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[image: 001] Table of Contents Epigraph Title Page Copyright Page Dedication Chapter 1 - WHY READ THIS BOOK? Chapter 2 - VALUE CREATION Chapter 3 - MARKETING Chapter 4 - SALES Chapter 5 - VALUE DELIVERY Chapter 6 - FINANCE Chapter 7 - THE HUMAN MIND Chapter 8 - WORKING WITH YOURSELF Chapter 9 - WORKING WITH OTHERS Chapter 10 - UNDERSTANDING SYSTEMS Chapter 11 - ANALYZING SYSTEMS Chapter 12 - IMPROVING SYSTEMS Acknowledgements APPENDIX A - HOW TO CONTINUE YOUR BUSINESS STUDIES APPENDIX B - FORTY-NINE QUESTIONS TO IMPROVE YOUR RESULTS NOTES INDEX “Fundamentals are fundamentals. Whether you’re an entrepreneur or an executive at a Fortune 50 company, this book will help you succeed.” —John Mang, Vice President of Japan Fabric & Home Care, Procter & Gamble “This book goes far beyond business: I used the marketing, sales, and communication principles in this book to complete my PhD and land a highly competitive postdoc and professorship at a world-class research university. Whatever you do for a living, this book will help you do it even better.” —Dr. Zachary Gagnon, Assistant Professor of Chemical Engineering, Johns Hopkins University “If you’re thinking of starting a business, this book will radically increase your confidence. If you’re already running a business, this book will help you identify weaknesses in your systems to get better results. If you’re thinking about plunging yourself into debt to get an MBA, this book will challenge you to your core. Are you more interested in becoming a better businessperson, or having a document to hang on your wall to impress people?” —Daniel Joshua Rubin, Playwright and Portrait Artist “I graduated with an MBA in 2005 before I encountered The Personal MBA, but I still felt like I didn’t know anything about business. In retrospect, I wish I had read this book before enrolling in an MBA program—it would’ve helped me be more mindful while completing my degree. Who knows . . . I might have skip; ped the MBA completely. This is easily the best foundational business book available.” —Roger Hui, Technical Account Manager, RedHat, Inc. “I used the mental models in this book to create a profitable business in less than four weeks. Josh quickly dispels many mistaken beliefs about entrepreneurship, and his guidance has made me vastly more productive and successful, and my life more fulfilling.” —Evan Deaubl, President and CEO, Tic Tac Code LLC “These concepts really work: I’m booked solid with clients, making eight times more money, feeling far less overwhelmed, and having a lot more fun. If you want to live up to our potential, you can’t afford to miss this book.” —Tim Grahl, Founder and CEO, Out:Think Group “After one hour with Josh, I immediately used his advice to bring in an extra $120,000 this year. These simple principles are astoundingly effective.” —Dan Portnoy, Founder and CEO, Portnoy Media Group [image: 001] PORTFOLIO / PENGUIN Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St. Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Books Australia Ltd, 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi—110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England First published in 2010 by Portfolio / Penguin, a member of Penguin Group (USA) Inc. Copyright © Worldly Wisdom Ventures LLC, 2010 All rights reserved Library of Congress Cataloging-in-Publication Data Kaufman, Josh. The personal MBA : a world-class business education in a single volume / Josh Kaufman. p. cm. Includes index. eISBN: 9781101455722 1. Management. 2. Management—Study and teaching. 3. Business. 4. Commerce. I. Title. HD31.K343 2010 650—dc22 2010027919 Set in Adobe Caslon Pro Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book. The scanning, uploading, and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law. Please purchase only authorized electronic editions and do not participate in or encourage electronic piracy of copyrightable materials. Your support of the author’s rights is appreciated. http://us.penguingroup.com To the millions of business professionals worldwide who work to make people’s lives better, in ways large and small. 1 WHY READ THIS BOOK? Just what the world needs . . . another business book! —U.S. CUSTOMS AGENT AT JFK INTERNATIONAL AIRPORT, AFTER ASKING ABOUT MY OCCUPATION Life’s tough. It’s tougher if you’re stupid. —JOHN WAYNE, WESTERN FILM ICON Since you’re reading this book, chances are you want to make something Since you’re reading this book, chances are you want to make something important happen: start a business, get a promotion, or create something new in the world. It’s also likely that a few things are holding you back from achieving your dream:▶ Business Angst.The feeling that you “don’t know much about business” and therefore could never start your own company or take more responsibility in your current position. Better to maintain the status quo than face the fear of the unknown. ▶ Certification Intimidation.The idea that “business is really complicated” and is a subject best left to highly trained “experts.” If you don’t have an MBA or similar expensive credentials, who are you to say you know what to do? ▶ Impostor Syndrome.The fear that you’re already “in over your head” and it’s only a matter of time before you’re unmasked as a total fraud. No one likes a phony, right? Here’s the good news: everyone has these unfounded fears, and they can be eliminated quickly. All you need to do is learn a few simple concepts that will change the way you think about how business works. Once you’ve conquered your fears, you can accomplish anything. If you’re an entrepreneur, designer, student, programmer, or professional who wants to master the fundamentals of sound business practice, this book is for you. No matter who you are or what you’re trying to do, you’re about to discover a useful new way of looking at business that will help you spend less time fighting your fears and more time doing things that make a difference. You Don’t Need to Know It All As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble. —RALPH WALDO EMERSON, ESSAYIST AND POET One of the beautiful things about learning any subject is the fact that you don’t need to know everything—you only need to understand a few critically important concepts that provide most of the value. Once you have a solid scaffold of core principles to work from, building upon your knowledge and making progress becomes much easier. The Personal MBA is a set of foundational business concepts you can use to get things done. Reading this book will give you a firm foundation of business knowledge you can use to make things happen. Once you master the fundamentals, you can accomplish even the most challenging business goals with surprising ease. Over the past five years, I’ve read thousands of business books, interviewed hundreds of business professionals, worked for a Fortune 50 corporation, started my own businesses, and consulted with businesses ranging from solo operations to multinational corporations with hundreds of thousands of employees and billions of dollars in revenue. Along the way, I’ve collected, distilled, and refined my findings into the concepts presented in this book. Understanding these fundamental principles will give you the tools you can rely on to make good business decisions. If you invest the time and energy necessary to learn these concepts, you’ll easily be in the top 1 percent of the human population when it comes to knowing:▶ How businesses actually work. ▶ How to start a new business. ▶ How to improve an existing business. ▶ How to use business-related skills to accomplish your personal goals. Think of this book as a filter. Instead of trying to absorb all of the business information that’s out there—and there’s a lot out there—use this book to help you learn what matters most, so you can focus on what’s actually important: making things happen. No Experience Necessary People always overestimate how complex business is. This isn’t rocket science—we’ve chosen one of the world’s most simple professions. —JACK WELCH, FORMER CEO OF GENERAL ELECTRIC Don’t worry if you’re a complete beginner. Unlike many other business books, this book does not require any prior business knowledge or experience. I don’t assume you’re already the CEO of a large company who makes multimillion-dollar decisions on a daily basis. (But this book will still be very useful if you are!) If you do have business experience, take it from many of my clients around the world who have MBAs from top schools—you’ll find the information in this book more valuable and practical than anything you learned earning your degree. Together, we’ll explore 226 simple concepts that help you think about business in an entirely new way. After reading this book, you’ll have a much more comprehensive and accurate understanding of what businesses actually are and what successful businesses actually do. Questions, Not Answers Education is not the answer to the question. Education is the means to the answer to all questions. —BILL ALLIN, SOCIOLOGIST AND EDUCATION ACTIVIST Most business books attempt to teach you to have more answers: a technique for this, a method for that. This book is different. It won’t give you answers—it will help you ask better questions. Knowing what’s critically important in every business is the first step in making good business decisions. The more you know about the essential questions to ask in your current situation, the more quickly you’ll be able to find the answers you need to move forward. Mental Models, Not Methods The limits of my language are the limits of my world. —LUDWIG WITTGENSTEIN, PHILOSOPHER AND LOGICIAN To improve your business skills, you don’t need to learn everything there is to know—mastering the fundamentals can take you surprisingly far. I call these foundational business concepts mental models, and together, they create a solid framework you can rely on to make good decisions. Mental models are concepts that represent your understanding of “how things work.” Think of driving a car: what do you expect when you press down on the right-side pedal? If the car slows down, you’ll be surprised—that pedal is supposed to be the accelerator. That’s a mental model—an idea about how something works in the real world. Your brain forms mental models automatically by noticing patterns in what you experience each day. Very often, however, the mental models you form on your own aren’t completely accurate—you’re only one person, so your knowledge and experiences are limited. Education is a way to make your mental models more accurate by internalizing the knowledge and experiences other people have collected throughout their lives. The best education helps you learn to see the world in a new, more productive way. For example, many people believe things like “starting a business is risky,” “to get started, you must create a massive business plan and borrow a lot of money,” and “business is about who you know, not what you know.” Each of these phrases is a mental model—a way of describing how the world works—but they’re not quite accurate. Correcting your mental models can help you think about what you’re doing more clearly, which will help you make better decisions:[image: 002] After learning the mental models in this book, many of my clients have realized that their picture of what businesses are and how businesses work was inaccurate—getting their venture off the ground would be far easier than they originally imagined. Instead of wasting valuable time and energy feeling intimidated and freaking out, learning these concepts gave them the freedom to stop worrying and start making progress. This book will help you learn the fundamental principles of business quickly so you can focus your time and energy on actually doing useful things: creating something valuable, attracting attention, closing more sales, serving more customers, getting promoted, making more money, and changing the world. Not only will you be able to create more value for others and improve your own financial situation, you’ll also have more fun along the way. My “Personal” MBA Self-education is, I firmly believe, the only kind of education there is. —ISAAC ASIMOV, FORMER PROFESSOR OF BIOCHEMISTRY AT BOSTON UNIVERSITY AND AUTHOR OF OVER FIVE HUNDRED BOOKS People often ask me if I have an MBA. “No,” I reply, “but I did go to business school.” As a student at the University of Cincinnati, I was fortunate enough to participate in the Carl H. Lindner Honors-PLUS program, which is essentially an MBA at the undergraduate level. The program was generously funded via scholarships, and as a result I had the remarkable opportunity to experience most of what business schools teach without the crippling burden of debt. I’ve also been on the “fast track to corporate success.” Through the University of Cincinnati’s cooperative education program, I landed a management position at a Fortune 50 company—Procter & Gamble—during my second year of college. By the time I graduated in 2005, I had an offer to become an assistant brand manager in P&G’s Home Care division, a role typically reserved for graduates of top MBA programs. As I began my last semester of college, I started focusing less on my coursework and more on the future. My new job would require a solid understanding of business, and almost all of my peers and managers would have MBAs from top-tier schools. I briefly considered enrolling in an MBA program, but it made no sense to pursue an expensive credential to get the kind of job I already had, and my responsibilities would be demanding enough without adding a load of coursework by enrolling in a part-time program. While considering my options, I remembered a bit of career advice that Andy Walter, the first associate director I reported to at P&G, had given me: “If you put the same amount of time and energy you’d spend completing an MBA into doing good work and improving your skills, you’ll do just as well.” (Andy doesn’t have an MBA—he studied electrical engineering in college. He’s now one of the company’s top global IT managers, responsible for leading many of P&G’s largest projects.) In the end, I decided to skip business school, but not business education. Instead of enrolling in an MBA program, I skipped the classroom and hit the books, creating my own “Personal” MBA. A Self-Directed Crash Course in Business Many who are self-taught far excel the doctors, masters, and bachelors of the most renowned universities. —LUDWIG VON MISES, AUSTRIAN ECONOMIST AND AUTHOR OF HUMAN ACTION I’ve always been an avid reader, but before I decided to learn everything I could about business, most of what I read was fiction. I grew up in New London, a small farm town in northern Ohio where the major industries are agriculture and light manufacturing. My mother is a children’s librarian, and my father worked as a sixth grade science teacher, then as an elementary school principal. Books were a major part of my life, but business was not. Before getting my first real job, I knew next to nothing about what businesses were or how they functioned, other than that they were places people went every day in order to draw a paycheck. I had no idea that companies like Procter & Gamble even existed until I applied for the job that swept me into the corporate world. Working for P&G was an education in itself. The sheer size and scope of the business—and the complexity required to manage a business of that size—boggled my mind. During my first three years with the company, I participated in decisions across every part of the business process: creating new products, ramping up production, allocating millions of marketing dollars, and securing distribution with major retailers like Walmart, Target, Kroger, and Costco. As an assistant brand manager, I was leading teams of thirty to forty P&G employees, contractors, and agency staff—all of whom had competing projects, plans, and priorities. The stakes were huge and the pressure was intense. To this day, I can’t help but marvel at the thousands of man-hours, the millions of dollars, and the enormously complex processes necessary to make a simple bottle of dish soap appear on the shelf of the local supermarket. Everything from the shape of the bottle to the scent of the product is optimized—including the text on the cardboard boxes used to ship inventory to the store. My work at P&G, however, wasn’t the only thing on my mind. My decision to skip business school in favor of educating myself developed from a side project into a minor obsession. Every day I would spend hour after hour reading and researching, searching for one more tidbit of knowledge that would help me to better understand how the business world worked. Instead of using the summer after graduation to relax and go on vacation, I spent my days haunting the business stacks at the local bookstore, absorbing as much as I possibly could. By the time I officially started working full-time for P&G in September 2005, I had read hundreds of books across every discipline that business schools teach, as well as in disciplines that most business schools don’t cover, such as psychology, physical science, and systems theory. When my first day at P&G finally arrived, I felt prepared to strategize with the best of them. As it turned out, my self-education served me well—I was doing valuable work, making things happen, and getting good reviews. As time went on, however, I realized three very important things:1. Large companies move slowly. Good ideas often died on the vine simply because they had to be approved by too many people. 2. Climbing the corporate ladder is an obstacle to doing great work. I wanted to focus on getting things done and making things better, not constantly positioning myself for promotion. Politics and turf wars are an inescapable part of the daily experience of working for a large company. 3. Frustration leads to burnout. I wanted to enjoy the daily experience of work, but instead I felt like I was running a gauntlet each day. It began to affect my health, happiness, and relationships. The longer I stayed in the corporate world, the more I realized I wanted out. I desperately wanted to work on my own terms, as an entrepreneur. The Wheat and the Chaff It is important that students bring a certain ragamuffin, barefoot irreverence to their studies; they are not here to worship what is known, but to question it. —JACOB BRONOWSKI, WRITER AND PRESENTER OF THE ASCENT OF MAN If there’s one thing I’m good at, it’s taking in a huge amount of information and distilling it to the essentials. I’m a synthesist by nature, and my travels through the world of business literature quickly became an exercise in separating the diamonds from the rough. The amount of business information being published every day is staggering. As of this writing, the Library of Congress has approximately 1.2 million business-related books in its general collection. Assuming you read at an average speed of 250 words per minute and an average book contains 60,000 words, it would take 528 years of around-the-clock reading to finish the entire collection, 822 years if you allowed yourself the luxury of food and sleep. According to Bowker, the company responsible for assigning ISBN numbers for the publishing industry, over 11,000 new business books are published worldwide each year, adding to the millions of business books printed since the early 1900s. Amazon.com carries over 630,000 business-related titles, not counting audiobooks, e-books, or materials that are published without an ISBN. Of course, books aren’t the only source of business information available. Take magazines and newspapers, for example: 527 major business-related periodicals are currently tracked by the Wilson Business Periodicals Index. Every year, the WBPI adds over 96,000 records to its database of 1.6 million entries. That figure doesn’t include blogs: according to Google Blog Search, there are currently over 110 million business-related blog posts on the Internet—a figure that is growing daily. There’s certainly no shortage of business writers in the blog world: the blog search engine Technorati has indexed over 4 million bloggers who write about business-related topics. Clearly, sifting through the massive amount of business information available would be an enormous challenge. My early business research was mostly haphazard—I simply went to a bookstore and picked up a book that looked interesting. For every great book I found, I had to wade through ten times as many hastily assembled texts by consultants who were more interested in creating a three-hundred-page business card than providing genuinely useful information. I started to wonder: how much of what’s out there—and there’s a lot out there—I really needed to know. How could I separate the valuable information from the rubbish? I only had so much time and energy, so I started searching for a filter: something that would direct me to the useful knowledge and keep me away from the chaff. The more I searched, the more I realized it didn’t exist—so I decided to create it myself. I began tracking which resources were valuable and which ones weren’t, then publishing my findings on my Web site, both as an archive and for the benefit of anyone interested. It was a personal project, nothing more: I was just a recent college graduate doing my best to learn something useful, and publishing my research for others seemed like a good use of time and energy. One fateful morning, however, the Personal MBA went unexpectedly public, and my life changed permanently. The Personal MBA Goes Global Whoever best describes the problem is the one most likely to solve it. —DAN ROAM, AUTHOR OF THE BACK OF THE NAPKIN In addition to reading books, I was following several hundred business blogs. Some of the best business thinking was being published on the Internet months (or years) before it ever appeared in print, and I wanted to read it all as soon as it was available. One of the bloggers I followed avidly was Seth Godin. A best-selling author (of books like Permission Marketing, Purple Cow, and Linchpin) and one of the earliest successful online marketers, Seth specializes in bold statements of big ideas designed to challenge you to do more, do better, question the status quo, and make a difference. One particular morning, Seth was commenting on a recent news story: Harvard was rescinding the admission of 119 previously soon-to-be Harvard MBA students.1 These prospective students had discovered an ethically dubious way to hack into the Harvard admissions Web site to view their application status before the official acceptance letters went out. The story quickly became a media frenzy, devolving into a debate about whether MBA students were naturally inclined to lie, cheat, and steal, or if business schools made them that way. Instead of being outraged at the bad behavior of the applicants, Seth (unsurprisingly) had a different perspective: Harvard was giving these students a gift. By rescinding their applications, Harvard was giving these students a significant opportunity: the university was returning $150,000 and two years of their lives, which would otherwise have been spent chasing a mostly worthless piece of paper. “It’s hard for me to understand,” he wrote, “why [getting an MBA] is a better use of time and money than actual experience combined with a dedicated reading of 30 or 40 books.” “Holy cow,” I thought. “That’s exactly what I’m doing!” Over the next two days, I created a list of the books and resources I had found most valuable in my studies,2 then published it on my blog with a link to Seth’s post, so anyone interested in figuring out how to do what Seth suggested would be able to find it. Then I typed a quick e-mail to Seth and sent him a link to my post. Two minutes later, a post went up on Seth’s blog directing people to my reading list, and a flood of readers from around the world started visiting my Web site. Popular personal development and productivity blogs like Lifehacker .com picked up the story, which then spread to social media Web sites like Reddit, Digg, and Delicious. Within the first week of the Personal MBA’s existence, thirty thousand people visited my little corner of the Internet to see what I was doing. Better yet, they started talking. Some readers asked questions—where should they start? Others suggested great books they’d read, helping me with my research. A few told me the entire project was naive, and that I was wasting my time. Through it all, I kept reading, researching, and developing the Personal MBA in my spare time, and the business self-education movement began to snowball. “The Personal MBA Manifesto,”3 an essay I created to help newcomers understand what the project is all about, has been viewed hundreds of thousands of times by readers all over the world and is still in the top ten manifestos published by ChangeThis.com after five years. The Personal MBA recommended reading list has been profiled by BusinessWeek4 and has been updated with the results of my latest research every year since 2005. Thousands of do-it-yourself business students from around the world help one another learn and grow every day in the PMBA Community forums.5 In an amazingly short period of time, the Personal MBA grew from a one-man side project into a major global movement, and I left P&G to focus on building the PMBA and working with my clients full-time. As much as I enjoyed leading the efforts of the worldwide PMBA community, I quickly realized that providing a reading list wasn’t enough. People read business books to solve specific challenges or to improve themselves in some tangible way. They’re looking for solutions, and a list of books, while valuable, could only do so much. The books themselves aren’t as important as the ideas and knowledge they contain, but many of my readers were missing out because it took hours of turning pages to get to the good stuff. Many Personal MBA readers started enthusiastically, then quit after reading a few books—it took too long to reap the rewards, and the demands of work and family life inevitably intervened. To help them, I had more work to do. Munger’s Mental Models I think it’s undeniably true that the human brain works in models. The trick is to have your brain work better than the other person’s brain because it understands the most fundamental models—the ones that do the most work. —CHARLES T. MUNGER, BILLIONAIRE BUSINESS PARTNER OF WARREN BUFFETT, CEO OF WESCO FINANCIAL, AND VICE-CHAIRMAN OF BERKSHIRE HATHAWAY My first glimpse into the future of the Personal MBA came when I discovered the work of Charles T. Munger. Charlie was born in Omaha, Nebraska, shortly before the Great Depression. As a young man, Charlie skipped high school athletics in favor of reading to satisfy his intense curiosity about how the world worked. His early business experience consisted of working in a family-owned grocery store for $2 a day. In 1941, Charlie graduated from high school. After two years of studying undergraduate mathematics and physics at the University of Michigan, he enlisted in the Army Air Corps, where he was trained as a meteorologist. In 1946, after leaving the army, he was accepted to Harvard Law School, even though he had never earned a bachelor’s degree, which wasn’t absolutely required at the time. Charlie graduated from Harvard Law in 1948 and spent the next seventeen years practicing as an attorney. In 1965, he left the law firm he had created to start an investment partnership, which went on to outperform the market by 14 percent compounded annually over fourteen years—an astounding record given his complete lack of formal business education. Charlie Munger isn’t a household name, but Warren Buffett, Charlie’s business partner, certainly qualifies. Buffett and Munger purchased Berkshire Hathaway, a floundering textile manufacturer, in 1975, turning it into a conglomerate investment holding company. Together, Buffett and Munger became billionaires. According to Buffett, Charlie’s mental-model-centric approach to business is a major contributing factor in the success of Berkshire Hathaway and Buffett’s status as one of the world’s wealthiest business owners: “Charlie can analyze and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in sixty seconds. He’s the perfect partner.”6 The secret to Charlie’s success is a systematic way of understanding how businesses actually work. Even though he never formally studied business, his relentless self-education in a wide variety of subjects allowed him to construct what he called a “latticework of mental models,” which he then applied to making business decisions:I’ve long believed that a certain system—which almost any intelligent person can learn—works way better than the systems most people use [to understand the world]. What you need is a latticework of mental models in your head. And, with that system, things gradually fit together in a way that enhances cognition. Just as multiple factors shape every system, multiple mental models from a variety of disciplines are necessary to understand that system . . . You have to realize the truth of biologist Julian Huxley’s idea that, “Life is just one damn relatedness after another. ” So you must have all the models, and you must see the relatedness and the effects f rom the relatedness . . . 7 It’s kind of fun to sit here and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.8 By basing their investment decisions on their extensive knowledge of how businesses work, how people work, and how systems work, Buffett and Munger created a company worth over $195 billion—an astounding track record for a meteorologist-turned-lawyer from Omaha with no formal business education. Discovering Munger’s approach to business education was a huge validation. Here was a man who, decades before, had decided to do what I was doing—and it had worked extraordinarily well! Munger’s method of identifying and applying fundamental principles made much more sense to me than most of the business books I’d previously read. I resolved to learn everything I could about the “mental models” Charlie used to make decisions. Unfortunately, Charlie has never published a comprehensive collection of his mental models. He’s given hints in his speeches and essays—even going so far as to publish a list of the psychological principles he finds most useful in Poor Charlie’s Almanack, a recent biography—but there was no single text that contained “everything you need to know in order to succeed in business.” If I wanted to understand the fundamental principles of how every successful businessperson works, I’d have to discover them myself. To do that, I had to rebuild my understanding of business from the ground up. Connecting the Dots In all affairs, it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted. —BERTRAND RUSSELL, RENOWNED PHILOSOPHER AND AUTHOR OF THE PROBLEMS OF PHILOSOPHY AND THE PRINCIPLES OF MATHEMATICS Most business books (and business schools) assume that the student already knows what businesses are, what they do, and how they work—as if it were the most obvious thing in the world. It’s not. Business is one of the most complex and multidisciplinary areas of human experience, and trying to understand how businesses work can be remarkably intimidating, even though they surround us every day. Businesses are so much a part of daily life that it’s easy to take the business world for granted. Day after day, businesses deliver what we want swiftly, efficiently, and with remarkably little fuss. Look around: almost every material good you’re surrounded by right now was created and delivered to you by some sort of business. Businesses invisibly create and deliver so many different things in so many different ways that it makes generalizations difficult: what do apple cider and airlines have in common? As it turns out, quite a bit—if you know where to look. Here’s how I define a business: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. Take away any of these things—value creation, customer demand, transactions, value delivery, or profit sufficiency—and you have something other than a business. Each factor is both essential and universal. As I deconstructed each of those factors, I found additional universal requirements. 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). None of these functions is rocket science, but they’re always necessary, no matter who you are or what business you’re in. Do them well, and your business thrives. Do them poorly, and you won’t be in business very long. 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. Before writing this book, I spent several years testing the principles in this book with my clients and readers. Understanding and applying these “business mental models” has helped them launch new careers, land job offers from prestigious organizations in the corporate and academic worlds, get promoted, start new businesses, and in several cases go through the entire product development process (from idea to first sale) in less than four weeks. These concepts are important because they work. Not only will you be able to create more value for others and improve your own financial situation, you’ll find it noticeably easier to achieve what you set out to do—and you’ll have more fun along the way. For the Skeptics You wasted $150,000 on an education you could have got for a buck fifty in late charges at the public library. —MATT DAMON AS WILL HUNTING, GOOD WILL HUNTING This is a book about business concepts, not business schools. However, many people simply don’t believe it’s possible to reap the benefits of a comprehensive business education without forking over enormous sums of money for a name-brand diploma from an Ivy League school. This section, which will discuss the merits and downfalls of traditional MBA programs, is for the skeptics. Should You Go to Business School? There is a difference between (A) what an MBA does to help you prove your abilities to others and (B) what getting an MBA actually does to improve your abilities. They are two different things. —SCOTT BERKUN, AUTHOR OF MAKING THINGS HAPPEN AND THE MYTHS OF INNOVATION Every year, millions of individuals determined to make a name for themselves have the following thought: “I want to become a successful businessperson. Where should I get my MBA?” Since you’re flipping through this book, you’ve probably wondered the same thing at some point in your life. Here’s the answer: five simple words that will save you years of effort and hundreds of thousands of dollars: Skip business school. Educate yourself. This book will show you how to succeed in business—without mortgaging your life. Three Big Problems with Business Schools College: two hundred people reading the same book. An obvious mistake. Two hundred people can read two hundred books. —JOHN CAGE, SELF-TAUGHT WRITER AND COMPOSER I have nothing against people who work in business schools: by and large, business school professors and administrators are lovely people who try their best and want to see their students succeed. Unfortunately, MBA programs around the world have three major systemic issues:1. MBA programs have become so expensive you must effectively mortgage your life to pay the price of admission. “Return on Investment” is always directly related to how much you spend, and after decades of tuition increases, MBA programs are increasingly a burden to their students instead of a benefit. The primary question is not whether attending a university is a positive experience: it’s whether or not the experience is worth the cost.9 2. MBA programs teach many worthless, outdated, even outright damaging concepts and practices—assuming your goal is to actually build a successful business and increase your net worth. Many of my MBAHOLDING readers and clients come to me after spending tens (sometimes hundreds) of thousands of dollars learning the ins and outs of complex financial formulas and statistical models, only to realize that their MBA program didn’t teach them how to start or improve a real, operating business. That’s a problem—graduating from business school does not guarantee having a useful working knowledge of business when you’re done, which is what you actually need to be successful. 3. 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. Instead of spending huge sums of money to learn marginally useful information, you can spend your time and resources learning things that actually matter. If you’re ready and able to invest in improving your skills and abilities, you can learn everything you need to know about business on your own, without mortgaging your life for the privilege. Delusions of Grandeur The very substance of the ambitious is merely the shadow of a dream. —WILLIAM SHAKESPEARE, HAMLET It’s easy to figure out why business school is attractive: it’s sold as a one-way ticket to a permanently prosperous and comfortable life. It’s a pleasant daydream: after two years of case studies and happy hour “networking,” corporate recruiters will be shamelessly throwing themselves at you, each of them offering a prestigious and high-paying position at a top firm. Your rise up the corporate ladder will be swift and sure. You’ll be a CAPTAIN OF INDUSTRY, collecting huge bonuses and tabulating the value of your stock options while sitting behind an impressive-looking mahogany desk in the corner office on the top floor of a gigantic glass skyscraper. You’ll be the big boss, telling other people what to do until it’s time to go play golf or relax on your yacht. You’ll be wined and dined all over the world, and the lowly masses will venerate you and your astounding achievements. Everyone will think you’re rich, intelligent, and powerful—and they’ll be damn right. What price for the promise of riches, power, and glory? A few thousand dollars in application fees, an effortless scribble on a loan document, and you’ll be on your way to the top! Not only that, you’ll get a two-year vacation from actually working. What a fantastic deal! Unfortunately, daydreams and reality are often quite different. Your Money AND Your Life There ain’t no such thing as a free lunch. —ROBERT HEINLEIN, AUTHOR OF STRANGER IN A STRANGE LAND AND THE MOON IS A HARSH MISTRESS For the moment, let’s assume you think business school is your ticket to everlasting success. You’re in luck—getting into at least one business school is relatively easy. If you pay thousands of dollars in application fees, write enough personal statements that strike just the right balance of confidence and humility, and compliment the quality of the school’s program in interviews, sooner or later some college or university will generously bestow upon you the chance to become the next Bill Gates.10 Here, though, is where the problems begin: business school is insanely expensive. Unless you’re independently wealthy or land a massive scholarship, your only option is to effectively mortgage your life by taking out an enormous loan against your future earnings to pay the tuition. Most prospective MBA students have already graduated from college with an undergraduate degree, so they’re already carrying some level of student loan debt. According to FinAid.org, a college financial aid Web site, the average cumulative debt of a student who completed an undergraduate degree in the United States in 2009 is $22,500. For students who choose to pursue an MBA program after undergrad, total average cumulative debt is $41,687. That doesn’t include providing for material needs like rent, groceries, and car payments, which are often funded via additional student loans. Forty thousand dollars is a significant chunk of change, assuming you go to an average school—but who wants to be merely average? If you’re shooting for offers from top-tier financial services companies like Goldman Sachs or major consulting companies like McKinsey and Bain (which are historically the highest-paying options for newly minted MBAs), you’re going to have to attend a top-ten program, and that’ll require a lot more than a measly forty grand. Breaking Out the Benjamins Who goeth a borrowing, goeth a sorrowing . . . A fool and his money are soon parted. —THOMAS TUSSER, SIXTEENTH-CENTURY ENGLISH FARMER AND POET According to the 2010 U. S. News & World Report business school rankings, each of the top fifteen MBA programs charge $40,000 to $50,000 per year for tuition. Most full-time MBA programs are two-year affairs. Once you factor in the high cost of living near any major university, you’re easily looking at a total price tag of somewhere between $125,000 and $200,000 for a b-school diploma. Assuming you get in, of course. Top business schools are notoriously hard to get into—the programs can afford to be picky because of their reputations. It’s circular. The reputation of a business school is built on the success of its graduates, so the top schools only admit those students intelligent and ambitious enough to make it through the rigorous selection process—the ones who are already likely to succeed, MBA or no MBA. Business schools don’t create successful people. They simply accept them, then take credit for their success. If you get in, the school will do what it can to help you get a decent job, but making things happen will always be your responsibility. If you’re successful in the years after graduation, the school will hold you up as a shining example of the quality of their program and will use the “halo effect” of your name to recruit more students. If you lose your job and go broke, you’ll get neither publicity nor help, but the loan bills will keep rolling in. Sorry about your luck. Here’s what Christian Schraga, a 2002 graduate of the Wharton School of Business, had to say about his MBA experience in an essay on his Web site:11 My been-there-done-that experience has taught me that a top MBA program provides some benefits, but at a steep price. If you are currently considering attending a full-time program, please stop to ask yourself whether or not you are willing to take the risk. Business school is a big risk. Should you choose to enroll, the only certainty is that you will shell out about $125,000. Such a figure correlates to a $1,500/month non-deductible loan repayment and a ten-year period of time in which you will not be able to save a red cent. If you think that this payment is worth it to earn the pedigree, the fraternity, the two years off, and a shot at the big bucks, then the MBA is right for you. If not, please do something else. Wise words. If you don’t absolutely need the sheepskin, don’t enroll. What an MBA Will Actually Get You Hypocrisy can afford to be magnificent in its promises; for never intending to go beyond promises, it costs nothing. —EDMUND BURKE, POLITICIAN AND POLITICAL THEORIST In “The End of Business Schools? Less Success Than Meets the Eye,” a study published in Academy of Management Learning & Education, 12 Jeffrey Pfeffer of Stanford University and Christina Fong of the University of Washington analyzed forty years of data in an effort to find evidence that business schools make their graduates more successful. Their hypothesis was remarkably straightforward: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. What Pfeffer and Fong found was astonishing and disturbing: business schools do almost nothing, aside from making money disappear from students’ pockets:Business schools are not very effective: Neither possessing an MBA degree nor grades earned in courses correlate with career success, results that question the effectiveness of schools in preparing their students. And, there is little evidence that business school research is influential on management practice, calling into question the professional relevance of management scholarship. According to Pfeffer and Fong’s study, it doesn’t matter if you graduate at the top of your class with a perfect 4.0 or at the bottom with a barely passing grade—getting an MBA has zero correlation with long-term career success. None. 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. That’s tough to hear if you’ve forked over a few hundred thousand dollars to buy a degree whose sole purpose is to make you a more successful businessperson. It gets worse: getting an MBA doesn’t even have an impact on your total lifetime earnings. It takes decades of work simply to dig yourself out of the debt you took on to get the degree. Christian Schraga, the Wharton MBA, estimated that the ten-year “net present value” (a financial analysis technique used to estimate whether or not an investment is worthwhile) of a top MBA program is approximately negative $53,000 (that’s bad). This assumes a pre-MBA base salary of $85,000, a post-MBA salary of $115,000 (a 35 percent increase), marginal tax rate increases (which you’ll pay if your job requires moving to a major city), and a discount rate of 7 percent to account for opportunity cost (the opportunities you give up by spending money on business school instead of investing it in something else). In plain English: Schraga used a technique business schools teach to prove that getting an MBA from a top-tier school is a bad financial decision. Assuming Schraga’s assumptions are accurate, it takes twelve years of solid effort just to break even—and that’s assuming everything goes according to plan. If you graduate into a bad job market, you’re screwed. Where Business Schools Came From It is, in fact, nothing short of a miracle that modern methods of instruction have not entirely strangled the curiosity of inquiry. —ALBERT EINSTEIN, NOBEL PRIZE-WINNING PHYSICIST MBA programs don’t make students more successful because they teach very few things that are actually useful in the working world. As Pfeffer and Fong state in their paper:A large body of evidence suggests that the curriculum taught in business schools has only a small relationship to what is important for succeeding in business . . . If there is, in fact, only a slight connection between the skills needed in business and what is taught in graduate business programs, then the absence of an effect of the MBA or mastery of the subject matter on the careers of graduates is understandable. If you look at the curriculum of any business school, you’ll notice a few assumptions about what you’ll do after you graduate: you’ll either be a C-level executive at a large industrial manufacturing or retail operation, become a consultant, become a corporate accountant, or work as a financier at an investment bank. Accordingly, the coursework is implicitly structured around keeping your massive operation running and/or doing sophisticated quantitative analysis—not doing any of the other critically important things that 99 percent of working businesspeople do in any given day. The disconnect between the classroom and the working world makes sense when you realize that the concepts, principles, and techniques most business schools teach were designed for a very different world. Graduate schools of business started popping up at the end of the nineteenth century during the Industrial Revolution. The intent of early MBA programs was to train managers to be more scientific in an effort to make large operations more efficient. Frederick Winslow Taylor, the pioneer of “scientific management” techniques that now form the foundation of modern management training, used a stopwatch to shave a few seconds off the average time a workman took to load iron ingots into a train car. That should give you a good idea of the underlying mind-set of most business school management programs. Management was thought of mostly as an exercise in getting people to work faster and do exactly what they’re told. The philosopher kings behind what passed for management psychology were Ivan Pavlov and, later on, B. F. Skinner, who believed that if you discovered and applied just the right stimulus, people would behave however you wanted. This mentality led to the widespread use of financial incentives to influence behavior: salary, bonuses, stock options, and so on, in an effort to encourage business professionals and managers to act in the best interest of corporate shareholders. There’s an enormous (and growing) body of evidence that direct incentives often undermine performance, motivation, and job satisfaction in the real world.13 Despite more useful competing theories of human action, 14 the search for the magic stimulus continues in business school classrooms to this day. In Search of Distribution Any technique, however worthy and desirable, becomes a disease when the mind is obsessed with it. —BRUCE LEE, WORLD-RENOWNED MARTIAL ARTIST Marketing, on the other hand, was originally a way to get additional store distribution for physical products and keep expensive factory production lines busy. With the widespread adoption of the radio and television in the early twentieth century, it became possible to advertise to a large national audience, paving the way for national brands and national retailers. More advertising typically resulted in more distribution, which in turn resulted in more sales and even more money to spend on advertising, continuing the cycle. As decades passed, this self-reinforcing feedback loop resulted in a few dominant behemoths in each industry. Business schools became obsessed with how to capture market share and create gigantic companies quickly via ever-larger mergers, raising the financial stakes with each acquisition. For entrepreneurs, venture capital became a must-have aspect of the business process—how else could you afford to build a factory or a national brand in a few short years? “Economies of scale” in production meant large companies could outcompete smaller rivals by offering similar products at lower prices. Investors wanted to see huge returns on their money quickly, prudence be damned, rewarding speculators who wrote business plans promising a huge exit in a short amount of time. Viable businesses were acquired and gutted in the name of conglomeration and “synergy,” all with the blessing of business academia. The sheer enormity of integrating these gigantic, complex business systems was ignored or overlooked, leading most of the companies that attempted huge mergers to ruin. Playing with Fire Beware of geeks bearing formulas. —WARREN BUFFETT, CHAIRMAN AND CEO OF BERKSHIRE HATHAWAY AND ONE OF THE WEALTHIEST INDIVIDUALS IN THE WORLD Finance, in the meantime, was steadily increasing in complexity. Before the twentieth century, accounting and finance were a matter of common sense and relatively simple arithmetic. The widespread adoption of double-entry bookkeeping (a thirteenth-century innovation) brought many benefits, like increased accuracy and ease of detecting anomalies like theft, at the cost of simplicity. The introduction of statistics to financial practice simultaneously enhanced analytical capability at the cost of abstraction, increasing opportunities to fudge the numbers without anyone noticing. Over time, managers and executives began using statistics and analysis to forecast the future, relying on databases and spreadsheets in much the same way ancient seers relied on tea leaves and goat entrails. The world itself is no less unpredictable or uncertain: as in the olden days, the signs only “prove” the biases and desires of the soothsayer. The complexity of financial transactions and the statistical models those transactions relied upon continued to grow until few practitioners fully understood how they worked or respected their limits. As Wired revealed in a February 2009 article, “Recipe for Disaster: The Formula That Killed Wall Street,” the inherent limitations of deified financial formulas such as the Black-Scholes option pricing model, the Gaussian copula function, and the capital asset pricing model (CAPM) played a major role in the tech bubble of 2000 and the housing market and derivatives shenanigans behind the 2008 recession. Learning how to use complicated financial formulas isn’t the same as learning how to run a business. Understanding what businesses actually do to create and deliver value is essential knowledge, but many business programs have de-emphasized value creation and operations in favor of finance and quantitative analysis. In “Upper Mismanagement,” journalist Noam Scheiber explores the reason behind the downfall of American industry:Since 1965, the percentage of graduates of highly ranked business schools who go into consulting and financial services has doubled, from about one-third to about two-thirds. And while some of these consultants and financiers end up in the manufacturing sector, in some respects that’s the problem . . . Most of GM’s top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost.15 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. Meanwhile, the widespread practice of using large amounts of debt as leverage16 created enormous companies with even more enormous obligations, amplifying returns in good years but making the firms catastrophically unstable during the slightest downturn. 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. Business is about creating and delivering value to paying customers, not orchestrating legal fraud. Unfortunately for us all, business schools have de-emphasized the former in favor of teaching the latter. No Reason to Change Schools teach the need to be taught. —IVAN ILLICH, PRIEST, THEOLOGIAN, AND EDUCATION CRITIC The world is constantly changing, but business schools aren’t changing with it. With the advent of the Internet and the widespread availability of new technologies, successful modern businesses tend to be smaller, require less capital to build, have less overhead, and require fewer employees. According to the U. S. Small Business Administration, small businesses represent 99.7 percent of all employer firms in the United States, employ half of all private-sector workers, have generated 64 percent of net new jobs over the past fifteen years, and create more than 50 percent of U.S. nonfarm gross domestic product (GDP).18 You wouldn’t know that from looking at b-school curricula: based on current standards, it seems that most MBA programs believe huge businesses are the only ventures worth managing. 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. The demands of the public market push executives to chase short-term earnings at the expense of long-term stability, creating waves of layoffs and severe budget cuts when times get tight or unexpected events occur. At the same time, more and more employees are looking for a greater sense of autonomy, flexibility, and security from their work—and they’re finding these things outside of the confines of the traditional corporate job. How do you manage someone who doesn’t really want to work for you in the first place? MBA programs are trying to cope, but they’re still teaching theories that are outdated, misguided, and even outright wrong. Even so, don’t expect them to start doing things differently. Why bother, when MBA programs are profitable status symbols for the colleges and in such high demand? As long as students are still signing up, don’t expect the hallowed halls of business schools to change their tune. The Single Benefit of Business Schools Institutions will try to preserve the problem to which they are the solution. —CLAY SHIRKY, PROFESSOR AT NYU AND AUTHOR OF HERE COMES EVERYBODY AND COGNITIVE SURPLUS The one significant benefit that business schools do provide is better access to Fortune 50 recruiters, consulting firms, large accounting firms, and investment banks via on-campus recruiting and alumni networks. 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. Hiring managers typically use MBA programs as a filter when deciding whom to bring in for an interview. HR managers are busy, and since each student in the program has been prescreened, there’s less of a chance the manager will be wasting precious time. Hiring directly from MBA programs also provides plausible deniability for the recruiter if the hire doesn’t work out: “I’m not sure what the issue was—she graduated from Harvard Business School!” The filtering aspect of MBA programs is very real, and difficult to overcome on your own. If you have your heart set on becoming a management consultant, international financier, or Fortune 50 fast-track management candidate, you may have to buy yourself a $150,000 interview. If you go this route, be aware of what you’re getting yourself into before you apply—once you sign your life away, the debt will make it very difficult to change your mind. If you’re more interested in working for yourself or holding down an enjoyable job while having a life, getting an MBA is a waste of time and money. As Dr. Pfeffer says, “If you are good enough to get in, you obviously have enough talent to do well, regardless.” I Owe, I Owe—It’s Off to Work I Go Are you where you want to be if it doesn’t work? —LOUIS L’AMOUR, AUTHOR AND HISTORIAN Let’s say you go ahead and get your MBA. If you’re “lucky,” you may be hired by a big financial services or consulting firm, where you’ll have the privilege of working eighty-plus hours a week for around $100,000 a year. The money is certainly good, but you’ll have a hard time maintaining any sort of life outside of work, and the pressure will be intense and relentless. Even if you don’t like your job, you’d better keep pushing if you want to pay your tuition bills and make your investment “worth it.” Congratulations: you’ve used your intelligence and drive to condemn yourself to the life of an indentured servant. If you do a good job, you’ll become an executive, get a raise, and have the privilege of working one hundred-plus hours a week. You’d better not mind enjoying the fruits of your labor alone: top executives consistently have the highest rates of divorce and family relationship issues. As the saying goes: you can have anything you want, as long as you’re willing to pay the price. If you’re not so “fortunate,” you’ll find a job that pays little more than what you’d be able to command without your MBA. Worse yet, graduating into an iffy job market means that you may graduate with a thousand-dollar-a-month loan payment without a job to foot the bill. An unforgiving job market won’t make student loan payments go away—in the United States, student loan debt cannot be forgiven, even if you declare bankruptcy. Regardless of how your life works out, your student loans will always be there, and your phone will ring with the calls of debt collectors until they’re repaid. I can’t emphasize this enough: the quickest and easiest way to screw up your life is to take on too much debt. The primary reason people spend decades working in jobs they despise is to pay off their creditors. Financial stress can destroy relationships, threaten your health, and jeopardize your sanity. Is a shot at a desk in a corner office really worth it? With heavy debt loads and questionable returns, MBA programs simply aren’t a good investment—they’re a trap for the unwary. A Better Way To educate educators! But the first ones must educate themselves! And for these I write. —FRIEDRICH NIETZSCHE, PHILOSOPHER AND AUTHOR OF THE WILL TO POWER AND THUS SPOKE ZARATHUSTRA Fortunately, you have a choice in how you go about educating yourself—a choice that can make you more successful than top MBA graduates while saving you hundreds of thousands of dollars. Studying the fundamentals of sound business practice and developing a network on your own19 can provide most of the benefits of business education at a fraction of the cost. Instead of wasting your time and hard-earned money learning outdated theories you’ll probably never use, it’s far better to spend your time and energy teaching yourself what you actually need to know to succeed. If you’re the type of person who’s capable of getting into a top MBA program and doing what it takes to succeed after graduation, skipping business school and learning the fundamentals of business by reading this book may be the best decision you ever make. What You’ll Learn in This Book When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principle s—generally three to twelve of them—that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles. —JOHN T. REED, REAL ESTATE INVESTMENT EXPERT AND AUTHOR OF SUCCEEDING This book is designed to teach you the fundamentals of sound business practice as quickly and efficiently as possible. Here’s a quick preview of what you’ll learn:How Businesses Work. A successful business, roughly defined, provides (1) something of value that (2) other people want or need at (3) a price they’re willing to pay, in a way that (4) satisfies the customer’s needs and expectations so that (5) the business brings in sufficient profit to make it worthwhile for the owners to continue operation. Together, the concepts in chapters 2 to 6 describe how every business operates and what you can do to improve your results. How People Work. Every business is created by people and survives by benefiting other people. To understand how businesses work, you need a firm understanding of how people make decisions, act on those decisions, and communicate with others. Chapters 7 to 9 introduce you to a few major concepts in psychology that describe how the human mind processes the world, how you can work more effectively, and how you can create and strengthen professional relationships. How Systems Work. Businesses are complex systems with many moving parts that exist within even more complex systems like industries, societies, cultures, and governments. Chapters 10 to 12 will help you understand how complex systems work, as well as help you analyze existing systems and find ways to improve them without provoking unanticipated consequences. Here are a few things you shouldn’t expect:Management and Leadership Overload. Many business resources (and all business schools) conflate management and leadership skills with business skills; they’re not the same thing. While management and leadership are important in the practice of business, they aren’t the be-all and end-all of business education: without solid business knowledge, it’s possible to organize and lead a group of people toward the accomplishment of the wrong objectives. Business is about the profitable creation and delivery of valuable offers to paying customers—management and leadership are simply a means to this end. We’ll discuss the essentials of effective management and leadership in chapter 9, but in their proper context. Deep Finance and Accounting. Learning how to manage money is a very important topic that we’ll discuss in chapter 6, but the ins and outs of managerial accounting and financial analysis are beyond the scope of this book. If you’re interested in exploring these subjects in more detail after learning the fundamentals, I highly recommend Accounting Made Simple by Mike Piper, Essentials of Accounting by Robert N. Anthony and Leslie K. Breitner, The McGraw-Hill 36-Hour Course in Finance for Nonfinancial Managers by Robert Cooke, and How to Read a Financial Report by John A. Tracy. Quantitative Analysis. Likewise, reading this book won’t help you become a high-flying spreadsheet jockey. Statistics and quantitative analysis are very useful skills when used appropriately, but the analytical techniques themselves are very situational and beyond the scope of this book. If you’re interested in quantitative analysis, I recommend starting with Principles of Statistics by M. G. Bulmer and Turning Numbers into Knowledge by Jonathan G. Koomey. How to Use This Book The best effect of any book is that it excites the reader to self-activity. —THOMAS CARLYLE, ESSAYIST AND HISTORIAN Here are a few tips that will help you get the most from this book: Browse, skim, and scan. Believe it or not, you don’t need to read a book cover to cover to benefit: browsing can give you better results with less effort. Periodically skim through this book until you find a section that grabs your attention, then commit to applying that concept to your work for a few days. You’ll begin to notice significant differences in the quality of your work, as well as in your ability to “think like a businessperson.” Keep a notebook and pen handy. The purpose of this book is to give you ideas about how to make things better, so be prepared to capture your thoughts as you have them; it’ll make it easier to review the major concepts later. Your notebook will also make it easy to shift from taking notes to creating detailed action plans as they occur to you.20 Review this book regularly. Keep it close to where you work so you can refer to it often, particularly before starting a new project. Repetition inevitably leads to mastery, and the better you internalize these concepts, the more you’ll improve your results. I also recommend setting a reminder in your calendar to review this book or your notes every few months to reinforce your understanding and spark new ideas. There’s always more to explore. Each of these mental models has extremely broad applications, and it’s impossible to explore every ramification of these concepts in a single book. There are many great resources in the world of business literature that can deepen your understanding if you’d like to learn more about a particular mental model. Join me at personalmba.com to explore these ideas in more detail and learn how to apply them to your daily life and work. Let’s begin. 2 VALUE CREATION Make something people want . . . There’s nothing more valuable than an unmet need that is just becoming fixable. If you find something broken that you can fix for a lot of people, you’ve found a gold mine. —PAUL GRAHAM, FOUNDER OF Y COMBINATOR, VENTURE CAPITALIST, AND ESSAYIST AT PAULGRAHAM.COM Every successful business creates something of value. The world is full of opportunities to make other people’s lives better in some way, and your job as a businessperson is to identify things that people don’t have enough of, then find a way to provide them. The value you create can take on one of several different forms, but the purpose is always the same: to make someone else’s life a little bit better. Without value creation, a business can’t exist—you can’t transact with others unless you have something valuable to trade. The best businesses in the world are the ones that create the most value for other people. Some businesses thrive by providing a little value to many, and others focus on providing a lot of value to only a few people. Regardless, the more real value you create for other people, the better your business will be and the more prosperous you’ll become. SHARE THIS CONCEPT: http://book.personalmba.com/value-creation/ The Five Parts of Every Business A business is a repeatable process that makes money. Everything else is a hobby. —PAUL FREET, SERIAL ENTREPRENEUR AND COMMERCIALIZATION EXPERT Roughly defined, a business is a repeatable process that: 1. Creates and delivers something of value . . . 2. That other people want or need . . . 3. At a price they’re willing to pay . . . 4. In a way that satisfies the customer’s needs and expectations . . . 5. So that the business brings in enough profit to make it worthwhile for the owners to continue operation. It doesn’t matter if you’re running a solo venture or a billion-dollar brand. Take any one of these five factors away, and you don’t have a business—you have something else. A venture that doesn’t create value for others is a hobby. A venture that doesn’t attract attention is a flop. A venture that doesn’t sell the value it creates is a nonprofit. A venture that doesn’t deliver what it promises is a scam. A venture that doesn’t bring in enough money to keep operating will inevitably close. At the core, every business is fundamentally a collection of five Interdependent (discussed later) processes, each of which flows into the next:1. Value Creation. Discovering what people need or want, then creating it. 2. Marketing. Attracting attention and building demand for what you’ve created. 3. Sales. Turning prospective customers into paying customers. 4. Value Delivery. Giving your customers what you’ve promised and ensuring that they’re satisfied. 5. Finance. Bringing in enough money to keep going and make your effort worthwhile. If these five things sound simple, it’s because they are. Business is not (and has never been) rocket science—it’s simply a process of identifying a problem and finding a way to solve it that benefits both parties. Anyone who tries to make business sound more complicated than this is either trying to impress you or trying to sell you something you don’t need. The Five Parts of Every Business are the basis of every good business idea and business plan. If you can clearly define each of these five processes for any business, you’ll have a complete understanding of how it works. If you’re thinking about starting a new business, defining what these processes might look like is the best place to start. If you can’t describe or diagram your business idea in terms of these core processes, you don’t understand it well enough to make it work.1 SHARE THIS CONCEPT: http://book.personalmba.com/5-parts-of-every-business/ Economically Valuable Skills Don’t go around saying the world owes you a living. The world owes you nothing—it was here first. —MARK TWAIN, GREAT AMERICAN NOVELIST If you want to improve your value as a businessperson, focus on improving skills directly related to the Five Parts of Every Business. Not every skill or area of knowledge is Economically Valuable, and that’s okay—there are many things worth pursuing for the sake of relaxation or enjoyment alone. You may enjoy whitewater rafting, but it’s very unlikely anyone will pay you to shoot the rapids unless you apply your skills for the benefit of others. Make the leap from personal enjoyment to Products and Services (discussed later), however, and you’ll find yourself getting paid—plenty of adventurous souls are willing to pay for rafting equipment and guides. As Michael Masterson suggests in Ready, Fire, Aim, don’t expect skills that aren’t related to the Five Parts of Every Business to be economically rewarded. Find a way to use them to create Economic Value, and you’ll inevitably find a way to get paid. Any skill or knowledge that helps you create value, market, sell, deliver value, or manage finances is Economically Valuable—accordingly, these are the topics we’ll discuss in this book. SHARE THIS CONCEPT: http://book.personalmba.com/economically-valuable-skills/ The Iron Law of the Market Market matters most; neither a stellar team nor fantastic product will redeem a bad market. Markets that don’t exist don’t care how smart you are. —MARC ANDREESSEN, VENTURE CAPITALIST AND FOUNDER OF NETSCAPE AND NING.COM What if you throw a party and nobody shows up? In business, it happens all the time. Dean Kamen, a renowned and prolific inventor whose creations include the Sterling engine, the world’s first insulin pump, and water purification devices, poured over $100 million into the development of the Segway PT, a $5,000, two-wheeled, self-balancing scooter that he claimed would revolutionize personal transportation “in the same way that the car replaced the horse and buggy.” When the Segway was made available to the public in 2002, the company announced that it expected to sell 50,000 units every year. Five years into the business, the company had sold a total of 23,000 units—less than 10 percent of the initial goal. (The company’s financial records are private, but it’s safe to say they don’t look good.) The problem wasn’t that the product was poorly designed—the technology that makes the Segway work is extremely sophisticated, and the benefits are significant: the Segway is a convenient, green urban car replacement. The problem was that very few people cared enough to spend $5,000 on a goofy-looking alternative to walking or riding a bike—the massive market that Kamen expected didn’t exist. The same thing happens to new businesses every day. Without enough revenue to sustain it, any business will fail. Your revenue is completely dependent on people actually wanting what you have to offer. Every business is fundamentally limited by the size and quality of the market it attempts to serve. The Iron Law of the Market is cold, hard, and unforgiving: if you don’t have a large group of people who really want what you have to offer, your chances of building a viable business are very slim. The best approach is to focus on making things people want to buy. Creating something no one wants is a waste. Market research is the business equivalent of “look before you leap.” Books like The New Business Road Test by John Mullins can help you identify promising markets from the outset, increasing the probability that your new venture will be a success. In the next few sections, we’ll explore how to figure out what people want and need before investing your time and hard-earned money into creating something new. SHARE THIS CONCEPT: http://book.personalmba.com/iron-law-of-the-market/ Core Human Drives Understanding human needs is half the job of meeting them. —ADLAI STEVENSON, POLITICIAN AND FORMER GOVERNOR OF ILLINOIS If you’re going to build a successful business, it’s useful to have a basic understanding of what people want. According to Harvard Business School professors Paul Lawrence and Nitin Nohria, the authors of Driven: How Human Nature Shapes Our Choices, all human beings have four Core Human Drives that have a profound influence on our decisions and actions:1. The Drive to Acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. Businesses built on the drive to acquire include retailers, investment brokerages, and political consulting companies. Companies that promise to make us wealthy, famous, influential, or powerful connect to this drive. 2. The Drive to Bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic. Businesses built on the drive to bond include restaurants, conferences, and dating services. Companies that promise to make us attractive, well liked, or highly regarded connect to this drive. 3. The Drive to Learn. The desire to satisfy our curiosity. Businesses built on the drive to learn include academic programs, book publishers, and training workshops. Companies that promise to make us more knowledgeable or competent connect to this drive. 4. The Drive to Defend. The desire to protect ourselves, our loved ones, and our property. Businesses built on the drive to defend include home alarm systems, insurance products, martial arts training, and legal services. Companies that promise to keep us safe, eliminate a problem, or prevent bad things from happening connect to this drive. There’s a fifth core drive that Lawrence and Nohria missed:5. The Drive to Feel. The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Businesses built on the drive to feel include restaurants, movies, games, concerts, and sporting events. Offers that promise to give us pleasure, thrill us, or give us something to look forward to connect with this drive. Whenever a group of people have an unmet need in one or more of these areas, a market will form to satisfy that need. As a result, the more drives your offer connects with, the more attractive it will be to your potential market. At the core, all successful businesses sell some combination of money, status, power, love, knowledge, protection, pleasure, and excitement. The more clearly you articulate how your product satisfies one or more of these drives, the more attractive your offer will become. SHARE THIS CONCEPT: http://book.personalmba.com/core-human-drives/ Ten Ways to Evaluate a Market So often people are working hard at the wrong thing. Working on the right thing is probably more important than working hard. —CATERINA FAKE, FOUNDER OF FLICKR.COM AND HUNCH.COM If you’re thinking of starting a new business or expanding an existing business into a new market, it pays to do some research before you leap. The Ten Ways to Evaluate a Market provide a back-of-the-napkin method you can use to identify the attractiveness of any potential market. Rate each of the ten factors below on a scale of 0 to 10, where 0 is extremely unattractive and 10 is extremely attractive. When in doubt, be conservative in your estimate:1. Urgency—How badly do people want or need this right now? (Renting an old movie is typically low urgency; seeing the first showing of a new movie on opening night is high urgency, since it only happens once.) 2. Market Size—How many people are actively purchasing things like this? (The market for underwater basket weaving courses is very small; the market for cancer cures is massive.) 3. Pricing Potential—What is the highest price a typical purchaser would be willing to spend for a solution? (Lollipops sell for $0.05; aircraft carriers sell for billions.) 4. Cost of Customer Acquisition—How easy is it to acquire a new customer? On average, how much will it cost to generate a sale, in both money and effort? (Restaurants built on high-traffic interstate highways spend little to bring in new customers. Government contractors can spend millions landing major procurement deals.) 5. Cost of Value Delivery—How much would it cost to create and deliver the value offered, both in money and effort? (Delivering files via the Internet is almost free; inventing a product and building a factory costs millions.) 6. Uniqueness of Offer—How unique is your offer versus competing offerings in the market, and how easy is it for potential competitors to copy you? (There are many hair salons, but very few companies that offer private space travel.) 7. Speed to Market—How quickly can you create something to sell? (You can offer to mow a neighbor’s lawn in minutes; opening a bank can take years.) 8. Up-Front Investment—How much will you have to invest before you’re ready to sell? (To be a housekeeper, all you need is a set of inexpensive cleaning products. To mine for gold, you need millions to purchase land and excavating equipment.) 9. Upsell Potential—Are there related secondary offers that you could also present to purchasing customers? (Customers who purchase razors need shaving cream and extra blades as well; buy a Frisbee, and you won’t need another unless you lose it.) 10. Evergreen Potential—Once the initial offer has been created, how much additional work will you have to put into it in order to continue selling? (Business consulting requires ongoing work to get paid; a book can be produced once, then sold over and over as is.) When you’re done with your assessment, add up the score. If the score is 50 or below, move on to another idea—there are better places to invest your energy and resources. If the score is 75 or above, you have a very promising idea—full speed ahead. Anything between 50 and 75 has the potential to pay the bills, but won’t be a home run without a huge investment of energy and resources, so plan accordingly. SHARE THIS CONCEPT: http://book.personalmba.com/ten-ways-to-evaluate-a-market/ The Hidden Benefits of Competition The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time. —HENRY FORD, FOUNDER OF THE FORD MOTOR COMPANY AND ASSEMBLY-LINE PIONEER One of the most common experiences of a first-time entrepreneur is discovering that your brilliant business idea isn’t as original as you’d thought: other businesses are already offering similar products or services. This would shake anyone’s confidence—after all, why bother when someone else is doing what you want to do? Cheer up: there are Hidden Benefits of Competition. When any two markets are equally attractive in other respects, you’re better off choosing to enter the one with competition. Here’s why: it means you know from the start there’s a market of paying customers for this idea, eliminating your biggest risk. The existence of a market means you’re already on the right side of the Iron Law of the Market, so you can spend more time developing your offer instead of proving a market exists. If there are several successful businesses serving a market, you don’t have to worry so much about investing in a dead end, since you already know that people are buying. 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. As a paying customer, you get to observe what works and what doesn’t before you commit to a particular strategy. Learn everything you can from your competition, and then create something even more valuable. SHARE THIS CONCEPT: http://book.personalmba.com/hidden-benefit-of-competition/ The Mercenary Rule Make money your god and it will plague you like the devil. —HENRY FIELDING, EIGHTEENTH-CENTURY NOVELIST AND SATIRIST Becoming a Mercenary doesn’t pay: don’t start a business for the money alone. Here’s why: starting and running a business always takes more effort than you first expect. Even if you identify a business that will largely run itself, setting up the Systems (discussed later) necessary to run the business requires persistence and dedication. If the only thing that interests you about an opportunity is the money, you’ll probably quit well before you find the pot of gold at the bottom of the landfill. Pay very close attention to the things you find yourself coming back to over and over again. Building or finishing anything is mostly a matter of starting over and over again; don’t ignore what pulls you. The trick is to find an attractive market that interests you enough to keep you improving your offering every single day. Finding that market is mostly a matter of patience and active exploration. That said, don’t ignore “boring” businesses until you investigate them; if you can find some aspect of the work that interests you and keeps you engaged, mundane markets can be quite attractive. “Dirty” businesses like plumbing and garbage collection certainly aren’t sexy, but they can be quite lucrative because there’s a significant ongoing need combined with relatively few people willing to step up and meet the demand. If you find a way to make a necessary but dull market interesting enough to pursue, you may have discovered a hidden vein of gold waiting to be mined. SHARE THIS CONCEPT: http://book.personalmba.com/mercenary-rule/ The Crusader Rule The zealous display the strength of their belief, while the judicious show the grounds of it. —WILLIAM SHENSTONE, EIGHTEENTH-CENTURY POET AND LANDSCAPE DESIGNER Being a Crusader doesn’t pay either. Every once in a while, you’ll find an idea so fascinating it becomes hard to think about it objectively. The stars align, heavenly trumpets blare, and suddenly you have the unmistakable impression that you’ve found your calling. In all the excitement, it’s easy to forget that there’s often a huge difference between an interesting idea and a solid business. In your optimism, forget ye not prudence: changing the world is difficult if you can’t pay the bills. Some ideas don’t have enough of a market behind them to support a business, and that’s perfectly okay. That doesn’t mean you should ignore them: side projects can help you expand your knowledge, improve your skills, and experiment with new methods and techniques. I’m a huge advocate of pursuing side projects as long as you don’t count on them to reliably produce income. Once you have your financial bases covered, crusade all you want. Before attempting to launch a business, take the time to do a thorough evaluation using the Ten Ways to Evaluate a Market. If you’re finding it difficult to be objective, find a trusted colleague or adviser to help you, then test it as quickly and as inexpensively as you can before you fully commit. A few hours spent in evaluation can prevent months (or years) of frustration and misplaced effort. SHARE THIS CONCEPT: http://book.personalmba.com/crusader-rule/ Twelve Standard Forms of Value Value is not intrinsic; it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. —LUDWIG VON MISES, AUSTRIAN ECONOMIST In order to successfully provide value to another person, it must take on a form they’re willing to pay for. Fortunately, there’s no need to reinvent the wheel—Economic Value usually takes on one of twelve standard forms:1. Product. Create a single tangible item or entity, then sell and deliver it for more than what it cost to make. 2. Service. Provide help or assistance, then charge a fee for the benefits rendered. 3. Shared Resource. Create a durable asset that can be used by many people, then charge for access. 4. Subscription. Offer a benefit on an ongoing basis, and charge a recurring fee. 5. Resale. Acquire an asset from a wholesaler, then sell that asset to a retail buyer at a higher price. 6. Lease. Acquire an asset, then allow another person to use that asset for a predefined amount of time in exchange for a fee. 7. Agency. Market and sell an asset or service you don’t own on behalf of a third party, then collect a percentage of the transaction price as a fee. 8. Audience Aggregation. Get the attention of a group of people with certain characteristics, then sell access in the form of advertising to another business looking to reach that audience. 9. Loan. Lend a certain amount of money, then collect payments over a predefined period of time equal to the original loan plus a predefined interest rate. 10. Option. Offer the ability to take a predefined action for a fixed period of time in exchange for a fee. 11. Insurance. Take on the risk of some specific bad thing happening to the policy holder in exchange for a predefined series of payments, then pay out claims only when the bad thing actually happens. 12. Capital. Purchase an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payout or ongoing dividend. Let’s investigate these Twelve Standard Forms of Value in more detail. SHARE THIS CONCEPT: http://book.personalmba.com/12-standard-forms-of-value/ Form of Value #1: Product Business is not financial science . . . it’s about creating a product or service so good that people will pay for it. —ANITA RODDICK, ENTREPRENEUR AND FOUNDER OF THE BODY SHOP A Product is a tangible form of value. To run a Product-oriented business, you must:1. Create some sort of tangible item that people want. 2. Produce that item as inexpensively as possible while maintaining an acceptable level of quality. 3. Sell as many units as possible for as high a price as the market will bear. 4. Keep enough inventory of finished product available to fulfill orders as they come in. The book you’re holding right now is a good example of a Product. It had to be written, edited, typeset, printed, bound, and shipped to bookstores in sufficient quantities before reaching your hands. Leave out any of these steps and you wouldn’t be reading this right now. To make money, a book must be sold for more than it cost to create, print, and distribute. Products can be durable, like cars, computers, and vacuum cleaners. They can also be consumable: goods like apples, donuts, and prescription medications are products as well. Products don’t have to be physical—even though things like software, e-books, and MP3s don’t have a distinct physical form, they are entities that can be sold. Providing value in Product form is valuable because Products can be Duplicated . This book was only written once, but individual copies can be printed and delivered millions of times to readers all around the world. As a result, products tend to Scale better than other forms of value, since they can be Duplicated and/or Multiplied (all discussed later). SHARE THIS CONCEPT: http://book.personalmba.com/product/ Form of Value #2: Service Everyone can be great because everyone can serve. —MARTIN LUTHER KING, JR., HUMAN RIGHTS ACTIVIST A Service involves helping or assisting someone in exchange for a fee. To create value via Services, you must be able to provide some type of benefit to the user. In order to create a successful Service, your business must:1. Have employees capable of a skill or ability other people require but can’t, won’t, or don’t want to use themselves. 2. Ensure that the Service is provided with consistently high quality. 3. Attract and retain paying customers. A good example of a Service business is a barbershop. A haircut is not a Product: you can’t purchase one from a shelf. The Service is the series of actions the stylist uses to transform your current hairstyle into the one you want. In this sense, doctors, freelance designers, massage therapists, lawn care providers, and consultants are all Service providers. Services can be lucrative, particularly if the skills required to provide them are rare and difficult to develop, but the trade-off is that they’re difficult to duplicate. Services typically depend on the Service provider’s investment of time and energy, both of which are finite. A heart surgeon can only complete so many four-hour operations on any given day. If you’re developing a Service, be sure to charge enough to compensate for the time you’ll be investing on a daily basis in providing the Service to your customers. Otherwise, you’ll discover that you’re working too hard for too little a reward. SHARE THIS CONCEPT: http://book.personalmba.com/service/ Form of Value #3: Shared Resource The joy that isn’t shared dies young. —ANNE SEXTON, PULITZER PRIZE-WINNING POET A Shared Resource is a durable asset that can be used by many people. Shared Resources allow you to create the asset once, then charge your customers for its use. In order to create a successful Shared Resource, you must:1. Create an asset people want to have access to. 2. Serve as many users as you can without affecting the quality of each user’s experience. 3. Charge enough to maintain and improve the Shared Resource over time. Gyms and fitness clubs are a classic example of a Shared Resource. A fitness club may purchase forty treadmills, thirty exercise bikes, six sets of free weights, a set of kettlebells, and other useful but expensive equipment that lasts a long time. The club’s members benefit by being able to access this equipment without having to purchase it themselves—instead, they pay an access fee, which is much easier for an individual to afford. (Most gyms combine access to their Shared Resource with Services and Subscriptions , a common example of Bundling—discussed later.) Businesses like museums and amusement parks work in much the same way. Whether it means studying a Monet or riding a roller coaster, Shared Resources allow many people to take advantage of experiences that would otherwise be too expensive. The tricky part about offering a Shared Resource is carefully monitoring usage levels. If you don’t have enough users, you won’t be able to spread out the cost of the asset enough to cover up-front costs and ongoing maintenance. If you have too many users, overcrowding will diminish the experience so much that they’ll become frustrated, stop using the resource, and advise others not to patronize your business, diminishing your Reputation (discussed later). Finding the sweet spot between too few members and too many is the key to making a Shared Resource work. SHARE THIS CONCEPT: http://book.personalmba.com/shared-resource/ Form of Value #4: Subscription Please accept my resignation. I don’t want to belong to any club that will accept me as a member. —GROUCHO MARX, COMEDIAN A Subscription program provides predefined benefits on an ongoing basis in exchange for a recurring fee. The actual benefits provided can be tangible or intangible—the key differences are (a) the expectation of additional value to be provided in the future and (b) that fees will be collected until the Subscription is canceled. In order to create a successful Subscription, you must:1. Provide significant value to each subscriber on a regular basis. 2. Build a subscriber base and continually attract new subscribers to compensate for attrition. 3. Bill customers on a recurring basis. 4. Retain each subscriber as long as possible. Cable or satellite television service is a great example of a Subscription. After you sign up, the company will continue to provide television service as long as you make the payments. You don’t have to call up the company every month to buy another thirty days’ worth—the service continues as long as the invoice is paid. Subscription is an attractive form of value because it provides more predictable revenue. Instead of having to resell to your existing customers every day, Subscriptions allow you to build a steady base of loyal customers over time. This model ensures a certain level of revenue coming in each billing period. The key to Subscription offers is doing everything you can to keep customer attrition as low as possible. As long as you continue to make your customers happy, only a small percentage of your customer base will cancel each period, giving you the ability to plan your finances with more certainty. Any subscriber attrition you experience can be overcome by enrolling more customers. SHARE THIS CONCEPT: http://book.personalmba.com/subscription/ Form of Value #5: Resale Buy low, sell high. —STOCK TRADER’S MAXIM Resale is the acquisition of an asset from a wholesale seller, followed by the sale of that asset to a retail buyer at a higher price. Resale is how most of the retailers you’re familiar with work: they purchase what they sell from other businesses, then resell each purchase for more than it cost. In order to provide value as a reseller, you must: