Zoom-out Pivot In the reverse situation, sometimes a single feature is insufficient to support a whole product. In this type of pivot, what was considered the whole product becomes a single feature of a much larger product. Customer Segment Pivot In this pivot, the company realizes that the product it is building solves a real problem for real customers but that they are not the type of customers it originally planned to serve.
In other words, the product hypothesis is partially confirmed, solving the right problem, but for a different customer than originally anticipated. A customer segment pivot, keeping the functionality of the product the same but changing the audience focus. In other words, David went from being a business-to-consumer B2C company to being a business-to-business B2B company. However, because of this customer intimacy, we often discover other related problems that are important and can be solved by our team.
The target customer has a problem worth solving, just not the one that was originally anticipated. Platform Pivot A platform pivot refers to a change from an application to a platform or vice versa. Most commonly, startups that aspire to create a new platform begin life by selling a single application, the so-called killer app, for their platform.
Only later does the platform emerge as a vehicle for third parties to leverage as a way to create their own related products. Business Architecture Pivot: a startup switches architectures. Some companies change from high margin, low volume by going mass market e. Value Capture Pivot: capturing value is an intrinsic part of the product - and changes to the way a company captures value can have far-reaching consequences for the rest of the business, product, and marketing strategies.
Engine of Growth Pivot: three primary engines of growth that power startups: the viral, sticky, and paid growth models. In this type of pivot, a company changes its growth strategy to seek faster or more profitable growth. Commonly but not always, the engine of growth also requires a change in the way value is captured.
Channel Pivot: the sales channel or distribution channel. For example, consumer packaged goods are sold in a grocery store, cars are sold in dealerships, and much enterprise software is sold with extensive customization by consulting and professional services firms. Often, the requirements of the channel determine the price, features, and competitive landscape of a product.
A channel pivot is a recognition that the same basic solution could be delivered through a different channel with greater effectiveness. It is precisely because of its destructive effect on sales channels that the Internet has had such a disruptive influence in industries that previously required complex sales and distribution channels, such as newspaper, magazine, and book publishing.
Technology Pivot: Occasionally, a company discovers a way to achieve the same solution by using a completely different technology. Technology pivots are much more common in established businesses. Technology life cycle ideas of theorists such as Geoffrey Moore know certain later-stage pivots by the names he has given them: the Chasm, the Tornado, the Bowling Alley.
Lean innovation – Getting to ‘Next’ •
Modern managers cannot have escaped the deluge of recent books calling on them to adapt, change, reinvent, or upend their existing businesses. Many of the works in this category are long on exhortations and short on specifics. On the page, these processes may seem clinical, slow, and simple.
In the real world, something different is needed. We have learned to steer when moving slowly. Now we must learn to race. Laying a solid foundation is only the first step toward our real destination: acceleration. Which activities create value and which are a form of waste? Once you understand this distinction, you can begin using lean techniques to drive out waste and increase the efficiency of the value-creating activities.
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? It works because of the surprising power of small batches. In process-oriented work like this, individual performance is not nearly as important as the overall performance of the system. 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 on our website for 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. There are assessments built into each activity so that data can be fed back to the teacher to choose appropriate tasks for the next playlist. The longer we worked, the more afraid we became of how customers would react when they finally saw the new version. As our plans became more ambitious, so too did the number of bugs, conflicts, and problems we had to deal with.
Pretty soon we got into a situation in which we could not ship anything. Our launch date seemed to recede into the distance. The more work we got done, the more work we had to do. The lack of ability to ship eventually precipitated a crisis and a change of management, all because of the trap of large batches.
Lean production solves the problem of stockouts with a technique called pull. When you bring a car into the dealership for repair, one blue Camry bumper gets used. The PDC sends the dealer a new bumper, which creates another hole in inventory. This sends a similar signal to a regional warehouse called the Toyota Parts Redistribution Center PRC , where all parts suppliers ship their products. That warehouse signals the factory where the bumpers are made to produce one more bumper, which is manufactured and shipped to the PRC. The ideal goal is to achieve small batches all the way down to single-piece flow along the entire supply chain.
- Understanding What's Next in Today's Economy, 1st Edition.
- Sons and Daughters of the Ocean.
- BOOK CATALOGUE 2008 Red Jordan Arobateau;
- Lean Innovation in International Development - Polymath Ventures.
Each step in the line pulls the parts it needs from the previous step. This is the famous Toyota just-in-time production method.
Lean Innovation: Understanding What's Next in Today's Economy
All the work that goes into designing the minimum viable product is - until the moment that product is shipped - just WIP inventory. Incomplete designs, not-yet-validated assumptions, and most business plans are WIP. Both have the net effect of reducing WIP. Our goal in building products is to be able to run experiments that will help us learn how to build a sustainable business. Thus, the right way to think about the product development process in a Lean Startup is that it is responding to pull requests in the form of experiments that need to be run.
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. Remember that although we write the feedback loop as Build-Measure-Learn because the activities happen in that order, 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.
Thus, it is not the customer, but rather our hypothesis about the customer, that pulls work from product development and other functions. Any other work is waste. 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. Although lean production techniques are powerful, they are only a manifestation of a high-functioning organization that is committed to achieving maximum performance by employing the right measures of progress over the long term.
Process is only the foundation upon which a great company culture can develop. But without this foundation, efforts to encourage learning, creativity, and innovation will fall flat - as Sustainable growth is characterized by one simple rule: New customers come from the actions of past customers. There are four primary ways past customers drive sustainable growth: 1. Word of mouth. As a side effect of product usage. Fashion or status, such as luxury goods products, drive awareness of themselves whenever they are used. Through funded advertising. For this to be a source of sustainable growth, the advertising must be paid for out of revenue, not one-time sources such as investment capital.
As long as the cost of acquiring a new customer the so-called marginal cost is less than the revenue that customer generates the marginal revenue , the excess the marginal profit can be used to acquire more customers. The more marginal profit, the faster the growth. Through repeat purchase or use.
Some products are designed to be purchased repeatedly either through a subscription plan a cable company or through voluntary repurchases groceries or lightbulbs. By contrast, many products and services are intentionally designed as one-time events, such as wedding planning. These sources of sustainable growth power feedback loops that I have termed engines of growth. Each is like a combustion engine, turning over and over. The faster the loop turns, the faster the company will grow. Each engine has an intrinsic set of metrics that determine how fast a company can grow when using it.
Startups have to focus on the big experiments that lead to validated learning. The engines of growth framework helps them stay focused on the metrics that matter. Companies using the sticky engine of growth track their attrition rate or churn rate very carefully. The rules that govern the sticky engine of growth are pretty simple: 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 simply the natural growth rate minus the churn rate.
Focus needs to be on improving customer retention. This goes against the standard intuition in that if a company lacks growth, it should invest more in sales and marketing. This counterintuitive result is hard to infer from standard vanity metrics. Customers are not intentionally acting as evangelists; they are not necessarily trying to spread the word about the product. Growth happens automatically as a side effect of customers using the product. Viruses are not optional. The viral engine 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 is, the faster the product will spread. The viral coefficient measures 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. This is not a sustainable loop. Imagine that one hundred customers sign up. They will cause ten friends to sign up. Those ten friends will cause one additional person to sign up, but there the loop will fizzle out.
By contrast, a viral loop with a coefficient that is greater than 1. 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.
The true test of the value hypothesis is always a voluntary exchange of value between customers and the startup that serves them. A lot of confusion stems from the fact that this exchange can be monetary, as in the case of Tupperware, or nonmonetary, as in the case of Facebook. In the viral engine of growth, monetary exchange does not drive new growth; it is useful only as an indicator that customers value the product enough to pay for it. If Facebook or Hotmail had started charging customers in their early days, it would have been foolish, as it would have impeded their ability to grow.
However, it is not true that customers do not give these companies something of value: by investing their time and attention in the product, they make the product valuable to advertisers. Once variable costs are deducted, this usually is called the customer lifetime value LTV. This revenue can be invested in growth by buying advertising. The margin between the LTV and the CPA determines how fast the paid engine of growth will turn this is called the marginal profit. All these costs should be factored into the cost per acquisition.
The NGO literally could not make the purchase because it had no process in place for buying something so inexpensive. Additionally, the NGO needed substantial help in managing the rollout, educating its staff on the new tool, and tracking the impact of the change; those were all services the company was ill equipped to offer.
Changing customer segments required them to switch to hiring a sizable outbound sales staff that spent time attending conferences, educating executives, and authoring white papers. Those much higher costs came with a corresponding reward: the company switched from making only a few dollars per customer to making tens and then hundreds of thousands of dollars per much larger customer. Their new engine of growth led to sustained success.
Advertising that is targeted to more affluent customers generally costs more than advertising that reaches the general public. Wealthy consumers cost more to reach because they tend to become more profitable customers. Over time, any source of customer acquisition will tend to have its CPA bid up by this competition. Successful startups usually focus on just one engine of growth, specializing in everything that is required to make it work. I strongly recommend that startups focus on one engine at a time.
Both assumptions are wrong. If a startup is attempting to use the viral engine of growth, it can focus its development efforts on things that might affect customer behavior - on the viral loop - and safely ignore those that do not. Such a startup does not need to specialize in marketing, advertising, or sales functions.
Conversely, a company using the paid engine needs to develop those marketing and sales functions urgently. What really matters is not the raw numbers or vanity metrics but the direction and degree of progress.
Stealth Mode’s Declining Popularity
Overarchitecture failure, in which attempting to prevent all the various kinds of problems that could occur wound up delaying the company from putting out any product. Friendster effect, suffering a high-profile technical failure just when customer adoption is going wild. One of the most important discoveries of the lean manufacturing movement: you cannot trade quality for time. If you are causing or missing 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 core idea of Five Whys is to tie investments directly to the prevention of the most problematic symptoms. At the root of every seemingly technical problem is a human problem. Five Whys provides an opportunity to discover what that human problem might be. Chronic problems are caused by bad process, not bad people, and remedy them accordingly. Managers and employees can fall into the trap of using the Five Blames as a means for venting their frustrations and calling out colleagues for systemic failures. We routinely asked new engineers to make a change to the production environment on their first day.
Ask teams to adopt these simple rules: 1. Be tolerant of all mistakes the first time. Never allow the same mistake to be made twice. It is also important to ensure that the product we are creating will deliver value to our customers.
This is the real valuable insight from the movement: first we search, then we execute. This insight applies to digital as well as physical products. In fact, when larger investments are at stake, ensuring that we are making stuff people want becomes more, not less, important. Design thinking puts the customer at the centre of innovation, regardless of the product that is being made. So beyond making stuff people want, another key takeaway from the lean startup movement is that business models matter.
Steve Blank defines a startup as an institution that is setup to search for a sustainably profitable business model. As much as we want to know that we are making products people want, we also want to ensure that we are able to create and deliver this value profitably. This means that we have to test our business model in the market before we scale. As we make prototypes of our products, we can use them to test our assumptions about the costs of production, price points and potential routes to market.
The key is to do as much early work as possible to remove business model risk from our products. We are not just running experiments and building minimum viable products for the sake of it. We are not just pivoting or iterating because Eric Ries says it is a good idea. All these practices serve the singular goal of helping us figure out our business model before we scale.
This is the lesson from the lean startup.
Lean startup has nothing to do with exact amounts of money that are spent on an innovation project. The key practice in this context is incremental investing or what Dave McClure calls Moneyball for Startups. If we want our innovation teams to be doing the right things at the right time, then managers and investors have to make investment decisions by asking the right questions at the right time. Incremental investing allows us to make the appropriate levels of investment depending on the team's innovation stage.
First, we want to know if there is a real customer need; so we invest in finding that out. Then we want to know if the team can make a solution that meets those customer needs, so we invest in that. Ultimately we want to know whether the product has a viable business model, so we invest as much as we need to for the team to find product-market fit.
If the team succeeds, then we double-down investment to scale the product. This is the principle of searching before we execute, applied to investment decision making. Who am I to disagree? Having a vision is important for innovation. Consider the two charts below. That there is such a strong overlap between the basic innovation structures is not surprising; both philosophies operate in a world with large amounts of uncertainty.
Both Lean and modern development organizations want to be efficient in their allocation of resources and eliminate wasteful programs by incorporating learnings and revising initiatives. Consider a research project I worked on in Pakistan. Started in , this project is still ongoing, with only preliminary findings capable of being presented. No serious policy has changed, the basic structure of the project has been only marginally altered, and it takes an entire year to make even minor changes.
That this project continues after four years is not strange in many development circles; however in a startup this would be horrifyingly slow. On the other hand, Polymath has fully embraced an alternative philosophy which encourages the speed of innovation necessary in a startup.
An example of this was when a team I was on tabled an idea for a financial product that relied on professional training to motivate financial advisors. Rather than being tied to rigorous statistical analysis to make a decision, Polymath focused on revising or killing the idea swiftly — albeit with a lower level of analytical rigor.
As a result, we were able to move forward with different ideas within days, rather than months.