The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses

by Eric Ries

The decision to pivot is so difficult that many companies fail to make it.

The kind of pivot we needed is called a customer segment pivot. In this pivot, the company realizes that the product it’s building solves a real problem for real customers but that they are not the customers it originally planned to serve.

However, waiting too long to release can lead to the ultimate waste: making something that nobody wants.

In Part Three, we will develop techniques that allow Lean Startups to grow without sacrificing the speed and agility that are the lifeblood of every startup.

The one envelope at a time approach is called “single-piece flow” in lean manufacturing. It works because of the surprising power of small batches.

Why does stuffing one envelope at a time get the job done faster even though it seems like it would be slower? Because our intuition doesn’t take into account the extra time required to sort, stack, and move around the large piles of half-complete envelopes when it’s done the other way.

Even if the amount of time that each process took was exactly the same, the small batch production approach still would be superior, and for even more counterintuitive reasons. For example, imagine that the letters didn’t fit in the envelopes. With the large-batch approach, we wouldn’t find that out until nearly the end. With small batches, we’d know almost immediately. What if the envelopes are defective and won’t seal? In the large-batch approach, we’d have to unstuff all the envelopes, get new ones, and restuff them. In the small-batch approach, we’d find this out immediately and have no rework required.

The small-batch approach produces a finished product every few seconds, whereas the large-batch approach must deliver all the products at once, at the end.

Because of its smaller batch size, Toyota was able to produce a much greater diversity of products.

The biggest advantage of working in small batches is that quality problems can be identified much sooner.

An assembly line works best when it is functioning smoothly, rolling car after car off the end of the line. The andon cord can interrupt this careful flow as the line is halted repeatedly. However, the benefits of finding and fixing problems faster outweigh this cost. This process of continuously driving out defects has been a win-win for Toyota and its customers. It is the root cause of Toyota’s historic high quality ratings and low costs.

Working in small batches ensures that a startup can minimize the expenditure of time, money, and effort that ultimately turns out to have been wasted.

Not every type of product—as it exists today—allows for design change in small batches. But that is no excuse for sticking to outdated methods.

Large batches tend to grow over time. Because moving the batch forward often results in additional work, rework, delays, and interruptions, everyone has an incentive to do work in ever-larger batches, trying to minimize this overhead. This is called the large-batch death spiral because, unlike in manufacturing, there are no physical limits on the maximum size of a batch.

The ideal goal is to achieve small batches all the way down to single-piece flow along the entire supply chain.

Almost every Lean Startup technique we’ve discussed so far works its magic in two ways: by converting push methods to pull and reducing batch size. Both have the net effect of reducing WIP.

The Toyota Production System is probably the most advanced system of management in the world, but even more impressive is the fact that Toyota has built the most advanced learning organization 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.11

The engine of growth is the mechanism that startups use to achieve sustainable growth.

I use the word sustainable to exclude all one-time activities that generate a surge of customers but have no long-term impact, such as a single advertisement or a publicity stunt that might be used to jump-start growth but could not sustain that growth for the long term.

Sustainable growth is characterized by one simple rule: New customers come from the a...

There are four primary ways past customers drive sustainable grow...

As a side effect of product usage.

Through funded advertising.

Through repeat purchase or use.

“Startups don’t starve; they drown.”

Therefore, companies using the sticky engine of growth track their attrition rate or churn rate very carefully.

Growth happens automatically as a side effect of customers using the product.

A consequence of this is that many viral products do not charge customers directly but rely on indirect sources of revenue such as advertising. This is the case because viral products cannot afford to have any friction impede the process of signing customers up and recruiting their friends. This can make testing the value hypothesis for viral products especially challenging.

Most sources of customer acquisition are subject to competition.

If the boss tends to split the difference, the best way to influence the boss and get what you want is to take the most extreme position possible. For example, if one group is advocating for an extremely lengthy release cycle, say, an annual new product introduction, you might choose to argue for an equally extremely short release cycle (perhaps weekly or even daily), knowing that the two opinions will be averaged out. Then, when the difference is split, you’re likely to get an outcome closer to what you actually wanted in the first place.

I call this building an adaptive organization, one that automatically adjusts its process and performance to current conditions.

To work, startups require built-in speed regulators that help teams find their optimal pace of work.

If you are causing (or missing) quality problems now, the resulting defects will slow you down later.

The core idea of Five Whys is to tie investments directly to the prevention of the most problematic symptoms. The system takes its name from the investigative method of asking the question “Why?” five times to understand what has happened (the root cause).

The Five Whys approach acts as a natural speed regulator. The more problems you have, the more you invest in solutions to those problems.

When the Five Whys approach goes awry, I call it the Five Blames.

I recommend several tactics for escaping the Five Blames. The first is to make sure that everyone affected by the problem is in the room during the analysis of the root cause.

When blame inevitably arises, the most senior people in the room should repeat this mantra: if a mistake happens, shame on us for making it so easy to make that mistake.

Conventional wisdom holds that when companies become larger, they inevitably lose the capacity for innovation, creativity, and growth. I believe this is wrong.

The imperative to innovate is unrelenting.

There are examples of one-time successes using a secret skunkworks or off-site innovation team, such as the building of the original IBM PC in Boca Raton, Florida, completely separate from mainline IBM. But these examples should serve mostly as cautionary tales, because they have rarely led to sustainable innovation.

I believe this is one reason why companies such as IBM lost their leadership position in the new markets that they developed using a black box such as the PC business; they are unable to re-create and sustain the culture that led to the innovation in the first place.

My suggested solution is to create a sandbox for innovation that will contain the impact of the new innovation but not constrain the methods of the startup team. It works as follows:

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

One team must see the whole experiment through ...

No experiment can run longer than a specified amount of time (usually a few weeks for simple feature experiments, longer...

No experiment can affect more than a specified number of customers (usually expressed as a percentage of the company’...

Every experiment has to be evaluated on the basis of a single standard report of five to ten (...

Every team that works inside the sandbox and every product that is built must use the same m...