The Lean Startup Innovate notes

June 23, 2016

These are my notes on this chapter from the book The Lean Startup. My original post is here.

When companies become larger they inevitably lose the capacity for innovation, creativity and growth.

Start up teams require three structural attributes: scarce but secure resources, independent authority to develop their business, and a personal stake in the outcome.

Start up’s are both easier and more demanding to run than traditional divisions: they require much less capital overall, but that capital must be absolutely secure from tampering.

Start up teams need complete autonomy to develop and market new products within their limited mandate. They have to be able to conceive and execute experiments without having to gain an excessive number of approvals.

Start up teams have to be able to build and ship actual functioning products and service, not just prototypes. Handoffs and approvals slow down the Build-Measure-Learn feedback loop and inhibit both learning and accountability.

The imperative to innovate is unrelenting. Without the ability to experiment in a more agile manner, this company eventually would suffer the fate described in The Innovator’s Dilemma: ever-higher profits and margins year after year until the business suddenly collapsed.

Do not hide the innovation team. People defend themselves when they feel threatened, and no innovation can flourish if defensiveness is given free rein. The common suggestion to hide the innovation team is misguided. Hiding from the parent organisation (a start up within a large org) can have long-term negative consequences.

To empower innovation out in to the open, create a sandbox for innovation that will contain the impact of the new innovation but not constrain the methods of the start up team.

Any team can create a true split-test experiment that affects only the sandboxes parts of the product or service (for a multipart product) or only certain customer segments or territories (for a new product). However:

  1. One team must see the whole experiment through from end to end
  2. No experiment can run longer than a specified amount of time
  3. No experiment can affect more than a specified number of customers
  4. Every experiment has to be evaluated on the basis of a single standard report of five to ten actionable metrics
  5. Every team that works inside the sandbox and every product that is built must use the same metrics to evaluate success
  6. Any team that creates an experiment must monitor the metrics and customer reactions (support calls, social media reaction, forum threads, etc.) while the experiment is in progress and abort it if something catastrophic happens.
Whenever possible, the innovation team should be cross-functional and have a clear team leader. It should be empowered to build, market, and deploy products and features in the sandbox without prior approval. It should be required to report on the success or failure of those efforts by using standard actionable metrics and innovation accounting.
True Experiments are easy to classify as successes or failures because top-level metrics either move or they don’t.
If someone wants to sabotage the innovation team, he or she will have to learn all about actionable metrics and learning milestones to do it.
When people have a chance to see a project through from end to end and the work is done in small batches and delivers a clear verdict quickly, they benefit from the power of feedback. Each time they fail to move the numbers, they have a real opportunity to act on their findings immediately. Thus, these teams tend to converge on optimal solutions rapidly even if they start out with really bad ideas.
By making the batch size small, the sandbox method allows teams to make cheap mistakes quickly and start learning.
A common practice is for the inventor of a new product or feature to manage the subsequent resources, team, or division that ultimately commercialises it. As a result, strong creative managers wind up getting stuck working on the growth and optimisation of products rather than creating new ones.
The way out of this dilemma is to manage the four kinds of work differently, allowing strong cross-functional team to develop around each area. When products move from phase to phase, they are handed off between teams. Employees can choose to move with the product as part of the handoff or stay behind and begin work on something new.
People should be allowed to find the kind of jobs that suit them best.
Push for rapid iteration, data-driven decision making, and early customer involvement.
Responding dogmatically is unhelpful, compromising by automatically splitting the difference does not work either.
Every suggestion should be subjected to rigorous scientific inquiry:
  • Can we use the theory to predict the results of the proposed change?
  • Can we incubate the change in a small team and see what happens?
  • Can we measure its impact?

You have to be able to predict the outcome of the changes you make to tell if the problems that result are really problems.

Force teams to work cross-functionally to achieve validated learning. Techniques for doing this – actionable metrics, continuous deployment, and the overall Build-Measure-Learn feedback loop.

It does not matter how fast we can build, it does not matter how fast we can measure.

What matters is how fast we can get through the entire loop

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The Lean Startup Adapt notes

June 23, 2016

These are my notes on this chapter from the book The Lean Startup. My original post is here.

As a company grows you need additional processes and systems designed to coordinate the company’s operations at each larger size.

Many start up become ossified (become fixed and will not change) and bureaucratic out of a misplaced desire to become “professional”.

Having no system at all is not an option.

Many ways for a start up to fail:

Overarchitecture failure – prevents / delays a company from putting out any product.

Friendster effect – Suffering a high-profile technical failure just when customer adoption is hoping wild.

You should engage in a little planning, but not too much. The problem with this willy-nilly approach is that it’s hard to give any rationale for why we should anticipate one particular problem but ignore another.

A process / program can evolve organically out of a methodical approach to evolving the process. This process of orientation was subject to constant experimentation and revision so that it grew more effective – and less burdensome – over time. This is building an adaptive organisation, one that automatically adjusts its process and performance to current conditions.

Toyota proverb “Stop production so that production never has to stop”. The key to the andon cord is that it brings work to a stop as soon as an uncorrectable quality problem surface – which forces it to be investigated.

You cannot trade quality for time.

If you are causing quality problems now, the resulting defects will slow you down later. Defects cause a lot of rework, low morale, and customer complaints, all of which slow progress and eat away at valuable resources.

The Build-Measure-Learn feedback loop is a continuous process. We don’t stop after one minimum viable product but use what we have learned to get to work immediately on the next iteration.

Shortcuts taken in product quality, design, or infrastructure today may wind up slowing a company down tomorrow.

Having a low-quality product can inhibit learning when the defects prevent customers from experiencing (giving feedback on) the product’s benefits. More mainstream customers are much less forgiving than early adopters.

When you’re going too fast, you cause more problems. Adaptive processes force you to slow down and invest in preventing the kinds of problems that are currently wasting time.

5 Whys

The core idea of Five Whys is to tie investments directly to the prevention of the most problematic symptoms.

You simply ask the question “Why” five times, to take you to the root cause. At the root of every seemingly technical problem is a human problem.

If the outage is a minor glitch, its essential that we make only a minor investment in fixing it.

The Five Whys approach acts as a natural speed regulator. As the investments in infrastructure or process pay off, the severity and number of crises are reduced and the team speeds up again.

The Five Whys ties the rate of progress to learning, not just execution.

The Five Whys coupled with working in small batches provides the foundation a company needs to respond quickly to problems as they appear, without overinvesting or over-engineering.

The goals of the Five Whys is to help us see the objective truth that chronic problems are caused by bad process, not bad people, and remedy them accordingly.

If a mistake happens, shame on us for making it so easy to make that mistake. This is a mantra that should be repeated by senior people in the room.

Simple rules of conducting  5 Whys

  1. Be tolerant of all mistakes the first time
  2. Never allow the same mistake to be made twice

Most mistake are caused by flawed systems, not bad people.

Whenever something goes wrong, ask yourself: How could I prevent myself from being in this situation ever again?

Process, Product, and Technology changes that enable working in smaller batches.

Genchi Gembutsu (means Go and See, in order to truly understand a situation one needs to go to genba (or the real place) where the work is done.

As Lean Start up’s grow, they can use adaptive techniques to develop more complex processes without giving up their core advantage: speed through Build-Measure-Learn feedback loop.

Both successful start up’s and established companies alike must learn to juggle multiple kinds of work at the same time, pursing operational excellence and disruptive innovation.

The Lean Startup Grow notes

June 23, 2016

These are my notes on this chapter from the book The Lean Startup. My original post is here.

The engine of growth is the mechanism that start up’s use to achieve sustainable growth.

New customers come from the actions of past customers

There are four primary ways past customer drive sustainable growth:

  1. Word of mouth
  2. As a side effect of product usage
  3. Through funded advertising
  4. Through repeat purchase or use

Engines of growth are designed to give startups a relatively small set of metrics on which to focus their energies.

Start up’s have to focus on the big experiments that lead to validated learning.

Three engines of growth, Sticky, Viral, Paid.

Sticky – Products are designed to attract and retain customers for the long term. Companies using the sticky engine of growth track their attrition rate or churn rate very carefully. The churn rate is defined as the fraction of customers in any period who fail to remain engaged with the company’s product.

If the rate of new customer acquisition exceeds the churn rate, the product will grow. The speed of growth is determined by what I call the rate of compounding , which is the natural growth rate minus the churn rate. Having a high rate of compounding will lead to extremely rapid growth – without advertising, viral growth, or publicity stunts.

Viral – Customers do the lion’s share of the marketing, e.g. Tupperware. Awareness of the product spreads rapidly from person to person similarly to the way a virus becomes an epidemic.

Like other engines of growth, this is powered by a feedback loop that can be quantified. It is called the viral loop, and its speed is determined by a single mathematical term called the viral coefficient. The higher this coefficient, the faster the product will spread. The viral coefficient measure how many new customers will use a product as a consequence of each new customer who signs up.

For a product with a viral coefficient of 0.1, one in every ten customers will recruit one of his or her friends. This is not a sustainable loop.

By contrast, a viral loop with a coefficient that is greater than 1.0 will grow exponentially, because each person who signs up will bring, on average, more than one other person with her.

However, it is not true that customers do not give companies something of value: by investing their time and attention in the product, they make the product valuable to advertisers (for example). Companies that sell advertising actually serve two different groups off customers – consumers and advertisers – and exchange a different currency of value with each.

Paid – Imagine two companies, the first make $1 on each customer, the second makes $100,000 for each customer. The second company sells heavy goods to large companies and each sale requires significant time invested and help to install the product; these costs total 80% of the sale price.

Both companies will grow at the exact same rate. Each has the same proportion of revenue 20% available to reinvest in new customer acquisition. If either company wants to increase its rate of growth, it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer.

The paid engine of growth is powered by a feedback loop. Each customer pays a certain amount of money for the product over her “lifetime” as a customer. Once variable costs are deducted, this usually is called the customer lifetime value (LTV). This revenue can be invested in growth by buying advertising.

Start up’s that employ an outbound sales force are also using this engine.

If everyone in an industry make the same amount of money on each sale, they all will wind up paying most of their marginal profit to the source of the acquisition.

Product/Market fit describes the moment when a start up finally finds a widespread set of customers that resonate with its product.

Every engine of growth eventually runs out of gas.

Growth is all coming from an engine of growth that is working – running efficiently to bring in new customers – not from improvements driven by product development.

The Lean Startup Batch notes

June 23, 2016

These are my notes on this chapter from the book The Lean Startup. My original post is here.

Product releases incur overhead, and so from an efficiency point of view, releasing often leaves less time to devote to building the product. However, waiting too long to release can lead to the ultimate waste: making something nobody wants.

The critical first question for any lean transformation is:

  • Which activities create value and which are a form of waste?
  • What products do customers really want?
  • How will our business grow?
  • Who is our customer?
  • Which customers should we listen to and which should we ignore?

Sustainable growth follows one of three engine of growth: paid, viral, or sticky. Each engine requires a focus on unique metrics to evaluate the success of new products and prioritise new experiments.

Today’s companies must learn to master a management portfolio of sustainable and disruptive innovation.

Small batches – instead of working in separate departments, engineers and designers would work together side by side on one feature at a time. Whenever that feature was ready to be tested with customers, they immediately would release a new version of the product, which would go live to a relatively small number of people. The team would be able immediately to assess the impact of their work, evaluate its effect on customers, and decide what to do next. For tiny changes, the whole process might be repeated several times per day.

As part of a Continuous Deployment system (CICD) you want to ensure an immune system is in place which detects a problem and then ensures:

  1. The defective change is removed immediately and automatically
  2. Everyone on the relevant team is notified of the problem
  3. The team is blocked from introducing any further changes, preventing the problem from being compounded by future mistakes….
  4. … until the root cause of the problem is found and fixed.

The ability to learn faster from customers is the essential competitive advantage that start up’s must possess.

Customer often don’t know what they want. Our goal in building products is to be able to run experiments that will help us learn how to build a sustainable business.

As soon as we formulate a hypothesis that we want to test, the product development team should be engineered to design and run this experiment as quickly as possible, using the smallest batch size that will get the job done. The feedback loop is Build-Measure-Learn, our planning really works in the reverse order: we figure out what we need to learn and then work backwards to see what product will work as an experiment to get that learning.

Toyota has built the most advanced learning organisation in history, it has demonstrated an ability to unleash the creativity of its employees, achieve consistent growth, and produce innovative new products relentlessly over the course of nearly a century.

The Lean Start up goal is to – as quickly as possible – learn how to build a sustainable business.
The Lean Start up works only if we are able to build an organisation as adaptable and fast as the challenges it faces.

The Lean Startup Pivot notes

June 23, 2016

These are my notes on this chapter from the book The Lean Startup. My original post is here.

Start up productivity is not about cranking out more widgets or features. It is about aligning our efforts with a business and product that are working to create value and drive growth. In other words, successful pivots put us on a path toward growing a sustainable business.

Failure is a pre-requisite to learning. The problem with the notion of shipping a product and then seeing what happens is that you are guaranteed to success – at seeing what happens.

When startups start to run low on cash, they can extend the runway in two ways: by cutting costs or by raising additional funds. But when entrepreneurs cut costs indiscriminately, they are as liable to cut costs that are allowing the company to get through its Build-Measure-Learn feedback loop as they are to cut waste. If the cuts result in a slowdown in the feedback loop, all they have accomplished is to help the start up go out of business more slowly.

Tell tale signs of a pivot: The decreasing effectiveness of product experiments and the general feeling that product development should be more productive.

Once you have found success with early adopters, you want to sell to mainstream customers. Mainstream customers have different requirements and are much more demanding.

Zoom-in Pivot

What previously was considered a single feature in a product becomes the whole product.

Zoom-out Pivot

Sometimes a single feature is insufficient  to support a whole product. What was considered the whole product becomes a single feature of a much larger product.

Customer Segment Pivot

The company realises that the product it is building solves a real problem for real customers but they are not the type of customers it originally planned to serve. So the product hypothesis is partially confirmed, solving the right problem, but for a different customer than originally anticipated.

Customer Need Pivot

As a result of getting to know customers really well, it sometimes becomes clear that the problem is not very important. The customer has a problem worth solving, just not the one that was originally anticipated.

A pivot is better understood as a new strategic hypothesis that will require a new minimal viable product test. A pivot is a special kind of structured change designed to test a new fundamental hypothesis about the product, business model, and engine of growth.