Master the Art of Business

The Personal MBA: Master the Art of Business by Josh Kaufman, 2010

Compelling concepts of business elements from conceiving a product to selling it.

2 Jul 2021

Large companies move slowly. Good ideas often died on the vine simply because they had to be approved by too many people.

Every successful business (1) creates or provides something of value that (2) other people want or need (3) at a price they’re willing to pay, in a way that (4) satisfies the purchaser’s needs and expectations and (5) provides the business sufficient revenue to make it worthwhile for the owners to continue operation.

Value can’t be created without understanding what people want (market research). Attracting customers first requires getting their attention, then making them interested (marketing). In order to close a sale, people must first trust your ability to deliver on what’s promised (value delivery and operations). Customer satisfaction depends on reliably exceeding the customer’s expectations (customer service). Profit sufficiency requires bringing in more money than is spent (finance).

Every business fundamentally relies on two additional factors: people and systems. Every business is created by people and survives by benefiting other people in some way. To understand how businesses work, you must have a firm understanding of how people tend to think and behave—how humans make decisions, act on those decisions, and communicate with others. Recent advances in psychology and neuroscience are revealing why people do the things they do, as well as how to improve our own behavior and work more effectively with others. Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result. By understanding the essentials of how complex systems work, it’s possible to find ways to improve existing systems, whether you’re dealing with a marketing campaign or an automotive assembly line.

MBA programs won’t guarantee you a high-paying job, let alone make you a skilled manager or leader with a shot at the executive suite. Developing skills such as decision making, management, and leadership takes real practice and experience, which business schools can’t provide in the classroom, regardless of how prestigious the program is.

If an MBA education is useful training for business, then the following should be true as a matter of logic: (1) having an MBA degree should, other things being equal, be related to various measures of career success and attainment, such as salary; and (2) if what someone learns in business school helps that person be better prepared for the business world and more competent in that domain—in other words, if business schools convey professionally useful knowledge—then a measure of how much one has learned or mastered the material, such as grades in course work, should be at least somewhat predictive of various outcomes that index success in business.

There is scant evidence that the MBA credential, particularly from non-elite schools, or the grades earned in business courses—a measure of the mastery of the material—are related to either salary or the attainment of higher level positions in organizations. These data, at a minimum, suggest that the training or education component of business education is only loosely coupled to the world of managing organizations.

Management was thought of mostly as an exercise in getting people to work faster and do exactly what they’re told.

There’s an enormous (and growing) body of evidence that direct incentives often undermine performance, motivation, and job satisfaction in the real world.

Process improvements are easy to skip if you want the business’s short-term profit numbers to look good, even though they’re essential to long-term viability. By ignoring the things that make a business operate more effectively, MBA-trained executives have unwittingly gutted previously viable companies in the name of quarterly earnings per share.

The “leveraged buyout” strategy taught in many business school classrooms—buying a company, financing massive expansion via debt, then selling the business to another company at a premium17—turned formerly self-sustaining companies into debt-bloated monstrosities, and the constant flipping of businesses from one temporary owner to the next turned financial markets into a game of musical chairs.

When financial wizardry and short-term returns trump prudence and long-term value creation, customers and employees suffer. The only people who benefit are the MBA-trained executive-level financiers and fund managers, who extract hundreds of millions of dollars in transaction fees and salaries while destroying previously viable companies, hundreds of thousands of jobs, and billions of dollars of value.

Mass-market advertising is no longer able to reliably convert pennies to dollars. Inventories (if they exist at all) tend to be smaller, businesses depend on others for critical functions, and markets change and adapt extremely quickly. Speed, flexibility, and ingenuity are the qualities that successful businesses rely on today—qualities that the corporate giants of the past few decades struggle to acquire and retain, and business school classrooms struggle to teach.

Upon graduating from a top-tier business school, you’ll find it much easier to get an interview with a corporate recruiter who works for a Fortune 50, investment bank, or consulting firm. The effect is strongest immediately after graduation, then largely wears out within three to five years. After that, you’re on your own: hiring managers no longer care so much about where you went to school—they care more about what you’ve accomplished since then.

Every business is fundamentally limited by the size and quality of the market it attempts to serve. The Iron Law of the Market is cold, hard, and unforgiving: if you don’t have a large group of people who really want what you have to offer, your chances of building a viable business are very slim.

Core Human Drives that have a profound influence on our decisions and actions:
The Drive to Acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. Businesses built on the drive to acquire include retailers, investment brokerages, and political consulting companies. Companies that promise to make us wealthy, famous, influential, or powerful connect to this drive.
The Drive to Bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic. Businesses built on the drive to bond include restaurants, conferences, and dating services. Companies that promise to make us attractive, well liked, or highly regarded connect to this drive.
The Drive to Learn. The desire to satisfy our curiosity. Businesses built on the drive to learn include academic programs, book publishers, and training workshops. Companies that promise to make us more knowledgeable or competent connect to this drive.
The Drive to Defend. The desire to protect ourselves, our loved ones, and our property. Businesses built on the drive to defend include home alarm systems, insurance products, martial arts training, and legal services. Companies that promise to keep us safe, eliminate a problem, or prevent bad things from happening connect to this drive.
The Drive to Feel. The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Businesses built on the drive to feel include restaurants, movies, games, concerts, and sporting events. Offers that promise to give us pleasure, thrill us, or give us something to look forward to connect with this drive.

The best way to observe what your potential competitors are doing is to become a customer. Buy as much as you can of what they offer. Observing your competition from the inside can teach you an enormous amount about the market: what value the competitor provides, how they attract attention, what they charge, how they close sales, how they make customers happy, how they deal with issues, and what needs they aren’t yet serving.

A Product is a tangible form of value. To run a Product-oriented business, you must:
Create some sort of tangible item that people want.
Produce that item as inexpensively as possible while maintaining an acceptable level of quality.
Sell as many units as possible for as high a price as the market will bear.
Keep enough inventory of finished product available to fulfill orders as they come in.

In order to create a successful Shared Resource, you must:
Create an asset people want to have access to.
Serve as many users as you can without affecting the quality of each user’s experience.
Charge enough to maintain and improve the Shared Resource over time.

Focus on creating Forms of Value that require the least end-user effort to get the best possible End Result—they will have the highest perceived value.

Most successful businesses offer value in multiple forms.

Unbundling the album into individual units opens the way to sales that wouldn’t otherwise happen.

On their own, ideas are largely worthless—discovering whether or not you can actually make them work in reality is the most important job of any entrepreneur.

“Stealth mode” diminishes your early learning opportunities, putting you at a huge early disadvantage. It’s almost always better to focus on getting feedback from real customers as quickly as you possibly can.

The Iteration Cycle often feels like additional work because it is additional work. That’s why so few people do it: it’s very tempting to skip all of these “extra” steps and attempt to create the final offering outright.

When making decisions about what to include in your offering, it pays to look for Patterns—how specific groups of people tend to value some characteristic in a certain context. The decisions you make about what to include and what to leave out will never make everyone happy, so perfection shouldn’t be your goal. By paying attention to the Patterns behind what your best customers value, you’ll be able to focus on improving your offering for most of your best potential customers most of the time.

There are nine common Economic Values that people typically consider when evaluating a potential purchase. They are:
Efficacy—How well does it work?
Speed—How quickly does it work?
Reliability—Can I depend on it to do what I want?
Ease of Use—How much effort does it require?
Flexibility—How many things does it do?
Status—How does this affect the way others perceive me?
Aesthetic Appeal—How attractive or otherwise aesthetically pleasing is it?
Emotion—How does it make me feel?
Cost—How much do I have to give up to get this?

It’s incredibly difficult to optimize for both fidelity and convenience at the same time, so the most successful offerings try to provide the most convenience or fidelity among all competing offerings. If you’re craving pizza, a table at the original Pizzeria Uno in Chicago is high-fidelity; Domino’s home delivery is convenient. Accordingly, Pizzeria Uno benefits more from making the dining experience remarkable, while Domino’s benefits more from delivering decent pizza as quickly as possible.

People never accept Trade-offs unless they’re forced to make a Decision. If the perfect option existed, they’d buy it. Since there’s no such thing as the perfect offering, people are happy to settle for the Next Best Alternative

Every business or offering has a set of CIAs that will make or break its continued existence. The more accurately you can identify these assumptions in advance and actually test whether or not they’re true, the less risk you’ll be taking and the more confidence you’ll have in the wisdom of your decisions.

Marketing is not the same thing as selling. While “direct marketing” strategies often try to minimize the time between attracting attention and asking for the sale, Marketing and selling are two different things.

If you want your message to be heard, the medium matters. The form of your message has a big influence on how receptive people are to the information that message contains. If the form of your message suggests that it was created just for them, you’re far more likely to get your prospect’s attention.

Whatever you’re offering, I can guarantee you that most of the people in this world don’t—and will never—care about what you’re doing. Harsh but true.

Skilled marketers don’t try to get everyone’s attention—they focus on getting the attention of the right people at the right time. If you’re marketing Harley-Davidson motorcycles, trying to land an appearance on Oprah to show off this year’s new models probably isn’t the best strategy. Likewise, Oprah’s core audience is not likely to include burly men in leather jackets with handlebar mustaches and tattoos, so don’t expect her to pay for a marketing booth at a motorcycle trade show any time soon.

Attempting to appeal to everyone is a waste of time and money: focus your marketing efforts on your Probable Purchaser. By spending your limited resources reaching out to people who are already interested in the types of things you offer, you’ll maximize the effectiveness of your attention-grabbing activities.

Screening your customers can help you filter out the bad customers before they do business with you. The more clearly you define your ideal customer, the better you can screen out the prospects who don’t fit that description, and the more you’ll be able to focus on serving your best customers well.

Sensitive or embarrassing topics tend to have low Addressability, even if there’s a huge need.

Using Framing to your advantage will allow you to communicate the benefits of your offer to your Probable Purchasers persuasively, as long as you don’t leave out information that your customers have a right to know.

Attention is necessary to attract paying customers, but if that attention never leads to sales, it won’t sustain your business.

If your position is agreeable to everyone, it becomes so boring that no one will pay Attention to you.

There are four ways to support a price on something of value:
Replacement cost
Market comparison
Discounted cash flow/net present value
Value comparison

Value Comparison is typically the optimal way to price your offer, since the value of an offer to a specific group can be quite high, resulting in a much better price. Use the other methods as a baseline, but focus on discovering how much your offer is worth to the party you hope to sell it to, then set your price appropriately.

Emulating shady used car dealers is the fastest way to destroy Trust and give your potential customers the impression that you care more about your bottom line than about what they want. In reality, the best salespeople are the ones who can listen intently for the things the customer really wants.

Understanding the other party’s Next Best Alternative gives you a major sales advantage: you can structure your agreement so it’s more attractive than their next best option. The more you know about the other party’s alternatives, the more attractively you can Frame your total offer by Bundling/ Unbundling various options.

In every negotiation, there are Three Universal Currencies: resources, time, and flexibility. Any one of these currencies can be traded for more or less of the others.

Coffee or cookies cost the dealer very little, but Reciprocation makes it more likely that the buyer will “pay back” the favor with a much larger concession.

Your prospects know you’re not perfect, so don’t pretend to be. People actually get suspicious when something appears to be “too good to be true.” If an offer appears abnormally good, your prospects will start asking themselves, “What’s the catch?” Instead of making them wonder, tell them yourself. By being up front with your prospects regarding drawbacks and Trade-offs, you’ll enhance your trustworthiness and close more sales.

The best businesses in the world deliver the value they’ve promised to their customers in a way that surpasses the customers’ expectations.

A customer’s perception of quality relies on two criteria: expectations and performance. You can characterize this relationship in the form of a quasi-equation, which I call the Expectation Effect: Quality = Performance - Expectations.

The best way to consistently surpass expectations is to give your customers an unexpected bonus in addition to the value they expect. The purpose of the Value Delivery process is to ensure that your customers are happy and satisfied, and the best way to ensure customer satisfaction is to at least meet the customers’ expectations, surpassing them whenever you possibly can.

If you want to create something that you can sell without your direct involvement, the ability to Duplicate your offer is essential. If you have to be personally involved with every customer, there’s an upper limit on the number of customers you can serve in a given amount of time. Combining Duplication with Automation allows you to deliver value to more people—and close more sales as a result.

Multiplication is what separates small businesses from huge businesses. There’s an upper limit on what any single business system can produce. By creating more identical business systems based on a proven model, Multiplication can expand a business’s ability to deliver value to more customers.

If your goal is to create a business that doesn’t require your direct daily involvement, Scalability should be a major consideration. Products are typically the easiest to Duplicate, while Shared Resources (like gyms, etc.) are easiest to Multiply.

If your offer improves with every Iteration Cycle, it won’t be long before your offer is many times more valuable to your customers than it was before.

The effect of any improvement or system optimization is Amplified by the size of the system. The larger the system, the larger the result.

Every benefit you deliver and every customer you serve make it harder for competitors to replicate you. Don’t focus on competing—focus on delivering even more value. Your competition will take care of itself.

As a general rule, the only good use of debt or outside capital in setting up a system is to give you access to Force Multipliers you would not be able to access any other way. If your business requires tooling up a factory, you probably don’t have $10 million sitting in your bank account. Taking a Loan from a bank or accepting Capital from an outside investor may be your best option, provided you use those funds to purchase and maintain Force Multipliers, not to pay yourself or maintain rent on a fancy office.

The minimization approach means that businesses should capture as little value as possible, as long as the business remains Sufficient (discussed later). While this approach may not bring in as much short-term revenue as maximization, it preserves the value customers see in doing business with the company, which is necessary for the business’s long-term success.

To calculate your market’s Allowable Acquisition Cost, start with your average customer’s Lifetime Value, then subtract your Value Stream costs—what it takes to create and deliver the value promised to that customer over your entire relationship with them. Then subtract your Overhead (discussed later) divided by your total customer base, which represents the Fixed Costs (discussed later) you’ll need to pay to stay in business over that period of time. Multiply the result by 1 minus your desired Profit Margin (if you’re shooting for a 60 percent margin, you’d use 1.00 - 0.60 = 0.40), and that’s your Allowable Acquisition Cost.

Control your costs, but don’t undermine the reason customers buy from you in the first place.

Bootstrapping is the art of building and operating a business without Funding. Don’t assume that the only way to create a successful business is by raising millions of dollars of Venture Capital—it’s simply not true. By limiting yourself to the use of Personal Cash, Personal Credit, the business’s revenue, and a little ingenuity, you can build extremely successful businesses without seeking Funding at all.

Don’t continue to pour concrete into a bottomless pit—if it’s not worth the additional investment, walk away. You never have to earn back money in the same way you lost it. If the reward isn’t worth the investment required to obtain it or the risk, don’t invest.

You can’t “motivate” other people by yelling at them to work faster—all the drill-sergeant approach accomplishes is making them want to move away from you. They may comply with you temporarily if they perceive some threat to themselves if they don’t, but you can bet that they’ll move away from working with you at the first available opportunity.

Great management is boring—and often unrewarding. The hallmark of an effective manager is anticipating likely issues and resolving them in advance, before they become an issue. Some of the best managers in the world look like they’re not doing much, but everything gets done on time and under budget.

The problem is, no one sees all of the bad things that the great manager prevents. Less skilled managers are actually more likely to be rewarded, since everyone can see them “making things happen” and “moving heaven and earth” to resolve issues—issues they may have created themselves via poor management.

People who are “unconsciously incompetent” don’t know they’re incompetent—they know so little about the subject that they can’t fully appreciate how little they actually know. That’s why every barber and taxi driver you meet is an expert on the economy and international politics.

Above a certain point, the more tasks a person has to do, the more their performance on all of those tasks decreases.

Investments in improving your personal skills and capabilities can simultaneously enrich your life and open doors to additional income sources. New skills create new opportunities, and new opportunities often translate into more income. Your ability to save is limited; your ability to earn is not.

The solution to Communication Overhead is simple but not easy: make your team as small as possible. You’ll be leaving people out, but that’s the point—including them is causing more work than it’s creating in benefits. Removing unnecessary people from the team will save everyone’s time and produce better results.

If you go to a CEO, customer, or partner with a plan that involves three months of Slack time, the most common response is, “That’s not acceptable—get it done faster.” The Slack is eliminated, and as a result, almost every project plan is very likely to be completely wrong.

Convergence is the tendency of group members to become more alike over time. In business, this is sometimes called a company “culture,” in the sense that people who work there tend to have similar characteristics, behaviors, and philosophies.

Sometimes incentives create unintended Second-Order Effects (discussed later). Stock options were created under the theory that executives who had an interest in the company’s stock price would act in ways to make the stock go up in value over time, which was in the best interest of the shareholders. That’s true, but only to a point: the actual interest of those executives is in making the stock price go up right before they intend to sell. Once the options are sold, they no longer care so much, leading to policies that sacrifice long-term stability for short-term gains.

You will never develop your business to the point that everything is perfect and unchanging. Many business owners and managers share an unexamined belief that by moving a business from “good to great,” it’ll be “built to last,” continuing to outperform competitors for decades to come. It’s a pleasant dream, but measuring yourself against that yardstick is unrealistic—it requires an unchanging world.

When your system relies on the performance of someone outside of your control, do all that you can to prepare for the possibility that they won’t perform as expected.

Counterparty Risk is Amplified by the Planning Fallacy. Your partners can’t predict the future any more than you can, and everyone has a tendency to be optimistic regarding plans and deadlines. Make plans and commitments, but always have a plan for when the project doesn’t go as expected.

Normal Accidents are a compelling reason to keep the systems you rely on as loose as you possibly can. There are many positive things to be said for systems, but expecting zero failures is unrealistic in the extreme. Loose systems may not be as efficient, but they last longer and fail less catastrophically.

Noncritical inputs are significant Opportunity Costs. If you’re spending most of your time in unproductive meetings, for example, you’re wasting time that could be used to actually get important things done. The same goes for noncritical expenses: they represent money that you could be using to far greater effect.

Don’t feel like you have to Optimize absolutely everything to perfection. Optimization and Refactoring are affected by the Critical Few as well—a few small changes can produce enormous results. After you’ve picked the “low-hanging fruit,” further Optimization can cost more in effort than you’ll reap in returns. That’s a good point to stop. Perfectionism is a trap for the unwary.

Every business process has some amount of Friction. The key is to identify areas where Friction currently exists, then experiment with small improvements that will reduce the amount of Friction in the system. Removing small amounts of Friction consistently over time Accumulates large improvements in both quality and efficiency.

The more efficient the Automated system, the more crucial the contribution of the human operators of that system. When an error happens, operators need to identify and fix the situation quickly or shut the system down—otherwise, the Automated system will continue to Multiply the error.

Reliable systems tend to dull the operator’s senses, making it very difficult for them to notice when things go wrong—the moment when their attention is most sorely needed. As a result, the more reliable the system, the lower the likelihood that human operators will notice when something goes wrong—particularly if the error is small.

Don’t let your Standard Operating Procedures lapse into bureaucracy. Remember, the purpose of an SOP is to minimize the amount of time and effort it takes to complete a task or solve a problem effectively. If the SOP requires effort without providing value, it’s Friction.