The Lean Startup - Book review
1 October 2018
Dr. Moria Levy
The book "The Lean Startup: How Constant Innovation Creates Radically Successful Businesses" was authored in 2011 by Eric Ries, a youthful entrepreneur and enthusiast of startups. He gained recognition as one of the most promising young entrepreneurs by Business Week in 2008.
Ries' philosophy presents a startup management approach that draws inspiration from large corporations, particularly Toyota, while also challenging some conventional notions. The term "startup" is not confined to new companies but can be applied across various organizations, irrespective of their size or location. The movement he pioneered in this area gained a significant following and is now acknowledged as an established methodology in the field.
The book covers the following topics:
Effective management is imperative for startups, regardless of the abundance of talented individuals or ingenious ideas. The value lies not only in commencing the journey but also in comprehending how to navigate it. This isn't a ready-made recipe but a framework that needs astute and sensitive application, tailored to the appropriate concepts, and executed as detailed below.
This book comes with high recommendations and merits a thorough read.
The book begins by highlighting familiar concepts:
Initiation: Refers to new companies, ideas, and activities within established or older organizations. The initiation ecosystem encompasses the broader environment that facilitates new forms of activities.
Startup: A startup is defined as an entity that meets three conditions:
1. It's a human organization.
2. It produces a new product or service.
3. It operates under conditions of significant uncertainty. A startup proposes a solution beyond its components, making it captivating. Its goal is to catalyze the transformation of ideas into innovative products or services.
Innovation: This term takes various forms, including scientific discoveries, novel applications of existing technologies, innovative business models, and more. Innovation follows a bottom-up approach, requiring distinct management as described below.
For a startup to thrive, the organization's leadership must:
1. Create an environment conducive to learning and experiential processes tailored to the unique demands of novel developments amid uncertainty.
2. Recognize the holistic nature of this concept rather than adopting isolated tactics in isolation.
At its core lies “validated learning” – a process that involves formulating a focused question and systematically examining, drawing conclusions, and obtaining answers through an agile methodology outlined in the guidance section. An illustrative focused question might be: To what extent will incorporating direct movement capability into AVATAR amplify customer interest in the product?
The focus is on addressing customers' needs through continuous improvement:
1. Ensuring the customer acknowledges the existence of a problem.
2. Eliciting a willingness to pay for problem resolution.
3. Cultivating a desire to pay us for addressing the issue.
4. Possessing the capability to devise a solution.
This experiential process can involve simulations, temporarily realizing human-operated computational principles, or even partial development. Expansive development occurs infrequently, as prudence dictates withholding significant investment until the product's viability is ascertained.
Steering the wheel directly is a complex task, particularly in an environment where roles other than management are expected. The startup operates as a catalyst, transforming concepts into successful novel products or services, demanding effective management, as elaborated below:
The learning cycle encompasses the subsequent stages: idea > construction > product > measurement > data > learning. This cycle then repeats. Establishing an agile process encompassing the entire learning cycle is pivotal: initiating with an idea and learning hypothesis, progressing towards agile development (potentially partial or simulated), resulting in a tangible product engaging customers for experimentation. Subsequently, a measurement system is established to gather data, assessing whether outcomes align with initial premises. Conclusions about the product's trajectory are drawn, guiding a more systematic implementation of components, if necessary. The central focus is on delivering a customer-centric experience. Drawing inspiration from Toyota's practices, part of the methodology involves venturing into the field and engaging with customers across multiple touchpoints to solicit their opinions. The directive is to abstain from making decisions on their behalf. It's important to note that the learning cycles for the product/service should be geared toward addressing two fundamental questions:
1. What value does the product/service deliver?
2. What constitutes the business growth model that ensures sustained profitability over the long term?
The customer receives a simple MVP (Minimum Value Product) – a streamlined version for acquiring valuable insights rather than an elaborate and costly comprehensive solution that might align more with our assumptions than the customer's needs. Expansion is only entertained after confirming its success, and each phase adheres to the cycle of idea formulation, assumption clarification, construction, and repetition. Regarding MVP, it's essential to remember that any element not necessary for testing the hypothesis is redundant, and expanding it would mean missing an opportunity. Identify potential obstacles that could hinder progress or demand significant investments and take measures to mitigate them. Pay attention to additional barriers such as legal concerns, brand risks, competition, and the potential impact on team morale if the MVP's performance falls short. Maintain vigilant and disciplined product progress management.
Similar to the other aspects discussed, measurement in this context diverges from the norm in most startups. Defining a milestone and gauging numerical changes through conversations with multiple customers needs to be improved. This approach often needs more substantial meaning (for instance, a single investment might yield a temporary increase, but if the cost outweighs the profit, it's not a viable solution).
1. Develop an MVP for data collection.
2. Implement customer segment-specific analysis (cohort analysis). According to Ries, this type of analysis is crucial for understanding the broader impact of each experiment, forming the foundation for a meaningful qualitative assessment.
3. Drive learning and refinement based on insights derived from data.
Both qualitative and quantitative data are fundamental for accurate measurement and learning.
The indicators themselves should meet three criteria:
1. Actionable – Metrics that, following the analysis above, enable informed decisions regarding further product development.
2. Accessible – Use straightforward metrics understandable to everyone, catering to a broad audience.
3. Defensible – Easily understandable, making it difficult to blame the data if the results don't meet the standards of specific departments.
In pursuing progress and advancement, an additional factor becomes crucial: the capacity for effective decision-making held by the entrepreneur, the guiding manager, and their supporting team. They must determine whether to adhere to the planned trajectory after learning from experiences or to execute a shift—be it tactical or strategic—that alters the course of development thus far. An illustrative instance of such a transformation could relate to the pricing model, target demographic, technology, platform, distribution channels, or any aspect connected to the product/service and its market presentation. Embracing change demands courage, yet it is a critical foundation for reaching new heights instead of simply navigating the original concepts that initiated the journey. The ability to adapt promptly, especially when required early on, not only conserves resources but also mitigates significant distress.
The Acceleration Phase
The acceleration phase is characterized by having a product in place and active sales. At this point, the priority is to ensure sustained profitability and long-term viability. Many startup companies need help at this stage, failing to maintain consistent engagement over time. Success, often initiated with MVP products, frequently starts with early adopters interacting with partially developed products. The transition to mainstream clientele is complex and linear. Ries proposes an approach that facilitates progression to this stage without losing the momentum of agility and speed characteristic of preceding phases.
Embracing Small Batch Implementation
The suggested implementation techniques draw inspiration from the LEAN principles established by Toyota. Prominent among these is the emphasis on adopting solutions in small batches. Instead of envisioning grand designs and extensive products that cater to every requirement, the focus shifts to modest units. This approach not only fosters diversification and reduces inventories in larger organizations but also erects a barrier against investing excessive time and resources, which might prove misguided in the long run. Examples include a preference for software alterations over additional hardware and using 3D printers to create solutions.
Customer expansion can originate from four sources:
1. Word-of-mouth: Existing customers attract new customers through positive referrals.
2. Usage-driven advertising: Exposure through product use; the product becomes a form of advertisement (e.g., wearable items).
3. Sponsored advertising.
4. Purchase or reuse: This is especially relevant for products bought regularly, such as food items or subscription-based services like telecommunications.
Ries outlines some common pitfalls in these areas, like investing more in advertising than the resulting benefits or focusing on acquiring new customers without addressing the attrition of existing ones.
Most startups focus on a single growth engine at a time. Having multiple machines can lead to confusion.
A robust growth engine indicates alignment between the product and the market. Aim for this alignment.
Genuine growth (not just activity) requires increased profitability per customer or the cost-effective acquisition of new customers.
Growth engines usually have a limited lifespan. Be vigilant in identifying when replacements are necessary.
The necessity for continuous adaptation is likely pertinent to any organization, given the era characterized by frequent changes in which we currently reside. However, this requirement becomes even more pronounced for startup companies aiming to establish their presence. The primary tool that facilitates adaptation is the 5 Whys technique, a method familiar to many in the realm of lessons learned: When confronted with any problem or uncertainty, ask "why." Repeat this process, asking "why" a total of 5 times, systematically tracing back to the fundamental causes—transition from seemingly technical issues to matters of human behavior.
Ensure you secure management support as a prerequisite for starting.
Share the process with all relevant stakeholders. Clearly outline the essence of the process at its inception.
Foster a sense of trust. Begin with more straightforward matters and be tolerant of initial mistakes.
The approach might uncover less favorable aspects; be cautious not to assign blame.
Ensure actionable outcomes – invest effort in preparation and improvement. Strive to provide recommendations at each "why" level. Make sure these suggestions are reasonable in scope rather than overwhelming.
Following their inception, companies that originated as startups must consider how to blend their existing customers and products with ongoing innovation. Here are some suggestions for fostering innovation within an established organization:
Grant autonomy to departments and employees for independent innovation.
Encourage innovation with well-defined boundaries, ensuring protection against budget cuts.
Offer employee compensation (monetary or intangible) as a reward for success.
Establish an innovation sandbox that operates under the startup principles outlined in the book, allowing for experimentation.
Foster a transparent relationship between seasoned entrepreneurs and the overarching parent organization.
Remember – every company that begins as an innovator will undergo four distinct stages, where innovation gives way to integrating conventional customers, establishing routines, and eventually pursuing efficiency through strategies like outsourcing, automation, or cost reduction. This phase also presents opportunities for revitalized innovation from the ground up.