Chapter 1: Introduction to the Lean Startup

Good day folks! Today’s book review and its follow-up chapters will be based on the book ‘The Lean Startup’ by Eric Ries. In his book, Eric Ries has divided 14 chapters into 3 parts. Before we explore the chapters in greater detail, we should first understand the 5 principles of the Lean Startup:

1. Entrepreneurs are everywhere. The idea of entrepreneurship includes anyone who fits within the definition of a startup by Eric Ries. That is “a human institution designed to create new products and services under conditions of extreme uncertainty.” This means that the Lean Startup approach applies to any size of a company, sector and industry.

2. Entrepreneurship is management. A startup is an institution and not a mere product. Thus, it necessitates a new type of management significantly adjusted to its theory of extreme uncertainty under the startup definition.

3. Validated learning. Startups not only exist to make products, make money or serve customers. They also exist to learn how to build a sustainable business. Their learning can be validated scientifically by conducting continuous experiments that enable entrepreneurs to test each element of their vision.

4. Build-measure-learn. The most essential function of a startup is to convert ideas into products, measure how customers react and then learn whether to pivot or continue.

5. Innovation accounting. To enhance results and make innovators responsible, you need to pay attention to boring things such as measuring progress, establishing milestones and organizing work. Thus, a new type of accounting is made for startups and those who make them accountable.

We will now explore part 1 of ‘The Lean Startup’.

PART ONE – VISION

1.0 START

As Eric Ries stated, “We are living through an unprecedented worldwide entrepreneurial renaissance, but this opportunity is laced with peril”. As most innovators lack an appropriate management paradigm for new innovative ventures, they’re throwing away their excess capacity wildly. Although this is the case, innovators are finding ways to make money. However, for every success, there are too many failures. For example, products are taken from their shelves only weeks after it has been launched, reputed startups that received press attention are eventually forgotten, and no one is using new products. What makes these failures more painful doesn’t lie with the economic damage it has caused to employees, companies and investors but the amount of precious time, passion and skill of innovators that have been wasted. Therefore, the lean startup is designed to prevent such failures.

1.1 The origins of the lean startup

The lean startup first got its name from the lean manufacturing revolution that Taiichi Ohno and Shigeo Shingo were credited with making Toyota. Lean thinking changes the way supply chains and production systems operate. Its principles touch on the knowledge and creativity of individual workers, reducing batch sizes, punctual production and inventory control and accelerating cycle times. In addition, lean thinking educated the world on the difference between value-creating activities and activities that are a waste of time and demonstrated how to build quality into products thoroughly.

The lean startup adapts these principles to the entrepreneurship context by suggesting entrepreneurs judge their progress differently from how other companies do. For example, manufacturing progress is measured by producing high-quality physical products. Chapter 3 will explore how the lean startup uses a different unit of progress called ‘validated learning.

A complete theory of entrepreneurship should cover all the functions of an early-stage venture: vision, concept, product development, marketing and sales, scaling up, partnerships and distribution, and structure and organizational design. It should provide a way of measuring progress concerning extreme uncertainty. It will guide entrepreneurs on how to make many trade-off decisions they encounter, that is, whether and when to invest, formulate, plan, build infrastructure, when to do it alone and when to partner up, when to respond to feedback, when to comply with vision and how and when to invest in scaling the business. Mainly, it should allow entrepreneurs to make provable predictions. Let’s consider the example by Eric Ries. Assume you have recommended having cross-functional teams in the company and holding them accountable for learning milestones instead of strictly organizing your company into functional departments like marketing and sales. IT, HR, etc., hold employees responsible for their performance in these specialized areas. You either agree to go ahead with your recommendation or are doubtful about it. If you decide to go ahead with it, either way, there’s a good chance that your teams will tell you that the new change is reducing their productivity. They will request you to return to the old way of working where they had the chance to stay productive by working in larger groups and passing work among departments. Eric Ries has experienced this problem many times, and it’s safer for us to predict this consequence as it’s also a direct prediction of the lean startup model itself.

The lean startup requires entrepreneurs to start measuring their productivity uniquely. As most startups often build something nobody desires, it doesn’t matter if they launch the product on time and on budget. Instead, a startup’s primary goal is to discover the right product to build. That is the product that customers require and will pay for as soon as possible.

If we take Henry Ford, the founder of Ford Motor Co, he is one of the most successful entrepreneurs in history. That being said, we will now consider the automobile as a metaphor for a startup. An internal combustion automobile is charged by two essential and different feedback loops. The first feedback loop is found deep inside the engine. Before Henry Ford became the CEO of Ford, he was a simple engineer who spent his days at his garage with the accurate mechanics of getting the engine cylinders to operate. Each tiny explosion in the cylinder provided the motive force to turn the wheels, but it also drove the ignition of the subsequent explosion. Unless the timing of the feedback loop was managed correctly, the engine broke down. Similarly, startups have an engine that Eric Ries addresses as the ‘engine of growth’. The customers and markets for startups are diverse. Each new product version, each new product feature and each new marketing program is an attempt to improve the engine of growth. Like Henry Ford’s experiments in his garage, not all of these attempts are successful improvements. New product developments take place on and off. Most of the time in a startup’s life, time is spent improving the engine of growth by improving the product, marketing or operation.

An automobile’s second essential feedback loop is between the driver and steering wheel. This feedback is so rapid and sudden that we don’t always think about it, but the steering distinguishes driving from most other types of transportation. For example, suppose you take a daily route to your office, and your hands seem to steer you there quickly without stopping. However, can you think of every push of hands on the steering wheel and brakes you must apply to your office route? It’s impossible because the choreography of driving isn’t easy when you properly think about it.

On the other hand, a rocket should be launched with the most accurate instructions on what to do in terms of every thrust, every firing of a booster and every change in direction. The tiniest mistake at the launch could cause disastrous consequences thousands of miles later. Sadly, most startup business plans look like they are planning to launch a rocket than drive a car. They establish the steps to follow and the expected results in awful detail that even the tiniest errors can lead to disastrous consequences.

Therefore, the lean startup theory is built to teach you how to run a startup. Rather than making complicated decisions through assumptions, entrepreneurs can make constant changes through a steering wheel called the Build-Measure-Learn feedback loop. Through this process, startups can learn when to pivot or whether they should continue their current path. Once they have an engine of high performance, the lean startup theory provides ways to scale and grow the business with maximum acceleration.

When we are driving, we have a clear idea of our destination. Similarly, startups have a destination to reach a successful and mind-blowing business. This is what we call a startup’s vision. To achieve this vision, startups should have a strategy which includes a business model, a product road map, a view of partners and competitors and ideas on who the customers will be. The product will be the result of this strategy. Products constantly change through the optimization process, which Eric Ries calls ‘tuning the engine’. Sometimes the strategy might have to change. However, the powerful vision hardly changes as entrepreneurs are committed to seeing the startup reach that destination.

Nevertheless, every hurdle is a chance to learn how to reach their destination. The real-life of a startup is an adventure of activities which takes place simultaneously where the engine is running, gaining new customers, serving existing customers, improving the product, marketing, operations, steering, and deciding If and when to pivot. The challenge of an entrepreneur is thus to balance all these activities regardless of whether they are coming from a fresh startup or a well-established company. As startups develop, these activities change the company’s work responsibilities.

Assume a manager responsible for building a new product in an established company goes to the chief financial officer a year later and says they have failed to meet the expected growth targets. As a result, they have no new customers and no revenue; however, they have learned a lot through this experience and are at the start of a breakthrough new line of business in which they need another year to improve. Mostly, this is the last report this manager will give to the CFO as a failure to deliver the expected results is due to inadequate planning or a failure to execute correctly. Both are essential lapses, yet new product development requires this kind of lapses to achieve greatness.

In the next chapter, we will discover that in the lean startup model, these internal innovators are entrepreneurs, and entrepreneurial management can help them be successful in achieving their targets.

Conclusion

The lean startup model is a new method of viewing the development of innovative products that highlights fast iteration, customer feedback, a big vision and grand ambition simultaneously.