termination rate or attrition rate (percentage of customers who have stopped using the product). If the acquisition rate of new customers surpasses the attrition rate, the product will experience growth. Therefore, the company must strive to enhance its retention rate.
Viral Engine of Growth:
Viral growth occurs as a product is naturally transmitted from one person to another through normal use. The viral engine operates through a feedback loop known as the “viral loop,” and its speed is determined by the “viral coefficient.” A viral coefficient greater than 1 leads to exponential growth because each new customer brings in, on average, more than one friend. Businesses using this engine focus on increasing their viral coefficient, and monetary exchange does not directly contribute to additional growth; it indicates customer value.
Acquisition-Based Engine of Growth:
This engine operates by either increasing revenue from each customer or reducing the acquisition cost of new customers. The “lifetime value” represents the amount a user spends on a product during their customer “life,” which can be invested in business growth through advertising.
In theory, a company can utilize multiple growth engines simultaneously. However, successful startups often concentrate on one growth engine at a time. Entrepreneurs typically have specific assumptions about the type of engine that might work, and real-world interactions with customers quickly reveal which could be the most profitable.
10.3. When the Engine Runs Out of Steam
Each growth engine relies on a specific customer base characterized by their habits, preferences, and preferred advertising channels. Eventually, this customer base will be depleted, the speed of which varies by industry. Therefore, it is crucial for a startup to adeptly manage its existing engine while concurrently exploring and developing new sources of growth. This proactive approach is essential to prepare for the inevitable moment when the current growth engine reaches its limit.
Chapter 11 – Flexibility
According to the principles of Lean Startup, a company needs to establish an organizational structure, foster a culture, and instill discipline to effectively navigate swift and often unforeseen changes. This concept is encapsulated by Eric Ries as the notion of an “adaptive organization.”
11.1. The And on Cord
In line with the Lean Startup methodology, each startup should incorporate controls that enable it to establish an optimal pace. Eric Ries illustrates the concept of speed regulation with the example of the Andon cord. The significance of the Andon alarm lies in its ability to halt work or production immediately upon detecting a problem. This compels teams to investigate the root cause of the issue before it can have a cascading impact on the entire process. Toyota succinctly encapsulates this technique with the mantra: “Stop production so that production never has to stop.”
11.2. The “Five Whys”
The systematic problem-solving tool, known as the “five whys,” originated from Taiichi Ohno, the pioneer of the Toyota production system. It operates on the principle of repeatedly asking the question “why” and providing answers. In the context of the Lean Startup philosophy, this method facilitates swift responses to problems without excessive investments.
The “five whys” approach delves into the root cause of a problem that may be concealed behind apparent symptoms. According to Eric Ries, many problems, initially perceived as resulting from a single mistake, actually trace back to insufficient employee training or inadequate adherence to the company’s procedural guidelines.
Moreover, the author suggests applying the “five whys” method to allocate investments proportionately across its five levels. This entails investing less when the symptom is minor and increasing investments as the symptom’s significance grows.
The primary aim of the “five whys” method is to illuminate that recurring problems are usually indicative of an inadequate process rather than the intentional wrongdoing of an individual. Consequently, this approach avoids placing blame on any specific person.
To escape the “five blames” trap and enhance the effectiveness of the “five whys” method, Eric Ries suggests several strategies:
- Ensure the presence of all individuals affected by the problem during the root cause analysis.
- Examine issues at the system level rather than attributing blame to specific individuals.
- Foster an environment of mutual trust and accountability.
- Treat initial errors with leniency but enforce a strict policy against the recurrence of the same mistake.
- Be open to discovering inconvenient truths about your business.
- Designate a “five whys” manager—someone with the authority to oversee the execution of tasks but not so high in the hierarchy that they are unavailable for each meeting.
- Introduce new problems gradually instead of presenting all issues at once.
- Brief new participants on the purpose and process of the “five whys” method before each session.
Chapter 12 – Innovation
12.1. Nurture Disruptive Innovation
To succeed and encourage innovation, a startup in the Lean Startup philosophy should have these three key traits:
- Limited but Reliable Resources:
Startups need less money, but it’s crucial that the initial budget doesn’t change abruptly.
- Independent Business Development:
The startup team should have the freedom to create and promote new products independently. This means they can conduct experiments without bureaucratic delays, ensuring a swift learning and accountability process.
- Personal Interest in Results:
The entrepreneur should have a personal stake in the startup’s success, which can be in the form of stock options, profit bonuses, or non-financial benefits like recognition for creating a successful product.
12.2. Create a Platform for Experimentation: A Sandbox of Innovation
In Lean Startup, the goal is to create a playground for innovation experiments. Here’s how it works:
- Test Environment:
- Teams can run experiments on different parts of a product or service in this environment.
- Key Principles:
- The same team runs the experiment from start to finish.
- Experiments have a specific duration and impact a limited number of clients.
- Each experiment is assessed using a standard report with five to ten key metrics.
- All teams and products in the innovation playground are evaluated using the same metrics.
- Teams monitor metrics and customer feedback during experiments and stop if there are serious issues.
- Transition to Main Company:
- Successful innovations from the sandbox rejoin the main company for further development, marketing, and growth.
- A larger team takes over, supervised initially by the sandbox innovators.
- Team Structure:
- Innovation teams are multidisciplinary, led by a designated manager.
- They report success or failure using standard metrics and innovation accounting.
12.3. Maintain the Management Portfolio
In a company, there are four main phases to manage:
Research and Development:
Creating innovative products.
Expanding the product in the market.
Improving the product through small innovations.
Managing expenses efficiently.
However, a common issue is that employees often stick with the products they develop throughout these phases. The original inventor manages resources and teams for marketing, and creative managers end up focusing on growing and optimizing existing products rather than creating new ones. This challenge is why established companies sometimes struggle to find leaders who drive innovation.
Chapter 13 – The Lean Startup Movement
Currently, we have the capability to produce almost anything we can think of, but the key question is not whether we can do it, but whether we should. This is about avoiding unnecessary waste. The Lean Startup approach believes that we can reduce waste in innovation by changing the way we work.
In this chapter, Eric Ries suggests several ways to achieve this:
- Create startup test labs that experiment with various product development methods.
- Train small, diverse teams to solve problems using different development approaches.
- Foster partnerships between university research teams and entrepreneurial communities beyond just funding or creating startup incubators.
- Aim to transform the entire entrepreneurship ecosystem.
- Consider establishing a new type of stock exchange, like the proposed Long-Term Stock Exchange (LTSE), focused on companies with long-term policies.
Chapter 14 – Join the Movement
The Lean Startup has become a global phenomenon, and according to Eric Ries, it’s crucial to become part of the entrepreneurial community. However, he emphasizes the importance of avoiding strict dogmas within the Lean Startup movement.
In the conclusion of his book, “Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses,” Eric Ries provides a list of recommended events, books, and blogs for further exploration. He also encourages readers to visit his website, “The Lean Startup,” for additional information on the concept and continuous innovation.
Conclusion of “Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses”:
At the start of the book, Eric Ries describes a common scenario in projects: a team works hard to create a perfect product, only to find out later that it doesn’t meet customers’ needs. The Lean Startup method aims to avoid this by emphasizing validated learning, ensuring that product ideas are confirmed by real customer feedback.
Lean Startup focuses on understanding customers without relying solely on their verbal input. It encourages creating functional prototypes (minimum viable products) to observe customer responses and measure their behaviors. The approach, inspired by Lean Management, advocates continuous innovation for adapting products to evolving market needs.
The Lean Startup method optimizes production speed and quality, eliminating waste for unmatched business results. It avoids unnecessary work, contributing to the creation of sustainable value and bettering the world. The book is a must-read for entrepreneurs seeking success by adopting Lean Startup principles.
The Lean Startup offers a compelling methodology supported by a wealth of examples. Eric Ries dives into key concepts such as the build-measure-learn loop, minimum viable product, Kanban, five whys, agile development, engine of growth, and innovation accounting, providing thorough explanations. On the flip side, some chapters tend to be somewhat repetitive, which can impact the overall clarity of the content.
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