LEAN

Titolo INNOVATION
presentazione This material and what the
Professors say in class are
sottotitolo intended for didactical use
Alberto PORTIOLI STAUDACHERMilano, XX mese 20XX only and cannot be used
Dipartimento Ing. Gestionale Politecnico di Milano ouside such context, nor to
Dep. Management, Economics and Industrial Engineering imply professors’ specific
alberto.portioli@polimi.it believes or opinion

Reference book: Lean Startup, by Eric Ries (2011)

Lean Innovation (LI): the journey

According to Forbes, 90% of startups fail.

Nowadays, more than ever, we need more innovation and more entrepreneurial approache
by managers. However, innovators and entrepreneurs are not common, and we cannot build
them, right?
Lean Innovation (LI): the journey

According to Forbes, 90% of startups fail.

Nowadays, more than ever, we need more innovation and more entrepreneurial approache
by managers. However, innovators and entrepreneurs are not common, and we cannot build
them, right?

Actually, there is a way to foster

innovation and, most importantly, become a successful
Innovator

LEAN INNOVATION
Derived from Lean Management,
scientific testing and fast learning
Why innovations fail?.. Look at what goes on in the world

The pace of introducing new technologies has become exponential resulting in an exponential
change in customers behavior and expectations. What used to be an order winner, is now an
order qualifier.
We are entering in the world of uncertainty…
Look at what companies should do… They should
innovate to adapt

It is not enough to be intelligent and rigorous planner to be the strongest in the

market. One should be able to respond to change and adapt to it by stepping into it
and not be a third-party observer.
True Innovators are innovators who think outside the box, they distance themselves
from the old-fashion thinking of “Just-do-it” following what the boss says or the
investor asks. And test their hypothesis
Scientific Testing & Learning… from intuition to science

Webster dictionary defines scientific method as a set of “principles and procedures for the
systematic pursuit of knowledge involving the recognition and formulation of a problem, the
collection of data through observation and experiment, and the formulation and testing of
hypotheses”
A scientific method helps :
• Tuning down the bias and the prejudgment
• Test the hypothesis in real-time
• Get validated feedback
• Learn how to improve any process
Isn’t this what companies and startups are lacking?

Can we apply this when we innovate (developing new products, new processes, new ventures)?...
Lean Innovation… from intuition to science

…YES, WE CAN.

Scientific Method

LEAN INNOVATION
Lean Innovation is a scientific based methodology that bursts innovation rate and
capabilities of individuals and organisations
Why some innovators succeed?... Because they learn

In 2014, Satya Nadella was appointed as the new CEO of Microsoft. Nadella learned that
Microsoft hypothesis that the success was based on proprietary phone hardware and operating
systems was false. Company’s share were dropping down and a major change was needed.
Nadella adopted a new hypothesis relying on customer behavior: a business around subscription
products with regularly recurring revenue. Since then the company’s stocks has tripled.
According to him you should simply always “Hit Refresh” on your company.
Why some innovators succeed?... Because they learn

In 2012, Ginni Rometty learned from her predecessors and successfully shifted IBM
away from "shrinking businesses such as computers and operating system software, and
into higher-growth areas like artificial intelligence”
 LI as a Process

Set Hypothesis Set hypothesis

Pivot (make a Change a feature

Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Set the hypothesis

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Set the hypothesis

Set the hypothesis: Just like any scientific experiment, you need a hypothesis, a
vision, upon which you base your predictions about your product value (value
hypothesis) and customers (growth hypothesis). In a scientific experimentation, a
theory guides us, whereas in a startup, the startup’s vision guides the experimentation.
An innovator’s objective is always to “discover how to build a sustainable business
around that vision”.
Test the hypothesis

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Test the hypothesis

Test the Hypothesis: Start the first BML loop with early adopters and an MVP
This is when you start testing your hypothesis, by identifying your early adopters through a
market research, this is your target customers.
What is an MVP?:

It is that version of the product ,with minimum features, that “enables a full turn of the
Build-Measure-Learn loop with a minimum amount of effort” …Think Lean. It is an
experiment that requires the joint efforts of all backgrounds. It is not as a result of the
usual rigid sequence of product development.

MVP Product
 MVP example: Dropbox

Dropbox needed to test its hypothesis: “can we provide a superior customer experience? will
people give our product a try?” They believed—rightly, as it turned out—that file synchronization
was a problem that most people didn’t know they had. Once you experience the solution, you
can’t imagine how you ever lived without it.

It would have been expensive and time consuming to demonstrate the working software in a
prototype form. Besides, it would have been expensive and time consuming to change in any way.

So they made a simple video (MVP) demonstration of the technology as it was meant to work, but
it was targeted at a community of technology early adopters. The founder narrated the video
personally, and as he’s narrating, the viewer is watching his screen.
 PDCA and BML

Less Rigorous planning inside closed doors….. “Get Out of the Building” and LEARN
one experiment at a time …

PLAN PLAN + Do
a process
BUILD
ACT
DO
Improve
and the plan
standardize
Analyze Act
MEASURE
+
=Check
CHECK: Reflect
performance
performance LEARN
 BML Loop … faster

PULL/What customers want

Experiment with Small batch of features
BUILD: Quick and dirty solutions
a product Scalability

Cohort Analysis
5 Whys LEARN: MEASURE: Split-Tests

from data performance Andon Card

Analyze data
Real-time monitoring
of customer behavior

Minimize the TOTAL time through the loop… Think Lean

 Validated Learning

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Validated Learning, what’s new

React rather than forecast: instead of spending resources (manpower, money and
time) on forecasting what the product could be with all its specifications, you release an
MVP to the market that allows you to “pull” the actual product requested

Get rid of the old-experience-based decision: entering the market confident of

yourself based on old data is far less effective than entering it based on real-time data
from your customers

From a seat on the bench to a seat in the game: The world is innovating at a fast
pace, to keep up with it you simply cannot wait, not to introduce a new product, not to
update your product (imagine facebook updates every year instead of several times a
year)
Validated Learning, what’s new

Sense and response: From the spoken need to the observed behavior of the customer.

Facebook displays products related posts based on clicks done few days ago or even
few minutes before you even access your account
Validated Learning starting point: Market Fit?

Market fit: If you acquire a large market, it means you achieved product /market fit.
Assessing whether the innovation is getting closer to the product/market fit, is done as it
tunes its engine by evaluating each round through the Build-Measure-Learn feedback loop
using innovation accounting. It is about the direction and degree of progress rather than raw
numbers or vanity metrics.
 Validated Learning

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

 Change a feature & Iterate

Change a feature: In this phase, based on the learning and the fact that there shall be a
market fit if you improve your MVP, you experiment with a feature. You can add or remove a
feature; either way you should start the BML loop again. It is no longer an MVP, it is a product.

The faster you iterate the faster you learn, the faster you get to your market fit and
eventually have a sustainable business.
 Validated Learning

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Pivot

The Pivot is a structured course correction designed to test a new fundamental

hypothesis about the product, strategy, and engine of growth. “A pivot requires that we
keep one foot rooted in what we’ve learned so far, while making a fundamental change
in strategy in order to seek even greater validated learning”. There are several types of
pivots including
 Set the hypothesis

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

 Test the hypothesis

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Persevere with the latest hypothesis

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Persevere

When you have a market fit, you are confident that your hypothesis is validated,
and you can now continue within the same hypothesis by tweaking your product,
that is you Persevere in the same direction.
 Adapt

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the
product
BML-Loop Sustainable Business

Successful, Sustainable Business

Adapt

It is essential to build an adaptive organization, one that automatically adjusts its process
and performance to current conditions, by training new employees and be attentive to required
investments.

To build an adaptive organization, Five Whys is to be used with a proportional investment to

be made for each of the five levels of the hierarchy, that is proportional to the size of the
symptom the company is facing

Large investments can be made in prevention only when dealing with large problems. The
Five Whys ties the rate of progress to learning, not just execution. Five Whys should be
applied whenever the team faces any kind of failure, including technical faults, failures to
achieve business results, or unexpected changes in customer behavior.
 Grow

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the Sustainable Business
BML-Loop
product

Successful, Sustainable Business

Grow

Sustainable growth is characterized by one simple rule: New customers come from the
actions of past customers. You are no longer adding major features, you are “tweaking
your product” through faster BML loops There exists three types of engine growth:
1. The sticky engine of growth: The speed of growth depends on the rate of
compounding.
Rate of compounding = Natural growth rate (rate of new customer acquisition) –
Churn rate (the fraction of customers in any period who fail to remain engaged with
the company’s product)
Focus on RETENTION rather than marketing to get new customers.

2. The Viral Engine of Growth: The speed of growth is determined by the Use
Viral coefficient, that is how many new customers will use a product as a
consequence of each new customer who signs up (person-to-person effect). In the
viral engine of growth, monetary exchange does not drive new growth (Facebook).
Focus on activities AFFECTING customer behavior
Grow

3. Paid engine growth: its feedback loop is: Each customer pays a certain amount
of money for the product over his or her “lifetime” as a customer. Once variable
costs are deducted, this usually is called the customer lifetime value (LTV). This
revenue can be invested in growth by buying advertising or customers.
Sustainable Business

Set Hypothesis Set hypothesis

Pivot (make a Change a feature
Run 1 BML-Loop Test hypothesis
big change)

No Market Fit NO but improved a lot

(have a significant
customer base)? Validated Learning
Yes
Persevere with the same hypothesis

Grow
Adapt Tweak the Sustainable Business
BML-Loop
product

Successful, Sustainable Business