PHASE 2- CRAFT
The Challenge of the Future
Always question established concepts and rethink business from the ground up. There are 2 types of progress: horizontal and vertical. While some people believe that horizontal globalization will define the future, vertical technology is the key to creating successful, sustainable startups.
Horizontal progress involves copying what has been created, making it cheaper or more efficient (like China). On a macro scale, this is globalization.
Vertical progress involves going from 0 to 1 – creating something new where nothing previously existed. Vertical progress is far more difficult, as humans struggle to imagine things that do not exist yet. At a macro level, this progress is “technology” – new and innovative ways of doing things.
Happy Companies Are Different
Big companies are not necessarily good businesses. For example, airline companies have annual revenues that reach into the billions, yet only profit 37¢ per passenger per trip. Google, in comparison, keeps 21% of their revenue as profit. Airlines exist in “perfect competition” (an equilibrium of supply and demand) and thus must sell at whatever price the market dictates. Google is a monopoly and owns the entire market, so it gets to dictate the price.
Monopolies lie by exaggerating the power of their non-existent competition to dissuade others.
Competitive industries lie by claiming they are completely unique, while in reality the differences are insignificant.
Highly competitive industries like the restaurant business incur low profit margins and often push people towards ruthlessness. Monopolies, on the other hand, can afford to think beyond short-term cash.
The Ideology of Competition
The more we compete, the less we gain. Yet the idea that competition is healthy is ingrained in our minds from grade school. Remember that while competition may drive down prices for consumers, it also drives down profits for businesses. While in some ways business is war – ruthless, intense, destructive, and costly for those who fail – competition often causes us to become obsessed with avoiding loss and beating our opponents instead of focusing on improving ourselves.
When hundreds of startups choose to target the same, tiny market, no one wins.
Always have the courage to venture down an unexplored path and avoid a congested highway. And if you cannot beat a rival, consider merging. But if you do have to fight, never half-ass your effort; strike hard and win, or don’t bother throwing a punch at all!
Last Mover Advantage
Once-prosperous companies are now losing value, and once-suffering businesses are booming. The value of a business lies not in the money it makes today, but rather what it will make tomorrow. Old Economy businesses such as newspapers are still making profits, but unless they adapt, this will dwindle. Technology Economies, however, may lose money during their formative years, but will build value exponentially. Although it will be difficult to endure the first few years of entrepreneurship, those who focus on short-term growth cheat themselves out of seeing the bigger picture.
Will your company still be around in 10 years? The answer has nothing to do with numbers, but rather the qualitative traits of your business.
Proprietary Technology: “Proprietary technology is the most substantive advantage a company can have.” Your company’s proprietary technology must be at least 10× better than your competitors’.
Network Effects: Start by introducing your product to a small network and expand from there.
Economies of Scale: Monopolies have large profit margins because the cost of producing additional copies is near 0. High-competition businesses (like yoga huts or restaurants), make low profits even when they expand, as costs remain high.
Branding: Creating a strong brand is an effective way to claim a monopoly with a unique factor (like Apple’s sleek, minimalistic design).
And while the “first mover” has its advantages – you can get ahead while the competition scrambles to catch up – it is often best to be the “last mover” and take that final great leap, making it impossible to be overtaken.
You Are Not a Lottery Ticket
Every company is created under a unique set of circumstances.
There is no luck involved – only indefinite vs. definite thinking. Indefinite thinkers believe in chance, while definite thinkers believe in their own ability to shape the future rather than becoming victims of chance.
Prioritize design over chance. Just as Steve Jobs was obsessed with making products which were beautifully crafted from the inside out, you too must strive for perfection in your business.
The most important thing to have is a plan – without a plan, there is no future. A plan for perfection means rejecting the tyranny of chance, and allowing a world of possibilities to unfold.
Follow the Money
Never underestimate the power of exponential growth. As you start to accumulate something (awards, land, money), the speed at which you gain more will grow. A small handful of startups will boom, while others will fail or experience minimal growth. This is why investing in tons of ventures is not wise; instead invest only in a few explosive companies.
For entrepreneurs, it is impossible to diversify enough to truly “play it safe”. All you can do is choose your market wisely and think carefully about your decisions. Exponential growth will always start slow; patience and good decisions are the way to ride up the curve.
In between conventions and mysteries, you find secrets. You can unearth previously hidden truths by asking the right questions. For example, have the courage to ask: “What valuable company is no one building?”
Many people believe that most secrets have already been uncovered, or that the few remaining secrets can only be dug up by super-geniuses. This is simply untrue. The world is rife with secrets, but humans are hardwired to avoid risk.
Secrets are out there waiting to be discovered, but only by dedicated keen searchers who have the courage to think beyond what already exists. Break free from standardized, institutionalized ideas to innovate technology; and if you do discover a secret, share it with as few people as possible!
Although every great company is unique, a startup flawed at its foundation cannot be fixed. Bad decisions are extremely difficult to correct later, and can even go unnoticed until bankruptcy becomes inevitable.
Choosing a co-founder is like getting married – it takes careful consideration before you know if you have the right chemistry. Reflect on complementary skill sets and personalities before jumping in. And just as important, everyone within your company must get along. Although decisions are easier within a sole proprietorship, it’s difficult to go from 0 to 1 without a team. As a founder, it is your job to establish a company structure which keeps people aligned. Consider:
Ownership: Who legally owns equity? (e.g. founders, employees, investors.)
Possession: Who runs the company day-to-day? (e.g. managers, employees.)
Control: Who formally governs the company’s affairs? (e.g. a board of directors made up of founders and investors.)
Also keep these general rules in mind:
Hire only full-time employees (aside from lawyers and accountants). You are either on the bus or not.
Limit remote communication.
“A company does better the less it pays its CEO”.
Compensate employees fairly and use bonuses to incentivize excellent performance.
Consider offering equity as compensation instead of cash. This will reveal which people are invested in increasing your company’s value long-term.
The Mechanics of Mafia
In the ideal company culture, everyone is working on the same mission. When hiring new employees, do not just hire based on accomplishments or résumés; think of compatibility and long-term relationships. Fill people in on your company mission and let potential recruits know why your company is a unique match for them. Assign a single responsibility per person; this makes management easier and reduces conflict.
Man & Machine
Today’s smartphones are many times more powerful than the computers which guided us to the moon. Still, computers are meant to complement people, not replace them. Humans and computers are categorically different and will never be interchangeable. The sooner we stop fearing that machines will replace manpower, the sooner we can best utilize these wonderful tools. While humans are hardwired to compete, computers are hardwired to obey, and without humans telling machines what to do, they are useless.
At the beginning of the 21st century, green tech was all the rage – investors believed they were so wise and poured over $50 billion into them. Most failed. Most were only 2× better than their competitors, not 10×. And many of their “clean solutions” were worse than the products they were trying to replace!
They created intense competition in a small market, making it impossible for a single startup to establish a monopoly. China then swooped in and distributed solar products a fraction of the price. Many green entrepreneurs then focused on “social entrepreneurship”, on altruistic, philanthropic motives. Yet when everyone is doing the same thing, nobody wins. Doing something different is what truly benefits the world. Still, it was possible to succeed in clean tech.
For example, Tesla successfully answered these crucial questions:
“Can you create breakthrough technology instead of just incremental improvements?” Tesla integrated numerous revolutionary technologies together.
“Is now the right time to start?” In 2009, green jobs were a political priority, and Tesla capitalized on this to secure a $465 million loan from the U.S. DoE.
“Do you have a big share of a small market?” Tesla dominated the electric sports cars market.
“Do you have the right team?” Musk assembled a dream team with knowledge of both design & sales.
“Do you have a way not just to create, but also to distribute your products?” Tesla built its own distribution chain to save money.
“Will your market be defensible 10 and 20 years in the future?” Tesla moves faster than anyone else, giving it a head start.
“Have you identified a unique opportunity that others do not see?” Tesla created a fashionable, eco-conscious, and unique car.
The Founder’s Paradox
Strategy is a young discipline with no single clear and pervasive definition, much less a consensus on how to build one. When a strategy succeeds, it seems like magic: unexplainable in advance, but obvious in retrospect. Strategy is essentially about making intentional, deliberate choices – to do some things and not others. In essence, to choose your trade-offs. When a bias for action drives a business, thinking often falls by the wayside. Instead of working to develop a winning strategy, many leaders tend to approach strategy in one of the following (ineffective) ways:
Strategy as a vision: Mission / vision statements are necessary but insufficient, lacking a guide to action.
Strategy as a plan: Plans and tactics are also necessary but insufficient elements of strategy. A detailed plan does not imply that the actions will yield a sustainable competitive advantage.
Strategy as improving the status quo: A firm could be exhausting resources in the wrong activities.
Strategy as following best practices: Some organizations define strategy as doing the same activities as the competition, simply more effectively. Yet sameness is a recipe for mediocrity.
Denying long-term strategy: The world is changing so quickly, some leaders argue, that a firm should just respond to new threats and opportunities as they arise.
These ineffective approaches are driven by a misconception of strategy. Winning should be at the heart of any strategy. In our terms, strategy is a coordinated and integrated set of 5 choices: (1) a winning aspiration, (2) where-to-play, (3) how-to-win, (4) core capabilities, and (5) management systems.
Strategy Is Choice
Oil of Olay was a moderately successful beauty product but by the late 1990s was seen as an old-fashioned product, “of the Old lady.” P&G decided it was time for a change. After researching and finding that Olay’s existing customers were women aged 50+ and price sensitive, they saw a real growth potential with women 35+ who were just seeing their first lines and wrinkles. They thus redefined anti-aging products after shifting the perception of beauty care to the higher-end mid-30’s market, without losing their existing cost-conscious consumers. They therefore changed the packaging to resemble more prestigious products, and experimented with price until they found that $18.99 was a great value to both the prestige shopper (who was used to spending $30 or more), and the mass shopper (who wanted it to be under $20).
Olay had a common strategic problem: a stagnant brand, aging consumers, uncompetitive products, strong competition, and momentum in the wrong direction. Olay’s employees weren’t harder working, nor were they smarter; yet their way of thinking about their choices was different. Strategy is the answer to these 5 interrelated questions:
What is your winning aspiration?
Where will you play?
How will you win?
What core capabilities must be in place?
What management systems are required?
In great strategies, the where-to-play & how-to-win decisions fit together to make the company stronger. Core capabilities and clear activities underpin these decisions. They come from deeply understanding the customer, innovating, building a great brand and go-to-market ability, and having the ability to scale globally.
An effectively functioning management system ensures that choices are communicated to the whole company, lest employees are unable to deliver on the strategic decisions. Plans must be made to decide where to invest resources over time. Progress must also be meticulously measured. Strategy is often an iterative process in which all the moving parts influence one another; by breaking down each individual component, each piece can thus be individually optimized.
What Is Winning
Aspirations are the guiding purpose of an enterprise. However, a lofty mission is not necessarily a strategy, merely a starting point. One of the first things to do is to define the guiding mission and aspiration in strategic terms. Winning is what matters and it is the ultimate criterion of a successful strategy. The essence of great strategy is making choices such as what businesses to be in (and which to not be in!), where-to-play, how-to-win, and what capabilities or competencies can be turned into core strengths that are supported by internal management systems. Without explicit where-to-play & how-to-win decisions connected to the aspiration, a vision alone is frustrating and, ultimately, unfulfilling.
Where to Play
Where-to-play defines the playing field. What business are you really in? This includes geographic location, product type, customer type, price tier, distribution channel, and stage of production. These considerations are the same regardless of company size or type of industry. Consider the farmer. Will he sell only locally to his friends and neighbors, or will he attempt to join a large co-op? Which fruits and vegetables will he grow? Will he sell organic products or standard ones? Clear choices must be made, for attempting to be all things to all customers tends to underserve everyone. It is ideal to stay focused on one single brand, as building brand loyalty is a priceless marketing tool.
How to Win
Where-to-play is half of the heart of strategy; its complement is defining how-to-win. While where-to-play defines the field,how-to-win choices clarify what you’re going to do on the field. Winning is about sustainably providing better customer value than your competitors. There are 2 primary methods of doing so: cost leadership & product differentiation.
In cost leadership, the low-cost player does not necessarily charge the lowest prices, but rather always has the option of underpricing competitors, while possibly reinvesting the margin in a competitive advantage. For example, since 1980, Mars bars held a distinct cost advantage over Hershey’s, as Mars bars could be produced on a single super-high-speed production line and had less expensive ingredients. But rather than selling the bars at a lower price, they competed at the same price point and used their higher profit margins to reinvest in premier shelf space.
In product differentiation, the company offers products or services that are perceived to be distinctively more valuable at approximately the same price point as competitors. In essence, seeming to provide more value for the same price. Each brand or product offers a specific value proposition that appeals to a specific group of customers. When there is a match between the brand’s values and the customer’s personal values, strong brand loyalty emerges.
Play to Your Strengths
Competitive advantage is sought after by every company; yet by everyone chasing the same core capabilities, they become undifferentiated carbon copies. It’s better to play to your individual strengths, thus allowing your company to stand out uniquely.
Contrary to common belief, a powerful, sustainable, competitive advantage is unlikely to arise from a single capability; a collection of capabilities that reinforce one another is key. The ways that various capabilities interact and support one another often allows for a sustainable competitive advantage to emerge naturally.
A clearly laid out system of activities, capturing the core capabilities of the firm on a single page, can be used to map out the connections between a company’s different capabilities, and can help delineate how such activities are different from competitors’. Returning to the Olay example, the company might need to be merely good at manufacturing, but not distinctively good, to win. Yet they might need to be distinctively good at understanding consumers, at innovation, and at branding. When articulating core capabilities, carefully distinguish between generic strengths and critical, mutually reinforcing activities.
While it may be tempting to simply ask yourself what you are really good at, and attempt to build a strategy from there, those core competencies may be irrelevant to consumers, and my confer no competitive advantage. The best core capabilities include:
Creating and building brands.
Partnering, and going to market, with suppliers.
Leveraging global scale.
Manage What Matters
How can you communicate its essence broadly and clearly? What are the critical strategic choices that everyone in the organization should understand? An effective management system is an oft-neglected part of strategy. Even with a winning aspiration, clear where-to-play & how-to-win decisions, and core capabilities elucidated, all is for naught without a management system and framework that supports the above. The business must communicate its strategies to management, who must in turn communicate it to the whole organization. The challenge is to find simple, clear, compelling ways to do so. A massive binder or thick PowerPoint deck won’t rally an organization.
If aspirations are to be achieved, capabilities developed, and management systems created, then progress must be measured, for what gets measured gets managed. Measurement provides the focus and feedback needed to improve. It is critical to indicate in advance what the expected outcomes are. Building management systems takes time, money, and focus. Yet until a set of systems and measures is in place, the strategic choice cascade is incomplete, and your strategy job is unfinished.
Think Through Strategy
How and when do you address the 5 choices in the strategy cascade, and how do you generate and choose between possibilities at each stage? With a near-infinite amount of data that could be crunched, and a wide array of strategic tools that could be brought to bear, it may seem intimidating.
The obvious place to start is at the top: choosing a winning aspiration. Without an initial definition of winning, defining the value of the subsequent choices is nebulous at best. But remember that strategy is an iterative process, so you may need to adjust your aspiration as time goes on. To define where-to-play & how-to-win, reflect on these 4 dimensions:
The industry. What is the structure of your industry and the attractiveness of its segments?
Customers. What do your channels and end customers value?
Relative position. How does (and how could) you fare relative to the competition?
Competition. What will your competition do in reaction to your chosen course of action?
Answer these 7 questions to clarify the above:
What are the strategically distinct segments?
How structurally attractive are the segments?
What attributes constitute channel value?
What attributes constitute end customer value?
How do our capabilities fare against competitors?
How do our costs stack up against competitors?
How will competitors react to our actions?
Shorten Your Odds
There are no sure things in strategy, and nothing lasts forever. Having a clear definition of winning, a robust analytical framework, and a thoughtful review process, can help organize your thinking and improve your analysis; but a successful outcome is never guaranteed.
In a typical strategy process, participants seek to find the single right answer. At some point, through the massive deluge of data, a few strategic options tend to emerge. The strategy team sees it as their job to ensure that all the options will be actionable. This implies that unexpected options and creative ideas may slow down the process and add no value, ultimately becoming dangerous if momentum is built up behind them.
In the typical strategy process, compromises must be made, and yet it is expensive and time-consuming to analyze everything upfront. Hard feelings tend to emerge as individuals advocate for one choice and feel marginalized if their option doesn’t make the cut. Weak middle-of-the-line, appease-everybody compromises may then be made, instead of real hard choices – and choices, as we know, are at the heart of strategy.
But asking a single question can change everything: What would have to be true? Strategy, after all, is not making a choice that makes everyone happy, but rather making the best choice. And answering this question can help mitigate conflicts. To answer this question:
Frame the choice: Convert issues into a least 2 mutually independent options to consider.
Generate strategic possibilities: Broaden the list to ensure all possibilities are considered.
Specify conditions: For each possibility, find which conditions must be true for it be sound.
Identify barriers to choose: Focus first on those conditions about which you are least confident.
Design valid tests: For each key barrier, design a valid test sufficient to determine commitment.
Conduct tests: Conduct hypothesis-driven analysis, testing low-confidence conditions first.
Choose: Compare test results to key conditions and make informed choices.
Conclusion. The Endless Pursuit of Winning
While there is no perfect strategy, there are signals that a company has a particularly worrisome strategy. Here are several common traps in strategy generation:
The do-it-all strategy: Failing to make choices, and making everything a priority. Strategy is choices.
The Don Quixote strategy: Attacking competitive “walled cities” or taking on the stronger competitor fist. Play where you have a chance to win.
The Waterloo strategy: Starting wars on multiple fronts with various competitors will make you address everything weakly. Strategy is about making the hard choices.
The something-for-everyone strategy: Attempting to capture all consumer, channel, or geographies at once will result in being divided. To create real value, you must choose to serve some constituents really well, and to not worry about others.
The dreams-that-never-come-true strategy: High level aspirations and mission statements that never get translated into concrete where-to-play & how-to-win choices, core capabilities, and management systems, is simply insufficient for winning.
The program-of-the-month strategy: Settling for generic industry strategies, in which all competitors are chasing the same customers, geographies, and segments in the same way. The more your choices look like those of your competitors, the less likely you will ever win.
On the other hand, there are some common signs that a winning strategy is in place:
An activity system different from any competitor’s.
Polarized people; customers who absolutely adore you, and noncustomers who can’t see why anybody would buy from you.
Competitors who make a good deal of profit doing what they are doing.
Having more resources to spend on an ongoing basis than your competitors have.
Competitors who attack one another, not you.
Customers who look first to you for innovations and enhancements.
A great invention or product can create a company, build value, and win in the marketplace for a while. But to last for the long run, the five strategic components must be crystal clear. This represents a strategic playbook for your organization. Rather than a simple, one-way path, the plays can be complex; you will need to circle back, revisit, and revise. This playbook can guide your strategic thinking and help create true and lasting competitive advantage.
The vision of a successful company is the foundation of your entire process. To implement the vision, you must execute a strategy. And to execute a strategy, you must optimize your product towards something that customers will actually purchase.
This is done through the "Build → Measure → Learn” loop. You build "Minimum Viable Products” (MVP's), push them out to customers, and learn which features the customers like or dislike. At some point in your product lifecycle, you will likely need to choose whether to "pivot” to a new version of your product, or “persevere” with the path you're on.
The New Reality: Technology that was once thousands of dollars is now few dollars or even free. Tools once out of reach are readily available. One person can often do the job of two or three people. This book is for those who already have a successful business, but also for people who have never dreamed of starting a business. Today, you don’t need an office, and can work with people hundreds of miles away whom you’ve never met. This completely changes the rules of the game.
Ignore the Real World: Plenty of naysayers will claim that your ideas will never work in the “real world”; don’t listen to them and their excuses for mediocrity. The world may limit them, but the author’s company defies plenty of expectations.
Learning from Mistakes is Overrated: Most people say to learn from your mistakes. Instead, learn from successes, for once you know what works, you can probably do it again, this time even better!
Planning is Guessing: There are too many factors that will be out of your hands to plan for the future such as market conditions, competitors, and customers. Recognize that you’re just guessing; you must be able to swiftly throw your “plans” aside, improvise, and adapt to opportunities (discussed in Adaptability). While you should think about the future and overcoming obstacles, don’t obsess about it, for things will not necessarily come out how your plan describes.
Why Grow?: In business it’s considered more impressive and professional to have a larger business. Why? Do we value Harvard or Oxford because of their size? No, and we should treat businesses the same way. Don’t make assumptions about how big you should be; if anything, be wary of it; many a company has met its premature death from large, premature hiring periods. “Small is not just a stepping stone. Small is a great destination in itself.”
Workaholism: “Our culture celebrates the idea of the workaholic…not only is this workaholicism unnecessary, its stupid” Working like this is not sustainable over time and tries to make up for intellectual laziness by throwing more hours at problems. In addition, it leads to poor morale when others are unable to do the same, and skews your own value judgments since you cannot determine what is worth the extra effort and what is not.
Enough with “Entrepreneurs”: Let the term die. Replace this word with something more down-to-earth like “Starters”, because this is a new age of young people starting businesses, just doing what they love and getting paid to do it.
Make a Dent in the Universe: Don’t sit around and wait for someone else to make a change.
Scratch Your Own Itch: Build something that you want to use, because you know what quality you’d want as a consumer.
Start Making Something: “What you do matters, not what you say or plan.” Go out and start building; it’s the only way to see dreams become reality.
No Time is Not Excuse: No time is the most common excuse; there is always enough time if you spend it right. You maketime.
Draw a Line in the Sand: Believe in what you’re making and defend it. People will always doubt you and your product. Actively ignore them.
Mission Statement Impossible: “There is a world of difference between truly standing for something and having a mission statement that says you stand for something.” Mean it. Deliver.
Outside Money is Plan Z: Many businesses can be started without outside cash. It forces you to relinquish control, “cashing out” takes over your mind, and spending others’ money is addictive. It’s a bad idea, and raising money becomes incredibly distracting. It’s just not worth it.
You Need Less than You Think: Do you really need fancy business cards or a big office? Do you really need a retail store or can you sell online?
Start a Business, Not a Startup: The idea of a startup is a crutch. It promotes putting off important things like paying bills. Start thinking like a business.
Building to Flip is Building to Flop: Never start something already thinking about your “exit strategy”. Think about how you want to grow and succeed, not how you can sell it out.
Less Mass: Avoid things like long term contracts, excess staff, meetings, office politics, hardware/software/technology lock-ins, or permanent decisions. These add mass, weigh you down, and make it harder to change directions.
Embrace Constraints: Less is more since fewer resources forces you to be creative.
Build Half a Product, not a Half-Assed Product: It is better to have a solid half of a product than a full yet unimpressive one.
Start at an Epicenter: While there are things you could do and things you want to do, focus first on what you have to do. Find your epicenter.
Ignore the Details Early On: Details make a huge difference, but if you get too involved too early they delay the project and you focus on things that don’t matter as much. Ignore the details for a little while.
Making the Call is Making Progress: Decide now even without the perfect solution; too many decisions that are put off hang around far past their expiration date. Just move forward.
Be a Curator: “You don’t make a great museum by putting all the art in the world into a single room. That is a warehouse. What makes a museum great is the stuff that’s not on the walls. Someone says no.” It’s the stuff you leave out that matters, so look for things to simplify or remove.
Throw Less at the Problem: When things are not working, people often just try to throw more at the issue. Instead, do less. Trim down and cut back.
Focus on What Won’t Change: While many companies focus on the next big thing, don’t be fooled. Trends change often, so focus on things that remain stable, things that customers want both today and 10 years down the line.
Tone is in Your Fingers: Good gear is an excuse people use, a crutch so they don’t have to put in the time. Focus on what you’re doing with the tools instead of the tools themselves, because in the end, it will still be you making the product.
Sell your By-Products: “When you make something, you always make something else. You can’t just make one thing. Everything has a byproduct.” Find ways to profit from everything.
Launch Now: A project often needs to be released before you think it is perfect. Once the product is functional, get it out there. Skimp on neither effectiveness nor quality, but realize that the easiest and quickest way to improve is to see how it does.
Illusions of Agreement: The business world is littered with documents that take forever to make but seconds to forget.
Reasons to Quit: Ask: Why are you doing this? What problem are you solving? Are you adding value? Will this change behavior? Is there an easier way? What could you be doing instead? Is it really worth it? Is what you’re doing working?
Interruption is the Enemy of Productivity: During the average work day it is rare to truly have time alone to work (discussed in No B.S. Time Management). Address this with long periods of disconnected time; you’ll find you get a lot done.
Meetings are Toxic: Meetings waste time, are vague and unfocused, require preparation no one has time for, and convey little to no actual information per minute. Set a timer, invite very few people, have a clear agenda, state a specific problem, and end with a definitive solution.
Good Enough is Fine: Find a solution that delivers the maximum efficiency with minimum effort. Showing off your amazing skills wastes time.
Quick Wins: Momentum fuels motivation, so accomplish a series of small goals along the way to bigger things (discussed in Little Bets).
Don’t Be a Hero: If you already spent too much time working on something that isn’t worth it, walk away because you cannot get that time back.
Go to Sleep: Don’t forget to sleep. Costs like stubbornness, lack of creativity, diminished morale, and irritability will bite you in the ass.
Your Estimates Suck: You can’t predict the far future, and when you try to, you’re usually very wrong. Breaking big things into smaller things helps estimate more accurately.
Long Lists Don’t Get Done: Make smaller, prioritized to-do lists; longer lists collect dust and become guilt trips.
Tiny Decisions: “Big decisions are hard to make and hard to change...instead make choices that are small enough they’re effectively temporary.”
Don’t Copy: If you copy a product, you miss deeply understanding why it works, and you don’t grow. This passivity begets failure, as you end up only following, never leading.
Decommoditize your Product: Deter copycats by putting yourself in your product. Offer something that no one else can offer, and infect it with your uniqueness, which competitors cannot copy.
Pick a Fight: “If you think a competitor sucks, say so. When you do that, you’ll find others who agree with you will rally to your side.” Take a stand and people will take notice. People like taking sides.
Underdo your Competition: Underdoing can beat overdoing. Solve the simple problems and leave the big, difficult, hairy problems to your competition lest you constantly remain on the defensive. And defensive companies cannot think ahead.
Who Cares What They’re Doing?: Worrying about competition quickly becomes an obsession, so avoid it. It will change all the time and is out of your control, so leave it alone and focus on yourself.
Defining progress. Traction is the goal.
Entrepreneurs tend to want to lead with their solution or idea, and showcase nice upward-trending graphs. Investors want to know market size, margins, and your unfair advantage. If you focus on traction, BOTH goals become aligned. Traction should track an increase in some customer behaviour or action.
Created value (your customer’s benefit) > Captured value (what you charge them) > Cost (your expenses)
You want to create happy customers, and to most efficiently turn your raw material into cash. In-progress items are a waste, as is excess inventory and non-paying users. When defining your traction metric, you must consider the cost of acquiring the customer, the lifetime value of the customer, as well as any increased operation expenses due to new customers. Traction “prioritizes value creation over cost cutting”, focus on increasing the rate at which you turn raw material into cash.
From Operational to Strategic Agility
Strategic Agility is about innovating to create new markets by turning noncustomers into customers. There are many ways to create markets – simplifying complicated products like computers, making products more affordable, or catering to needs that people did not even know they had, like Starbucks or iPhones.
Market creation is necessary for innovation because as the saying goes, if Henry Ford had asked customers what they wanted, they would have said faster horses.
Creating a new market can be difficult since new products may cannibalize existing ones. For example, Apple sacrificed the iPod to pursue the iPhone. Lucrative products should enjoy little competition because they meet a need in the marketplace that is currently unsatisfied. Corporations must think of outcomes rather than outputs.
To create new markets, corporations must pay attention to nonusers. Customers are people currently purchasing products while a user is anyone who could eventually purchase it. To reach new users, corporations must focus on various market segments, not just one.
The Trap of Backward-Looking Strategy
Strategy has been a key business component for decades, but how does strategy become Agile? In 1983, Michael Porter founded the Monitor Group, a consulting firm that claimed to know strategy better than anyone else. But in November of 2012, Monitor could not pay its bills and filed for bankruptcy protection. How did a business focused on selling strategy fail so completely in their own strategy?
In 1969 Porter saw the growing market for strategy as businesses poured time and resources into strategizing. Ten years later, he published his findings in Harvard Business Review in an article entitled “How Competitive Forces Shape Strategy.” His framework formed the basis of the field of strategy and he became known for reliable strategies that created exciting new lines of business that crushed competition and enhanced profits from existing business. However, none of them created new markets.
Porter’s strategies involved massive data gathering and analysis, and creating barriers to competition. But since there was no data on the future, these strategies ignored change and innovation. They were backwards-looking, and while they had the benefit of hindsight, they lacked foresight. They utilized an understanding of how industries used to work, but could not adapt to change. Strategy was meant to protect companies from competition by focusing on 5 main forces:
The bargaining power of suppliers.
The bargaining power of customers.
Competition among existing firms.
The threat of new entrants.
The threat of substitute products.
In this model, customers only had some bargaining power. But as technology changed, customers gained more power as they had more options than ever before. Porter compared business to warfare or sports, where competition is the main concern. But this mindset is flawed in the modern marketplace. Instead, business is more like the arts — each business is a unique performer that creates its own customers, not taking them from other businesses. A firm should focus on competition only to learn how to better add value. The real essence of business strategy is adding value for customers, not outperforming other corporations.
Good Strategy is about exerting relative strength against relative weakness. It's the discovery of power by the discovery of an asymmetry.
Bad Strategy typically confuses strategy with lists of goals. For example, to "work with others to defuse regional conflicts” is a useless superficial political slogan.
A good strategy would explain why there are regional conflicts in certain areas. Why is it a problem now, when humanity has always had conflicts? Bad Strategy is not no strategy; it's obscuring a lack of Good Strategy by confusing lofty ambitions with strategy.
"Fluff": Buzzwords, catchy slogans, and "a flurry of fluff masking an absence of substance."
"Failure to Face the Challenge": Increasing market share, ignoring gross internal inefficiencies, and using silly fill-in-the-blank strategy templates avoiding the hard work of strategic thinking.
“Mistaking Goals for Strategy": Drive, ambition, and visualization exercises are not strategy.
"Bad Strategic Objects": Having a mess of goals to achieve, or lofty ambiguous goals with “no clue as to how to get there."
Bad Strategy is not miscalculation but rather complacency; it's easier to avoid the hard work of digging into the facts. Strategy requires tough choices – to direct resource to A removes resources from B.
Charisma may be an important trait for a leader, but is different from good strategy.
The Kernel of Good Strategy
1. Diagnosis: "What's going on here?" An insightful diagnosis can change an entire strategy. It tells a simpler story and defines a domain of action. For example, redefining Starbucks as a coffee restaurant, but rather "an urban oasis" could change the strategic direction of their entire product line.
2. Guiding Policy: It constrains the domain of actions by determining advantage. It anticipates responses from others and leverages effort.
3. Coherent Action: It has specific actionable steps which build on each other. Having individuals take responsibility for the final result is important.Elevate
In business, elevation is the difference between managing day-to-day operations and maximizing core business elements. With mental agility and a willingness to improve, you can elevate your business’s profit exponentially. Unsuccessful businesses have bad strategic blueprints due to a lack of time, commitment, support, and timely data. Many businesses misinterpret their priorities, refuse to refresh their strategy, and don’t have a clear definition of “strategy”. Some are constantly reacting to little fires, and few businesses share their strategy with their employees.
The G.O.S.T. framework can help clarify decisions.
Goal: A target to reach.
Objectives: Stepping stones toward your goal which should be S.M.A.R.T: Specific, Measurable, Achievable, Relevant, and Time-bound.
Strategy: The path one takes to achieve the goals by deciding how to allocate resources.
Tactics: Specific actions to implement strategies.
Core strategic thinking is split into 3 steps: (1) Acumen (generating key insights), (2) Allocation (focusing resources), and (3) Action (execution).
Elevated strategic thinking also involves 3 steps: (1) Coalesce (combining insights to create an innovative business model), (2) Compete (creating strategies to gain a competitive advantage), and (3) Champion (leading others in executing strategies).
Discipline #1 – Coalesce
Patterns & Systems
Patterns (both intentional and unintentional) define strategies. Many companies, for instance, draft a new strategy only once a year – far too infrequently to be effective. Good patterns periodically reassign resources to fast-growing parts of a company, and cuts from unprofitable areas. With failing projects, many adopt an “in too deep” mentality and continue investing money and time. Long-term success requires keen instincts that identify consumer, competitor, and company patterns. This can allow you to construct a database that helps determine when to drop failures or predict them beforehand. Good systems are created when all the elements in a business interconnect and function as a cohesive unit in order to achieve a singular purpose.
A business is platform-based if it identifies customer needs, meticulously records which products fulfill those needs, and creates novel solutions for the next set of needs. Platforms should have complementors, or “connected products.” For example, the Xbox platform is worthless without its games (its complementors). So why would a customer choose an Xbox over a PlayStation? The answer lies in differentiation: the Xbox platform will work with games that were made for any previous generation of its console. Some companies create slapdash differentiations (like different colors, flavors, or sizes) to adapt an already existing product; however, studies show that 61% of profits come from innovation, while only 39% come from line extensions.
Business models are like skeletons, structuring a company’s actions and values; yet after the startup of the business, they are often ignored. Companies that develop their business model beyond the startup phase have been shown to outperform their industry peers.
Phase I of the Business Model: Value Creation
To create a value proposition (how the customer sees a product’s worth) companies require core competencies (areas of expertise) and capabilities (resources to deploy). Clear articulation of the skills and technologies being advertised comes from core competencies, and capabilities allows companies to differentiate how their resources are applied.
To determine core competencies, ask yourself:
Who is the customer? Not everyone needs your product; only target those who do.
What needs to be done? Concentrate on providing new and unique value to your customers.
What benefits are offered? Customers categorize benefits into quality (effectiveness), convenience (time-saving), and cost (money-saving).
Phase II of the Business Model: Value Delivery
While value propositions define the value a customers perceives from a product, value chains are self-assessments involved in creation, design, marketing, delivery, and continued support of a product line.
A business’s “make-or-break” moment often occurs when products begin to be funneled into the market. By paying careful attention to the distribution channels for your product, you can ensure that the right potential target customers see the product. Channels can be direct (e.g. internet or retail outlets) and indirect (e.g. wholesalers or manufacturer’s representatives).
Phase III of the Business Model: Value Capture
Capturing precisely how your business provides value will allow for improved customer satisfaction and thus improved profits. Carefully consider price, revenue, cost, and profit. In addition, while sales are the most common form of revenue, licensing, subscriptions, or advertisements can be other potential sources.
Manipulation of revenue and cost are the primary ways to improve profit. The costs associated with each stage of the value chain should be meticulously monitored to ensure that fluctuations don’t damage value generation. In addition, although cutting costs can bring short-term relief, to maximize long-term profit it’s usually better to focus on gaining more revenue.
A company’s strategy should yield continuous profitable growth. Clearly answer:
What are you offering?
Who is your target audience?
Why do customers need your product?
Where will you showcase your products?
When will your customers access your products?
How will your customers access your products?
You can also consider a company’s existing and emerging positions, in addition to its customers, thereby analyzing growth from a “job to be fulfilled” perspective.
Finally, break your strategy into 3 time horizons: Year 1 (extend & defend), Years 2-3 (revise business model), and Years 3+ (recycle business model).
Strategy & Innovation
Both strategy and innovation play vital roles in gaining a continuous financial and competitive advantage. There are various types of innovation best used at different times in a market’s life cycle.
Growing Market: Focus on disruption, production, application, and a good platform.
Early-Maturing Market: Here, customers want an intimate experience. Focus on product line extensions, product enhancements, more intimate marketing, and an improved user experience.
Late-Maturing Market: At this stage, operational excellence is most important. Focus on improving engineering, integration, and internal processes.
Declining Market: To provide value here, focus primarily on organic innovation and acquisitions.
All innovation must shoot for 4 possible outcomes:
Differentiation: Offering a distinct product.
Neutralization: Eliminating the performance gap between the company and the competition.
Productivity: Increasing efficiency, reducing costs.
Waste: Ensuring all efforts provide good results.
When no product meets a customer’s exact needs, they then make purchasing decisions based on a product’s functionality, reliability, convenience, user experience, and price, in that order. Ensure that your product outshines the competition at every level of this tract. Create cutting-edge products, focus on personalized, tailored, intimate solutions, and combine low cost with high convenience to create operational excellence.
Discipline #2 – Compete
Goals and strategies are based on your condition and position. You’re either the leader (protecting an existing business and seeking new growth), the challenger (expanding brand awareness and operations), or the spectator (observing and reacting passively).
As a Leader, assess what your current employees can offer, but take ultimate responsibility. Act only after considering the business model, value proposition, core competencies, capacities, and target consumers. Focus on retaining existing customers and reducing rates of defection. Neutralize the competition by highlighting the benefit of your product and minimizing the competitor’s advantages and strengths.
Because Challengers tend to be newbies, they excel at fulfilling unmet customer needs, cleverly distributing resources, and providing unique, differentiated value. Challengers will brainstorm ways around the existing industry norms (e.g. the 11am checkout time for hotels), and cleverly frame competing offers negatively.
Spectators analyze a business’s situation objectively and look for potential improvements such as disengaging from an unprofitable project. Possible disengagements should be evaluated more frequently than only once per year to have the most impact.
Most companies aim to differentiate, but significantly overestimate the depths of their uniqueness. Thus, you not only need superior value, but also insight into your competition’s strategy. Identify their position, core competencies, capabilities, target customers, unmet needs, approach, and value proposition.
Competitive intelligence is often about gauging what the customer knows about your business. Survey your team, have strategic brainstorming sessions on your chief competitor, and discuss which factors lead to success in your market. Then, link the competitive insights you uncover to your knowledge about your customers and market. Finally, put it into use by taking action and fostering communication channels between all levels of your business in order to enhance decision-making, strategy, and tactics across the board.
Trade-offs are a natural byproduct of competition. Although it’s impossible to please everyone, ranking possible trade-offs when allocating resources (e.g. quality, convenience, cost, or service) is essential. If your business mirrors competitors’ trade-offs too closely, differentiate by asking: which customers you serve and don’t serve, which benefits are most appealing, and which features you are not focused on.
The real goal is not to beat your opponents, but to earn greater profits yourself. There will always be competition, both direct (other businesses) and indirect. Indirect competitors often pose the bigger threat because they eat away at profits slowly. They include:
Customers: Have you successfully raised prices in the past? Are there any switching costs for customers to transition from a competing product?
Supplies: Have you obtained a price decrease in the past? How many other suppliers exist?
Potential Entrants: Has there been any influx of competition in the last 2 years? Is the market susceptible to disruptive innovation such as a simple low-cost offering with wide appeal? Are there any unmet needs a new entrant could fulfill?
Substitutes: Have any substitutes entered the market in the last 2 years that fulfill unmet needs? Which part of the market most needs a substitute?
Intangibles also slowly eat away at profits, such as:
Status Quo: Introducing new products can be surprisingly risky; not only are you asking customers to change their habits, but you’re also diving into waters uncharted by predecessors. Even so, put faith in your product – every revolution has a catalyst and starts somewhere!
Apathy: Both customers and employees will become indifferent unless your product and business model are interesting, relevant, & useful.
Priorities: When a sub-group is given obscure tasks, or when a company pursues an agenda out of line with their customers, confusion occurs.
Discipline #3 – Champion
Using Time Strategically
As a leader’s responsibilities increase, their disposable time decreases, leading to unhealthy multi-tasking. Leaders should learn to delegate and concentrate exclusively on specific tasks. Never feel pressured to attend every meeting! Manage your time better by sending fewer emails; your employees will follow your lead. In addition, record how you spend your time in 30-minute increments to better optimize. Finally, consider “chunking”, where you work on one task at a time. Chunking channels all your cognitive processing into that activity, boosting productivity by up to 65%.
Influencing Strategy Commitment
Employees are more willing to accept and implement new strategies when they provide input; thus, leaders should always involve everyone. Leaders should set an example of commitment to strategy to encourage employees to behave similarly. Lastly, leaders should intentionally manipulate the environment; Amazon CEO Jeff Bezos, for instance, occasionally adds an empty chair during meetings to represent the customer.
When confronted with change, people wonder if it’s worth it, and if they can do it. Consider making things into a game, where sub-groups receive missions with clear rules. This helps them reach flow, a state of full engrossment and optimal performance. (Click here to browse our summaries on flowstate.)
Practicing Strategic Thinking
Which past behaviors have driven both your results, as well as your competitors’? Will these behaviors result in future results? Practice makes permanent, but only if you repeat it correctly. Establish a clear goal, break it into pieces, and correct mistakes immediately. New behaviors are often learned better when practiced slowly and meticulously, since this allows the correct neural circuitry to become properly myelinated.
Developing Strategy Habits
Habits form from cues and triggers, which are followed by routines, and then are rewarded. Negative habits can be made positive by simply changing the routine whilst keeping cues and rewards the same.
For example, a common bad habit is the “fire drill”, in which people allow seemingly urgent fires to interrupt purposeful, flowing work. When a new little fire pops up (cue), change your routine from frantic reaction to calm assessment, and then provide a reward.
All companies must encourage the exchange of ideas by promoting candor (honesty), suspension (active, objective listening), and openness. Oftentimes, companies begin meetings with discussions, shirking the opportunity to first explore new ideas. The best strategy conversations educate, record insights, and then engage employees from all areas of the business.
The Power of Story
Stories are often far more memorable than lists. With plots, characters, conflicts, and resolutions, they are difficult to write but easy to remember. Present strategies as stories in which the heroes (your team) have to overcome obstacles (trade-offs in resource allocation) to defeat the villains (your competition) in a suspenseful moment (the current market conditions). Framing business like this will spark passion and a team identity, but more importantly will allow everyone to understand and remember your current situation and the strategic plan. Always include the situation, characters, challenges, issues, options, resolutions, actions, and a symbolic theme. (Click here to browse our summary of Resonate which discusses elements of an effective narrative.)
Although the facets of elevated strategic thinking require time, energy, and commitment, they can create defining moments in your business’s success.
The back-of-the-envelope. Business model test.
1. Start with your minimum success criteria, not maximum.
2. Find out what you would prefer the company to be worth in 3 years.
3. Define the revenue and throughput you’ll need to reach your 3-year goal.
4. Convert that target into a required number of customers.
5. Consider customer leaving and calculate the lifetime value of each customer.
6. Calculate the number of customer per month you need to grow to reach your goal.
7. Calculate the number of unaware people you need to see your offer to reach your desired growth.
Turn each of the above calculations into assumptions you can quickly test. Also consider that most entrepreneurs are not willing to increase the price of their product, but if doubling the price gains you more revenue than you lose from lost customers, it can be a viable strategy. In essence, define your minim success, calculate your required customer throughput, and adjust your business model.
Revolutionizing existing business models often relies on outthinking the competition by generating unconventional approaches. But be aware that cutting-edge business models can be intimidating for investors. While “Outthinkers” may be the laughing stock of “Thinkers”, eventually the profits prove there was a method to the outthinkers’ madness.
If you let innovation stall because “it’s always been done this way,” you run the risk of eliminating a superior option. Recognizing any rigidity and finding novel strategies is vital to cultivating innovation. Once you’ve discovered an original strategy, determine whether it is superior to the “old school” methods. Luckily, it is generally difficult for others to copy true innovation.
Most breakthrough, revolutionary companies encourage outthinkers in leadership roles. These leaders facilitate original ideas that contrast against prevailing paradigms. They focus on paradigm shifts — “any major shift in technology, thinking, or practice.” There are 9 trends transforming established paradigms:
The Erosion of Economies of Scale: Modern methodologies dramatically reduce the time and cost of producing new products.
Acceleration: As economies of scale grow obsolete, the pace of business rapidly increases.
Disaggregation: Harvard Business School professor Shoshana Zuboff defines “distributed capitalism” as the “myriad ways in which production and consumption increasingly depend on distributed assets, distributed information, and distributed social and management systems.” This is changing competition, making customizable products vital.
Free Flow of Information: Global data flows are growing by almost 50% per year with ubiquitous cell phones and an online presence.
The Death of the Middleman: Global Distribution Systems (GDS), otherwise known as the middleman, are fast becoming irrelevant as companies provide similar services internally.
Self-Organized Citizens & Customers: Social media facilitates group coordination and formation of complex, adaptive, and powerful systems.
The Shift in Power to the Developing World: A tactic known as “reverse innovation” capitalizes on the need for low-cost products in developing countries, by manufacturing goods cheaply in developed countries.
A Rising Global War for Talent: Today, companies are more focused on recruiting talented employees to meet the needs of expanding customer bases.
Global Network Volatility: Our vastly interconnected world means companies must adapt to the butterfly effect; small fluctuations may result in rifts across the globe.
Build a traction model.
Entrepreneurs must break their ambitious goals into milestones. The purpose is not to build the product first, or receive funding first, but rather to create traction first. Your goal is not to create a surge of customers, but rather create a repeatable system for customer acquisition. While the first customers are challenging, start with an offer and the follow that up with a minimum viable product (MVP). The offer should contain your unique value proposition (your grand vision), a demo (your “carefully scripted narrative”), followed by your pricing model.
While individual people do indeed act irrationally, it is still possible to predict their (irrational) behaviour. Ten customer interviews may be sufficient to notice a trend. The growth curve you are aiming for is not actually smooth, it comes in little pushes that eventually yield exponential growth. Focus your effort on increasing the percentage of new customers per month.
- Remember: you want your minimum success criteria to be 3 years away.
- The company Y Combinator recommends 5-7% growth per week.
- It should take approximately 8 weeks from idea to “solution fit”.
- It should then take 2 years to find “market fit”.
- Find your best early adopters, refine your product with them, and then scale. If you can’t convince your first 10, how can you convince thousands?
"Build → Measure → Learn" loop through which every iteration of the product should be run. You build a MVP, measure customer response, learn about your assumptions, and repeat. The goal is to go through that cycle as quickly as possible.
In order to determine which assumptions to test, you should seek to quickly test the riskiest assumptions. List the assumptions deeply embedded in your product, and rigorously test each one, prioritizing the riskiest.
There are a few assumptions which are leaps of faith. A leap of faith might be: customers will flock to your product because your product is similar to a competitor's product. Aim to specifically drill down which assumptions are leaps of faith.
The Power Schedule To Advance And Conquer
The person who actively puts in time and effort will be compensated for their struggle. The person who sits by idly, will not. There are no quick fixes. Bandages will not stop the bleeding it you refuse to put in the effort required to maintain forward momentum. Any action is better than staying still and accepting fate.
Make small steps in the right direction, and before you know it you'll be there. Create a power-schedule to conquer:
-Do not entertain negativity. Remain optimistic, and ruthlessly focused on pulling through.
-Stick to a daily schedule. If you plan for productive action, you are likely to engage in productive action.
-Use your free time to do new things like exercising.
-Having a designating time to wake up and sleep will help you feel in control of your day.
-Create a list of things that waste your time.
Energy against pivotal objectives at the right time creates leverage. It requires Anticipation and Pivot Points:
Anticipation: Consider the "habits, preferences, and policies of others." One example is the anticipation of future demand in Manhattan real-estate. A second is that the Iraqis anticipated the US public opinion on Iraq War, whereas the US did not anticipate the Iraqi's anticipation (like a poker game).
Pivot Points: Direct effort at one point to magnify its effects. One example is when cola companies
Many leaders have lofty visionary goals rife with ambiguity. Yet objectives must be both feasible and on the near time horizon.
Define more and more granular proximate objectives until becomes you distill lofty goals into specific tasks.
When a system is tightly integrated, performance is limited by the weakest link. For example, in assessing property value, being near a noisy highway can be a limiting factor. While you will likely not see incremental improvement, you must identify and address bottlenecks, one after another.
While low quality chain- linked systems (such as General Motors) can be disastrous, high quality ones (such as Ikea's distribution system), can make it difficult for others to compete.
One should always use anticipation, and then design coordinated action. Visualize the customer trying out your product. Keep all the pieces in your head simultaneously, and try to “optimize” her smile after using your product.
Imagine different business decisions, and how they'd change the level of "smiling". You must fit the pieces together as a coherent, high-quality whole (which is especially important in resource-strapped situations like a startup).
Inertia and Entropy
Inertia: Business inertia happens when a company is unable or unwilling to adapt to new circumstances. Outdated routines and stubborn culture can cause inertia. For example, the deregulation of the airline industry meant that the old cost calculations, business models, and strategies, had to change. And yet few airlines spent the effort to actually change their deeply ingrained routines. Some methods for breaking inertia are: (1) simplification (e.g. outsourcing), and (2) have the alphas of small social groups institute new norms in the culture.
Entropy: The idea that "great works of art blur and crumble" also applies to organizations. Companies must value adaptation over old profit streams. Look deeply into the data regarding which parts of the company or customer base are underperforming. Undo accumulated clutter by staying constantly vigilant.
The Science of Strategy
While meticulous planning is what an engineer might want, it relies on deduction. Strategy is actually induction: a creative hypothesis to test against reality. Not a deductive analysis.
Using Your Head
Challenge your own limitations, biases, and judgments. Write down decisions in order to later analyze them. Fact check things on the ground.
Good ideas pop into our heads and most people tend to stick with their first idea. This may be good in some situations (as described in the book Blink). Yet instead of rashly accepting the first one, Good Strategy is about coming up with alternative ideas and investigating each one.
Constantly create and destroy new ideas. Improved strategy typically stems from a better diagnosis of the issue, not necessarily better actions. Create an internal “virtual counsel" of people you respect, and ask yourself how they'd react to the given situation in which you find yourself.
Keeping Your Head .
Trusting the all-knowing stock market is simply following the crowd. Instead, delve into the details of the business logic yourself. (Remember Enron?)
Government bailouts means that others are taking the loss when things go poorly, and actually increases riskiness of the economy in the long-run. Easy credit, an incorrect belief that owning land can never lose you money, and overleveraging, were all Bad Strategy decisions which caused the 2008 crisis. Everyone (and every company) believes that the statistics don't apply to them; that they are different.
The 4 Villains of Decision Making
Most people are prone to four decision-making biases:
1. Narrow Framing. You have defined your choices too narrowly. For example, one company had a major project to outsource and was deciding on which firm to use. They decided to break the project up into sub-projects, and hired 5 contractors for the first sub-task. It barely increased the budget, and yet had a great effect since the organization got a feel for how each firm performed on a real task.
2. Confirmation Bias: We tend to look for data which supports what our guts already tell us. It makes us feel scientific since we are gathering data but isn't.
3. Short-term Emotion: In the 1980s, Intel was debating whether to stay in the memory business or not – it was a major product line but heavily competitive. The executives were only able to think
clearly after asking themselves a simple question: IF they were fired and someone else took over, what would the new CEO do? They clearly have done well in the microprocessor business since.
4.Overconfidence: Believe it or not some producers didn't like the Beatles at first, they didn't believe people would want t-person boy bands. When most people sive adviou, they just know they are right. And they are often wrong.
Find Someone Who's Solved Your Problem.
In 1954, Sam Walton (founder of Walmart) frequently went to variety stores. He saw some stores which had a centralized checkout and duplicated it for his store. He ruthlessly copied from others all the time.
Use Others' Solutions: Someone has most likely already solved your problem; use them. One medical practitioner wanted to fight sepsis in her hospital. She scoured the research and came across a scientific article describing some unique methods. She implemented this in her hospital and was able to reduce the rates of sepsis to 28% below the national average.
Bright Spots: Look for "bright spots” in the past. For example, you are trying a new exercise regimen but are not staying consistent. Look for the few days you did go to the gym last month (the bright spots). What did they have in common, and what can you learn from these bright spots?
Prescription List: Once you have absorbed the best practices from others and found your bright spots, create a "prescription list of solutions so you can replicate the process. For example, what questions did you come up with the last time budget cuts were made?
Analogies: Scientists frequently use analogies to solve problems. They define the important features of a given problem, and then naturally search for solutions others have come up with in similar areas. "When you use analogies you can take your pick from the world's buffet of solutions.
Ladder Approach: Move up the ladder in generality. For example, one principal wanted to improve the speed of the lunch line at school. He might look at department stores checkout lines. If there are no new ideas, he might then look at lines in sports stadiums. He might then look at methods
plumbers use to control flow through a pipe.
Consider the opposite
Seek Disagreement. We must seek disagreement, as we are all biased towards our own beliefs.
Devil's Advocate. Create a person whose job it is to pretend they are a strategist for your competitor.
However, beware of (1) the devil's advocate being marginalized, and (2) lazy thinking where people
don't bother thinking of critiques because they believe the devil's advocate will handle it.
Anti-Group. Assign a few people to argue against all major decisions.
Specifies: When we ask the waiter if the chocolate cake is good, we just want to be told yes. To counteract this tendency, request specifics. For example, a new recruit for a law firm might ask existing lawyers the number of dinners they spend with family per week, instead of asking general
questions about work-life-balance
Consider the Opposite: When you're upset with your spouse, write down days she was good to you.
70% of couples improved their relationship following the creation of such a diary. Or with a new fad diet, consider the opinions of those who take the opposite approach.
Zoom Out Zoom In
One way is to get an outside view is to talk to an expert about "base rates” (how similar situations have played out in the past). Yet be careful to avoid asking about predicting the future of your situation. Ask them about the past, not the future.
But perhaps we should we trust our gut instincts over the data. Aren't you better than the average? The truth is, it doesn't matter what you believe, you are simply seeking to feed your gut more data to make better decisions.
Afterwards, you then want to zoom in and get some dose-up "texture" to the situation by talking to
individuals. Yet when you zoom in and read some individual negative reviews, you might realize the negative reviews are only due to the price.
In business, zoom in and actually our competitor's product to add some texture. Taking this outside view helps overcome our overly optimistic bias in our own thoughts.
Overcome Short-Term Emotion
The age-old platitude of "sleep on it" actually has a lot of wisdom to it; it lets the visceral emotions fade. Two methods are: Ask yourself how you'd feel 10 minutes, 10 months, and 10 years from now, for a given decision. Ask yourself what you'd advise a friend to do in a similar situation.
Bookend the Future
Define a Range: It's extremely difficult to predict the future with high accuracy. It's far better to consider both good and bad possibilities, and define a range for the future. This counterbalances
both overconfidence and over-pessimism.
What Would Have to Happen: Start with either a positive or negative future outcome, and then ask
what would have had to happen for the result to occur. For example, what would have occurred to
make an employee quit months from now?
Premortems: Pretend a project has failed, and work backwards to figure out why. You can also conduct a "preparade" in the opposite manner.
Buffers: Most companies now know to build buffers into budgets and timelines, thus intuitively
recognizing that the future is a range, not a value.
Mental Vaccination: One company had interview applicants deal with a simulated irate customer on
the spot, in an attempt to prepare them for the reality of the job. This helped weed out applicants and made the future employees more prepared
Trusting the Process
When you include negative opinions, you are demonstrating to colleagues that you've considered
multiple angles. When a manager decides on Plan A, but someone wanted Plan Z, a wise manager would say that Plan 2 has merits, and Plan A does indeed have faults, but the decision was made. It's crucial that the organization trust in the decision-making process even if not on every decision.
Make the commitment.
Your peers will likely be enjoying some early success in life while you are busy plugging away trying to grow a business, which can be frustrating for an entrepreneur. But you must follow through your commitment. There will be enormous amounts of stress. Other people and obligations in one’s personal life will inevitably compete for and entrepreneur’s time and resources.
- One of the most important lessons for a startup is DROOM “Don’t Run Out Of Money”. Money not only buys resources to create a product but also buys time.
- One great idea is insufficient for success, you need great execution and the ability to spin off new ideas rapidly in order to adapt to changing circumstances.
- You must recognize that as an entrepreneur you’re inherently a salesman.
- Entrepreneur who fail to plan “may as well plan to fail”.
- Entrepreneurs must develop the skill of self-creation, pulling themselves up by their bootstraps.
- Once a full commitment towards entrepreneurship is made, a context-shift is made in which you being to wonder “Why not?” instead of “Why?”
Becoming a CEO
You must be okay upsetting people short term. Get constant feedback on your performance from
employees. Don't sugarcoat feedback or firing because it's in the employee's best interest if you're straight with her. Feedback is a dialog not a monologue. Make sure you allow bad new's to reach your ears. Your "story" and "strategy" are really the same.
The CEO's primary job is to be the chief decision maker. Recognize that you're always operating with incomplete information. Business schools love to analyze and critique the decisions of CEO's, but may fail to realize that they are studying a situation after the fact, when all the information is present and the outcome is known. You need a mixture of intelligence, logic, and courage.
Seven habits for highly effective experiments.
“Strategy” in entrepreneurship is about increasing your throughput within a set timeframe. Big strategies can be sliced and diced into smaller experiments.
1. State your expected outcomes clearly and outloud. People tend to fear being wrong, and thus avoid this.
2. Detach ego and declare your expectations to your team. “Make it team effort”.
3. Estimate don’t be precise. Guess in term of range rather than numbers.
4. Ignore what people say and only focus on the actions of your customers.
5. Create specific falsifiable hypothesis.
6. Create small batches of customers in order to receive feedback more quicly.
7. Always have a control group.
Picking Up Speed
When starting a new business, you tend to focus on everything. Entrepreneurs are not short on ambition nor work ethic. Most try to overschedule themselves and focus on everything. However, such relentless brute force is not actually good. “They end up overworked, overscheduled, overwhelmed, and still underperforming.
Most people focus on what feels productive, yet actually is not. You can be "busy" without being
productive. “Activity is not productivity.'
Vital Functions are the 3 key contributions that will actually result in financial success for your company. Find them and focus on them. Your "Vital Priorities" are the 3 day-to-day actions which will improve those vita functions.
The "Vital Metric" is the 1 measure of success that everything else stems from. Find that one
"economic denominator", focus on it, and let the rest of your business activities maximize that metric.
Distractions will never go away, but you must have the mental fortitude to say no.
Boundaries are vital to succeed. This means saying no to happy hours, and to that useless phone call.
Find 3 key habits which, if done daily would yield success. You must track your habits on paper; otherwise they will drift.
Lay out your throughput process by writing down the system which turn your raw material into cash. Then, determinate the number of units being created through each part of your pipeline. Loom for bottlenecks, which are slowing down the rest of the chain. Such bottlenecks may include inventory piling up at one part of the system, or defective units at another part of the flow.
You might need to increase your quality system if defective units are appearing, or you may need to devote more manpower to one part if inventory is piling up. Even “pending users” can be seen as inventory pileup representing a bottleneck. Constraints in your business can include:
- External: The market demand is actually less than what your company can handle.
- Physical: Insufficient time, money, equipment, or people in order to grow. Keep in mind one should not jump quickly to a “more is better” mentality. More money can accelerate bad decision, and more people can increase complexity. More time however is nearly always a benefit.
-Policy: Existing company mindsets, constrained habits, conflicting metrics of success, and outdated methods may be causing constraints.
Archiving breakthrough. The art of the scientist.
The build → Measure → Learn loop is akin to the scientific method, aims to creatively come up with a new hypothesis and test it against reality. When scaling, you must aim to find constraints, define strategies to overcome them, and test out such strategies via experimentation.
- You want to run either “learning experiments” (are meant to generate new ideas) or “throughput experiments” (determine if a new feature increases throughput).
-When you find a constraint, first try to leverage the constraint by improving the bottleneck without spending additional resources.
- When discussing constraints, (1) lay out the background of itself, (2) highlight the problem, (3) analyze the constraint, (4) set a goal, (5) propose a new idea, and (6) test out each idea with an experiment.
Developing the Correct Frame of Mind
Principle #1. Entrepreneurship is a Career
“Entrepreneurship” is not simply starting your own business, but rather is a lifelong career path involving extraordinary amounts of decision-making. Setbacks are inevitable regardless of which career path you choose, so take these impediments (even bankruptcy) as valuable learning opportunities. In the long-run, entrepreneurship is a rewarding career if you retain the resources and willpower to keep persevering.
Principle #2. Successful Entrepreneurs are Just Like You
There are entrepreneurs all around us – anyone can be one, whether or not he seems to possess the “correct attributes” for a businessperson. Though factors such as intelligence, confidence, and creativity may play a role in success, it is simply impossible to possess every single trait required of the ideal businessperson. And qualities that might seem to be helpful could also be detrimental; for example, being overly optimistic can lead to taking unsafe risks. That being said, entrepreneurs must avoid being perfectionists, rebellious, arrogant, or overly independent.
Principle #3. There Are No Secrets to Success
Every website or author claims to have the “secrets to success” but these “secrets” inevitably vary from person to person. Research shows that there are no definite rules to follow to guarantee success. The strategies you apply may fail for one venture, yet could make you millions in your next. It is best to find out yourself what is most suitable for your situation.
Principle #4. Luck Is Part of the Equation
Like it or not, luck plays a role in all aspects of our lives. A lucky investment or a favorable change in consumer demands can give our business the push it needs to become successful. On the other hand, economic depression, employee dissatisfaction, and competition can cause even the best entrepreneurs to suffer.
Learn to distinguish between bad luck and bad decisions; while the former is unavoidable, the latter is how to improve. Do not dwell too long on luck; instead, focus on the aspects that you can control. Remember: your results could be very different next time.
Principle #5. Never Reach for a Gallon When You Only Need A Quart
“Reaching for the stars” may seem like a good idea to reach long-term goals, but reaching for smaller, more easily achievable goals along the way is often the better route. It is easier to avoid disappointment if we are reasonable and understand our current limits. The joy of obtaining economic wealth lasts only temporarily, and is easily replaced with greed. Being happy with what you currently have can prevent you from being swayed by the lure of money, for when our aspirations are too big, we tend to take unnecessary risks. These risks in turn increases the probability of facing great losses. Make every goal modest, and you will find yourself satisfied rather than regretful.
Principle #6. It Shouldn’t Only Be About Money
For every business, profit determines success. However, business decisions should not be made based solely on money, but instead on whether the overall experience of running the business is a positive one. Your company should aim to fulfill your life goals, not just your financial goals.
Principle #7. Embrace Fear
Whether the threat is a competitor or an economic recession, fear prepares us for conflict. Nurture and explore your fear so that it motivates you to improve. Pressure yourself to become more aware of everything around you in order to learn what threats surround you. Do not become paralyzed by fear; instead, allow it to fine-tune your decision-making skills.
Making the Right Decisions
Principle #8. Never Bet the Farm
More people lose rather than gain money from risky business decisions. There is a preconception that risk takers are bold and admirable, while more cautious entrepreneurs are timid and cowardly. Yet it is often social pressure, not wisdom, which causes entrepreneurs to make rash decisions. Your goals and experience, as well as the opportunity, must all be assessed. The greater the risk, the more difficult the recovery will be. To manage risk, stick to these 4 rules:
Novel ideas are often riskier and less effective than simple ones. While many believe that venturing in a direction never travelled is the best path, there are many advantages to following in the footsteps of others. Focus on expanding a territory in which you already have knowledge to make smarter decisions. Simplicity is a tool that we under-appreciate in the modern day.
No matter how safe your path seems to be, obstacles will appear. Adversities are unavoidable, but problems that arise in one company may never affect another; every situation is unique. By putting a spin on an existing product instead of creating a new one, you are taking a safer path, but will never be 100% free of obstacles.
Low-tech ideas are often the best ones. Fancy new gadgets do not appeal to everyone and are expensive to make. With so many companies focusing on technology, going low-tech could bring an aspect of uniqueness to your venture.
The idea itself is not as important as the way you bring it to life. Executing a strategy is critical to any business; the same idea can either lead to bankruptcy or to the next billion-dollar venture depending on how well the proposal is effectuated. Companies such as McDonalds and Dell have very basic business proposals and instead focus more on execution to reap in great profits.
Principle #9. Don’t Spend a Dollar when a Dime Will Do
Do not fret if you don’t currently have the assets to launch a large-scale venture. Here are 3 lessons to help:
Starting small can help you succeed. The larger the business, the greater the risk of making grave errors. If a small business fails, you will have more resources left over to try again. Starting small also teaches “resource parsimony”: the ability to control expenses and solve problems without spending money. You will also have more ownership of your venture if you limit outside investment.
The steps to keeping investments small are simple. Invest money into what matters most. Decide carefully if you need equipment or high-quality products. Seek solutions to obtain expensive goods with limited funds. For example, find office space in a low-rent district or consider buying secondhand. Do not be afraid to negotiate for more favorable prices, and do not overspend on advertising; providing high-quality goods and services will naturally attract more customers through word-of-mouth (discussed in Contagious). Try not to borrow money from friends or family, as this could make it difficult to walk away later.
Incubators are for chickens. Though incubators can be an asset, some incubators have awful track records and a low success rate. Plus, they can be expensive and may cause a large portion of your company to be controlled by outsiders. Some incubators rush the start-up phase of running a business, increasing the risk of bankruptcy.
Principle #10. Always Tap a Bridge Before Crossing
Patience is vital, as it allows you to minimize losses and be more prepared. Prudence leads to increased customer retention, lower financial risk, and greater employee satisfaction in the long run. For example, announcing your business too early via advertising allows competitors to develop a counter-strategy. The 3 basic steps to becoming prudent are: (1) Question everything, (2) Do thorough research, and (3) Write things down. Here are 5 rules to becoming prudent:
Never assume any venture is a sure thing. Remember that “haste makes waste,” and that every idea, no matter how great, needs refinement. Modify your business plan until it is error-free.
Let someone else be the pioneer. Being the pioneer takes an incredible amount of resources to create your product, research the market, and create distribution channels. It may reduce your competitive advantage by draining your assets.
Make sure the market is ready for your idea. Some ideas may actually be ahead of their time. Essential products such as toilet paper, dishwashers, and 3D printers were all reject
Make sure your organization is ready before you start. Ensure that your organization is prepared to provide high-quality service and products before launching. Know your competition, have a risk-management plan, and understand regulations.
Grow no faster than your organization can handle. It causes you to use up your assets far too quickly, causing premature bankruptcy. It is very difficult to turn away good opportunities and customers, but creating a sustainable business relies on slow, steady progress. It is more important to maintain close connections with loyal customers than to use overly aggressive marketing.
Only Fools Fly Without a Net
Just as many high-schoolers dream of being NBA basketball players, many aspiring entrepreneurs wish to be millionaires. But 99% of basketball players never get drafted, and many entrepreneurs never end up rich. The 3 objectives of a great backup plan are:
Support: Friends, family, and business connections can create a network to rely on during tough times or after a failed venture.
Solid Base: This “base” for launching your next venture in the event of failure can be anything from a place that you can return to, a different career path that can sustain you, or even a state of mind!
Re-entry: The plan should be flexible and encourage you to re-enter the market again.
Need ideas for a backup plan? Here are 4 ideas:
The Weekend Entrepreneur: Maintain your day job, and fit it around your work schedule.
The Active Supporter: Have one partner (or spouse) quit their job while the other works to support the financial needs of both people.
The Tag Team: Have both partners work part-time. This ensures that the business is looked after while you both get to keep your day jobs.
The Silent Sponsor: Act as a “silent sponsor” for a business by providing support in return for equity. This option is very low-commitment and can yield great rewards if the business prospers.
Connect But Protect
What Networking Can Do For You
A good network enables you to find more business opportunities. It can provide invaluable feedback on the feasibility of your idea, and can help garner financial, human, and intellectual resources during times of need. It allows you to gain connections to more suppliers, partners, or customers, and can help with professional advice on taxes or government policies.
How to Build Your Network
Be aggressive: Utilize interpersonal skills and note down contact information.
Do not try to befriend everyone: Only approach those who can aid your business.
Learn where to look: Schools, organizations, social groups, and the Internet are some places to look.
How to Protect Yourself
In the business world, prepare for dishonest employees, deceitful partners, and aggressive competitors. Hire a lawyer to protect your intellectual property, review your contracts, resolve issues between partners, and aid with important other services. Never feel embarrassed to ask for a written contract (even between family members), and never place trust in someone just because they seem sincere. Also strike a balance between a disciplined and a familial atmosphere. Remember: you are not helping your business if your employees take advantage of you.
Why Do I Need A Partner?
A partner sharers risk: It is much safer for two people to each invest $10,000 than for one person to risk the full $20,000.
Encouragement: During unfavorable situations, it helps to have some encouragement.
Two heads are better than one: Starting a business is time-consuming, difficult, and extremely frustrating. Having an extra source of insight allows problems to be solved more efficiently.
A larger combined network: With each partner having different connections, the company will be more likely to prosper with an expanded network.
Responsibility: Partnerships encourage you to work hard for someone else, not just for yourself.
Who Should Be My Partner?
Partner with someone who complements you: People with contrasting personalities often work well together because this allows for a more well-rounded view of situations and problems.
Partner with someone who shares your aspirations: A lack of a similar visions will always lead to conflicts of interest.
How Do I Reach a Consensus With My Partner?
Clearly define roles: Both formal and informal roles must be stated right when the partnership is formed. A backup plan should be created, in case one partner cannot continue.
Decide on decision-making authority: What happens if you have contrasting opinions?
Decide who gets to allocate resources: Who has the authority to control the money flow?
Learn to Play the Grey
There are no clear-cut, black & white boundaries for making ethical decisions. While businesspeople should not purposefully act unethically, they must learn to bend the rules. Here are 4 ways to “play the grey”:
Dealing with the System: There are often legal ways around rigid government regulations. Think creatively, like analyzing the wording of laws.
Building an Image: Set the impression that your business is larger and more successful than it is. For example, when trying to make a deal, always make it seem as if you have other options available.
Closing the Deal: It is best to be overconfident when sealing the deal with a potential client. This may mean overstating your position and the power you have over the market.
Being Opportunistic: Profit from your creativity by always seeking the chance to get ahead of the competition. Find shortcuts that save you time, money, and valuable resources, thus enabling you to gain a competitive advantage.
Plan A Timely Exit
It is not an easy task to learn how to give up a venture at the appropriate time. Knowing when to quit is crucial for an entrepreneur who needs to move on to a different path. Sometimes, a plan must be halted before it is even launched. An idea might be fantastic, but if you are not passionate about it, it must be abandoned.
Bankruptcy tends to occur when entrepreneurs lose interest; save your resources for the venture that is right for you. Other times, a business must be halted after no positive results have been yielded. Or you may realize that your business is not fulfilling your life goals. Never be afraid to admit that things are not going as planned!
Persist, persevere, prevail.
If you have successfully mitigated as many risks as possible, collected the right team of people and learned how to sell, then persistence will likely be the deciding factor separating success and failure. When you persist long enough, you are allowing yourself to survive in order to take advantage of opportunities which will inevitably be presented. By refusing to accept failure as a possibility, your mind will look for ways to succeed despite setbacks.
- Every year that a company survives, increases its odds of long term survival.
- While persisting, you must be willing to reflect and critically analyze your past decisions in order to learn and improve.
- Keeping a diary can help you analyze past decisions.
- Always look for more data and knowledge to adapt and improve your strategy.
- Bad luck is rarely the real reason for failure. Typically it has to do with the people on your team, the problem you are trying to solve, or the competition you may have underestimated.
Entrepreneurship is about money and fulfillment. Making a total commitment to the goal is necessary, as is the extremely difficult work to make the goal a reality. The four element to a successful life are balancing: “happiness, achievement, significance and legacy”.