The Personal MBA

Business Angst.The feeling that you “don’t know much about business” and therefore could never start your own company or take more responsibility in your current position. Better to maintain the status quo than face the fear of the unknown.

Politics and turf wars are an inescapable part of the daily experience of working for a large company.

According to Buffett, Charlie’s mental-model-centric approach to business is a major contributing factor in the success of Berkshire Hathaway and Buffett’s status as one of the world’s wealthiest business owners: “Charlie can analyze and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in sixty seconds. He’s the perfect partner.”

What you need is a latticework of mental models in your head. And, with that system, things gradually fit together in a way that enhances cognition.

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.

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.

I highly recommend Accounting Made Simple by Mike Piper, Essentials of Accounting by Robert N. Anthony and Leslie K. Breitner, The McGraw-Hill 36-Hour Course in Finance for Nonfinancial Managers by Robert Cooke, and How to Read a Financial Report by John A. Tracy.

If you’re interested in quantitative analysis, I recommend starting with Principles of Statistics by M. G. Bulmer and Turning Numbers into Knowledge by Jonathan G. Koomey.

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, FOUNDER OF Y COMBINATOR, VENTURE CAPITALIST, AND ESSAYIST AT PAULGRAHAM.COM

The best businesses in the world are the ones that create the most value for other people. Some businesses thrive by providing a little value to many, and others focus on providing a lot of value to only a few people. Regardless, the more real value you create for other people, the better your business will be and the more prosperous you’ll become.

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.

A venture that doesn’t attract attention is a flop. A venture that doesn’t sell the value it creates is a nonprofit.

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.

Any skill or knowledge that helps you create value, market, sell, deliver value, or manage finances is Economically Valuable—accordingly,

Market matters most; neither a stellar team nor fantastic product will redeem a bad market. Markets that don’t exist don’t care how smart you are. —MARC ANDREESSEN, VENTURE CAPITALIST AND FOUNDER OF NETSCAPE AND NING.COM

What if you throw a party and nobody shows up? In business, it happens all the time.

The problem wasn’t that the product was poorly designed—the technology that makes the Segway work is extremely sophisticated, and the benefits are significant: the Segway is a convenient, green urban car replacement. The problem was that very few people cared enough to spend $5,000 on a goofy-looking alternative to walking or riding a bike—the massive market that Kamen expected didn’t exist.

Every business is fundamentally limited by the size and quality of the market it attempts to serve.

The best approach is to focus on making things people want to buy. Creating something no one wants is a waste. Market research is the business equivalent of “look before you leap.” Books like The New Business Road Test by John Mullins can help you identify promising markets from the outset, increasing the probability that your new venture will be a success.

The Drive to Acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence.

The Drive to Bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic.

The Drive to Learn. The desire to satisfy our curiosity.

The Drive to Defend. The desire to protect ourselves, our loved ones, and our property.

The Drive to Feel. The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation.

At the core, all successful businesses sell some combination of money, status, power, love, knowledge, protection, pleasure, and excitement.

Urgency—How badly do people want or need this right now?

Market Size—How many people are actively purchasing things like this?

Pricing Potential—What is the highest price a typical purchaser would be willing to spend for a solution?

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?

Cost of Value Delivery—How much would it cost to create and deliver the value offered, both in money and effort?

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?

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.

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.

In all the excitement, it’s easy to forget that there’s often a huge difference between an interesting idea and a solid business. In your optimism, forget ye not prudence: changing the world is difficult if you can’t pay the bills.

Gyms and fitness clubs are a classic example of a Shared Resource. A fitness club may purchase forty treadmills, thirty exercise bikes, six sets of free weights, a set of kettlebells, and other useful but expensive equipment that lasts a long time.

Resale is the acquisition of an asset from a wholesale seller, followed by the sale of that asset to a retail buyer at a higher price. Resale is how most of the retailers you’re familiar with work: they purchase what they sell from other businesses, then resell each purchase for more than it cost.

The human species, according to the best theory I can form of it, is composed of two distinct races: the men who borrow and the men who lend. —CHARLES LAMB, ESSAYIST

Audience Aggregation revolves around collecting the attention of a group of people with similar characteristics, then selling access to that audience to a third party.

An Option is the ability to take a predefined action for a fixed period of time in exchange for a fee. Most people think of Options as financial securities, but they’re all around us: movie or concert tickets, coupons, retainers, and licensing rights are all examples of Options.

retainers, and licensing rights are all examples of Options. In exchange for a fee, the purchaser has the

In order to provide value via Options, you must: 1. Identify some action people might want to take in the future. 2. Offer potential buyers the right to take that action before a specified deadline. 3. Convince potential buyers that the Option is worth the asking price. 4. Enforce the specified deadline on taking action.

Insurance involves the transfer of risk from the purchaser to the seller. In exchange for taking on the risk of some specific bad thing happening to the policy holder, the policy holder agrees to give the insurer a predefined series of payments. If the bad thing actually happens, the insurer is responsible for footing the bill. If it doesn’t, the insurer gets to keep the money.

Perceived Value determines how much your customers will be willing to pay for what you’re offering. The higher the perceived value of your offering, the more you’ll be able to charge for it, which significantly improves your chances of succeeding.

Great things are not done by impulse, but by a series of small things brought together. —VINCENT VAN GOGH, ARTIST

The benefit of making your offers small and Modular is that it allows you to take advantage of a strategy called Bundling. Bundling allows you to repurpose value that you have already created to create even more value.

The classic MBA product development model is shrouded in secrecy and mystique: develop the offering in private, make everyone involved sign non-disclosure agreements,2 raise millions of dollars in venture capital, spend years making it perfect, then unveil your creation to the astonishment of the world and the thunderous sound of ringing cash registers. Unfortunately, this mentality ruins careers and empties bank accounts. On their own, ideas are largely worthless—discovering whether or not you can actually make them work in reality is the most important job of any entrepreneur.

Ideas are cheap—what counts is the ability to translate an idea into reality, which is much more difficult than recognizing a good idea.

I have not failed. I’ve just found 10,000 ways that won’t work. —THOMAS A. EDISON, PROLIFIC INVENTOR

Iteration has six major steps, which I call the WIGWAM method: 1. Watch—What’s happening? What’s working and what’s not? 2. Ideate—What could you improve? What are your options? 3. Guess—Based on what you’ve learned so far, which of your ideas do you think will make the biggest impact? 4. Which?—Decide which change to make. 5. Act—Actually make the change. 6. Measure—What happened? Was the change positive or negative? Should you keep the change, or go back to how things were before this iteration?

Getting useful Feedback from your potential customers is the core of the Iteration Cycle. Useful Feedback from real prospects helps you understand how well your offer meets their needs before development is complete, which allows you to make changes before you start selling.