1

Impact of the Lean Startup

 2

Abstract

Lean Startup is an approach for startups to reach the product-market fit in the minimum time. It is a

relatively new product development method proposed by Eric Ries in 2008 compared to Lean itself,

which was coined by Krafick in 1988. This research focuses on understanding the methods proposed in

"The Lean Startup" book by Eric Ries and its effectiveness by looking at two case studies. One case study

focuses on applying Lean Startup to transform a consumer electronics company’s environment so that it

can adapt to a rapidly changing market and ultimately encouraging an entrepreneurial mindset among

its employees. The second case study highlights the challenges and their solutions in implementing Lean

Startup Approaches in digital startups.

Keywords: Lean Startup, Lean, Lean Startup Approaches

 3

Table of Contents

Introduction 5

The Lean Startup methodology 7

Examples of MVP 7

Video MVP 7

Concierge MVP 8

Wizard of Oz MVP 8

Growth 8

The Sticky Engine 9

The Viral Engine 9

The Paid Engine 9

Pivot 10

Case Study 1: Samsung’s transformation 10

Phase 1: Experimentation 11

Phase 2: Learning and Revision 11

Phase 3: Transformation 12

Phase 4: Future Direction 13

Case Study 2: Lean Startup Approaches in Digital Startups 13

Survey Methodology 13

If and how digital startups apply LSA 13

Ensuing Results 14

Advantages and Disadvantages 14

 4

How digital startups combine LSA with other entrepreneurship approaches and tools 14

Conclusion 14

References 16

List of Figures 18
 5

Impact of the Lean Startup

Silicon Valley is a hub for many startups. Although many startups launch daily, very few are

successful. Therefore, it’s important to understand what makes startups succeed or fail. Startups need

to iterate and find a sustainable business model. Since they do not already know the product or the

customer, there is very high uncertainty. Lean Startup (Ries, 2011) is a methodology that helps startups

navigate this uncertainty and arrive at the right product-market fit in minimum time. This study aims at

understanding the Lean Startup process and its impact from selected case studies. It will help aspiring

product managers to learn how lean principles can be applied to startups.

The report reviews "The Lean Startup" book (Ries, 2011) to illustrate the proposed concepts and

step-by-step procedures. I evaluated five related journal papers associated with this idea. Bieraugel (2015)

considered the Lean Startup method’s application for managing libraries. Hwang and Shin (2019) studied

a large corporation’s transformation to overcome its challenges using Lean Startup. Ghezzi (2019)

surveyed the impact of Lean Startup in 227 digital startups. Werwath (2019) analyzed why Lean Startup

is essential but not sufficient in the case of science-based startups. Frederiksenand Brem (2017)

identified the relations of Lean Startup with leading theories in scientific literature, and they discuss

broader implications. Out of these, I have selected Hwang and Shin (2019) and Ghezzi (2019) for this

report because they provide insights from practical applications.

Lean Manufacturing (Womack & Jones, 1997) is a production method that maximizes workplace

efficiency by eliminating waste. In manufacturing, Ohno (1988) defined waste as “anything that does not

add value to the customer”. Some examples of waste are overproduction, waiting times, internal

transport, and excess inventory. Lean Startup applies the same principles to startups by defining waste as

anything that doesn’t help in the validation of the business model.

Traditional product development uses a stage-gate or waterfall process. As the waterfall model

requires knowing the specifications beforehand, it does not apply to startups. The agile method allows
 6

adapting to the changing requirements by closely working with the customer. However, in the case of

startups, even the customer is unknown, making agile sub-optimal. The Lean Startup method fills this

gap. Ries, (2011, p.20) defines the goal of the startup as “to figure out the right thing to build - that

customers want, and they are willing to pay for it”. Lean Startup proposes to achieve this goal by setting

up a Build Measure Learn feedback loop. Learning happens by formulating hypotheses behind the

business model and designing experiments to validate them. The next step is to build the Minimum

Viable Product (MVP) in which only the minimum features necessary to prove or reject the hypothesis

should be retained and everything else should be removed. Thus, it treats anything which does not

contribute to learning as waste.

The next step is to measure the customers’ behavior with the MVP and determine if the

hypothesis is passed or rejected. If the hypothesis is rejected, the same process should be repeated until

a valid hypothesis is found. After it’s confirmed that the product creates value for someone, the same

loop is used to tune the business model in order to maximize growth. At the end of every iteration, a

decision is made on whether to continue with the same model (persevere) or to adjust it (pivot). This

process is illustrated in Figure 1.

Hwang and Shin (2019) have studied the application of the Lean Startup methodology to

minimize the risk associated with the transformation of large companies. It covers the case study of

Samsung Electronics in the 2010s when it was losing to Chinese competitors that produced at a cheaper

rate and smaller startups that responded quicker to innovations. Samsung was losing its market share.

Samsung at this point was a large firm with a hierarchy that needed to become an entrepreneurial

company so that it can adjust to a rapidly changing market and beat the competition. This experience of

Samsung shows the Lean Startup method’s effectiveness in this transformation process to generate an

entrepreneurial mindset.
 7

Ghezzi and Cavallo (2018) coined the term Lean Startup Approaches (LSA) for referring to the

combination of Lean Startup (Ries, 2011) and Customer Development (Blank, 2007). Ghezzi (2019)

surveyed 227 digital startups to understand their reasons for adopting LSA and the benefits and

disadvantages. The study also connects LSA aspects to existing entrepreneurship theories of

effectuation, bricolage, and opportunity creation from academic literature to provide them with a

theoretical foundation.

The introduction section has described the Lean Startup process at a high level. The next section

covers detail about the different types of MVP, growth engines, examples of the Build Measure Learn

loop, and pivots. The first case study section reviews Samsung’s transformation process in detail and

highlights the risks that were involved. It explains how lean helps in mitigating them, and also where it

fell short. The second case study section examines the advantages and disadvantages of Lean Startup

approaches in digital startups. The report concludes with the similarities and contrasts between the two

case studies and the most important insights.

The Lean Startup methodology

Lean Startup (Ries, 2011) requires learning about the market by providing the product to the

customer and obtaining feedback by observing them. This kind of learning is termed as “validated

learning”. This is unlike the learning from market research surveys which ask customers what they need

or whether they would be willing to pay for a certain product. Validated learning is necessary because

customers often don’t know what they want. To obtain validated learning, it is not required to build the

whole product. This version of the product which contains only the features needed for validated

learning is termed as Minimum Viable Product (MVP).

Examples of MVP

Ries (2011) has discussed the following examples to illustrate the concept of MVP.

Video MVP
 8

Dropbox created a video of its product functionality without actually building the product and

published this video along with the link to sign up. Within a day there were more than 75000 signups,

which validated that customers are interested in a product that solves the file synchronization problem.

Note that the validation is strong because it is based on actual customer behavior of signing up for the

beta waitlist as opposed to survey feedback.

Concierge MVP

Food on the Table is a service that generates a shopping list by processing customer’s meal

preferences, listing ingredients from recipes, identifying grocery stores to buy the ingredients at the

optimal price. The founders started by personally visiting their first customer to understand meal

preferences, looking through grocery stores themselves, and creating the shopping list. There was no

need for a software system to serve one customer. As more customers got added, in-person service

became inefficient, and only then was the software product added to the MVP.

Wizard of Oz MVP

Aardvark’s vision was to build a new search technology that can answer subjective questions.

The team spent 6 months to figure out what they should build by testing out different ways of solving

this problem. For example, one prototype was to provide a phone number where customers could call

and request any online service. They purposefully avoided the technical search algorithm work by having

employees search for the answers manually. This allowed them to iterate over different prototypes and

validate that the customers need the product before investing in building the technology.

Growth

Once the assumptions behind the product are validated, startups can then focus on growth

using the “engine of growth” framework. Every engine type defines a set of metrics that should be

optimized. After choosing the engine of growth, startups should iterate through the Build Measure

Learn loop to optimize the associated metrics.

 9

The Sticky Engine

This engine retains customers for the long term. A company of this type should track the

customer acquisition rate subtracted by the churn rate as its growth metric, where the churn rate is the

proportion of users that cannot remain engaged. With this approach, a startup that gains 39% new

customers but has a retention of 61% is considered "not growing" as the churn rate cancels out the

acquisition rate. Based on the values of acquisition rate and churn rate, a startup should decide whether

to invest in marketing/sales or in revising the product to improve engagement.

The Viral Engine

This engine relies on customers for product marketing. Social network or messaging products are

a natural fit for the viral engine, as the product usage itself requires inviting more customers and growth

is a side effect. Note that this differs from the word-of-mouth growth in which inviting other customers is

optional. This engine suggests using “viral coefficient” as the growth metric. This is defined as the

number of new customers that will get acquired because of a single sign up. A viral coefficient value of

less than 1 implies that although the number of customers is growing, the growth rate will eventually

fade out. On the contrary, a value greater than 1 means exponential growth. Such startups rely on

indirect revenue sources such as advertising instead of charging upfront during sign up. This is aligned

with the principle of maximizing the viral coefficient.

The Paid Engine

The paid engine of growth relies on advertising in some form to acquire customers. The two

most useful metrics are cost per acquisition (CPA) and lifetime value (LTV). CPA is the cost to acquire one

customer, and LTV is the revenue earned over a lifetime from one customer subtracting the variable cost.

The difference between LTV and CPA is the key growth metric that companies following this engine

should focus on. A positive margin implies companies can reinvest the revenue into acquiring more
 10

customers and the growth rate will increase and similarly, a negative margin means the growth rate will

slow down. Ecommerce businesses or retail stores often use the paid engine of growth.

Pivot

The three engines of growth are a way to focus energy on the startup in the right place. Another

topic of the Lean Startup iteration process is “Pivot”. At the end of every loop, the startup should decide

whether to Pivot or Persevere. The pivot can involve tweaking any aspect of the startup’s business

model. The book discusses some common pivot examples:

• Customer Segment Pivot: The initial group of customers that the startup intended to focus on

showed less interest but added value for some other group. The startup can switch to the other

customer segment.

• Engine of Growth pivot: Hypothesis that the product will spread virally gets rejected, but it is

discovered that the lifetime value of every customer is much higher than the cost of acquiring the

customer. Then the startup can move from viral to paid engine of growth.

The further sections focus on insights from the Lean Startup’s implementation at different

organizations.

Case Study 1: Samsung’s transformation

Samsung is a large corporation in the domain of consumer electronics and was working in the

mode of sustaining innovation. To overcome the challenge of losing out prominent market share to

Chinese companies, it needed to transform its work environment to encourage disruptive innovation.

After studying different methodologies, they chose the Lean Startup methodology to transform the

company culture. Hwang and Shin (2019) interviewed the top management and the project members to

gain insights about the transformation process. One of the authors worked at Samsung, which helped in

supplementing the learnings out of the interview process. As the entire company’s mindset cannot be

changed overnight, this transformation was done in four phases as shown in Figure 2. The first two
 11

phases consisted of iterations in its experimental organization called Creative Lab (C-Lab). These

correlate with the Build Measure Learn loop in the Lean Startup process. Phases three and four applied

the successful learnings from C-Lab to the entire corporation and the international startup community

respectively, corresponding to the growth stage of the Lean Startup.

Phase 1: Experimentation

The experimentation effort was defined as “a corporate venture program designed to identify

and support employees’ business ideas. C-Lab aims at disruptive innovations through hybrid innovation

structure with rapid execution, honorable failures, and entrepreneurship based on strong support from

Samsung.” as said by one of the C-Lab staff members (Hwang & Shin, 2019). This program was set up as

an eight-step process as shown in Figure 3. Multiple small teams of up to five people participated in this

program with every team functioning as a Lean Startup. In the initial version, the team members are

sent back to their home business units at the end of the process. At every step of the process, a team

can advance to the next phase or perish and start over resembling the Lean Startup’s Build Measure

Learn loop. However, after two years of this process, it was found that the ideas were closely related to

existing company products and did not meet the top management’s expectations. It was realized that

employees were not motivated enough about their participation in the C-Lab and considered it a

temporary activity. The next phase focused on identifying gaps and revising the program.

Phase 2: Learning and Revision

The following four lessons were learned through interviews with project members. (a)

Hierarchical company structure discouraged employees from taking risks. (b) The entrepreneurship spirit

was lacking because there was no option of spin-offs, which meant employees had to return to their

home units after the project. (c) Business units were not supportive of sending their talent to C-Lab, as

that would weaken their performance. (d) The traditional process-heavy approach hindered the team’s

from making actual progress.

 12

To rectify these challenges, four revisions were implemented as highlighted by red lines in

Figure 3: (a) encourage risky projects by creating a 90% failure rate principle; (b) change management

method to holacracy, allowing project teams to make their own decisions; (c) remove hierarchy to

encourage freedom of expression; (d) introduce the possibility of spinoffs to motivate innovative

outcomes.

To reduce the resistance from the business unit’s top management highlighted the necessity of

C-Lab. The evaluation policy was updated so that C-Lab project members will be evaluated by C-Lab

instead of their home business unit. Additionally, they were exempted from their home business unit

responsibilities, allowing them to focus completely on their C-Lab project. Participating in C-Lab was

encouraged by providing incentives such as monetary rewards, opportunities for promotion, and

receiving investment for spinoffs. The impact of these revisions is visible from Figure 4, which shows a

significant increase in the number of C-Lab projects showcased in the Consumer Electronics Show (CES).

46.6% of C-Lab projects proposed new ideas that were unrelated to any existing products. Several

products from C-Lab were launched to the market and were considered for large-scale manufacturing.

Phase 3: Transformation

With the success of these revisions within C-Lab, the next step was to replicate them across the

company. The company prioritized organizational transformation (Figure 5) over new product

development. The corporate policies and communication guidelines were updated to align with the new

principles introduced at C-Lab. Initiatives such as Failing Encouragement Awards helped instill these

throughout the company. The central C-Lab process was replicated to mini C-Labs within each business

unit. Continuous interaction between other units and C-Lab was set up to encourage entrepreneurial

spirit.
 13

Phase 4: Future Direction

After the transformation within the company, Samsung sought to incubate 500 startups in C-Lab

over the next 5 years to support their growth. Thus, a small Lean Startup experiment that started within

the organization is now expanding towards the entire nation.

Case Study 2: Lean Startup Approaches in Digital Startups

Ghezzi (2019) focused on the effectiveness of Lean Startup Approaches (LSA) in digital startups.

Previous literature on LSA relied on single case examples, which did not provide an overall picture of the

usage and effectiveness. This study surveyed 227 digital startups to answer the following research

questions: (a) if and how digital startups apply LSA; (b) ensuing results; (c) advantages and

disadvantages; (d) how digital startups combine LSA with other entrepreneurship approaches and tools.

As this report is focused on practical applications of Lean Startup, it does not cover the linkage of LSA to

existing entrepreneurship theories suggested in this article.

Survey Methodology

The survey was implemented in two steps. The first step consisted of objective questions with

Boolean or multiple choices, which provided quantitative insights. From the statistical analysis of these

answers, a subset of startups that came out as outliers were selected for the next step which consisted

of open-ended questions to gain qualitative insights.

If and how digital startups apply LSA

93% of the surveyed startups adopted LSA. The top reason for adopting was to achieve a

product-market fit in the shortest time. Out of the 7%, the top reason for not adopting LSA was that the

startups already achieved product-market fit. These numbers show that LSA is gaining popularity and

startups are seeking tools to solve these problems. Business Model Canvas and MVP were found to be

the most useful aspects of LSA, while falsifiable hypotheses and early evangelists were often unused.
 14

Ensuing Results

The time needed to adopt LSA ranged from 4.1 months to 13.5 months with an average of 8.2

months. Overall satisfaction of LSA on a Likert scale of 4 points was observed to be 2.8, which means

slightly lower than moderately satisfied. The reason for the longer implementation time was that

startups late in adopting LSA were unwilling to pivot because of sunk cost. One reason for lower

satisfaction was that Lean Startup is not universally applicable and needs significant refining and tuning

according to the company’s needs before it can be applied.

Advantages and Disadvantages

74% of the startups showed LSA helps in reducing time and cost during testing. The major

disadvantage was that LSA does not define clear steps for defining and testing MVPs. Startups also

found that investors are more interested when they present LSA data obtained from real customers

along with the business plan.

How digital startups combine LSA with other entrepreneurship approaches and tools

Business Plan, Agile Development, and Scrum were the top tools used alongside LSA. As

discussed in the previous section, data got from LSA helped strengthen the business plan when

presenting to investors. The Sprint tool within Scrum and Agile were useful to track the timeline of MVP

implementation.

Conclusion

Just as Lean helps in increasing efficiency by removing waste, Lean Startup avoids building

products that do not create value for the customers. The survey results from digital startups show that

Lean Startup has reduced the time to achieve product-market fit in practice. The two case studies have

shown that Lean Startup is effective in both large and small organizations. However, companies need to

customize it or combine it with other tools in order to satisfy their requirements. Also, in the business-

to-business market, it is difficult to use the MVP approach as a startup needs to add enough features to
 15

compete with other products. Despite these downsides, the success of the Lean Startup in Samsung

encouraged top management to expand it throughout the country.

 16

References

Bieraugel, M. (2015). Managing library innovation using the lean startup method. Library Management,

36(4-5), 351–361. http://dx.doi.org/10.1108/LM-10-2014-0131

Blank, S. (2013). The four steps to the epiphany: Successful strategies for products that win (2nd ed.).

K&S Ranch. https://www.amazon.com/Four-Steps-Epiphany-Steve-Blank/dp/0989200507

Eisenmann, T. R., Ries, E., & Dillard, S. (2012). Hypothesis-driven entrepreneurship: The Lean Startup.

Harvard Business School Entrepreneurial Management Case, (812-095).

https://hbr.org/product/hypothesis-driven-entrepreneurship-the-lean-startup/812095-PDF-ENG

Frederiksen, D. L., & Brem, A. (2017). How do entrepreneurs think they create value? A scientific

reflection of Eric Ries’ Lean Startup approach. International Entrepreneurship and Management

Journal, 13(1), 169–189. https://doi.org/10.1007/s11365-016-0411-x

Ghezzi, A. (2019). Digital startups and the adoption and implementation of lean startup approaches:

Effectuation, bricolage and opportunity creation in practice. Technological Forecasting and

Social Change, 146, 945–960. https://doi.org/10.1016/j.techfore.2018.09.017

Ghezzi, A., & Cavallo, A. (2018). Agile business model innovation in digital entrepreneurship: Lean

startup approaches. Journal of Business Research, 110, 519–537.

https://doi.org/10.1016/j.jbusres.2018.06.013

Hwang, S., & Shin, J. (2019). Using lean startup to power organizational transformation: Creating an

internal division that implemented concepts from lean startup helped a consumer electronics

firm foster an entrepreneurial mindset among employees. Research-Technology Management,

62(5), 40–49. https://doi.org/10.1080/08956308.2019.1638224

Ohno, T. (1988). Toyota production system: Beyond large-scale production. Productivity Press.

https://www.amazon.com/Toyota-Production-System-Beyond-Large- Scale/dp/0915299143
 17

Ries, E. (2011). The lean startup: How today’s entrepreneurs use continuous innovation to create

radically successful businesses. Currency. https://www.amazon.com/Lean- Startup-

Entrepreneurs-Continuous-Innovation/dp/0307887898

Werwath, M. (2019). Lean startup and the challenges with “hard tech” startups. IEEE Engineering

Management Review, 47(1), 22–23. https://doi.org/10.1109/EMR.2019.2903705

Womack, J. P., & Jones, D. T. (1997). Lean thinking - banish waste and create wealth in your corporation.

Journal of the Operational Research Society, 48(11), 1148–1148.

https://doi.org/10.1057/palgrave.jors.2600967
 18

List of Figures

Figure 1

The Lean Startup steps (Eisenmann et al., 2012)

 19

Figure 2

Phases of transformation (Hwang & Shin, 2019)

Figure 3

C-Lab Project Steps (Hwang & Shin, 2019)

 20

Figure 4

C-Lab Projects showcased in CES (Hwang & Shin, 2019)

Figure 5

Transformation steps (Hwang & Shin, 2019)