BS&R 1: The Lean Startup

(20 – 30 minute read)

Hello fellow readers!!

Welcome to my first book summary and review (BS&R)..!!

A while back, a friend told me to try writing book reviews. Initially, I wasn’t keen on the idea because at the time, I felt I wasn’t good enough.

Today, I realized that it isn’t about getting to a stage of being good enough to do it. It’s the act of becoming and doing that matters. Every expert, champion, athlete, genius, artist, musician and more didn’t just become successful and achieved what they sought in a single day. They became who they are today from the act of becoming.

Continuing, I previously did a book review as part of my assignment. Not only did I love reading, I had a knack at phrasing sentences eloquently (from many years of reading). I think many avid readers will understand. You get a feel for it. Later, my lecturer said it was one of the best pieces he had ever read. I felt great and proud of myself. Not because I did great on an assignment. It was because I put my heart into that piece. For that, it remains special in my heart.

Thus, realizing the opportunities, I decided to give it a try and see how it goes. A couple of people have given me positive responses on my first post. For that, I really appreciate it and would like to continue. For now, don’t expect frequent posts.

Let’s begin..

a) Introduction

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This book was published in 2011 by Eric Ries, a co-founder of IMVU and talks about an innovative way for businesses, initially used by startups.

Yet, not only can this business philosophy  and practice be used by startups, even corporations, larger companies and similarly applicable organizations can use it. For simplicity’s sake, I’ll refer to startups to make the points across before I continue.

Most business people romanticize the idea of starting a startup because of the success stories we have heard, causing us to irrationally correlate success with what we have heard rather than understanding the true nature of success. Society tends to overplay success through audacity, boldness, talent, ingenuity and more etc. while underplaying the reality of how real success is actually earned. That is through hard work and more, resulting in the “Lean Startup” philosophy

Here’s a remark from the author:

“Brilliant college kids sitting in a dorm are inventing the future. Heedless of boundaries, possessed of new technology and youthful enthusiam, they build a new company from scratch. Their early success allows them to raise money and bring an amaizing new product to the market. They hire their friends, assemble a superstar team, and dare the world to stop them.” (pg.11)

The author continues:

“In magazines and newspapers, in blockbuster movies, and on countless blogs, we hear the mantra of the successful entrepreneurs: through determination, brilliance, great timing, and – above all – a great product, you too can achieve fame and fortune.” (pg.12)

However, the reality is probably like this for most startups:

“Ten years and several startups ago, that was me, building my first company. I particularly remember a moment from back then: the moment I realized my company was going to fail. My co-founder and I were at wits’ end. The dot.com bubble had burst, and we had spent all our money. We tried desperately to raise more capital, and we could not. It was like a breakup scene from a Hollywood movie: it was raining, and we had argued in the street. We couldn’t even agree on where to walk next, and so we parted in anger, heading in opposite directions. As a metaphor for our company’s failure, this image of the two of us, lost in the rain and drifting apart, is perfect.” (pg. 11)

The author then explains what is really going on:

“There is a mythmaking industry hard at work to sell us that story, but I have come to believe that the story is false, the product of selection bias and after-the-fact rationalization. In fact, having worked with hundreds of entrepreneurs, I have seen firsthand how often a promising start leads to failure. The grim reality is that most startups fail. Most new products are not successful. Most new ventures do not live up to their potential.

Yet the story of perseverance, creative genius, and hard work persists. Why is it so popular? I think there is something deeply appealing about this modern-day rags to riches story. It makes success seem inevitable if you just have the right stuff. It means that the mundane details, the boring stuff, the small individual choices don’t matter. If we build it, they will come. When we fail, as so many of us do, we have a ready-made excuse: we didn’t have the right stuff. We weren’t visionary enough or weren’t in the right place at the right time.” (pg.12)

Thus this has caused the author to rethink how he saw entrepreneurship. Though, entrepreneurship has different meanings due to how people interpret and understand it, we’ll go with the most common meaning. The author saw it not as simply starting and operating a business nilly-willy but as a form of management.

Ironically, before this, the author describes that everything seemed to be going smoothly and suddenly, everything went downhill.

Interesting, isn’t it? The author later explains, it wasn’t that his start-up did not have the measures to determine how the situation was going. Rather, the wrong measures were causing them to simply look the wrong way. The warning signs were all there. They just didn’t know what to look for.

So the question is what actually causes startups to fail similarly in such a miserable manner?

According to the author, most startups (and even larger companies) fail for several reasons:

There is a lack of insightful management by using the “just do it” mentality. This doesn’t mean there is no planing. On the contrary, planning exist. It’s just that the management is planning the business to excel at something that will fail.

 

Startups create products that they think customers want. Instead, they end up creating products nobody wants.

 

Even if customers say what they think they want, they don’t know what they want till they have seen it. Related to this is that startups fall back to conventional wisdom in that the “Customer is King” which on a surface thought, is not a bad idea. However, when you’re asking customers for feedback especially for new prototype products, they don’t really know what they want because it’s all so new and unfamiliar to them. It’s kind of like asking people their feedback for advice on the smartphone before it was even invented.

(There are probably more reasons why startups fail. We’ll focus on these for now)

The author based this line of thinking not only from the experiences of many startups, but even from his own experience as a co-founder of IMVU, which is one of the most actively used forms of virtual reality and online social networks.today. Think the Sims with Facebook.

When it was first formed, IMVU relied on flawed conventional wisdom. One of the first things they did was to invite people to invite their currently existing friends to try out the prototype for IMVU. The actual situation was nearly 180 degrees around. Rather than try out the new product with existing friends, they wanted to make new friends through IMVU. They wouldn’t want to invite new existing friends to try it out, because they thought it would make them look silly, using a then unpopular product. By experimentation through trial and error, they learned what customers really want, tailored their products towards customers with what worked and didn’t. From there, they build the foundation for their current success today. The basis of that idea is the “Lean Startup” philosophy

b) What is the Lean Start-Up?

The Lean Startup is a business idea on entrepreneurship that emphasizes on a scientific approach to innovation (build, measure and learn) by using IMVU as an example. Contrary to popular belief, the author emphasizes a crucial point in that any organization can use this idea.

Here’s a concise summary of the book and its ideas:

  • It was first derived from the Lean Management philosophy (from Japanese companies).
  • The basis of it revolved around creating a minimum viable product (MVP) which was largely imperfect, then asking customers for feedback, and fine-tuning it using simple trial and error methods. This is known as “A/B testing” or “Split Testing”. In essence, there is no “perfect” product as the product is always in a constant state of improvement or change.
  • A product becomes valuable not entirely because of its inherent value. It can become valuable for its extrinsic value. Take for example cell phones. If you were the only person who can use a cell phone, you will find it has no value because only you can use it. But, if everyone else were given cell phones, the cell phones becomes many times more valuable simply because of who you can reach. (However, this too depends on the item in question).
  • IMVU adopted the view that their job was to find a synthesis between their vision and what customers would accept; it wasn’t to capitulate to what customers though they wanted or to tell customers what they ought to want. It was finding a balance between customers wants and company ideas.
  • Thus, the Lean Startup uses a whole new way of measuring progress and success rather than traditional metrics. This was originally based on the idea that startups deal with too much uncertainty and risk that larger companies have already bypassed or overcome. Nevertheless, in our modern world’s ever dynamic and competitive landscape, perhaps it isn’t too farfetched for larger companies to revamp their metrics for progress.
  • However, the author explicitly states that following IMVU’s strategy is not a general rule of thumb. The Lean Startup is a flexible business idea that any business can adapt to their business style, market and industry. Thus, its a case-by-case basis, depending on your product and customer types etc. For instance, IMVU early adopters were quite accepting of IMVU’s early low quality product at the time. Interestingly, the author asks us to redefine what we think of as quality. He explains that we perceive IMVU’s early MVP to be low quality and buggy. Yet, it had the critical, minimal and usable features needed to satisfy customers’ primary needs. Thus, it was a quality product for IMVU’s early adopters. Hence, “quality” refers to the quality that customers want. Thus,  “low-quality” product can be high-quality if it serves to fulfil customers’ need as close as possible rather than a “high-quality” product which doesn’t.
  • Nevertheless, some customers will not accept a low quality product, depending on who they are and the product offered. Though IMVU was successful with its early adopters, it stumbled for a while against mainstream customers who have higher standards of what they deem acceptable. Therefore, businesses must determine what features are truly critical to their targeted customers and adapt their products.
  • Additionally, businesses have to ask themselves.. “can we build a sustainable business around this set of products and services?” Remember earlier on when the author’s company was dead set on failing? The reason was simple. The company was betting a huge gamble with too many risks and uncertainty that ultimately failed. Their idea was to naively create a “perfect product” in their eyes without really vigorously testing it on a small scale with real customers whether or not their target customers actually wanted to use them for real. I don’t mean focus groups. I mean real customers who give the hard knocks of feedback that truly matter to product design teams.
  • In essence, the Lean Startup is a “method for systematically breaking down a business plan into its component parts and testing each part empirically”.. Think of product design as how scientists conduct experiments. As such, learning from failure then becomes vital to success as it teaches businesses to acquire much needed experience and feedback from good failures. There are bad and good failures. Although we can learn from failures, bad failures give us very little to learn from and are too costly, damaging or demoralizing to learn from. With good failures on a small scale, we can learn so much more and the cost-effective way of earning success outweigh the marginal cost of failing and the tests themselves.
  • “Think big, start small” is another ethos of this idea. I’ll give you an example. I like to play video games. I recently played an old game called “Lords of Magic – Legends of Urak” whereby you play as one of 8 opposing factions (Life – Death, Order – Chaos, Water – Fire, Air -Earth). When you begin, you start out with a lord and meager army, not enough to even do anything more than win skirmishes at the beginning. Yet, it is these minor skirmishes that matter. My act of “thinking big” was that I wished to grow my kingdom ino the strongest faction, liberate the lands and defeat my stronger opposing factions. My act of starting small was to do what I can with what I have. Then, I consolidated what I have with the gains I have to grow. This seems to simple that it makes no sense for me to mention it. Yet, it’s for it’s simplicity that creates success. Additionally, children learn fast at games, thus slowly but surely succeeding. Interesting, right?
  • Another idea to consider is this..

    “You don’t make the product to sell it; you sell the product to make it.”

    Reis gives an example. Food on the Table, an Austin, Texas-based startup led by its CEO, Manuel Rosso, “creates a weekly meal plan and grocery lists that are based on food you and your family enjoy, then hooks into your local grocery stores to find the best deals on the ingredients” (pg. 101).

    When they began their idea, did you know what they did? The product design team and even the CEO went to a customer, followed him or her home, understood the family’s lifestyle and then manually purchased the ingredients to cook the food based on the family’s recipes. There was no system, app or website for this at the beginning. This was all manually done until the team could really understand how to personally satisfy their target customer’s needs while gaining experience.It seems a ridiculous approach to traditional business standards if it were to implemented on a huge scale. Yet, this was the beauty of it. It was done at a small level with very low costs. Ultimately, this unconventional method became very cost-effective. The company later moved on to another family and another (all the while, the product team was creating the actual product itself) until a MVP was ready.

    Another example was Dropbox. At the beginning, they did something similar. They had no actual product and just the idea. So, they sold the idea to customers by illustrating using a simple power-point and animation of what could be done in their product (it wasn’t that they could not create the initial product at all. It was to determine if customers would actually like the idea before creating the MVP). However, the author’s experiences in being involved with customers informs us that explaining to layman people how something works is very difficult. So, use a video to explain it. Suit the video to your audience like what Dropbox did.

    When the early adopters saw what they liked from the presentations, they told the product design team what features to incorporate and so on (even if it were only in ideas). It seems so insane and counter-intuitive, yet it works. Moreover, the product wasn’t even ready, barely in its prototype stage, yet businesses could get feedback fast without huge costs. Thus, “success is not delivering a feature; success is learning how to solve the customer’s problem.”

    Thus, an MVP can be a prototype product or even an idea (tangible in a form that can be understood by customers, using a video etc.)

    “Rather than finding solutions to problems, it’s about finding problems to solutions.”
    ~ Re-engineering the Corporation

  • Additionally, this business philosophy overcomes the prevailing management thinking that puts over-excessive faith in its well-researched plans.This quote explains why this is inadvisable:

    “No battle plan survives contact with the enemy..”
    ~ Helmuth von Moltke the Elder

    Thus, no business plan survives contact with reality or its intended customers. The Lean Startup accounts for this. Moreover, it removes the assumption that, once you’ve figured out your customers, you’ve figured them out for good. Your product is merely a reflection of customer needs, wants and preferences, which will be ever changing.

  • Here’s a scenario of failed products. If you shipped over-polished products with too many features, early adopters or potential customers actually get turned off. It’s like you’re selling a Swiss army knife with too many functions which customers won’t even use. Heck, they just wanted a knife. Why should customers pay more for your product with the extra features they won’t use?
  • Thus, businesses can receive “unenthusiastic response” from customers despite successfully differentiating our products from rivals with “extra features” but instead exceeded “the needs and use patterns of buyers” which encouraged customers to conclude lower-priced bands possess better value as they have little use for “deluxe attributes”
     
  • Another huge problem highlighted is how ineffective large batches can actually be. We think economies of scale (EOS) are effective but the reality is different. Large batches tend to grow over time because moving the batch forward often results in increasingly incremental levels of work, rework, delays, and interruptions,  everyone has an incentive to do work in ever-larger batches, trying to minimize this overhead.
  • This called the large-batch death spiral because there are no physical limits on the maximum size of a batch. So, this is where the “Lean Management” idea originated from. As explained by the author, Japanese automobile companies could not initally keep up with Western large batch production. So what did they do? They went the opposite direction. They created products in small batches in different variations when the need arose. They could then customize or personalize their products based on customer specifications. They, they made their products truly relevant to customer needs.
  • Another important idea the book explains is how we use “vanity metrics” to measure progress. On paper, it seems these metrics actually show progress. In reality, it doesn’t and actually portrays unrealistic situations. This is what happened to the author’s company at the beginning. Additionally, the 5 Whys are explained versus the 5 Blames, why cross-functional teams need to be included and more.

Thus, I’ll end this post here. Even though there are more ideas, I feel this post is far too long and I’ve covered the basic ideas.

c) Review and Response

I really liked and enjoy this book and place it on par with “Re-enginnering The Corporation: A Manifesto for Business Revolution”, another business book I read. The only thing I would have to say if I was playing the devil’s advocate, is that the Lean Start-up idea is a counter-intuitive idea to normal business practices and would take some time implementing. This post is more about the summary and introducing the idea to readers.

d) Conclusion

To conclude, this book is definitely a must for any business people to read about and incorporate into their businesses.

Thank you and I hope you enjoyed this book summary and review. Feel free to comment here at the blog or at the available social media links.

Till the next post.
Sol.

 

Acknowledgements

  1. 11.jpg By svklimkinhttp://cdn.morguefile.com/imageData/public/files/s/svklimkin/11/l/1448250328c5evf.jpg

 

References

  1. Reis, E. (2011) The Lean Startup. Crown Business : New York
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