cs419 technology entrepreneurship building a lean, scalable startup fall 2012 – fall 2013 emre oto

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CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

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The Lean Startup Power of small batches  Idea inspired from the Toyota Production System  Just-in-time systems in Toyota Production System  Reduce in-process inventory  Translation to startups: Just-in-time scalability  Conduct experiments without making massive up- front investments in planning and design  Reduce Work-in-progress (WIP) Inventory CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

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Page 1: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

CS419Technology

Entrepreneurship

Building a Lean, Scalable StartupFall 2012 – Fall 2013

Emre Oto

Page 2: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

What is the Lean Startup?Why is the Lean Startup «Lean?»

Methodology inspired from Lean Manufacturing principles developed by Taichi Ohno and Shigeo Shingo The Toyota Production System (TPS)

Throughout the course we will see many reflections of the TPS on startup product development: Eliminating waste (muda) Genchi Gembutsu (go and see) Just-in-time manufacturing and Kanban (push vs pull) The Andon Cord Principle of Small Batches

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 3: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

The Lean StartupPower of small batches Idea inspired from the Toyota Production

System

Just-in-time systems in Toyota Production System Reduce in-process inventory

Translation to startups: Just-in-time scalability Conduct experiments without making massive

up-front investments in planning and design Reduce Work-in-progress (WIP) Inventory

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 4: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupEnvelope folding..

We will start with a small experiment..

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 5: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupSingle-piece flow Batch-size = what moves from one stage to the

next at a time

One envelope = Batch size of one = single-piece flow

Why is stuffing one envelope at a time faster? Reason 1: Extra time needed to sort, stack, move

around large piles of half complete envelopes (WIP Inventory)

Reason 2: Less error prone (what if letters don’t fit the envelopes?) = Reduce potential rework

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 6: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupSingle-piece flow

The small-batch approach finishes a product every few seconds

The large-batch approach must deliver all the products at once, at the end

What if it turns out customers don’t want the product?

Which one allows us to find out sooner?

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 7: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupSingle-piece flow

Biggest advantage of working in small batches = quality ptoblems can be identified much sooner

Andon cord = Any worker can stop the production line.

Benefits of finding and fixing problems faster outweigh the cost of stopping the production line.

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 8: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBenefits of reducing batch size

Reducing batch size reduces cycle time

• Size of the shaded area is the size of the queue

• Queue size is proportional to

batch size• Reduce cycle

time without changing either demand or capacity

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 9: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBenefits of reducing batch size

Reducing batch size reduces variability in flow 100 people entering a restaurant at the same time

Reducing batch sizes accelerates feedback Fast feedback provides disproportionate economic benefits

because the consequences of failures usually increase exponentially when we delay feedback

The number of dependent decisions generally grows geometrically with time

A single incorrect assumption can force us to change hundreds of decisions

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 10: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBenefits of reducing batch size

Reducing batch size reduces risk Risk of failure is significantly reduced

Reducing batch size reduces overhead 300 open bugs, we enter #301 vs 30 open bugs,

we enter #31

Large batches reduce efficiency Reviewing 200 drawings with incorrect assumptions

vs reviewing 20 drawings and getting feedback

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 11: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBenefits of reducing batch size

Large batches inherently lower motivation and urgency Delivery of one module in 5 days vs 100 days until

integration point Lack of rapid feedback leads to dismotivation

The entire batch is limited by its worst element

Batch size slippage principle: Large batches cause exponential cost and schedule

growth High slippage of long-duration projects

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 12: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBatch size slippage principle

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Original Planned Duration

Perc

ent S

lippa

ge

Page 13: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBatch size optimization

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Transaction cost:Cost of sending a batch to the next process

Holding cost:Cost of not sending the batch

Page 14: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBatch size optimization

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

• Optimal batch size function is continuous

• Batch size reduction is reversible

Page 15: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small batches in the Lean StartupBatch size optimization Key idea from the TPS:

Reduce batch size before you attack other bottlenecks

Reducing batch size reduces variability, and with lower variability we may find current capacity is sufficient

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 16: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Entrepreneurial Connection The goal is not to produce more stuff efficiently

The lesson is not about manufacturing

The key question is: What if it turns out the customer doesn’t want

the product we are building? Better finding out sooner than later

Working in small batches, a startup can minimize the expenditure of time, money, and effort that could potentially be wasted.

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 17: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Entrepreneurial Connection Release small

Test small with automated tests

Integrate small Create «andon cords» to detect integration failure

Deploy small and deploy continuously

= Continuous deployment

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 18: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Entrepreneurial Connection

The essential lesson is not to ship/deploy 50 times per day

By reducing batch size, we get through the Build-Measure-Learn feedback loop more quickly than our competitors

The ability to learn faster from customers is the essential competitive advantage that startups must possess

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 19: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Large Batch Death Spiral Large batches tend to grow over time

Moving the batch forward results in additional, work, rework, delays, and interruptions

Everyone works to reduce this overhead

Unlike in manufacturing, there are no physical limits on the size of the batch

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 20: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Large Batch Death Spiral

It is possible for the batch size to keep growing and growing

Since the product has been in development for so long, why not fix this one more bug, or add this one more feature?

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Why risk the success of this release by failing to address this potentially critical flaw?

Page 21: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupWIP Inventory in a Startup

When factories have excess WIP, it piles up on the factory floor

Startup work is intangible

All the work that goes into designing the MVP

Incomplete designs, not-yet-validated assumptions, and most business plans are WIP

Lean Startup techniques convert push methods to pull and reduce batch size Reduce WIP

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 22: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupWhat the Lean Startup is NOT

Lean Startup is not applying pull to customer wants

The pull signal to product development is not what the customer tells us to build as a product

This is not the way the Lean Startup works because customers often do not know what they want

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 23: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Pull Signal in a Lean Startup

Our goal in building products is to be able to run experiments that will help us learn how to build a sustainable business

The Lean Startup responds to pull requests in the form of experiments that need to be run

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 24: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Pull Signal in a Lean Startup

We formulate a hypothesis we want to test

Product dev. Team designs and runs the experiment, using the smallest batch size that will get the job done

Build-Measure-Learn loop actually works in reverse order

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 25: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Small Batches in the Lean StartupThe Pull Signal in a Lean Startup

We figure out what we need to learn

We work backwards to see what product will work as an experiment to get that learning

The caveat: It is not the customer, but rather our hypothesis about the customer that pulls work from product development Any other work is waste

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 26: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Wisdom of the 5 Why’s Regulation of speed

Speed is the only strategy in a startup

But speed alone can be destructive

Startups require built-in speed regulators that help teams find their optimal pace of work

Remember the andon cord: Stop production so that production never has to stop You cannot trade quality for time

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 27: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Wisdom of the 5 Why’s Regulation of speed

It is OK for the initial MVP to have bugs, missing features and bad design

When you start building products customers want, low-quality products inhibit learning when customers cannot fully experience the product due to defects

We need an adaptive process that allows us to invest in preventing the problems that waste time and resources

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 28: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Wisdom of the 5 Why’s5 Why’s Analysis

Allows us to make incremental investments and evolve a startup’s processes gradually

Asking Why? 5 times to get to the root cause and understand what has happened

At the root of every seemingly technical problem is a human problem

5 Whys provides an opportunity to discover what that human problem might be

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 29: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Wisdom of the 5 Why’s5 Why’s Analysis

Why did the machine stop? (There was an overload and the fuse blew)

Why was there an overload? (The bearing was not sufficiently lubricated)

Why was it not lubricated sufficiently? (The lubrication pump was not pumping sufficiently)

Why was it not pumping sufficiently? (The shaft of the pump was worn and rattling)

Why was the shaft worn out? (There was not strainer attached and metal scrap got in)

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 30: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Wisdom of the 5 Why’s5 Why’s Analysis

The real cause is hidden behind more obvious symptoms

The root cause moves away from a technical fault = a blown fuse

Toward a human error = someone forgot to attach a strainer

Typical of most problems startups face

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 31: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Wisdom of the 5 Why’s5 Why’s Analysis

Acts as a natural speed regulator

The more problems you have, the more you invest in solutions to those problems

With startups in particular, there is a danger that teams will work too fast, trading quality for time in a way that causes sloppy mistakes

Five Whys prevents that, allowing teams to find their optimal pace

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 32: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Wisdom of the 5 Why’s5 Why’s Analysis

Ties the rate of progress to learning, not just execution

Startup teams should go through Five Whys whenever they encounter any kind of failure Technical faults, failure to achieve business results, or

unexpected changes in customer behavior

Small batches + 5 Whys analysis: Provide the foundation a company needs to respond

quickly to problems as they appear without overinvesting or overengineering

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 33: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Growth Drivers in a StartupEngine of Growth

Mechanisms that startups use to achieve sustainable growth

Sustainable excludes all one-time activities that generate a surge of customers but have no long-term impact e.g. A single advertisement or a publicity stunt that

generate jump-start growth

Characterized by one simple rule: New customers come from the actions of past

customers

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 34: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Growth Drivers in a StartupSources of sustainable growth Four ways past customers drive sustainable

growth:1. Word of mouth2. As a side effect of product usage

Inherent awareness created by product use E.g. Luxury products

3. Through funded advertising Paid through revenue generated through other

customers4. Through repeat purchase or use

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 35: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Growth Drivers in a StartupEngines of Growth Feedback loops powered by the four

sources of sustainable growth

Faster the loops turn, faster the company will grow

Each growth engine has an intrinsic set of metrics that determine how fast a company can grow when using it

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 36: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

The Sticky Engine of Growth

The Viral Engine of Growth

The Paid Engine of Growth

Growth Drivers in a StartupThe 3 Engines of Growth

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 37: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

The 3 Engines of GrowthThe Viral Engine of Growth

Relying on awareness of product to spread rapidly from person to person similar to a virus becoming an epidemic

Different from simple WoM Virality is an inherent property of the product itself Customers are not intentionally acting as

evangelists Growth happens automatically with product use

Viral engine can be quantified = Viral loop and Viral coefficient

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 38: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Viral coefficient = Measures how many new customers will use a product as a consequence of each new customer who signs up

How many friends will each customer bring with him or her?

E.g. Viral coefficient of 0.1 not sustainable

Used mainly by products targeting advertisers

The 3 Engines of GrowthThe Viral Engine of Growth

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 39: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

Invest Customer Lifetime Value in user acquisition

CLV = Revenue – Variable Costs

Company grows if customer acquisiton cost < CLV

May be subject to competition and may require bidding at some point

The 3 Engines of GrowthThe Paid Engine of Growth

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»

Page 40: CS419 Technology Entrepreneurship Building a Lean, Scalable Startup Fall 2012 – Fall 2013 Emre Oto

The 3 Engines of GrowthThe Paid Engine of Growth

Using the right engine of growth is important for attaining product / market fit

CS419 Technology Entrepreneurship Week #6 «The Lean Startup Redux II»