Lean Start-Up

What is Lean Start-up Methodology?

Lean Start-Up is a methodology for building a business or beginning your start-up. The idea is that you are constantly testing the product when first the product is released in small quantities for further changes based on consumer feedback, so this approach is called "Lean Start-Up.'" It seeks to understand customer preferences while the product is still in process so that it is released in the correct quantity to meet market demand.

The Lean Start-Up methodology requires an immediate and practical conviction that the product will be in demand and valuable rather than relying on demand once sales have been launched. It empowers you to understand the idea's value at the get-go and determine whether it is worth investing the available funds in the business. It is about financial investments, time, and human resources.

The author of Learn Start-Up methodology is the American entrepreneur Eric Ries. He first described the lean start-up methodology in his book "The Lean Start-up: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses." Reece combined several "Agile" methodologies such as Customer Development, Agile and Lean Canvas to create a new Lean approach to a Start-Up and running a business.

A concise summary of the essence of each methodology:

• Customer Development is an approach to promoting a start-up or business based on creating a product according to an identified customer need. It involves regularly questioning and testing potential customers and modifying the product to meet their needs.

• Agile is an approach to project management that balances customers' interests, clients' needs, and developers' capabilities. Indeed, Agile is a mindset, a philosophy. Its basic principles are reflected in the official document Agile Manifesto. What's more, Lean start-up borrowed methods of one of the Agile techniques - framework Scrum, which implies a team approach and non-standard distribution of tasks within the team.

• Lean Canvas is a template for building a business model to describe the product and quickly make changes.

Thus, lean start-up rejects the usual, proven linear method of building and developing a business and uses entirely different principles.

The Principles of a Lean Start-up

The principles of lean start-up methodology are:

1. Universality. This approach can be implemented in any company, irrespective of its scale, business geography, specialisation and industry.
2. Flexibility and ability to manage risks. It is the ability to react quickly to changes in the market and the influence of external factors on business processes. Therefore, it is necessary to consider the volatility of the world, always be ready for changes and experiments, and be able to create a new product in an ever-changing environment without compromising the budget, quality of the future product and timing of sales.
3. Relevance. The main task of a start-up is to quickly understand and assess what the market needs and what consumers are ready to buy right here and now, what problems customers face and how it can solve them. The lean concept suggests that a detailed business plan and all the bureaucracy can get neglected for the sake of it.
4. The primary objective is to produce an MVP or minimum viable product. Evaluating its advantages and disadvantages should clarify whether to continue the same course or make a pivot, an abrupt leap to other forms of business existence or product development.
5. Validated learning is a process of evaluating whether the previous version of a product has proved to be in demand and valuable. The eponymously named "validated learning" is so called because customer feedback confirms it in practice. According to the Lean Start-Up methodology, you must regularly test the product and validate all innovations in practice.
6. Continuous Improvement is imperative to keep improving the product regularly to move towards the final incarnation the consumer anticipates seeing.
7. Feedback. It is necessary to demonstrate improved versions and updates of the product to potential customers for further development.
8. Accounting for success metrics. Lean start-up involves regular review of criteria and key metrics to assess the effectiveness of ongoing activities. Key business metrics include:

• Growth rate.

• CR - Customer Churn Rate.

• CAS - Customer Acquisition Cost.

• LTV - Lifetime Customer Value.

• MRR - Monthly Recurring Revenue.

• ARPU - Average Revenue Per User.

• Gross Profit.

The fundamental principles of the Lean start-up methodology are derived from the Lean philosophy.

Lean Philosophy

Lean is a philosophy of lean thinking, so that's why "Lean start-up" is a part of it, along with other lean technologies. This name comes from a book by scientists James Woomek, Daniel Jones, and Daniel Russ entitled "The Machine That Changed the World: The Story of Lean Production," where the authors analysed various aspects of making cars. After all, it was in the Japanese company Toyota that the Lean philosophy, known as the "Toyota Management System" (its name was later changed to the "Production System"), was first used. From there, the lean technology spread to other production facilities.

The key idea of the lean philosophy is to create valuable products while reducing production costs. This approach saves significant resources and achieves first-class results. Despite this, Lean technology is first and foremost about customer focus and only then about thriftiness. To maintain the lean philosophy in production, Toyota has developed the "5S strategy."

• Seiri or Triage means separating and classifying work tasks and the organisational structure to achieve the desired success.
• Seiton or systematise means to organise all work processes.
• Seiso or Sparkle means maintaining order and cleanliness in the workplace and creating a favourable psychological climate.
• Seiketsu or Standardisation will simplify many bureaucratic issues associated with paperwork, instructions, etc.
• Shitsuke or discipline, i.e., the rules and regulations of the workplace and subordination must be adhered to.

These principles allow the lean philosophy to be implemented responsibly in production. However, lean thinking does not stop there. For the lean philosophy to produce tangible results, all employees of a company should share the following lean thinking values:

1. Continuous Product Improvement.

Each step or phase of production should bring you closer to the goal of creating the perfect product, and the results of these steps should only represent progress. To keep track of the lean start-up process, you need to answer critical questions regularly:

• "How else can we improve the functionality of the product?"

• "What problems have already been solved, and what is stopping us right now?"

• "What is worth improving first?" and so on.

2. Ongoing Training of the Team.

For the product to gradually improve and approach the ideal, the development team must also improve their skills, qualification, and knowledge level.

3. Optimising the System and Eliminating Anything Superfluous.

If an action or a tool does not improve the product quality, bring no profit, or save development time, it is useless and should get excluded.

4. Making Only Those Decisions in Which You Are Confident.

The lean philosophy involves making crucial decisions at the very last moment. But it does not mean you must put off critical moments until later. On the contrary, in the Lean thinking philosophy, we should thoroughly analyse the problem to be solved, consider the various ways out of the situation, foresee their consequences, and decide only depending on the information available. Thus, it is possible to be assured of its correctness and avoid stupid mistakes.

5. Team Unity.

Product developers must work together. As the foundation of any activity is always communication, if there is no understanding between employees, even the most well-organised processes will not bring the desired result. Furthermore, the Lean philosophy aims at fast and efficient work processes.

6. A Willingness to Experiment.

The Lean philosophy is based on observation, experience, and experimentation. Additionally, one must always be prepared for changes because things cannot always go as planned. For example, the requirements of the product itself or the conditions of its production may change. Therefore, make adjustments at every stage of the development process.

7. The Continuity and Integrity of the Lean Start-Up Process.

Firstly, those involved in the lean start-up process must observe the whole system and have an overview of what is happening. Moreover, all players must be aware of their tasks and responsibilities because this makes it possible to maintain a smooth production flow. Agile methodologies use whiteboards which show past and upcoming steps, goals, and objectives for the near future to make the Lean start-up process more visible to developers.

8. Flow Management

It means fixing any malfunctions or errors made in product development promptly. Flow management also means minimising various risks while reducing costs and multiple resources. To keep track of these, all team members should keep the visualisation board up to date regularly. That is how it is possible to identify weaknesses and eliminate problems that occur while continuing the workflow uninterrupted.

The Main Stages of a Lean Start-up

The Lean Start-Up cycle methodology gets divided into four distinct stages that are regularly replacing each other and continue until there is a product that best meets the needs of potential customers:

Stage 1: Creating the Lean Start-up Model.

Developing a new product often begins with a traditional business plan. Nevertheless, the Lean start-up philosophy suggests not wasting time on it and getting to the most crucial thing before the idea is outdated or has not been implemented by someone else.

The best way to build a business model is to use Lean Canvas, a special template for quickly describing a product and making all kinds of changes. It is a visualisation of the main components of the business and helps to take further steps for business development. There are nine blocks in such a template:

• Consumers, i.e., the potential audience of the product divided into segments. To identify your customers, the key questions to answer are: "Who are you creating value for?", "What does your ideal customer look like?", and "Who are your most important customers?"
• Value Propositions. This block involves answering the questions: "What customer problems will the new product solve?", "How many needs can it meet?", "What value is contained in the product for customers?" and "What results has MVP demonstrated?"
• Channels of Distribution. "How do you reach customers?", "Which channels do you use to communicate with customers?", "How do other companies contact their customers?" and "How do customers themselves prefer to contact companies?"
• Relationship with Customers. "What style of communication with customers is worth pursuing?", "Will it be impersonal and automated or lively, personal?" and "How do you develop and maintain relationships with customers?"
• Revenue Streams. The critical question is: "How do you plan to make money?"
• Key Resources. "What are the key assets needed to create the product?", "What capital is involved?", "What resources are missing?" and "What can and cannot you do without?"
• Key Activities. "How do you build long-term relationships with customers?", "How do you partner with other companies?" and "What activities should be undertaken to do this?"
• Key Partners. "Who do you need to partner with?", "Does this require strategic alliances?", "Who will be the suppliers of the necessary materials?" and "Who are the main competitors?"
• Cost. "Which resources are the most expensive?", "What are the most important costs inherent in the business model?" and "Are they fixed or variable costs?"

Instead of a detailed traditional business plan, the company describes the main processes in a diagram, clearly showing how the start-up creates value for itself and the target audience. The next stage begins after studying each block of Lean Canvas and answering as many questions as possible.

Stage 2: Formulating Hypotheses.

Any business model starts with several hypotheses and assumptions, which is the essence of a start-up - hypothesis testing. In the second step, it is time to divide your hypotheses into three risk categories:

• Desirability.
• Viability.
• Feasibility.

Let's talk more about each category:

• Desirability

Desirability looks at the risks associated with the attractiveness of your offer. That is: "Will customers be interested in the product? Who are these customers, and why are they attracted to your product?"

• Viability

These hypotheses assess the risks associated with the viability and flexibility of your Lean Start-Up business model. In other words, it's understanding whether and how to solve your potential customer's problems. Other aspects to consider include where you will find customers, what channels and resources they will use, how much they are prepared to pay for your product, and whether there is scope to increase that amount or reduce production costs when profitability is possible.

• Feasibility

Next are the risks associated directly with the ability to deliver a sought-after and successful USP (Unique Selling Proposition). That is the value that your product or service offers to potential customers. Next, it describes what makes a company special and why customers should choose its products or services. Finally, it assesses the risks associated with the availability of all necessary resources for production, the ability to implement the business model in detail - the Lean Start-Up model, the timing of implementation and the subsequent issues after the sales launch.

Nevertheless, you can also follow a less extensive classification of hypotheses, and these are divided into two groups:

1. Value Hypotheses;
2. Growth Hypotheses.

The value hypothesis is concerned with whether customers will see value in the product or service when they start using it. The growth hypothesis should answer the question: "Will the start-up be able to grow?", "How and how fast? It would be best to highlight these hypotheses at the start of a Lean Start-Up approach. Then, the next step is to test those hypotheses.

Stage 3: Testing the Hypotheses and Creating a minimum viable product (MVP).

First, test the hypotheses that pose the greatest threat, and lastly, proceed to those in which you are most confident. MVPs are created and brought to market precisely to get user feedback and test hypotheses without cost.

Developing a genuinely minimal version of the future product is imperative when creating an MVP. MVP functionality should only include the key feature that will benefit users most and allow developers to test the underlying hypotheses. You should also set criteria for the success of such an experiment and various limitations on metrics, timing, and purchases. At the end of the experimental stage, the data gets analysed.

Stage 4: Error Analysis and Product Improvement.

After the experiment gets carried out in the previous stage, the data are analysed. It is first necessary to study all the customer feedback and understand what changes you need to make to the product, such as what features should be removed or added. In addition, this step involves a change of business direction in case a pivot is needed.

After data verification, analysis, and product changes based on the information obtained, the Lean Start-Up process begins again with the hypothesis formulation phase. This Lean Start-Up cycle must continue until the developers are convinced that the product suits the market.

Thus, Lean Start-Up knowledge enables the creation of quality products with minimal costs. The lean start-up method also helps avoid production costs, let-downs, risks, and unclaimed market opportunities. Finally, remember that mistakes are normal. You will never create your finished product on the first go. So, be prepared to experiment constantly, and the result won't be long coming, and that is what the Lean philosophy and the Lean Start-Up method teach us.