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Innovation Management in Business-to-Business Software as a Service Startups

Investigating the Lean Startup Methodology and its Shortcomings around Selecting Ideas

Written by Johan Båth, Jakob Köhler

Paper category

Master Thesis


Business Administration>Entrepreneurship




Master Thesis: Lean Startup Methodology Lean Startup Methodology (LSM) is an innovation framework developed by Eric Ries (2011). LSM focuses on providing software companies with tools to develop new products and services, allowing rapid iterations to develop their businesses through what he calls a "build-measure-learn" feedback loop (Ries, 2011). Ries defines a start-up as a “human organization that aims to create new products and services under extremely uncertain conditions” (Ries, 2011, p. 8). This in turn means that, according to Ries' definition, a startup is not necessarily a small group of people with the stereotype of sitting in a garage doing the next big thing, but it may also exist in a mature company. This is another basic principle in the Lean Startup methodology: "Entrepreneurs are everywhere" (Ries, 2011). In developing this methodology, Ries was heavily influenced by Blank’s customer development model (2007), Taiichi Ōno’s lean manufacturing model (1988), agile software development (Martin, 2003) and design thinking (Brown, Year 2009). In other words, Reese did not create something new from scratch, he used the existing model in a new way. When it comes to lean manufacturing, the goal is to eliminate waste in the production process. This includes, but is not limited to, unnecessary use of materials, storage space, labor, and expenses (Ōno, 1988). Likewise, the goal of LSM is to eliminate waste by ensuring that time and money are not first spent on building products that customers don't want. Agile development is known for solving rapidly changing problems, which is especially common in software development (Cobern and Highsmith, 2001). Some basic principles of agile development are to make the team more effective by: improving the flow of information between people; reducing the time from decision-making to seeing the consequences of the decision; bringing people closer to each other physically; providing information for the team Quick feedback; and improve the overall morale of the team (Cockburn & Highsmith, 2001). In LSM, agile development is used for the technical aspects of MVP and product construction. Compared with other product development models, such as the Stage-Gate model developed by Cooper (1990), LSM has a more agile approach. Stage-Gatemodel has a linear "waterfall" method for product development and was frequently used throughout the 20th century. In the waterfall approach, the process has a certain number of stages, which are carried out gradually, with little or no customer feedback. LSM's agile method is similar to the method in agile software development, in which customer feedback is collected throughout the process, including continuous iteration. 2.2.1 Verify that the core principles of learning lean and the core principles of LSM are to create more value for customers with fewer resources. In LSM, this is achieved through "validation learning"-in the process, agile methods are used to test hypotheses about the market and customers. The results of each test will drive future iterations in the larger learning process. The core concept of LSM is to eliminate as much uncertainty as possible in the product development process (Ries, 2011). 2.2.2 Build-measure-learn feedback loop One of the key components of LSM is the “build-measure-learn” feedback loop (Reese, 2011). This is an ongoing process whose goal is to maximize learning for the organization. Ries (2011), like Blank and Dorf (2013), advocates the release of minimum viable products (MVP). By issuing MVPs, companies can gather early feedback from customers and make informed decisions about when to "turn", which means making structured curriculum corrections to test new hypotheses about the product, or "sticking to", which means Keep it unchanged and continue to iterate on the first hypothesis (Ries, 2011). The MVP can be anything, from a website or landing page to a brochure or clay prototype of a physical product. Pre-determined goals should be set and measured. After collecting and measuring the feedback, the company learns from the results and decides whether it should continue along the same path, or turn to and test new hypotheses. 2.2.3 Innovative accounting Because of the abundance of information, measuring the right things poses a challenge to start-ups. Venture capitalist Shawn Carolan (Shawn Carolan) said: "Start-up companies do not go hungry; they drown." (Reese, 2011, p. 209). Ries (2011) advocates "innovative accounting"-a new method of measuring innovation progress and results. In contrast to traditional accounting, which uses existing products that work best, innovative accounting does not only consider financial ratios, such as return on equity or operating profit margins. It measures what is more important for new products and innovations, such as customer retention and usage patterns (especially for SaaS companies), which enables entrepreneurs to analyze more deeply what works and what does not work. Innovative accounting is divided into three steps (Ries, 2011): 1) Establish a baseline by using MVP to measure the state of the company; 2) Adjust the engine through experiments to see what can be improved; 3) Turn or persist according to the survey results . The faster this process is completed, the more successful the adventure will be. Croll and Yoskovitz (2013) advocated the use of David McClure's "pirate indicator"-AARRR-for innovative accounting. 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