“Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.”
The Lean Startup methodology, as outlined by Eric Ries in his book published in 2011, continues to have a significant impact in recent years. Despite not introducing entirely new ideas, the concepts presented in the book have proven to be immensely valuable, particularly for large established organizations rather than just startups. Ries defines a startup broadly as any "human institution designed to create a new product or service under conditions of extreme uncertainty."
Let's explore how this methodology enables us to continuously innovate and generate value for customers.
Indeed, one of the most transformative ideas in innovation today is the application of the scientific method to handle uncertainty. This approach involves formulating a hypothesis, creating a small product or feature to test that hypothesis, learning from the results, and adjusting accordingly. This simple yet powerful method has demonstrated remarkable outcomes and allows companies to make small investments in numerous ideas simultaneously, using the findings to determine which ideas should progress.
The Build-Measure-Learn framework can be employed not only for new product development but also for various other aspects of a business. It can be used to test customer service ideas, evaluate management review processes, assess website text and offers, or introduce new features to existing products. However, it is crucial to ensure that the hypothesis can be clearly tested and validated, requiring the collection of sufficient data or metrics to measure the results of the build.
The primary objective is to iterate through the Build-Measure-Learn cycle as quickly as possible. This entails determining whether it is worthwhile to proceed with another cycle or to stop and shift focus to another idea. To achieve this, it is important to define a specific idea to test and identify the minimum set of metrics to measure. In the case of products, the goal is to ascertain whether customers genuinely desire or require the proposed offering.
By embracing the Build-Measure-Learn approach, companies can significantly enhance their innovation efforts. This methodology allows for rapid experimentation, early validation of assumptions, and efficient resource allocation. Rather than relying solely on intuition or making large upfront investments, organizations can take a more iterative and data-driven approach, reducing the risks associated with uncertainty. This methodology fosters a culture of continuous learning, adaptability, and customer-centricity, ultimately increasing the likelihood of success in the ever-changing business landscape.
“We must learn what customers really want, not what they say they want or what we think they should want.”
2. The Minimal Viable Product (MVP)
In the past, product development required extensive planning to determine the specifications of the product, as well as substantial investments of time and resources to bring it to fruition. However, the lean startup approach advocates for creating only what is necessary to complete one iteration of the Build-Measure-Learn cycle, known as the minimal viable product.
“The MVP is that version of the product that enables a full turn of the Build-Measure-Learn loop with a minimum amount of effort and the least amount of development time.”
Creating an MVP doesn't always require writing code. It can be as simple as preparing a slide deck that outlines the customer journey or creating a series of design mockups. The important thing is to test your hypothesis with actual customers and obtain enough validation to proceed with another cycle of learning.
3. Validated Learning
One of the key principles of the lean startup is to test a hypothesis with a clear understanding of what you want to learn. It can be tempting to focus on superficial metrics that create a false sense of progress, but these metrics provide no insight into the actual value of the product.
While metrics like the number of likes and total accounts created on Facebook may have their place, they can be considered vanity metrics. The true value and stickiness of the platform lie in the average amount of time spent on Facebook per day, per user. This metric provides a deeper understanding of user engagement, platform relevance, and overall user satisfaction, ultimately shaping the long-term success of the platform.
“By all accounts, what impressed investors the most were two facts about Facebook’s early growth … More than half of the users came back to the site every single day. This is an example of how a company can validate its value hypothesis - that customers find the product valuable.”
Lean Startup author Eric Ries provides an example from his own experience. IMVU was showing the chart below to their management and investors, painting a good picture - registrations were going up like a hockey stick graph. However, it was not showing whether users actually valued the service, and it was hiding the marketing costs to acquire new registrations. This was a chart showing vanity metrics, and not testing a hypothesis designed to give validated learning.
4. Innovation Accounting
“Innovation accounting enables startups to prove objectively that they are learning how to grow a sustainable business.”
The process consists of three steps, which are as follows:
- Establish the baseline. One way to establish some initial data points is by conducting an MVP test. This could entail a marketing-focused smoke test to gauge potential customer interest, or an online sign-up form to test product or service viability. By doing so, you can establish a baseline for the first Build-Measure-Learn cycle. Even if the initial numbers are unfavorable, it serves as a starting point to improve upon.
- Tuning the Engine. Once the baseline is set, it's best to make a single change that can be tested for improvement. Avoid making multiple changes at once and instead concentrate on one particular aspect. For example, you could test whether a redesigned signup form increases the number of conversions. Always proceed with caution when fine-tuning, testing one hypothesis at a time.
- Pivot or Persevere. As you go through multiple cycles, you should gradually progress beyond the baseline and work towards achieving the ultimate target outlined in the business plan. If you're not making progress, you'll know from the small learning steps you've taken along the way.
5. The Pivot
“What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.”
Deciding to pivot is a tough task when following the Lean Startup method. Founders and entrepreneurs become attached to their products after investing time and money into them. It's easy to get sidetracked by vanity metrics and testing the wrong hypothesis, leading teams astray. Unclear hypotheses make failures difficult to detect, and blindly launching a product without a clear plan is not a guaranteed success. It's crucial to analyze every aspect before launching and testing the waters.
Just because you pivot, it doesn't mean you failed. It implies that you are modifying one of the core assumptions you began with. There are different variations on the pivot:
- Zoom-in pivot. A single feature in the product now becomes the entire product.
- Zoom-out pivot. The opposite of the above. A whole product becomes a single feature in something much larger.
- Customer segment pivot. The product was right, but the original customer segment wasn’t. Changing to a different customer is necessary, but the product remains the same.
- Customer need pivot. Through validated learning it becomes clear that a more important problem needs to be solved for the customer than the original one.
- Platform pivot. Often platforms start out as an application but due to success it grows to become a platform ecosystem.
- Business architecture pivot. Geoffrey Moore’s idea of switching from high margin and low volume to low margin and high volume.
- Value capture pivot. Changing how value is captured fundamentally changes everything else in the business (marketing strategy, cost structure, product, etc.)
- Engine of growth pivot. Startups typically follow one of the viral, sticky, or paid growth models, according to Ries. Changing from one to the other might be necessary to fuel faster growth.
- Channel pivot. The internet has created many more channel options for startups, and complex sales or advertising channels are far less dominant. A startup has many more options from the get-go.
- Technology pivot. New technology can offer substantial benefits in cost, efficiency, or performance and allow you to keep everything else the same (value creation, customer segment, channel, etc).
“Pivots are a permanent fact of life for any growing business. Even after a company achieves initial success, it must continue to pivot.”
6. Small Batches
There is a story about a man who had to put newsletters into envelopes with his two daughters. The daughters suggested that they fold all the newsletters first, then put stamps on each one, and finally write the address for each letter. The dad, on the other hand, wanted to complete each envelope entirely before moving on to the next one. They decided to have a competition to see which method would be quicker.
The approach known as "single-piece flow" used in lean manufacturing proved to be the most effective method employed by the dad. Although it may seem more efficient to repeatedly perform the same task, individual performance is not as crucial as the overall performance of the system. Restacking letters and preparing envelopes between batches results in lost time. However, when the entire process is viewed as a single batch, efficiency is improved.
One advantage of working in small batches is the ability to quickly catch errors. If you were to start by folding all the letters and then realize they don't fit properly in the envelopes, you'd have to redo the entire process. However, with the small batch method, errors can be identified from the very beginning.
“The biggest advantage of working in small batches is that quality problems can be identified much sooner. This is the origin of Toyota’s famous andon cord, which allows any worker to ask for help as soon as they notice any problem, such as a defect in a physical part, stopping the entire production line if it cannot be corrected immediately.”
7. The Andon Cord
As previously discussed, Toyota implemented the Andon Cord to enable any worker on the production line to stop the system if a defect was detected. Detecting a problem promptly is crucial as it becomes increasingly challenging and expensive to remove defects as they progress along the production line. Despite the need to halt production temporarily, identifying issues immediately is highly effective. This approach is the key factor behind Toyota's exceptional quality standards throughout history.
“The key to the andon cord is that it brings work to a stop as soon as an uncorrectable quality problem surfaces - which forces it to be investigated. This is one of the most important discoveries of the lean manufacturing movement: you cannot trade quality for time.”
Eric Ries has highlighted IMVU's daily automated checks, which ensure that essential features of the site, including the 'purchase' button, are functioning correctly. This system quickly detects any production errors and prevents any new changes from being implemented until the issue is resolved. It serves as a programming equivalent of the andon cord.
8. Continuous Deployment
Although SaaS applications have become standardized in 2016, continuous deployment can still be a daunting and unimaginable concept for many. This involves updating the live production systems continuously throughout the day.
Back in 2009, IMVU was able to run up to 50 updates per day on their production code due to their significant investment in test scripts. They had around 15,000 test scripts that would simulate various user actions such as clicks on the browser and running back-end code in the database. To learn more about their approach, you can check out Timothy Fitz's blog post about it.
In the book on online investment management trackers, Wealthfront is highlighted as a prime example. Despite operating in an SEC-regulated environment, the company manages to implement true continuous deployment, with over a dozen production releases occurring daily. For further insight into their setup, the Wealthfront Engineering Blog is a great resource to explore.
“The essential lesson is not that everyone should be shipping fifty times per day but that by reducing batch size, we can get through the Build-Measure-Learn feedback loop more quickly than our competitors can. The ability to learn faster from customers is the essential competitive advantage that startups must possess.”
Kanban is a technique adopted from the lean manufacturing world, as explained by Ries with an example from Grockit - an online skills improvement tool for standardized tests. In their product development process, Grockit creates 'stories' to build a feature with clear benefits and outcomes for the end user. These stories are validated through a split test to confirm their effectiveness in improving the customer experience. Kanban involves four states.
- Backlog - items that are ready to be worked on but have not yet started.
- In Progress - items currently under development.
- Built - development has finished work on the item, and it’s ready for the customer.
- Validated - item has been released, and it’s been positively validated.
In order to maintain product quality, any story that fails the validation test will be removed. It's recommended to limit each of the four stages, or "buckets", to a maximum of three projects at a time. Once a project has been completed, it can only move into the validated stage if there is available space (less than three projects already in there). Additionally, backlog items cannot be worked on until the "in progress" bucket is freed up.
An extremely beneficial result of implementing this approach is that teams shift their focus towards measuring productivity based on the customer's validated learning rather than just the quantity of new features developed.
“I have implemented this system with several teams, and the initial result is always frustrating: each bucket fills up, starting with the ‘validated’ bucket … Pretty soon everyone gets the hang of it … As engineers look for ways to increase their productivity, they start to realize that if they include the validation exercise from the beginning, the whole team can be more productive.”
10. The Five Whys
Many technical problems can be traced back to a human error. By utilizing the five whys method, you can uncover the root cause of these issues. Despite its apparent simplicity, this technique is incredibly powerful. According to Eric Ries, most problems arise from inadequate training, even though they may initially appear to be technical problems or the result of an individual's mistake. For instance, Ries cites a case from IMVU where customers were dissatisfied with a recent product update.
- A new release disabled a feature for customers. Why? Because a particular server failed.
- Why did the server fail? Because an obscure subsystem was used in the wrong way.
- Why was it used in the wrong way? The engineer who used it didn’t know how to use it properly.
- Why didn’t he know? Because he was never trained.
- Why wasn’t he trained? Because his manager doesn’t believe in training new engineers because he and his team are “too busy.”
One technique that is highly beneficial for startups is identifying the optimal speed for making improvements. Investing a large sum of money in training may not be the most effective approach during the early stages of development. However, by examining the root causes of problems, you can pinpoint core areas that require attention, instead of merely addressing surface-level issues.
It's common to react strongly to events as they happen, but the Five Whys technique encourages a deeper examination of the root causes. Initially, team members may focus on assigning blame instead of identifying chronic issues stemming from flawed processes. It's crucial to involve all affected parties, including managers and customer service representatives, in the analysis. When assigning responsibility, it's important for management or the CEO to take responsibility for not having a system-level solution in place to prevent the issue. The Five Whys aims to identify problems caused by processes rather than individuals.
Good practices for getting started with the Five Whys:
- In order to establish mutual trust and empowerment, it is important to be tolerant of mistakes the first time they are made. However, it is crucial to ensure that the same mistake is not repeated again.
- Let's prioritize the system-level. Many mistakes stem from a flawed system, so it's important to concentrate on resolving issues at that level.
- It is important to confront uncomfortable realities. The approach being taken will bring to light some unpleasant realities about the organization, and addressing these initial challenges will require significant effort. There is a risk that this could lead to a culture of blame, so it is crucial for senior leaders to oversee the process and ensure that everyone follows it fairly. Their involvement as a neutral referee is essential.
- To get the process embedded, it's best to start small and be specific. Begin by addressing small issues with precise solutions. Make sure to run the process regularly and involve as many people as possible. This will help ensure its success.
- Consider designating a Five Whys master to drive change effectively. The individual should possess sufficient authority to execute necessary actions and be responsible for monitoring progress. It is their responsibility to evaluate the effectiveness of investing in problem prevention.
The Five Whys technique is an effective tool for fostering adaptability within an organization. However, it can be quite difficult to implement, as parents of young children can attest to.
“Some of the engineers I have trained to use it believe that you can derive all other Lean Startup techniques from the Five Whys. Coupled with working in small batches, it provides the foundation a company needs to respond quickly to problems as they appear, without over-investing or over-engineering.”
If you're on the lookout for a great book on innovation and growth creation, The Lean Startup should be at the top of your list. This read is packed with practical concepts like the ones mentioned in the list above, and they can either be adopted individually or as part of the overall methodology. It's highly recommended that you incorporate these ideas into your business strategy if you haven't already.