The Lean Startup

How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Business

The only way to win is to learn faster than anyone else. – Eric Ries

Starting up a new company or a business always involves a lot of risk. A number of startups fail even before they can reach a certain level. The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses is about using a new and innovative approach called ‘Lean Startup’ to revolutionize the world of business. When an individual or a group of individuals starts a new business, there is always an air of uncertainty prevailing over their minds. What they want to do is to create something meaningful that will sustain, proving all the uncertainties futile.

The Lean Startup approach concentrates on increasing the capital efficiency of the companies as well as using the human creativity to its highest level. The book explains difficult concepts like validated learning and vanity metrics, with ease. It puts forward new ideas to make the company agile and flexible. The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation To Create Radically Successful Businesses is a must-read for budding entrepreneurs, for its innovative and effective ideas. It's a fact that the vast majority of startups fail. But according to Eric Ries, author of  The Lean Startup, those failures can be prevented if you take a structured and scientific approach. "Startup success can be engineered by following a process," he says. And if there's a process that means it can be learned. His goal is to teach that process to entrepreneurs everywhere.

In this book, he describes the Start Up company method to shorten the product development cycle (lean start up). According to Ries, if Start Up can develop products or services quickly, and then introduce them to customers for immediate feedback, they can reduce the risk of developing and launching old and expensive products. The Lean Startup discusses the scientific methodology in developing "startup". Before discussing further about the "lean startup" method, Eric defines "startup" as: a startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. Startups are designed for the situations that cannot be modeled, are not clear-cut, and where the risk is not necessarily large - it's just not yet know”. Based on that definition then startup can be interpreted as:

·         Pilot companies led by entrepreneur.

·         A new division within the company that tries to create breakthrough innovation led by entrepreneur.

·         All institutions seeking to create productt or services under extreme uncertainty conditions. NGO, non-profit, etc.

Most startups and new products fail. This failure is generally due to two things:

1.      Startups are too stunned and confident with their business plan. This is very dangerous because the situation is often faced with a full startup of uncertainty so it is very difficult to make a business plan that is one hundred percent accurate.

2.      Mentally "just do it" that takes the opposite approach, feels planning and management are not important due to the uncertainty situation faced earlier so it is better to immediately immediately plunge into the business. Usually this is combined with a misconception that success must come as long as it is persistent. It's equally dangerous because it's often chaotic and more relying on luck.

These failures are an incredible waste of resources. Time and money are spent on making companies and products fail that consumers often do not want. Ironically this failure is often disguised as a lesson for the perpetrators.

Lean Startup was conceived as an approach to overcome this problem by considering startup as a learning actor. The task of startup is to learn and find out which product (or service) is suitable for the consumer as quickly as possible. The process is done by borrowing the scientific method that is by parse the business plan of the new product into hypotheses which then must be tested its validity. It is hoped that the assumption of a flawed business plan can be quickly identified so that the company can act to improve it. Wasting can also be suppressed (minimal waste), companies will move forward systematically little by little testing the business plan aspect before committing too far based on assumptions that are not necessarily true.

The process of testing this hypothesis done repeatedly in this book called the cycle Build - Measure - Learn. Each cycle is expected to validate the hypothesis to give a lesson to a startup called validated learning. The process of recording validated learning (as innovation) that has been achieved by the company called innovation accounting, an alternative method proposed this book to know the progress of startup.

The Lean Startup process centers on the build- measure-learn cycle. This cycle can be regarded as a data processing engine for basic decision-making. The input of this machine is the hypothesis and the output is the validation status of the hypothesis. Startup should formulate hypotheses according to plan and business conditions encountered. In this book are described some examples of companies that implement this process, from the conditions encountered, hypotheses made and tested.

There are two most important hypotheses that must be created and tested by each startup. The first hypothesis is about the value of the product or service (value hypothesis). Whether the product or service is created adds value to the consumer. Startup is recommended to go directly to the field interacting with the consumer in this process, confirming the problem that is assumed to be totally groundless. Through this learning cycle, startup can study consumer behavior in using the product and make the necessary changes until the interaction approaches expectations. The second important hypothesis of growth (growth hypothesis) is how new consumers find the product or service. This book considers sustainable growth an absolute requirement for startup so that it becomes an important hypothesis for immediate testing. There are three types of growth engines (engine of growth) for startup:

1. Sticky engine of growth: as much as possible to retain consumers. Growth occurs when the level of consumer growth is higher than the rate of loss.

2. Viral engine of growth: new users brought in by old consumers as a side effect of product use.

3. Paid engine of growth: uses a portion of the income from consumers to pay for activities to get new customers. Growth occurs when income per customer is greater than the cost of a new consumer search.

By determining the type of growth engine suitable for their business, startup can monitor what metrics are relevant to them and make adjustments to improve performance.

In order to survive, the startup must cycle and repeat it quickly to find a suitable condition before it runs out of resources. When starting a startup business can immediately test the hypothesis about the product by creating a product type called MVP (minimum viable product). The concept of MVP aims to address analysis paralysis by including only the minimum features needed to teach a lesson from the initial hypothesis, a fundamental assumption of startup business. MVP is also a lean thinking implementation by preventing waste at the beginning of the process, just looking for what key features relate to consumer issues. The data obtained from this initial cycle will be the baseline for comparison for subsequent cycles when startup attempts to make improvements.

From the startup learning outcomes can decide to make fundamental changes (and test it). When this happens a startup is called pivoting, ie a structured change to test a new fundamental hypothesis: it could be about a product, a business model, or a growth engine.

There are 10 pivot that we can use:

1.      Zoom-in pivot

In this case, what previously was considered a single feature in a product becomes the whole product. This highlights the value of “focus” and “minimum viable product” (MVP), delivered quickly and efficiently.

2.      Zoom-out pivot

In the reverse situation, sometimes a single feature is insufficient to support a customer set. In this type of pivot, what was considered the whole product becomes a single feature of a much larger product.

3.      Customer segment pivot

Your product may attract real customers, but not the ones in the original vision. In other words, it solves a real problem, but needs to be positioned for a more appreciative segment, and optimized for that segment.

4.      Customer need pivot

Early customer feedback indicates that the problem solved is not very important, or money isn’t available to buy. This requires repositioning, or a completely new product, to find a problem worth solving.

5.      Platform pivot

This refers to a change from an application to a platform, or vice versa. Many founders envision their solution as a platform for future products, but don’t have a single killer application just yet. Most customers buy solutions, not platforms.

6.      Business architecture pivot

Geoffrey Moore, many years ago, observed that there are two major business architectures: high margin, low volume (complex systems model), or low margin, high volume (volume operations model). You can’t do both at the same time.

7.      Value capture pivot

This refers to the monetization or revenue model. Changes to the way a startup captures value can have far-reaching consequences for business, product, and marketing strategies. The “free” model doesn’t capture much value.

8.      Engine of growth pivot

Most startups these days use one of three primary growth engines: the viral, sticky, and paid growth models. Picking the right model can dramatically affect the speed and profitability of growth.

9.      Channel pivot

In sales terminology, the mechanism by which a company delivers it product to customers is called the sales channel or distribution channel. Channel pivots usually require unique pricing, feature, and competitive positioning adjustments.

10.  Technology pivot

Sometimes a startup discovers a way to achieve the same solution by using a completely different technology. This is most relevant if the new technology can provide superior price and/or performance to improve competitive posture.

So we can conclude that, this Lean methodology is very risk-averse. All processes are made to avoid wastage by systematically trying to find fault in the business plan as early as possible with minimal cost. Just as a useful scientific method to test our understanding of a phenomenon, the Lean Startup method also invites startups to be critical of their business plans and test the understanding of consumers and their problems.

Although examples of implementation given in books ranging from information technology but the concepts offered are quite useful and relevant to other sectors. It should be mentioned that Eric Ries specifically mentions this methodology made for startup conditions that face extreme uncertainty. For a new business whose type is exactly the same as an existing business, business success is more related to execution so that traditional management approaches with solid business plans and strategies are powerful enough to achieve success.

Regardless, the message about preventing waste, the use of scientific methods in entrepreneurship practice, the fundamental business hypothesis and a number of other concepts introduced here are very, very reasonable and I think is quite universal. It is our duty to re-think critically in its application because my understanding of this book only gives direction, not rigid implementation. Depending on the unique conditions facing each business.