Entrepreneur

The Lean Startup

The Lean Startup

One-sentence summary of “The Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses“: In this book, Eric Ries develops all the concepts of The Lean Startup methodology in order to radically increase customers and the chances of success for all those who wish to start their own business or develop a new project through continuous innovation.

By Eric Ries, 2011, 337 pages.

Chronicle and summary of “The Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses”

Introduction

The author’s journey, Eric Ries

To introduce his remarks, Eric Ries returns to his career as an entrepreneur. He has, in fact, set up several startups: he tells us about his beginnings, his failures and the lessons he learned from these different startups and, more recently, within the company, IMVU.

It’s a set of elements that have brought, throughout his journey, Lean Startup to life: lectures, mentors (some of whom are great minds in Silicon Valley), new ideas on how to start a business, associates ready to experiment with new methods.

The author explains that he first realized that by applying the ideas of lean manufacturing to his own entrepreneurial challenges, he could sketch a framework that would enable him to analyze them. This reflection led to Lean Startup, the application of the lean philosophy to the innovation process.

Eric Ries began to describe this experience on a blog, Startup Lessons Learned, and to talk about it at conferences and with companies, startups and investors. By defending his point of view and with the help of other authors, thinkers and entrepreneurs, he succeeded in fine-tuning the Lean Startup theory and advancing it. Although his entrepreneurial experience began in the high-tech software industry, the Lean Startup movement has expanded far beyond. Thousands of entrepreneurs are implementing its principles in all sectors.

Eric Ries quickly decided to devote himself full-time 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

A startup is a business structure, not just a product. Therefore, it requires a new type of management adapted to its context of extreme uncertainty.

3. Validated learning

The sole purpose of a startup is not to deliver products, to earn money or to serve customers. Its goal is to learn how to set up a sustainable business in the long term.

4. The build-measure-learn feedback loop

The fundamental activity of a startup is to turn ideas into products. This then assesses the reaction of customers to learn the lessons that will enable them to decide whether it should pivot or persist.

5. Innovation accounting

There is a need for a new type of accounting management specifically for startups to measure progress, define milestones and set priorities.

Book Structure ” Lean Startup– How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses”

Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses is divided into three parts: “Vision”, “Steering” and “Acceleration”.

The “Vision” part

Eric Ries pleads, in this part, for a new technique allowing startups to evaluate their progress: validated learning. Based on scientific experimentation, this technique helps startups discover how to start a sustainable business, whether they take their first steps in a garage or in an established company.

The “Steering” part

In this part, Eric Ries presents the Lean Startup method in detail, describing the build-measure-learn feedback loop.

He explains:

  • how to develop a minimum viable product (MVP) to test its fundamental assumptions with the utmost rigor;
  • how to evaluate our progress with a new cost accounting system;
  • how to decide whether to pivot, that is to say change course, or persist in the same way.

The “Acceleration” part

Eric Ries offers us, in this part, several techniques to allow a startup to go through the build-measure-learn loop as quickly as possible. He also addresses:

  • The concepts of lean manufacturing that apply to startups, such as small batch production;
  • The organizational structure of the startup and its mode of growth;
  • The principles of Lean Startup to apply beyond the legendary garage, and even within the largest multinationals.

Part One: The Vision, according to the concept of Lean Start-up

Chapter 1: Start

Lean Startup takes its name from the Lean Manufacturing revolution, which was introduced to Toyota by Taiichi Ohno and Shigeo Shingo in the 1950s. The Lean philosophy has radically transformed the way of managing supply chains and production systems.

It is based in particular on:

  • Showcasing the know-how and creativity of each employee,
  • Shrinking of batch sizes,
  • Just-in-time production,
  • Inventory reduction,
  • Acceleration of cycle times.

Lean Startup asks people to measure their productivity differently. The development of a new product is done in fits and starts. It proposes a new way of approaching the development of innovative products, with a focus on:

  • Fast iteration,
  • Taking into account the customer’s opinion,
  • A huge vision,
  • Great ambition.

Startups rely on a mechanism that the author calls “the engine of growth.” In the life of a startup, most of the time is spent tuning the engine by improving the product, marketing or operation.

Lean Startup offers businesses the ability to continually adjust their trajectory through what the author calls the build-measure-learn feedback loop. From then on, the startup knows when it is time to pivot, or on the contrary, whether it is better to persist in the same direction.

Chapter 2 – Define

The Lean Startup is a set of practices designed to help entrepreneurs increase their chances of creating a successful business.

A startup is a business structure organized by people looking to design a new product or service under conditions of extreme uncertainty. It does not matter its size, sector or area of activity. On the other hand, the product or service of a startup claims to be innovative.

Startups have activities related to setting up any structure: hiring creative staff, coordinating their functions and establishing a corporate culture.

Chapter 3 – Learn

The fundamental objective of a startup is to design a business structure under conditions of extreme uncertainty. Its most vital function is its ability to progress.

The Lean Startup rehabilitates the notion of learning according to a concept that Eric Ries calls validated learning. This is a rigorous method to demonstrate the progress of a startup facing a climate of extreme uncertainty.

The idea is to learn what customers really want, not what they say they want or what they think they should want.

The Lean Startup philosophy defines value as something that brings benefits to the customer. All the rest is just waste to eliminate. So, the first question any follower of the Lean Startup method asks is: “What part of our efforts is value-creating and what is wasteful?”. In fact, any effort that is not absolutely necessary to know what customers want should be eliminated. However, it is easy to be wrong about customer expectation. Validated learning will therefore be based on empirical data collected from real customers.

The question is not, “Is it possible to make this product?”. In our modern economy, virtually every conceivable product can be made. The most relevant questions are: “Should we create this product? And “Can we design a sustainable and prosperous business around this series of products and services?”.

To answer these, we need a method that allows us to split a business plan into its different components and then test each of them empirically.

In other words, we need a scientific method. In the Lean Startup model, every product, every feature, every marketing campaign is understood as an experiment of which the goal is to achieve validated learning.

Chapter 4 – Experiment

4.1. From Alchemy to Science

In the Lean Startup methodology, a startup conducts experiments to see what is brilliant and what to eliminate. These experiments follow a scientific method, they:

  • Are guided by a vision (as they would be by a theory);
  • Include hypotheses that make it possible to predict what is supposed to happen;
  • Serve as a test based on concrete elements.

4.2. Think Big, Start Small

The Lean Startup

For Eric Ries, you have to think big and start small.

To illustrate this idea, Eric Ries returns to the story of Zappos, which he believes to be one of the greatest success stories of e-commerce. It knew how to meet the expectations of its customers on a small scale, without preventing the realization of the ambitious vision of its founder, Nick Swinmurn.

The author then mentions the experience of Hewlett-Packard (HP). This company could have avoided, according to him, a terrible waste by experimenting immediately and modestly with its idea rather than relying on assumptions.

 4.3. Break it Down

It’s about breaking down a big vision into its different components.

Thus, the two most important assumptions that entrepreneurs make are:

  • The value hypothesis: to verify whether a product or service really brings value to the customers who use it;
  • The growth hypothesis: to test how new customers discover a product or service and, once the program is defined and implemented, how it will spread.

According to the Lean Startup, to verify these assumptions, it is vital to conduct experiments. In the Lean Startup model, an experiment is more than just a theoretical inquiry. It is also, and above all, a product.

Unlike a traditional strategy or a market study, the approach here is to know what works today thanks to customer feedback. There is no question of anticipating what could work tomorrow by speculation. It can be done in its entirety within a few weeks, less than one-tenth of the time required for traditional strategic planning.

Part Two: Steering Vision to Optimization, according to the Lean Startup Model

A startup is a catalyst that turns an idea into a product. When customers interact with these products, they provide feedback and data. This feedback is both qualitative and quantitative.

We can visualize this process in three steps with this simple diagram: build, measure, learn.

This build-measure-learn feedback loop is at the heart of the Lean Startup.

The Lean Startup model states that none of these steps are more important than others. The goal in steering a startup is to minimize the total duration of this feedback loop.

Chapter 5 – Changing Gear

The Lean Startup method says each business plan starts with a series of hypotheses that must be tested as quickly as possible.

As we saw in the previous chapter, where Eric Ries recalls, through Facebook’s experience, two fundamental assumptions take precedence over all others: the hypothesis of value creation and growth.

To test these assumptions, the Lean Startup recommends going directly to the customers to understand them. Moreover, this principle is at the heart of Toyota’s production system: it is called the Genchi gembutsu; this can be translated as “going to see on the ground in order to understand the situation”. Eric Ries then invites us to leave our chair and discover our potential customers in the same way as Yuji Yokoya did. Yugi was an engineer at Toyota who traveled through the United States, Canada and Mexico by car to design a new model of minivan that could suitcustomers’ needs as closely as possible.

The purpose of these first contacts with potential customers:

  • Is to confirm that the customer has a problem that is worth solving;
  • Is not to get definitive answers but rather to be able to develop a customer archetype in order to humanize the targeted clientele.

Chapter 6 – Test

Eric Ries returns, at the beginning of this chapter, to the beginnings of Group on. This example does highlight very well a key concept of the Lean Startup: the minimum viable product (MVP).

6.1. The Role of The Minimum Vital Product (MVP)

Unlike traditional product development methods, which require a long period of reflection and brainstorming in trying to achieve perfection right away, the Minimum Viable Product helps the startup creator to launch his or her learning process through quick feedback(and not to end this process).

The MVP will go through all the steps of the build-measure-learn method with minimum effort. It’s the product that aims to test fundamental assumptions.

6.2. Quality and Design in an MVP

Before they can be mass-marketed, products need to be sold to early adopters. They are, in a way, early customers who want to be the first to adopt a new product or technology.

For many entrepreneurs, this revolutionary product must be perfect, well thought out and ready for the mass market. It is difficult to present a product early if it is incomplete and full of defects. We must then set aside our traditional professional criteria to adopt a validated learning approach through feedback.

During the development of the MVP, we must be guided by a simple rule: eliminate any feature, any procedure, any effort that does not contribute directly to the sought-after learning. The MVP is there to teach us that any extra work beyond what is necessary to start learning is a waste, no matter how important it was initially.

In fact, the minimum viable product can take different forms. Eric Ries describes several examples by mentioning Dropbox startups, Food on the Table (FotT) and Aardvark.

6.3. The Brakes on MVP

  • Formalities and legal constraints:

They relate in particular to the risks related to the filing of patents. The author advises to seek the advice of a specialized law firm to ensure that all risks are taken well into account.

  • The fear of competition

Eric Ries explains that having one’s idea stolen by competitors is, in reality, almost impossible.

  • The brand risk

With a low-quality MVP, there is the fear of damaging the brand image of the parent company. The author proposes a simple solution: launch an MVP under a different brand name.

  • The impact on morale

The MVP often brings bad news but often provides a healthy dose of reality.

The Lean Startup

Chapter 7 – Measure

7.1. Innovation Accounting: to Measure Growth Rate

Startups are far too unpredictable, and their points of reference are far too vague to use conventional cost accounting. They need a new kind of accounting management tailored specifically to disruptive innovation. This is what Eric Ries calls innovation accounting.

Innovation accounting allows startups to objectively demonstrate long-term growth.

Growth rate depends primarily on three points:

  • The profitability of each customer,
  • The acquisition cost of new customers,
  • The renewal rate of purchase.

7.2. Innovation Accounting: Three Stages of Learning

Innovation accounting is divided into three stages:

Step One: Define Your Frame of Reference

As we saw in the previous chapter, it is a question of using a minimum viable product (MVP) to obtain real data on the current state of the company.

To that end, a startup could, in particular:

  • Create a single complete prototype of its product and offer it to real customers through its usual sales channel.
  • Launch multiple MVPs to receive customer feedback separately for each assumption.
  • Before establishing your prototype, perform a surface test from your marketing materials: the customer has the opportunity to pre-order a product that does not yet exist on the market.

This type of test only evaluates one thing: the interest of customers in testing a new product. They alone are not enough to validate a growth model as a whole but are very useful for getting some feedback on key assumptions before investing more money or other resources into a product.

Step Two: Perform Engine Adjustments

The startup must strive to tune its engine making it go from basic operation to full capacity.

This may require many attempts. Once all the product adjustments are made to reach the ideal RPM, the company reaches the last decisive step: the pivot.

Third Step: Pivot or Persist

A company that is progressing satisfactorily knows how to learn from its experience. It succeeds in putting it to good use. In this case, it is normal to persist in this way. However, should the opposite occur, the management team must conclude that there are gaps in its current strategy. It then needs to be revised in depth.

When a company pivots to achieve its goal, its development process starts somewhat from scratch: the company redefines a new base and readjusts its engine. We know, afterward, that the pivot was successful when the activities related to engine adjustments become much more profitable.

7.3. Cohort Studies

The cohort study is one of the most powerful Lean Startup analytical tools.

In a complex way, this analytical method is based on a simple principle: instead of focusing on numbers, such as turnover or the total number of customers, it examines the performance of each customer group (called a cohort) in contact with the product at a given moment.

This funnel type of analysis is similar to the traditional sales funnel used to manage prospects who are becoming customers. Startups based on the Lean Startup model also use it for the development of their products. This provides a quantitative understanding of the customer as well as more reliable predictions than traditional encryption methods.

7.4. Decision-making and Illusory Metrics

Innovation accounting is useless if the startup is guided, wrongly, by a type of illusory figures: the total number of customers, for example.

Eric Ries cites the example of the Grockit company to develop several decision-making metrics that are not illusory:

The agile development method

This allows to reorient very quickly. Its flexible and light operation facilitates responsiveness to changes requested by the product owner.

Comparative A / B tests

A comparative A / B test simultaneously offers two versions of the same product to two groups of customers. By observing the differences in behavior between the two groups, we can deduce what the impact of the different variants would have.

In the Lean Startup model, startups often integrate this type of comparative testing (sometimes called split tests) directly into their product development phases. In fact, these comparisons help teams refine their knowledge of customers, what they want or don’t want.

The principle of Kanban

The Kanban method, derived from the Japanese automotive industry, is an integral part of the Lean Startup approach: it uses a pull system, created by the customer’s consumption, instead of a push system (as most companies do). According to this principle, the company makes a product at the customer’s request, only when it is requested and only in the quantity requested.

The Kanban approach also makes it possible to interrupt the production process at any time in order to solve a problem identified.

7.5. Triple A (Action, Accessibility, Audit) in innovation accounting

Action

For an analysis to enable action, it must clearly and objectively establish a cause and effect. Otherwise, it is an illusory metric.

Accessibility

For an objective use of the numbers in the reports used to make decisions, they must be:

– simplified to the fullest so that everyone can understand the metrics (concrete and tangible units of measurement), based on cohort studies (which make it possible to transform human and complex behaviors into quantified reports).

– accessible to everyone: sent by email to everyone or placed on the website, well organized and easy to read (each experiment and its results are explained in simple language), a simple page summarizing the results.

Audit

Entrepreneurship is not just a big innovative idea: the big idea represents only 5% of history. The remaining 95% is made up of the thankless tasks measured by innovation accounting: setting development priorities, targeting customers, selecting customers to listen to, bravely submitting a great visionary idea to continual testing and feedback.

Chapter 8 – Pivot (or Persist)

Sooner or later during the development of a product, every startup creator faces a major challenge: knowing when to change course and when to persist.

A pivot, or change of course, is to change its course in order to test a new fundamental assumption about the product, the strategy and the engine of growth.

The Lean Startup

People often believe that there is an objective and rigorous formula for deciding whether to pivot. This is not the case. It is impossible to suppress the human element (vision, intuition, judgment) of entrepreneurship. Furthermore, it wouldn’t be desirable.

8.1. Innovation Accounting Allows You to Pivot Faster

To discuss the subject of pivoting, Eric Ries recounts the story of David Binetti, CEO of Votizen. He explains how innovation accounting helped him to avoid the pitfalls of change in direction. Eric Ries details the different phases and types of pivot through which Votizen had gone.

In addition, Votizen’s journey highlights some recurring patterns. One of the main ones is the acceleration of the development of the minimum viable product. In fact, it took eight months to develop the first MVP, four months for the second, three months for the third and 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

In general, the room for maneuver available to a startup (that is to say, the time it has left to take off or throw in the towel) is determined by dividing the cash remaining in the bank by the monthly consumption of liquid assets (burn rate). It then has two ways to increase its room for maneuver: either by reducing its costs or by raising new funds.

However, according to the Lean Startup, the true unit of measurement for the room for maneuver is the number of pivots that the startup is still able to achieve, that is to say, the number of times it can fundamentally change its business strategy. In other words, the startup must find a way to obtain the same amount of validated learning at a lower cost or in a shorter period of time.

8.3. Pivoting Requires Courage

Many entrepreneurs who have made the decision to change course say they should have done so sooner. Eric Ries contends that this is due to three reasons:

  • First reason: Illusory metrics encourage the entrepreneur to draw false conclusions and confine himself/herself to his/her own reality. This is particularly detrimental to decision-making because the teams do not think it is necessary to change.
  • Second reason: If the hypothesis formulated by the entrepreneur is not sufficiently clear, it is impossible to experience failure. However, without awareness of failure, there is usually no impetus for radical change.
  • Third reason: Many entrepreneurs are afraid.

8.4. Meetings to Decide to “Pivot” or “Persist”

The telltale signs of a need for change are:

  • the reduction of the effectiveness of the experiments carried out on the product
  • the general impression that its development should be more productive

The decision of a reorientation is always emotionally delicate. Therefore, it must be approached in a structured way. For that, Eric Ries recommends to schedule in advance regular meetings to decide to “pivot or persist”. For these meetings, each startup must find the pace that suits it. The product development team and the sales team must participate.

When you change course, you do not have to throw away all the above and start over. Rather, it is about adapting what has been created and learned in order to choose a more favorable orientation.

As an example, Eric Ries tells us the case of the spectacular pivot made by the company, Wealth front. This company is today one of the ten most innovative companies in the financial sector.

8.5. A Whole Range of Pivots

The pivot is more than just a change. It consists in testing a new fundamental hypothesis concerning the product, the business model and the engine of growth.

There are different types of pivots, or changes of course:

  • The Restrictive Pivot: One of the features of the initial product becomes the product in its own right.
  • The Extensive Pivot: The initial product becomes one of the features of a much larger product.
  • The Customer Segment Pivot: The company notes that the product it has developed responds to a real problem experienced by real customers, but not the customers initially approached; in other words, the hypothesis generated solves the right problem but is aimed at a different clientele.
  • The Customer Need Pivot: Because of the intimacy established with its customers, the company realizes that the problem it seeks to solve is not so important to them; it discovers other related problems of greater concern to its customers that it is able to solve either by repositioning the existing product or through a totally different product.
  • The Platform Pivot: The change is to move from an application to a platform or vice versa.
  • The Business Architecture Pivot: This is usually a change between a “high margin / low volume” model (Business-to-business companies or complex sales cycles), and a “low margin / high volume” model (consumer products).
  • The Value Capture Pivot: Change is among the different methods of monetization or appropriation of existing revenue.
  • The Engine of Growth Pivot: The company modifies its growth strategy by changing growth drivers (viral, loyalty-based or acquisition-based).
  • The Channel Pivot: The company decides to change the distribution channel (the means by which it delivers its product to the customers) when it considers that it can deliver the same product more efficiently by another way.
  • The Technology Pivot: A company discovers a way to achieve the same solution by using a completely different technology.

Part Three: Acceleration, according to the Lean Startup Method

In this third part, Eric Ries presents the techniques that will enable Lean Startup model companies to gain momentum while retaining their agility, learning attitude and culture of innovation.

Chapter 9 – Batch Size

9.1. Reduce Batch Size

To start this chapter, Eric Ries reports an anecdote found in the book ” Lean Thinking” by James Womacck and Daniel Jones. The anecdote is a mail route that they did with their children. For each mail, they had to write the address of the recipient, paste a stamp, insert the letter in the envelope and seal it. To accomplish this task, two methods can be used:

  • Fold all the letters, seal them and then paste the stamps,
  • Perform the four tasks for each mail one after the other.

Although seemingly ineffective, the latter method, envelope by envelope is, in fact, the fastest. Many studies have shown this, one of which was the subject of a video.

By this example, Eric Ries seeks to demonstrate that small-batch production is ultimately faster than mass production.

Moreover, even if the two methods took exactly the same amount of time, the small-batch production would still be more appealing. Indeed, it allows you to output a finished product every five to ten seconds. With mass production, all products come out at the same time and only at the end of the process. It can be hours, days, even weeks.

The great advantage of small-batch production is that it allows:

  • To identify quality issues more quickly: The author gives the example of the Toyota And on alarm system;
  • To react immediately if in the meantime the customer decided not to buy the product anymore.

In conclusion, reducing batches saves time, money, and effort that may otherwise prove to be unnecessary.

To gain a better understanding, Eric Ries recounts several examples of companies, including that of SGW Design works, specialized in rapid industrial production techniques.

9.2. Replace the Push System with the Pull System

In manufacturing, the “pull” system consists of ensuring that production adapts to the volume of customer demand. Without such a system, factories may be producing too much or not enough parts that customers truly want.

Based on this system, the ideal is, according to the concept of Lean Startup, to achieve small batches throughout the chain. In fact, each step of the production chain pulls the necessary parts from the previous step. This is Toyota’s famous “just-in-time” production method. When a company shifts to this mode of production, its warehouses are immediately emptied because its stocks “just-in-case” (also called “work-in-progress”) are reduced considerably. It’s as if the whole production chain was suddenly put on a diet. Hence the name of Lean Manufacturing.

Thus, until the day of delivery, all the work devoted to the development of the minimum viable product is only a stock of work-in-progress.

Chapter 10 – Growth

In this chapter, Eric Ries describes the metrics that a startup needs to rely on to evaluate its growth as it acquires new customers and discovers new markets.

The Lean Startup

10.1. Where does growth come from?

Definition

The engine of growth is the mechanism that startups achieve sustainable growth. One-off actions that generate a sudden influx of customers with no long-term impact are excluded (e.g., a single advertising campaign intended to boost growth but unable to sustain it).

New customers come from the actions of past customers

Sustainable growth is based on a very simple rule: new customers come from the actions of former customers. These former customers can create sustainable growth in four ways:

  • By word of mouth: the products contain a natural growth caused by the enthusiasm of satisfied customers.
  • By using the product: fashion items, prestige items or so-called viral products (such as Facebook and Paypal) attract attention when used.
  • And by contributing to funded advertising: if the acquisition cost of a new customer (the marginal cost) is lower than the revenue generated by this customer (the marginal income), the difference (the marginal profit) can be used to acquire more customers. The higher the marginal profit, the faster the growth.
  • By renewing the purchase or use of the product: some products are intended to be purchased several times, either through a subscription (Ex.: cable television), or by voluntary purchase renewals (Ex.: food, light bulbs).

10.2. Three Types of Engines of Growth

Sustainable growth relies on three types of engines: either paid, viral or loyalty. Each engine needs to focus on specific metrics to evaluate the success of a new product and determine the following experiments. Operated using the innovation accounting described in the previous section, these metrics allow the startup to know when its growth may run out of steam, and to decide to pivot to remedy it.

The engine growth based on loyalty

It’s about attracting and retaining customers in the long run.

Companies that rely on this engine of growth closely track their termination rate or attrition rate (= percentage of customers who have stopped committing to the product): if the acquisition rate of new customers exceeds the attrition rate, the product will grow. Therefore, the company must work to increase its retention rate.

The viral engine of growth

The viral growth of a product is based on the transmission from one person to another as an inevitable consequence of its normal use: the customer does not intentionally act as an evangelizer; he doesn’t necessarily try to make the product known.

The viral engine is powered by a feedback loop called “viral loop”. The speed of this viral loop is determined by what is called the “viral coefficient”. When a product has a viral coefficient of 0.1, it means that one in ten clients will recruit one of their friends. Such a loop is not sustainable. On the other hand, a viral loop with a coefficient greater than 1 will cause exponential growth because each new client will bring on average more than one friend.

Consequently, a business based on this type of engine of growth must first and foremost try to increase its viral coefficient. With a viral engine, the monetary exchange does not result in additional growth. It simply indicates that customers value the product enough to be willing to pay.

The engine based on acquisition

This engine works either by increasing the revenue from each customer or by reducing the acquisition cost of the new customer.

During their “life” as a customer, each user spends a certain amount of money on a product. After deducting variable costs, this amount, commonly referred to as “lifetime value“, can be invested in the growth of the business by advertising.

In theory, several growth engines can be used at the same time in a company. Thus, some products have very fast viral growth and extremely low customer attrition rates. Moreover, nothing prevents a product generating simultaneously high margins and a high retention rate. However, according to the author’s experience, successful startups typically focus on one growth engine. That’s why he strongly recommends that startups focus on one growth engine at a time.

Most entrepreneurs have, from the start, a very specific assumption about the type of engine that can work. Otherwise, their exchanges on the ground with customers will quickly tell them which should be the most profitable.

10.3. When the Engine Runs Out of Steam

Each engine of growth is based on a set of customers with their habits, preferences and advertising channels. At some point, this clientele will be exhausted, more or less quickly, depending on the sector.

Thus, it is essential that the startup is able to manage its engine while developing new sources of growth to anticipate the inevitable day when its engine will run out of steam.

Chapter 11 – Flexibility

In the principle of Lean Startup, a company must have an organizational structure, a culture and discipline in order to manage the rapid and often unexpected changes. This is what Eric Ries calls “an adaptive organization”.

11.1. The And on Cord

According to the Lean Startup method, each startup should have regulators that allow it to find an optimal rhythm.

Eric Ries cites, as an example of speed regulation, the Andon cord. The interest of the alarm Andon is that it interrupts the work, the chain of production, as soon as a problem appears. This forces the teams to look for the cause of the problem before it impacts the rest of the chain. The Toyota company summarizes this technique with the following: “Stop production so that production never has to stop”.

11.2. The “Five Whys”

This systematic problem-solving tool created by Taiichi Ohno, the father of the Toyota production system, is guided by the principle of asking five times the question, “why?” and of answering it. In the concept of Lean Startup, this method allows you to react quickly to problems, without investing more than necessary.

The “five whys” method goes back to the root cause of a problem that is behind more obvious symptoms. Eric Ries explains that most of the problems that appear to be due, at first glance, to a single mistake, actually stem from inadequate staff training or inadequate instruction in the company’s procedures guide.

In addition, the author proposes to follow the “five whys” method to invest proportionately in each of the five levels. It is, in fact, about investing less when the symptom is minor, and more when the symptom is more significant.

The purpose of the “five whys” method is to help us realize that recurring problems result from an inadequate process, not the ill-will of an individual.

As a result, there is no question of blaming anyone in this method.

The Lean Startup

In order to escape the “five blames” trap and optimize the results of the “five whys” method, Eric Ries recommends several tactics:

  • Ensure that all people affected by the problem are present in the room during the root cause analysis;
  • Examine things at the system level;
  • Create an environment of mutual trust and accountability;
  • Consider all errors leniently the first time and never allow the same error to happen again a second time;
  • Be prepared to discover unpleasant facts about one’s business;
  • Name a “five whys” manager: he / she must be high enough in the company hierarchy to have the authority to verify the execution of these tasks, but not too high in order to be available for each meeting;
  • Do not submit all your problems at once: start “five whys” sessions as new problems arise;
  • Take a few minutes to explain to new participants what this process is and what purpose it serves.

Chapter 12 – Innovation

12.1. Nurture Disruptive Innovation

In the philosophy of Lean Startup, in order not to fail and foster innovation, a startup must have at least the following three characteristics:

Limited but reliable resources

Startups require less capital, but this should not change midway.

The ability to develop your business independently

The team involved in a startup activity must have full autonomy to develop and market new products. It must have the possibility to design and implement experiments without it being necessary to obtain countless authorizations. Transfers between departments and hierarchical approvals only slow down the build-measure-learn feedback loop and hinder validated learning and accountability.

A personal interest in the results

The entrepreneur must find a personal interest in the success of the startup.

This interest can take the form of stock options or profit bonuses. However, it doesn’t necessarily have to be financial. It can be, for example, the creator receiving credit for the new product, in the case of success.

The Lean Startup

12.2. Create a Platform for Experimentation: A Sandbox of Innovation 

The idea in the Lean Startup concept is to create a test environment or sandbox of innovation.

According to Eric Ries, any team can set up a comparative test type experiment on the parts of the product or service.

However:

  • The same team must follow the experiment from start to finish;
  • No experiment should exceed a previously specified duration and should not affect more than a certain number of clients;
  • Each experiment should be evaluated on the basis of a single standard report based on five to ten decision-making metrics;
  • All teams working within the sandbox of innovation and all products designed there must be evaluated using the same metrics;
  • Any team initiating an experiment should monitor the metrics and customer feedback during its course and abandon it in case of catastrophic repercussions.

After being incubated in the sandbox, an innovative product should be reintegrated into the parent company. A larger team will be needed to develop, market and grow it. At first, this team will need to be supervised by the sandbox innovators.

Whenever possible, the innovation team should be multidisciplinary and led by a clearly designated manager. The team should report on the success or failure of these approaches using standard decision-making metrics and innovation accounting.

12.3. Maintain the Management Portfolio

A company must manage four main phases of activity:

  • Research and development of innovative products,
  • The growth of the product once it has found its market,
  • Product optimization through incremental innovation,
  • Cost-containment

However, employees often follow the products they develop in each of the different phases. It is usually the inventor of the product that manages the resources, the team or the department that will market it. Creative managers then find themselves working to grow and optimize their product instead of creating new ones.

This is one of the reasons why established companies struggle to find creative leaders to drive innovation.

Chapter 13 – The Lean Startup Movement

At present, our production capacity far exceeds our ability to know what to make. We are able to produce just about anything we can imagine. The big question is no longer whether we can do it, but whether we should do it. In other words, it’s about avoiding waste.

The Lean Startup is based on the belief that, when it comes to innovation, waste can be avoided. To that end, it is enough to change our way of working.

In this chapter, Eric Ries suggests several ways of working in this direction:

  • Create test labs for startups that test all kinds of product development methodologies;
  • Train small multidisciplinary teams and ask them to solve problems using different development methodologies;
  • Build partnerships between university research teams and the entrepreneurial communities they seek to support: Universities should intervene other than by simply funding or creating startup incubators;
  • Set a goal of transforming the ecosystem of entrepreneurship as a whole;
  • Establish a new kind of stock exchange that would exchange stocks of companies that have adopted a long-term policy; for this, Éric Ries proposes to create a long-Term Stock Exchange (LTSE).

Chapter 14 – Join the Movement

The Lean Startup has expanded globally. Eric Ries believes it’s important to integrate into an entrepreneurial ecosystem. The author, however, warns against any rigid doctrine regarding the Lean Startup movement.

At the end of his book, “Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses”, Eric Ries lists some of the best events, books and blogs to research and engage in further. He also invites us to discover his website, ” The Lean Startup”, to find more sources of 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 beginning of the book, Eric Ries shares with us a well-known scenario in the setting up of a project: the team works hard to imagine, then to create industrially the first perfect product. The team manages to put it on the market just to realize that the product only interests a narrow section of the public, works poorly and, therefore, does not have the necessary features.

We clearly understand, by the end of “Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses”, that the idea of Lean Startup is to work differently so that such a scenario does not take place.

Indeed, the essential notion of Lean thinking is confirmation, or validated learning. Eric Ries starts from the premise that intuition is a very bad guide to designing new offers as long as it is not validated by a rigorous “confirmation”:

  • On the one hand, the developers of new products get the wrong idea of what really interests the customers;
  • On the other hand, the customers themselves usually have trouble expressing their specific needs.

In the principle of Lean Startup, the important thing is to get to know your customer without relying on what he/she says. To that end, it is necessary to offer him/her concrete models of the product, functional prototypes (the famous minimum viable product) in order to see him/her respond to crises and to keep listening to his/her feedback. In fact, it is a question of measuring these purchasing behaviors in order to guide the design which, in the Lean Startup method, highlights the importance of “small batches”.

Lean Management

Based on the ideas of Lean ManagementLean Startup is an innovative method for everyone who wants to start a business or develop a new project.  By following the principle of continuous innovation, this approach makes it possible to constantly adapt one’s products and one’s business to customer needs and market developments.

In summary, the Lean Startup allows more precisely to optimize speed and quality in terms of production. It eliminates the “waste” for business results, which are, according to Eric Ries, unequaled. It avoids unnecessary work that does not provide instruction. Finally, it is the source of new business structures of which the long-term mission is to create sustainable value and make the world a better place.

The book “Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses” is an essential reading for any entrepreneur or company creator to increase their chances of success and who wants to develop their original business model. It is a true reference, rich of essential concepts, to any company, big or small, which plans to completely change the way of working by adopting the Lean Startup methodology.

Strong points:

  • Inspiring methodology which is illustrated with numerous examples of companies that have been able to encourage creativity by adapting to the needs of their customers;
  • All of Lean Startup ‘s key concepts are developed to re-invent one’s way of working and to strive for continuous innovation: the build-measure-learn feedback loop, the minimum viable product, the Kanban principle, the five whys, agile development, engine of growth, innovation accounting, etc.

Weak points:

  • Somewhat repetitive throughout some chapters, which takes away a bit from the content’s clarity.

My rating : innovation customers business innovation customers business innovation customers businessinnovation customers businessinnovation customers businessinnovation customers businessinnovation customers businessinnovation customers businessinnovation customers business

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