Analysis of The Lean Startup Book by Eric Ries
June 1, 2021
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Eric Ries wrote The Lean Startup Book with the aim of presenting new approaches that could contribute to the development of businesses more efficiently than the creation of a business plan. The author defines the term startup as an organization that is focused on the creation of something new under extreme and uncertain conditions. The crucial goal of such organizations is penetration of this fog of uncertainty with the aim of discovering a successful path to a prosperous business. The book can help people learn a range of useful lessons that could be effectively used in practice. It focuses on fostering the companies that leverage human creativity more efficiently and simultaneously are more efficient in terms of capital. Taking into the consideration the lessons from lean manufacturing, it became clear that the approach relies on validated learning, fast scientific experimentation, and a range of counter-intuitive practices that stimulate actual progress without resorting to vanity metrics, decrease the cycles of product development, and study the real desires of potential customers.
Such an approach helps the company shift directions by changing their plans every minute with agility. The useful pieces of information included advice on how to identify the most efficient aspect of a startup. Additionally, the autho stated that the creation of entrepreneurs in companies of different sizes will help continuously test the vision, as well as adjust and adapt until it is not too late. The paper is based on the analysis of Eric Riess book that promotes the learning of numerous useful lessons, because the principles presented by the author can help form and manage effective startups because efficient development of the company demands innovative approaches that will be based on a more effectively elaborated accounting system, validated learning, and an efficient built-measure-learn strategy.
Description of the main concepts of the lean startup
Validated learning is not an indulgent strategy for hiding failures, but a rigorous method for representing progress when the organization is operating under the impeding uncertainty in which the startup grows. Thus, validated learning is a process of demonstrating the current value level of startups and possibility of future prosperity of the business (Ries 225). Validated leaning is grounded on the empirical data that is collected from real customers. In case the entrepreneurs embrace validated learning, the process of development can reduce sustainability. When an organization focuses on the formation of right objectives, it will not spend a significant amount of time until the customers will begin to pay for the product (227). Ries emphasizes that the revenue is not a crucial goal during the early stages of startups. It is much better to focus on the abilities and flexibility of the model.
Ries mentions the example of how IMVU increased its first venture through continuously changing the product and compelling the per customer economics, receiving the monthly revenue of only $10 000 (227). The other efficient real life example is the firm the revenue of which is only $30 000. The product of this company was only a fraction of what the organization was planning to build. However, a crucial aspect was the presence of long-term vision (Lamotte). In contrast to million dollars startup, small businesses operate on a micro-scale. That requires focus not on selling the product by hand, but on making the customers pass the process of self-serving through signing up and paying the money. A crucial aspect is that such methodology lets the company to know all customers very well and perform their experiments with the products more effectively, simultaneously attracting new clients (Lamotte). Besides, the organization will have clearer prospects concerning their revenues, because it know what costs the customer can bring in and how much money they can make.
The need for innovation accounting is dictated by the necessity of figuring out the ability of the company to make real progress and reach validation. Innovative accounting is created especially for startups. According to Ries philosophy, innovation accounting should focus on three basic aspects. The first is using the minimal viable product (MVP) to identify the real results the organization will receive in case of selling the product (Ries 228). The primary objective of MVP is testing the fundamental business hypothesis while avoiding the proposition of perfect product. The second aspects is using many attempts of MVP startups to move from the baseline to the ideal. The third is that identification of progress in definite junctures that will drive the strategy concerning further operations (230). The organization needs to study the results of every experiment using an independent group of people with the aim of determining whether the evaluating metrics decrease or increase over the time. However, it is important to notice that the accumulated metrics can lead to misunderstanding the real core of the process. That is why it is necessary to take into consideration all possible advantages and disadvantages. Ries provides an example of the company that will not invest money in case somebody says that its platform has 2000 users, but the result will be adverse because this person will prove the positive tendency of clear tracking of baseline metrics and set the experiment to prove the hypothesis (242).
Another example that proves the necessity of innovative accounting implementation is based on the study of positive and negative indicators. A crucial aspects is that often negative indicators can be thoroughly hidden and that can complicate the situation (Lamotte). For example, it would be interesting to consider the indicator of the total number on the graph.
It shows that the total quantity of users increases simultaneously with the number of active users (Lamotte). Thus, it is obvious that both curves grow.
However, when studying the absolute numbers and the rate of active users with the respect to general users, it becomes obvious that the result is not positive.
Thus, the company investing money does not raise the profit.
Consequently, using innovative accounting will make the process of investigation more controllable, accessible, and understandable, because it will allow obtaining necessary data while avoiding complexity.
Build-measure-learn is a central principle of lean startups. Ries considers build-measure-learn to be a crucial framework for establishing the support for products effectiveness through the formation of new ideas and creation of quicker and more cost effective services (Ries 243). Providing example from his own experience, the author insists that the model involves a cycle of formation and testing the hypotheses through the creation of something small for potential clients with the aim of measuring their reaction and learning from the result. Such an approach is demonstrated in Figure 1.
Figure 1. The Build-Measure-Learn Feedback Loop
Ries states that some companies would consider such approach too simple but its core is a game-changing technique for the businesses that previously developed the product without any input from potential customers. However, a crucial aspect is that the build-measure-learn principle would not be effective for the projects that demand a low rate of failure and have already succeeded (245). Using it would be more appropriate for high-risk and fast changing environments where the clients are not clear about their needs.
A good example that is frequently used by the companies is building the three-cycle diagram for build-measure-learn that will be clarified by adding more elements like Ideas-Build-Code-Measure-Data-Learn (Broughton).
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An important aspect of innovation accounting is its aligning with the three learning milestones that every organization should know. The first milestone concerns the correctness of the business plan assumptions. The organization should have one or more prototypes or use the smoke test to establish the baseline (Broughton). All of these approaches work because of the validation of business plan assumptions. For example, the startup is going to create a complete prototype of a definite product to sell it to clients thought definite marketing channels (Broughton). The organization will prefer to build separate MVPs that will provide the feedback on the assumption of time. Before creating the prototype, the organization will test the marketing items that measure only one thing: whether the clients are interested in buying the product. This approach is insufficient and can be useful before committing other resources and more money to the product (Broughton). The MVP lets startups fill in the real data baseline in its growth model that is important as a basis for learning about the clients even if the foundation begins with bad news.
Another milestone is identification the key drivers of growth. The company, which elaborated the baseline that includes these key drivers, can test how possible changes will influence the growth through running experiments that will help identify further actions. For example, the company chooses a products oriented on the young adult population as key drivers, but it did not mentioned that there is a similar product on the market that is proposed in combination with other applications (Broughton). Thus, the firm can make the price lower and analyze if the product will have success in that situation.
The third milestone concerns the sustainability of the business model. In case the real-world baseline of the organization is close to breaking, it can tell what the company will gain using definite improvements. For example, in case of a decrease in the revenues that the product brings, the company should study the innovative technologies that can improve it and simultaneously support the process through strong advertisement (Broughton). In case the real-world results are below the expectations, the company should try the opposite approach. All of the learning milestones mentioned above are necessary because they prevent the possibility of fast endings even if the business plan was not effective. Innovation accounting will signal in case the company is stuck and needs immediate improvements.
Effectiveness of the lean startup used by the other firms
The analysis of the book induced to make the conclusion that the innovative strategy proposed by the author is really effective and can help the companies to succeed on the market. However, it also made to doubt whether the new approach will work in the best way with enterprise platforms and inventions that demand a guaranteed long development cycle (Lamotte). Additionally, the application of lean startup approach in large organization is difficult, because its funding and projects are usually based on the structure that fights against the approach of willingness to accept failure and rapid experiments. However, in case the inventions and enterprises do not require a long development cycle, the lean startup approach can help businesses find items for making progress more quickly (Lamotte). Using the canvas strategy helps understand whether individual elements logically work together and make sense that is a crucial aspect for prospering of the company.
Despite the author stating that the strategies elaborated by him are more effective for big business, the experts proved that small businesses like wholesale distribution industry companies, can leverage the lean startup principles used by tech entrepreneurs to deliver great scopes of the products to the customers quickly and affordably too (Broughton). There are three ways small businesses can boost their enterprises using the tech lean startup principles. The first way is application of the validated assumptions to mitigate the risk. A significant difference between the old rout and the new approach is orientation of the first on the question on whether the idea could be brought to the market instead on how to build the product. It is important to write down all assumptions concerning this idea and identify the variants of how the market will respond to this concept. It is important to think about the quantity of costs necessary for development of the product, how the company will drive the idea, and how it will sell it (Broughton). The second way is to talk to the target market. It is important not to look at the prospect from ones own perspective. The market does not think about the business. Furthermore, it would not be appropriate to use Google. Instead, people involved in the business should go directly to people and ask them about their preferences. The third crucial way is starting with a minimum viable product and not investing great money. The testing of such product will provide the answer on whether it will be demanded or not (Broughton). It is important to identify the one thing the product must include and then benefit through the active search for its components.
The crucial aspect that can help every business prosper is pivoting. Pivoting is a structured course that is designed to test new fundamental hypotheses about the product, through strategy and engine of growth (Penenberg). A pivot requires constant changing of the strategy with the aim to seek greater validated learning. A more recent example of a successfully pivoted company is Twitter. In 2005, the Odeo aggregation platform was launched. However, by the end of the year it was rented by iTunes. That induced the founders to search for the pivot. The founders engaged the employees that specialized in Odeo in their brainstorming sessions that led to the creation of the Dorseys pitch for a social networking or micro blogging platform based on text messages (Penenberg). Initially, Twitters value was unclear and Odeos investors allowed the founders of the company to buy back their shares because they did not believe that this new pivot will open a prosperous future for the company. However, they were wrong and the current appraisal of Twitter is $10 billion.
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The analysis of the book showed that the philosophy proposed by the Ries is really effective and can help businesses improve their operations. Despite some shortcomings that are connected with the need of the enterprise platforms and inventions in the guarantee of long development cycle and discrepancy the essence of the new approach and old strategies that are more conventional for the business, the lean startup is significant ground for building the prosperous business. The core of the principle is orientation on the innovative approach and understanding the needs of the customers, which is the core philosophy that makes businesses successful. The philosophy requires a clearly defined process that could focus on constant changes. The crucial factor is that the application of feedback-focused development process will provide opportunities for startups to use their already limited resources in a more efficient manner. Consequently, the time will be reduced because the tests will show the real viability of the product that will help eliminate the ineffectiveness of investments. Undoubtedly, every new step is scary. However, it is time to move forward. Besides, there is a great number of firms that have used the strategy and successfully pivoted.