England were beaten 20-14 at Twickenham on Saturday after being outsmarted and outplayed by an Australia side on the rebound from a 33-6 mauling in Paris.
The Wallabies were also without four world-class players but they had too many ideas in attack and too much nous in defence for England's inexperienced side.
Michael Hooper, Australia's second-choice openside flanker, was man of the match as Australia controlled the breakdown and stifled England.
Lancaster is attempting to rebuild the national team and that means overlooking veterans like Nick Easter and France-based players like Steffon Armitage, no matter how they are playing.
Sir Clive Woodward insists England have to forget about building for the World Cup and pick the best side - "a tougher side" - to beat South Africa next weekend.
However, Lancaster will not change his policy on the back of one defeat which, however frustrating, he believes can play a key role in the development of the team.
"We are developing a squad. We have come very close to winning and we should be confident in the decisions we are making," Lancaster said.
"Bringing on Mako Vunipola and Joe Launchbury, two 21-year-olds, in the pack shows where we are and where we want to get to.
"The players in France are not available to play against New Zealand (on December 1 because the match falls outside the international release window).
"We could maybe pick someone but the reality is we couldn't play them against New Zealand so what do we do then?''
Vunipola, Launchbury and Tom Wood were integral to England's improved performance in the final quarter but the decision not to kick penalties for goal backfired as the Wallabies held firm.
Lancaster backed the decision on the basis that England's driving line-out was proving effective but they could not break down the streetwise Australian defence.
Thomas Waldrom dropped the ball over the line and other chances went begging either through sloppy execution or poor discipline.
"We want performances and execution that can win at the highest level and we didn't quite achieve that,'' Lancaster said.
"We have to back ourselves to score from those situations. Our driving maul put them under pressure but Australia played a smart game, they pulled us down a few times on the line.
"There are a few things we feel slightly hard done by.
"We will look at those decisions and the different things we could have done. If we are going to back ourselves (to go for the line-out or take the quick tap penalties) we have to take those opportunities.''
Australia were the smarter attacking side with the variety offered by Kurtley Beale and Berrick Barnes a lesson to England about how to use twin playmakers at fly-half and full-back.
England, in contrast, lacked penetration with the ball in hand.
"Australia were brilliant at slowing the ball down," said scrum-half Danny Care.
"Fair play to Australia, they defended really well, they played the referee well but it is definitely a missed opportunity.
"We had broken them down after 50-60 minutes and we should have scored at least one try.
"It was a game we should have won. The fans expect us to win at home, we expect to win at home. There is a lot to work on.
"Next week we have a massive challenge again to look forward to and we will really fire into South Africa on Saturday.''
England lost twice to the Springboks on the summer tour and then drew the third Test in Port Elizabeth, when Care delivered a man-of-the-match performance.
But for Lancaster's England to start building on the momentum they gathered during the RBS 6 Nations, Care accepts they need to claim a southern hemisphere scalp.
"We know what is coming. We should have got a win in the last Test in the summer and that gives us the confidence we know how to go out there and beat them.
"We can't keep losing at home against these big teams. It is the worst feeling."
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