The Personal MBA
Livre de Business
Highlights
Chapter 7 - THE HUMAN MIND
Businesses are built by people for people. As we discussed in Value Creation and Value Delivery, if people didn’t have needs and wants, businesses wouldn’t exist. Likewise, if no one was able or willing to fulfill those needs and wants, businesses couldn’t operate.
Chapter 1 - WHY READ THIS BOOK?
Once you’ve conquered your fears, you can accomplish anything.
The Personal MBA
As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble. —RALPH WALDO EMERSON, ESSAYIST AND POET
The Personal MBA
One of the beautiful things about learning any subject is the fact that you don’t need to know everything—you only need to understand a few critically important concepts that provide most of the value. Once you have a solid scaffold of core principles to work from, building upon your knowledge and making progress becomes much easier.
The Personal MBA
Think of this book as a filter. Instead of trying to absorb all of the business information that’s out there—and there’s a lot out there—use this book to help you learn what matters most, so you can focus on what’s actually important: making things happen
The Personal MBA
People always overestimate how complex business is. This isn’t rocket science—we’ve chosen one of the world’s most simple professions. —JACK WELCH, FORMER CEO OF GENERAL ELECTRIC
The Personal MBA
Most business books attempt to teach you to have more answers: a technique for this, a method for that. This book is different. It won’t give you answers—it will help you ask better questions. Knowing what’s critically important in every business is the first step in making good business decisions
The Personal MBA
To improve your business skills, you don’t need to learn everything there is to know—mastering the fundamentals can take you surprisingly far. I call these foundational business concepts mental models, and together, they create a solid framework you can rely on to make good decisions.
The Personal MBA
Mental models are concepts that represent your understanding of “how things work.”
The Personal MBA
many people believe things like “starting a business is risky,” “to get started, you must create a massive business plan and borrow a lot of money,” and “business is about who you know, not what you know.” Each of these phrases is a mental model—a way of describing how the world works—but they’re not quite accurate. Correcting your mental models can help you think about what you’re doing more clearly, which will help you make better decisions
The Personal MBA
Self-education is, I firmly believe, the only kind of education there is. —ISAAC ASIMOV
The Personal MBA
“If you put the same amount of time and energy you’d spend completing an MBA into doing good work and improving your skills, you’ll do just as well.”
The Personal MBA
I decided to skip business school, but not business education. Instead of enrolling in an MBA program, I skipped the classroom and hit the books, creating my own “Personal” MBA.
The Personal MBA
- Large companies move slowly. Good ideas often died on the vine simply because they had to be approved by too many people.
The Personal MBA
I realized three very important things:
The Personal MBA
- Climbing the corporate ladder is an obstacle to doing great work. I wanted to focus on getting things done and making things better, not constantly positioning myself for promotion. Politics and turf wars are an inescapable part of the daily experience of working for a large company.
The Personal MBA
- Frustration leads to burnout. I wanted to enjoy the daily experience of work, but instead I felt like I was running a gauntlet each day. It began to affect my health, happiness, and relationships. The longer I stayed in the corporate world, the more I realized I wanted out. I desperately wanted to work on my own terms, as an entrepreneur.
The Personal MBA
It is important that students bring a certain ragamuffin, barefoot irreverence to their studies; they are not here to worship what is known, but to question it. —JACOB BRONOWSKI
The Personal MBA
I only had so much time and energy, so I started searching for a filter: something that would direct me to the useful knowledge and keep me away from the chaff. The more I searched, the more I realized it didn’t exist—so I decided to create it myself. I began tracking which resources were valuable and which ones weren’t, then publishing my findings on my Web site, both as an archive and for the benefit of anyone interested. It was a personal project, nothing more: I was just a recent college graduate doing my best to learn something useful, and publishing my research for others seemed like a good use of time and energy.
The Personal MBA
Whoever best describes the problem is the one most likely to solve it. —DAN ROAM
The Personal MBA
By basing their investment decisions on their extensive knowledge of how businesses work, how people work, and how systems work, Buffett and Munger created a company worth over $195 billion—an astounding track record for a meteorologist-turned-lawyer from Omaha with no formal business education.
The Personal MBA
In all affairs, it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted. —BERTRAND RUSSELL
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Business is one of the most complex and multidisciplinary areas of human experience, and trying to understand how businesses work can be remarkably intimidating, even though they surround us every day.
The Personal MBA
Every successful business (1) creates or provides something of value that (2) other people want or need (3) at a price they’re willing to pay, in a way that (4) satisfies the purchaser’s needs and expectations and (5) provides the business sufficient revenue to make it worthwhile for the owners to continue operation.
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Value can’t be created without understanding what people want (market research)
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Attracting customers first requires getting their attention, then making them interested (marketing).
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Customer satisfaction depends on reliably exceeding the customer’s expectations (customer service)
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In order to close a sale, people must first trust your ability to deliver on what’s promised (value delivery and operations).
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Profit sufficiency requires bringing in more money than is spent (finance).
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Every business fundamentally relies on two additional factors: people and systems. Every business is created by people and survives by benefiting other people in some way. To understand how businesses work, you must have a firm understanding of how people tend to think and behave—how humans make decisions, act on those decisions, and communicate with others.
The Personal MBA
Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result. By understanding the essentials of how complex systems work, it’s possible to find ways to improve existing systems, whether you’re dealing with a marketing campaign or an automotive assembly line.
The Personal MBA
The very substance of the ambitious is merely the shadow of a dream. —WILLIAM SHAKESPEARE, HAMLET
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It’s easy to figure out why business school is attractive: it’s sold as a one-way ticket to a permanently prosperous and comfortable life. It’s a pleasant daydream: after two years of case studies and happy hour “networking,” corporate recruiters will be shamelessly throwing themselves at you, each of them offering a prestigious and high-paying position at a top firm. Your rise up the corporate ladder will be swift and sure. You’ll be a CAPTAIN OF INDUSTRY, collecting huge bonuses and tabulating the value of your stock options while sitting behind an impressive-looking mahogany desk in the corner office on the top floor of a gigantic glass skyscraper. You’ll be the big boss, telling other people what to do until it’s time to go play golf or relax on your yacht. You’ll be wined and dined all over the world, and the lowly masses will venerate you and your astounding achievements. Everyone will think you’re rich, intelligent, and powerful—and they’ll be damn right. What price for the promise of riches, power, and glory? A few thousand dollars in application fees, an effortless scribble on a loan document, and you’ll be on your way to the top! Not only that, you’ll get a two-year vacation from actually working. What a fantastic deal!
The Personal MBA
It is, in fact, nothing short of a miracle that modern methods of instruction have not entirely strangled the curiosity of inquiry. —ALBERT EINSTEIN
The Personal MBA
Management was thought of mostly as an exercise in getting people to work faster and do exactly what they’re told. The philosopher kings behind what passed for management psychology were Ivan Pavlov and, later on, B. F. Skinner, who believed that if you discovered and applied just the right stimulus, people would behave however you wanted. This mentality led to the widespread use of financial incentives to influence behavior: salary, bonuses, stock options, and so on, in an effort to encourage business professionals and managers to act in the best interest of corporate shareholders.
The Personal MBA
There’s an enormous (and growing) body of evidence that direct incentives often undermine performance, motivation, and job satisfaction in the real world.13 Despite more useful competing theories of human action, 14 the search for the magic stimulus continues in business school classrooms to this day.
The Personal MBA
Any technique, however worthy and desirable, becomes a disease when the mind is obsessed with it. —BRUCE LEE
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More advertising typically resulted in more distribution, which in turn resulted in more sales and even more money to spend on advertising, continuing the cycle. As decades passed, this self-reinforcing feedback loop resulted in a few dominant behemoths in each industry.
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Understanding what businesses actually do to create and deliver value is essential knowledge
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Process improvements are easy to skip if you want the business’s short-term profit numbers to look good, even though they’re essential to long-term viability
The Personal MBA
The “leveraged buyout” strategy taught in many business school classrooms—buying a company, financing massive expansion via debt, then selling the business to another company at a premium17—turned formerly self-sustaining companies into debt-bloated monstrosities, and the constant flipping of businesses from one temporary owner to the next turned financial markets into a game of musical chairs. When financial wizardry and short-term returns trump prudence and long-term value creation, customers and employees suffer. The only people who benefit are the MBA-trained executive-level financiers and fund managers, who extract hundreds of millions of dollars in transaction fees and salaries while destroying previously viable companies, hundreds of thousands of jobs, and billions of dollars of value.
The Personal MBA
Business is about creating and delivering value to paying customers, not orchestrating legal fraud.
The Personal MBA
Speed, flexibility, and ingenuity are the qualities that successful businesses rely on today—qualities that the corporate giants of the past few decades struggle to acquire and retain, and business school classrooms struggle to teach.
The Personal MBA
more and more employees are looking for a greater sense of autonomy, flexibility, and security from their work—and they’re finding these things outside of the confines of the traditional corporate job. How do you manage someone who doesn’t really want to work for you in the first place?
The Personal MBA
I can’t emphasize this enough: the quickest and easiest way to screw up your life is to take on too much debt. The primary reason people spend decades working in jobs they despise is to pay off their creditors. Financial stress can destroy relationships, threaten your health, and jeopardize your sanity. Is a shot at a desk in a corner office really worth it?
The Personal MBA
When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principle s—generally three to twelve of them—that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles. —JOHN T. REED, REAL ESTATE INVESTMENT EXPERT
The Personal MBA
How People Work. Every business is created by people and survives by benefiting other people. To understand how businesses work, you need a firm understanding of how people make decisions, act on those decisions, and communicate with others
The Personal MBA
How Businesses Work. A successful business, roughly defined, provides (1) something of value that (2) other people want or need at (3) a price they’re willing to pay, in a way that (4) satisfies the customer’s needs and expectations so that (5) the business brings in sufficient profit to make it worthwhile for the owners to continue operation
The Personal MBA
How Systems Work. Businesses are complex systems with many moving parts that exist within even more complex systems like industries, societies, cultures, and governments
The Personal MBA
While management and leadership are important in the practice of business, they aren’t the be-all and end-all of business education: without solid business knowledge, it’s possible to organize and lead a group of people toward the accomplishment of the wrong objectives. Business is about the profitable creation and delivery of valuable offers to paying customers—management and leadership are simply a means to this end.
The Personal MBA
The best effect of any book is that it excites the reader to self-activity. —THOMAS CARLYLE
The Personal MBA
Browse, skim, and scan. Believe it or not, you don’t need to read a book cover to cover to benefit: browsing can give you better results with less effort. Periodically skim through this book until you find a section that grabs your attention, then commit to applying that concept to your work for a few days. You’ll begin to notice significant differences in the quality of your work, as well as in your ability to “think like a businessperson.”
The Personal MBA
Repetition inevitably leads to mastery
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Keep a notebook and pen handy. The purpose of this book is to give you ideas about how to make things better, so be prepared to capture your thoughts as you have them; it’ll make it easier to review the major concepts later. Your notebook will also make it easy to shift from taking notes to creating detailed action plans as they occur to you.20
Chapter 2 - VALUE CREATION
Make something people want … There’s nothing more valuable than an unmet need that is just becoming fixable. If you find something broken that you can fix for a lot of people, you’ve found a gold mine. —PAUL GRAHAM
Chapter 2 - VALUE CREATION
the purpose is always the same: to make someone else’s life a little bit better.
Chapter 2 - VALUE CREATION
Without value creation, a business can’t exist—you can’t transact with others unless you have something valuable to trade.
Chapter 2 - VALUE CREATION
the more real value you create for other people, the better your business will be and the more prosperous you’ll become.
The Personal MBA
A business is a repeatable process that makes money. Everything else is a hobby. —PAUL FREET,
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Roughly defined, a business is a repeatable process that: 1. Creates and delivers something of value … 2. That other people want or need … 3. At a price they’re willing to pay … 4. In a way that satisfies the customer’s needs and expectations … 5. So that the business brings in enough profit to make it worthwhile for the owners to continue operation.
The Personal MBA
A venture that doesn’t create value for others is a hobby. A venture that doesn’t attract attention is a flop. A venture that doesn’t sell the value it creates is a nonprofit. A venture that doesn’t deliver what it promises is a scam. A venture that doesn’t bring in enough money to keep operating will inevitably close.
The Personal MBA
At the core, every business is fundamentally a collection of five Interdependent (discussed later) processes, each of which flows into the next:1. Value Creation. Discovering what people need or want, then creating it. 2. Marketing. Attracting attention and building demand for what you’ve created. 3. Sales. Turning prospective customers into paying customers. 4. Value Delivery. Giving your customers what you’ve promised and ensuring that they’re satisfied. 5. Finance. Bringing in enough money to keep going and make your effort worthwhile.
The Personal MBA
Business is not (and has never been) rocket science—it’s simply a process of identifying a problem and finding a way to solve it that benefits both parties
The Personal MBA
The Five Parts of Every Business are the basis of every good business idea and business plan. If you can clearly define each of these five processes for any business, you’ll have a complete understanding of how it works. If you’re thinking about starting a new business, defining what these processes might look like is the best place to start. If you can’t describe or diagram your business idea in terms of these core processes, you don’t understand it well enough to make it work.1
The Personal MBA
Don’t go around saying the world owes you a living. The world owes you nothing—it was here first. —MARK TWAIN
The Personal MBA
You may enjoy whitewater rafting, but it’s very unlikely anyone will pay you to shoot the rapids unless you apply your skills for the benefit of others. Make the leap from personal enjoyment to Products and Services (discussed later), however, and you’ll find yourself getting paid—plenty of adventurous souls are willing to pay for rafting equipment and guides.
The Personal MBA
Without enough revenue to sustain it, any business will fail. Your revenue is completely dependent on people actually wanting what you have to offer. Every business is fundamentally limited by the size and quality of the market it attempts to serve. The Iron Law of the Market is cold, hard, and unforgiving: if you don’t have a large group of people who really want what you have to offer, your chances of building a viable business are very slim.
The Personal MBA
Understanding human needs is half the job of meeting them. —ADLAI STEVENSON
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Core Human Drives that have a profound influence on our decisions and actions:1. The Drive to Acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. Businesses built on the drive to acquire include retailers, investment brokerages, and political consulting companies. Companies that promise to make us wealthy, famous, influential, or powerful connect to this drive. 2. The Drive to Bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic. Businesses built on the drive to bond include restaurants, conferences, and dating services. Companies that promise to make us attractive, well liked, or highly regarded connect to this drive. 3. The Drive to Learn. The desire to satisfy our curiosity. Businesses built on the drive to learn include academic programs, book publishers, and training workshops. Companies that promise to make us more knowledgeable or competent connect to this drive. 4. The Drive to Defend. The desire to protect ourselves, our loved ones, and our property. Businesses built on the drive to defend include home alarm systems, insurance products, martial arts training, and legal services. Companies that promise to keep us safe, eliminate a problem, or prevent bad things from happening connect to this drive. There’s a fifth core drive that Lawrence and Nohria missed:5. The Drive to Feel. The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Businesses built on the drive to feel include restaurants, movies, games, concerts, and sporting events. Offers that promise to give us pleasure, thrill us, or give us something to look forward to connect with this drive. Whenever a group of people have an unmet need in one or more of these areas, a market will form to satisfy that need. As a result, the more drives your offer connects with, the more attractive it will be to your potential market. At the core, all successful businesses sell some combination of money, status, power, love, knowledge, protection, pleasure, and excitement
The Personal MBA
The more clearly you articulate how your product satisfies one or more of these drives, the more attractive your offer will become.
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If you’re thinking of starting a new business or expanding an existing business into a new market, it pays to do some research before you leap.
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The Ten Ways to Evaluate a Market provide a back-of-the-napkin method you can use to identify the attractiveness of any potential market
The Personal MBA
So often people are working hard at the wrong thing. Working on the right thing is probably more important than working hard. —CATERINA FAKE
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- Urgency—How badly do people want or need this right now? (Renting an old movie is typically low urgency; seeing the first showing of a new movie on opening night is high urgency, since it only happens once.) 2. Market Size—How many people are actively purchasing things like this? (The market for underwater basket weaving courses is very small; the market for cancer cures is massive.) 3. Pricing Potential—What is the highest price a typical purchaser would be willing to spend for a solution? (Lollipops sell for $0.05; aircraft carriers sell for billions.) 4. Cost of Customer Acquisition—How easy is it to acquire a new customer? On average, how much will it cost to generate a sale, in both money and effort? (Restaurants built on high-traffic interstate highways spend little to bring in new customers. Government contractors can spend millions landing major procurement deals.) 5. Cost of Value Delivery—How much would it cost to create and deliver the value offered, both in money and effort? (Delivering files via the Internet is almost free; inventing a product and building a factory costs millions.) 6. Uniqueness of Offer—How unique is your offer versus competing offerings in the market, and how easy is it for potential competitors to copy you? (There are many hair salons, but very few companies that offer private space travel.) 7. Speed to Market—How quickly can you create something to sell? (You can offer to mow a neighbor’s lawn in minutes; opening a bank can take years.) 8. Up-Front Investment—How much will you have to invest before you’re ready to sell? (To be a housekeeper, all you need is a set of inexpensive cleaning products. To mine for gold, you need millions to purchase land and excavating equipment.) 9. Upsell Potential—Are there related secondary offers that you could also present to purchasing customers? (Customers who purchase razors need shaving cream and extra blades as well; buy a Frisbee, and you won’t need another unless you lose it.) 10. Evergreen Potential—Once the initial offer has been created, how much additional work will you have to put into it in order to continue selling? (Business consulting requires ongoing work to get paid; a book can be produced once, then sold over and over as is.)
The Personal MBA
The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time. —HENRY FORD
The Personal MBA
When any two markets are equally attractive in other respects, you’re better off choosing to enter the one with competition. Here’s why: it means you know from the start there’s a market of paying customers for this idea, eliminating your biggest risk. The existence of a market means you’re already on the right side of the Iron Law of the Market, so you can spend more time developing your offer instead of proving a market exists
The Personal MBA
The best way to observe what your potential competitors are doing is to become a customer. Buy as much as you can of what they offer. Observing your competition from the inside can teach you an enormous amount about the market: what value the competitor provides, how they attract attention, what they charge, how they close sales, how they make customers happy, how they deal with issues, and what needs they aren’t yet serving.
The Personal MBA
Becoming a Mercenary doesn’t pay: don’t start a business for the money alone. Here’s why: starting and running a business always takes more effort than you first expect. Even if you identify a business that will largely run itself, setting up the Systems (discussed later) necessary to run the business requires persistence and dedication.
The Personal MBA
Building or finishing anything is mostly a matter of starting over and over again
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The trick is to find an attractive market that interests you enough to keep you improving your offering every single day. Finding that market is mostly a matter of patience and active exploration
The Personal MBA
Being a Crusader doesn’t pay either. Every once in a while, you’ll find an idea so fascinating it becomes hard to think about it objectively. The stars align, heavenly trumpets blare, and suddenly you have the unmistakable impression that you’ve found your calling. In all the excitement, it’s easy to forget that there’s often a huge difference between an interesting idea and a solid business
The Personal MBA
Some ideas don’t have enough of a market behind them to support a business, and that’s perfectly okay. That doesn’t mean you should ignore them: side projects can help you expand your knowledge, improve your skills, and experiment with new methods and techniques. I’m a huge advocate of pursuing side projects as long as you don’t count on them to reliably produce income. Once you have your financial bases covered, crusade all you want.
The Personal MBA
Value is not intrinsic; it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. —LUDWIG VON MISES,
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In order to successfully provide value to another person, it must take on a form they’re willing to pay for. Fortunately, there’s no need to reinvent the wheel—Economic Value usually takes on one of twelve standard forms:1. Product. Create a single tangible item or entity, then sell and deliver it for more than what it cost to make. 2. Service. Provide help or assistance, then charge a fee for the benefits rendered. 3. Shared Resource. Create a durable asset that can be used by many people, then charge for access. 4. Subscription. Offer a benefit on an ongoing basis, and charge a recurring fee. 5. Resale. Acquire an asset from a wholesaler, then sell that asset to a retail buyer at a higher price. 6. Lease. Acquire an asset, then allow another person to use that asset for a predefined amount of time in exchange for a fee. 7. Agency. Market and sell an asset or service you don’t own on behalf of a third party, then collect a percentage of the transaction price as a fee. 8. Audience Aggregation. Get the attention of a group of people with certain characteristics, then sell access in the form of advertising to another business looking to reach that audience. 9. Loan. Lend a certain amount of money, then collect payments over a predefined period of time equal to the original loan plus a predefined interest rate. 10. Option. Offer the ability to take a predefined action for a fixed period of time in exchange for a fee. 11. Insurance. Take on the risk of some specific bad thing happening to the policy holder in exchange for a predefined series of payments, then pay out claims only when the bad thing actually happens. 12. Capital. Purchase an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payout or ongoing dividend.
The Personal MBA
Business is not financial science … it’s about creating a product or service so good that people will pay for it. —ANITA RODDICK
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To run a Product-oriented business, you must:1. Create some sort of tangible item that people want. 2. Produce that item as inexpensively as possible while maintaining an acceptable level of quality. 3. Sell as many units as possible for as high a price as the market will bear. 4. Keep enough inventory of finished product available to fulfill orders as they come in.