Book Summary: The Lean Startup

Book Summary: The Lean Startup

I loved the book, The Lean Startup (Crown Publishing, 2011), by Eric Ries.  Even though I am in sales and marketing and work for a large software company, the principles in the lean startup framework have helped me substantially increase the effectiveness and efficiency of my organization.  Below is my summary of the book.

Introduction
The five principles of the lean startup framework are: 1) A startup is a human institution designed to create new products under conditions of extreme uncertainty.  2) Entrepreneurship requires management for extreme uncertainty.  3) Experiments can test each element of a vision (validated learning).  4) Feedback is received by building products; measuring customer response; and deciding to pivot or persevere (build-measure-learn).  5) Success is determined by establishing a baseline and measuring progress toward the ideal (innovation accounting).

Part 1: Vision
1 – Start
Lean manufacturing principles involve identifying value-creating activities and eliminating waste.  Value-creating activities are what customers want or are willing to pay for.  Everything else is waste.  Instead of using a business plan based on unproven assumptions, learn startups make constant adjustments with the build-measure-learn feedback loop.  Feedback received from experiments is either qualitative (subjective) or quantitative (objective).  Each iteration through the feedback loop is an opportunity to learn whether to pivot or persevere.

2 – Define
A startup transforms an idea into a product with the goal of building a sustainable business.  An entrepreneur’s vision is their picture of a world-changing business; it is why the firm exists.  To achieve the vision, entrepreneurs create strategy (business model, competitive landscape, customer segment, etc.).  The product is the end result of the strategy.  The product will change constantly through the optimization process (build-measure-learn or “tuning the engine”).  The strategy may also change (pivot or “steering”).  However, the vision will rarely change.

3 – Learn
Learning is key to building a sustainable business.  If you build a product that nobody wants, it does not matter if you deliver it on time or budget.  Validated learning is the result of running experiments and measuring customer response.  Customer action is validation that the learning was real (how to measure productivity).  It is more accurate than focus groups or market research.  Always avoid success theatre (artificial success, such as big events) and vanity metrics (figures without cause and effect, such as total hits).  Eventually, business fundamentals win.

4 – Experiment
Experiments are used on customers (early adopters) to test strategy and learn how to build a sustainable business around the vision.  Experiments use a hypothesis (educated guess) to predict what will happen.  The first step is to break down the vision: 1) Value hypothesis.  How the product will deliver value to customers.  2) Growth hypothesis.  How customers will discover the product.  A minimum viable product is used to measure customer action.  If outcomes are negative, get qualitative feedback to improve.  If outcomes are positive, continue the optimization process.

Part 2: Steer
5 – Leap
Traditional business plans create strategy based on assumptions.  Two leap of faith assumptions are the value hypothesis and growth hypothesis.  Because assumptions are not proven, they must be tested with experiments.  Early strategy is based intuition.  To turn intuition into data, entrepreneur’s must start learning from customers.  Learning reveals what assumptions need to be tested first and other issues to explore.  Build a customer archetype (hypothesis) to make the target customer real and ensure product development is aligned with customers.

6 – Test
Using a minimum viable product (MVP) is the fastest way to get through the build-measure-learn feedback loop.  MVPs are used to test a hypothesis first and design or technical questions second.  MVPs contain only features needed for validated learning.  Any additional features are waste.  Since learning what customers want is the main objective, product design and quality issues evolve over time.  If needed, MVPs can be launched under a different name to protect a brand.  Executing faster than competition gives startups hope of surviving once an MVP is known.

7 – Measure
Innovation accounting establishes a baseline; measures progress from baseline to ideal with action metrics; and decides to pivot or persevere.  Action metrics are: 1) Actionable.  Demonstrate cause and effect.  2) Accessible.  Easy to understand.  3) Auditable.  Can be tested with customers.  Types of testing: i) A/B. Different versions of product are offered to customers at same time.  ii) Cohort Analysis.  Different groups of customers are analyzed versus cumulative totals.  iii) Kanban.  Fixed number of features tested; new feature added only after validation.

8 – Pivot (or Persevere)
A pivot requires a startup to retain what has been learned while making a change in strategy.  When a company pivots, the process of testing a new hypothesis is re-started.  Successful pivots result in greater validated learning.  Regular pivot or persevere meetings should be held.  Business leadership should bring customer feedback. Development should bring the results of product optimization efforts, including how they relate to expectations. Waiting too long to pivot because “success is just around the corner” wastes both time and resources.

Part 3: Accelerate
9 – Batch
Batch size is how much work moves from one stage to the next.  Small batches produce finished product faster.  Large batches requires more time.  Small batches increase the speed of the build-measure-learn feedback loop.  Quality issues are also identified sooner requiring less re-work.  The benefits of fixing quality problems now outweigh the cost of stopping production (e.g., Andon cord at Toyota).  Because of the length of time between releases or to minimize overhead, it is not uncommon for batch sizes to grow large enough to become death spirals.

10 – Grow
Sustainable growth is driven by: 1) Advertising.  2) Repeat business.  3) Side effects.  Customers act based on product exposure (PayPal) or product status (iPhone).  4) Word of mouth.  The four customer actions power the engines of growth.  The three engines of growth are: i) Paid.  Customers pay money to use the product.  ii)  Sticky.  New customers exceed the churn rate (drop off).  iii) Viral.  Normal customer use causes the product to spread.  A product/market fit occurs when the startup finds a large set of customers that resonate with its product.

11 – Adapt
Adaptive organizations adjust their processes to current conditions.  Going too fast can cause problems, so speed regulations need to be built-in to ensure an optimal pace of work.  Problems are diagnosed with the five whys.  Affected groups are asked why five times.  Why did A happen?  Because of B.  Why did B happen?  Etc.  A facilitator manages sessions and resolution.  Problems are often the result of bad process, not bad people.  Problems are corrected with investments proportionate to size.  Slowing down saves time and money in the long run.

12 – Innovate
Leaders must balance the needs of existing customers and innovation.  Sustained innovation is incremental improvement to existing products.  Disruptive innovation is creating new, breakthrough products.  Innovation requires scarce resources; independent authority to develop and market products; and a personal stake in the outcome.  All teams must be empowered to innovate under consistent guidelines.  If a new product is integrated into the company, the creative manager should have the choice to continue to innovate or follow the product.

13 – Epilogue: Waste Not
Work can be improved through conscious effort and rigorous experimentation.  In the past, man has been first; today, systems are first.  Companies are systems to be effectively and efficiently managed.  While the main objective of a system is to develop first-class people, no great person can compete with a group of people who have been properly organized to efficiently cooperate.  In the end, waste is the result of working on the wrong things.  Most waste is preventable once its causes are understood.  Eliminate waste and focus on value-creating activities.

All contents copyright © 2012, Josh Lowry. All rights reserved.

Advertisements

One Response to Book Summary: The Lean Startup

  1. Sonia Scott says:

    Great article. I appreciate the summary.

    Like

Leave Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: