Thursday, December 01, 2011

Lean Thinking and Entrepreneurship

With the release of Eric Ries' bestselling book The Lean Startup two months ago, the Lean Startup movement has received tremendous exposure in the business press and general media.

So, what are lean startups?

Lean startups use a scientific approach to creating and managing innovation and to get profitable products to customers faster.  The approach adapts concepts from lean manufacturing to reduce waste in the entrepreneurial management process and attempts to reduce the likelihood that a startup creates a product doesn't lead to a sustainable business (eg. a product that no one wants or that no one will pay for).  Of course, using this approach doesn't mean that lean startups won't experience product failures.  Rather, it allows entrepreneurs more opportunities to test their business hypotheses and learn from customers given the same amount of time and money.

Ries has five guiding principles for lean startups:

  1. Entrepreneurs Are Everywhere.  They may be in classic tech startups working out of a garage, in large corporations, or in mom and pop shops on Main Street.
  2. Entrepreneurship Is Management.  Startups are institutions that require management geared toward developing sustainable new business models under conditions of extreme uncertainty.
  3. Validated Learning.  Startups exist to learn how to build a sustainable business.  They can validate their business model scientifically by running experiments designed to test each element of their vision.
  4. Innovation Accounting.  Build a quantitative financial model based on the startups leap-of-faith assumptions.  Establish baseline metrics, test hypotheses for improving those metrics, then persevere if tuning improves the drivers of the business model or if not, pivot.
  5. Build-Measure-Learn.  All processes should be geared to accelerate the feedback between building a product, measuring customer responses, and learning whether to persevere or pivot.
The first two principles set the stage.  Principle #1 is a scoping statement that tells us that the lean startup approach can be applied anyone who is tasked with creating a new venture or product innovations.  Principle #2 justifies the need a different approach by pointing out how startups differ from established businesses that are not faced with creating something new under extreme uncertainty.  While managing an established business is all about analysis, planning and execution, managing a startup requires rapid hypothesis testing and learning.

The last three principles are interrelated and get to the heart of Ries' approach. To make this approach easier to understand, I like to break-up each element of the build-measure-learn cycle it's own principle and add a sixth one.

     3. Build.  Create the minimum viable product (MVP) to test your business model and hypotheses.
     4. Measure.  Setup metrics tied to your financial model and measure customer reactions
     5. Learn.   Validate whether or not your hypotheses are correct and decide to persevere or pivot
     6. Continuous Feedback.  All processes should be geared accelerate the build-measure-learn
         feedback loop.

In future posts, I will take a look these last four principles in more detail.  I'll delve into hypothesis testing, data-driven design, A/B testing and the problem of local optimization; and discuss specific tactics used to foster continuous learning and eliminate waste.

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