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Summary and Analysis of The Lean Startup
How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses
By Eric Ries OPEN ROAD INTEGRATED MEDIA
Copyright © 2016 Open Road Integrated Media, Inc.
All rights reserved.
ISBN: 978-1-5040-4343-4
CHAPTER 1
Summary
Introduction
Ries describes the Lean Startup method and how he developed it. There are five basic ideas behind this approach:
1. Anyone, anywhere, can be an entrepreneur. Contrary to the popular definition, Ries defines a startup as any group attempting to make a new product or service in an unpredictable environment. Thus, anyone running such an enterprise is an entrepreneur.
2. The management of the startup is as important as the product itself. The concepts of "entrepreneurship" and "management" cannot be separated.
3. Since startups are inherently untested, being new products or ideas, they require a continual state of learning in order to be successful. Ries uses the term "validated learning" to describe this cycle of testing.
4. There is a standard process that startups should follow: "Build-Measure-Learn." Ries believes companies should first make a product, see how consumers react to it, and then take action in response. This cycle continues throughout the building of the business.
5. No matter how exciting and fresh its product is, a startup needs to do the dull work of quantifying progress.
Part One: VISION
1. Start
There are more entrepreneurial opportunities today than at any other time in human history. But because we use antiquated management techniques, startups are not getting the most out of our human resources and, worse, they are "achieving failure" — a phrase Ries uses to describe the perfect execution of a plan to build something that it turns out nobody wants or needs. Rather than make something and wait to see if it attracts customers, businesses should use scientific methods to determine what customers want before they spend a lot of time and money creating a perfect product.
2. Define
Any type of entrepreneur in almost any industry can use the Lean Startup philosophy to increase the likelihood of launching a successful startup. What makes a startup different from other businesses isn't that the business is related to technology, necessarily. It's that the new service or product is framed by extreme uncertainty — that is, there is no known business model and no known market for the product. Ries uses the example of Intuit's SnapTax to illustrate that a startup can even exist within an established business. Customers who were using Intuit's TurboTax began asking if there was a way to complete their taxes entirely on their phones. Seizing this opportunity, Intuit was able to develop such a product while still maintaining its core business with TurboTax.
3. Learn
A startup must measure progress, but knowing the right way to measure progress is critical. If a business is failing, entrepreneurs will often spin it as a learning experience. While doubtlessly true, that doesn't change the fact that the exercise is a waste of time and money. It's not surprising, therefore, that "learning" has something of a bad reputation in business. In spite of this, it is a vital piece of the startup process.
Ries reconceives "learning" to make the process an actual, quantifiable part of product development. He calls this "validated learning," meaning that each experiment leads to an improvement in the process or an improvement to the product (and therefore validates the time and money spent on learning). It helps a startup understand how close its vision is to what customers want — which may be very different from what the creators originally imagined. According to Ries, validated learning requires a scientific approach to measure results and test hypotheses.
4. Experiment
Learning is impossible if there isn't a way to fail without catastrophic consequences. To determine which parts of a startup's strategy are good and which are bad, it is more efficient to run a series of experiments than to waste resources on surveys and market research. Ries cites examples of this approach from Zappos and Kodak, as well as within government and volunteer programs. He posits that data from small-batch experiments that target early adopters is the best way to learn about which aspects of a product or process work, and which do not. People using an actual product are able to offer more valuable feedback than people being asked questions about a hypothetical product. Additionally, the product itself has already been built and tested in this process, so it's ready for tweaking.
Part Two: STEER
This section examines the best way to move through the Build-Measure-Learn feedback loop as quickly as possible.
Essentially, a startup begins with an idea for a product, then builds that product. Once constructed, the product undergoes the testing discussed in previous chapters, which provides data that allows the startup to learn. The learning, as we've seen, leads to ideas about how to improve or change the product. At this point, the entire loop begins again. For efficiency's sake, the startup must cycle through this loop as fast as it can.
5. Leap
The author uses the early days of Facebook to illustrate two invaluable ideas behind any successful startup: the value hypothesis and the growth hypothesis. To attract investors, a startup must be able to offer not only value (a product that customers want), but also the prospect of continued growth (a product that will continue to add value going forward). If a startup can offer an answer to these two hypotheses, that startup can then take a "leap of faith" to begin work.
As we've seen in previous chapters, testing is vital to success. Even the basic leap- of-faith assumptions must be tested. The Japanese phrase genchi gembutsu speaks to how this must be done. It means "go and see for yourself." Ries describes how this method is utilized by Toyota to gain firsthand knowledge of consumer needs. It is not enough to do traditional market research; the entrepreneur must literally talk to customers in order to develop solutions for the problem the startup aims to solve.
6. Test
This chapter details the concept of the "minimum viable product" (MVP), which is the fastest way for entrepreneurs to engage in the Build-Measure-Learn loop. The MVP is not a prototype in the traditional sense, because it is built not to approximate the final product, but rather to answer questions about technical aspects, design, and business hypotheses.
An MVP doesn't need to be perfect; its role is to test the entrepreneur's assumptions about a product based on its interaction with early adopters. MVPs often deliver bad news, which is just as important as good news, and which is the reason a cheaper, more basic version of the product was built first. Worried about the competition stealing the idea? Ries assures the reader that, for the most part, the competition either won't care or won't be able to do anything about it.
7. Measure
Accounting is important to all business ventures. But the typical methods of accounting cannot be applied to startups because of the degree of uncertainty involved in the process. Therefore, Ries suggests that startups use what he calls "innovation accounting." The first step in this accounting process is to build the MVP and test it, as seen in chapter six. With the data gained by testing the MVP, the startup can establish an accurate picture of where it stands. Once this baseline exists, the next step is to "tune the engine," as Ries puts it. That means looking at where the product is and at where it ultimately needs to be, and then making incremental changes to get it there. Along the way, of course, the process of validated learning continues. Eventually this data will make clear whether the startup is moving toward its ideal or away from it. At that point, a decision can be made: keep going, or fundamentally change the product or process?
Measuring progress this way is critical for startups. Whether a startup will succeed or fail is exceedingly difficult to predict, and this is made more difficult because so many of them rely on vanity metrics — numbers created specifically to make it look as if the company is doing well. These metrics are often given to investors or the media, but the danger is when the startup itself believes in the vanity metrics.
Using IMVU and Grockit as examples, Ries discusses many different methods of gathering actionable metrics — that is, numbers that directly show the results of specific actions. These metrics, not vanity metrics, must be used to evaluate the product and make decisions. Some of the methods described are split-testing, cohort analysis, and kanban, which is a Japanese term for constraining capacity.
8. Pivot (or Persevere)
Once the right information has been gathered through methods such as the MVP, the Build- Measure-Learn loop, and innovation accounting, the fit between the product and the market is known. This allows a startup to intelligently change direction rather than, say, mistakenly fire its management team. It might mean pivoting toward a product nobody envisioned, but this is preferable to the course too many entrepreneurs take: refusing to admit their original course was flawed, which leads to the failure of the entire company.
When pivoting, the entrepreneur does not blindly change to a new product or process. Rather, they use the information gained through the all the previous testing to lead them in a new direction that offers sustainable growth.
Part Three: ACCELERATE
Once a startup has decided to persevere — to move forward with its product — it is time to accelerate. This does not mean that the learning feedback loop ends, but rather that the information gained is used to create a company that utilizes lean thinking as its backbone as it moves into the future.
9. Batch
Startups should think big about products but think small about batches. Most people would think the fastest way to manufacture something is to create an assembly line that does each task separately. But in fact, it has been proven more efficient to use a "single- piece flow," which means that one product is made in its entirety before the next is begun.
The value of the single-piece flow is that errors aren't proliferated throughout a large batch. If step three on your assembly line requires a screw to be dropped into a hole, but the hole has been drilled in the wrong place in step one, the error will not be discovered until the batch reaches step three. All of the products already on the line will have to be scrapped, since their holes are in the wrong place. By contrast, if one product in its entirety is completed before moving on to the next one, that error will be discovered on the first round. Waste is reduced, and the problem will be addressed more quickly.
For startups, utilizing small batches allows problems to be spotted and fixed rapidly. The small batch concept is also built into the MVP. Tech companies can borrow from Toyota's andon cord, which allows any member of the team to shut down production when a problem is detected. Picture that assembly line: you don't want it to keep chugging along, drilling holes in the wrong place. You want to stop the line immediately until the problem is addressed. When this thinking is applied to the Build-Measure-Learn loop, it saves time and money while improving systemic quality.
10. Grow
Growth alone isn't enough. Startups must seek sustainable growth, which means continually finding new markets and new customers. The best way to do this is to use existing customers, who contribute to growth by talking about the product, using the product so that others can see it, buying the product for repeat use, and, at the most basic level, paying for the product. The money made on past purchases is what pays for the advertising that creates new customers.
Ries discusses three engines of growth: viral, sticky, and paid. While it is possible for a company to run more than one engine at a time, he feels that the most prosperous startups use only one. The process of genchi gembutsu is a good way for a startup to decide which growth engine is most appropriate for them. Making small adjustments after each Build-Measure-Learn loop is the way to achieve a better fit between the product and the market.
11. Adapt
There are many more ways for startups to fail than to succeed. The entire organization must be adaptive to new challenges — and it must stay adaptive. Ries says that one important way to do this is for managers to incentivize group success over individual success. Doing the reverse may result in a situation where office politics stifles innovation. The long-term prospects of a company are grim unless employees feel they'll sink or swim together.
It is also important to make sure employees are trained properly so that they can be successful at adapting. How to tell if the training is effective? Ries suggests using a method called the Five Whys. Borrowed from Toyota, the philosophy of the Five Whys says that when there is a problem, the root will be discovered when you ask "why?" five times. Ries uses the example of a problem with the new version of a product that's just been released: "1. A new release disabled a feature for customers. Why? Because a particular server failed. 2. Why did the server fail? Because an obscure subsystem was used in the wrong way. 3. Why was it used in the wrong way? The engineer who used it didn't know how to use it properly. 4. Why didn't he know? Because he was never trained. 5. Why wasn't he trained? Because his manager doesn't believe in training new engineers because he and his team are 'too busy.'" As we see in this example, the process of asking questions reveals a simple, human problem, even if the trouble initially seems to be technical.
But use caution: if this technique isn't employed properly, people may use it to shift the blame (five times). Done correctly, the Five Whys can reveal unwelcome issues: a problem with the management or process, for example. It is crucial that these problems are seen and corrected. Ries stresses the importance of solving a problem using a proportionate amount of resources — a small outlay of resources for a small problem, a large outlay for a large problem.
12. Innovate
Companies can still act like startups as they grow, and they should. Creativity and innovation are a vital part of any organization, and retaining lean thinking can help with this even after the flagship product no longer carries with it the uncertainty required to be considered a startup.
One way to do this is to allow small teams to operate independently within a larger organization. But the parent organization must not feel threatened by the startup. Consider developing what Ries calls an "innovation sandbox," a small area of the main product (or process) that innovative teams are encouraged to openly experiment on. As long as the experiment is contained to that one area, it cannot harm the company's main product, and it may lead to the development of something new and beneficial to the company as a whole.
13. Epilogue: Waste Not
There is a great deal of waste in modern business. While our ability to manufacture virtually anything is greater than ever before in history, the problem remains that it is wasteful to make things that are not needed. Ries wants us to stop asking whether or not a product can be built and start asking whether or not it should be built. The lean startup seeks to reduce the waste created by expending resources on the wrong ideas — those that do not fill a demand or solve a problem. It is not a matter of making workers more productive or efficient, because they already are both of those things. Rather, it is a matter of using their efficiency to create products that people actually want.
The focus should not be on how hard a business works — it should be on working more intelligently. This means valuing facts over intuition, science over pseudoscience. Ries warns against allowing lean thinking to become a system in and of itself: testing and learning, he stresses, cannot continue in a rigid system.
(Continues...)
Excerpted from Summary and Analysis of The Lean Startup by Eric Ries. Copyright © 2016 Open Road Integrated Media, Inc.. Excerpted by permission of OPEN ROAD INTEGRATED MEDIA.
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