The Personal MBA Book Note

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

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

Every successful business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Core Human Drives that have a profound influence on our decisions and actions:

The Drive to Acquire. The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence. Businesses built on the drive to acquire include retailers, investment brokerages, and political consulting companies. Companies that promise to make us wealthy, famous, influential, or powerful connect to this drive.

The Drive to Bond. The desire to feel valued and loved by forming relationships with others, either platonic or romantic. Businesses built on the drive to bond include restaurants, conferences, and dating services. Companies that promise to make us attractive, well liked, or highly regarded connect to this drive.

The Drive to Learn. The desire to satisfy our curiosity. Businesses built on the drive to learn include academic programs, book publishers, and training workshops. Companies that promise to make us more knowledgeable or competent connect to this drive.

The Drive to Defend. The desire to protect ourselves, our loved ones, and our property. Businesses built on the drive to defend include home alarm systems, insurance products, martial arts training, and legal services. Companies that promise to keep us safe, eliminate a problem, or prevent bad things from happening connect to this drive.

The Drive to Feel. The desire for new sensory stimulus, intense emotional experiences, pleasure, excitement, entertainment, and anticipation. Businesses built on the drive to feel include restaurants, movies, games, concerts, and sporting events. Offers that promise to give us pleasure, thrill us, or give us something to look forward to connect with this drive.

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

A Product is a tangible form of value. To run a Product-oriented business, you must:

*Create some sort of tangible item that people want.

Produce that item as inexpensively as possible while maintaining an acceptable level of quality.

Sell as many units as possible for as high a price as the market will bear.

Keep enough inventory of finished product available to fulfill orders as they come in.

In order to create a successful Shared Resource, you must:

Create an asset people want to have access to
Serve as many users as you can without affecting the quality of each user’s experience.
Charge enough to maintain and improve the Shared Resource over time.
Focus on creating Forms of Value that require the least end-user effort to get the best possible End Result—they will have the highest perceived value.

Most successful businesses offer value in multiple forms.

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

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

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

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

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

There are nine common Economic Values that people typically consider when evaluating a potential purchase. They are:

Efficacy—How well does it work?
Speed—How quickly does it work?
Reliability—Can I depend on it to do what I want?
Ease of Use—How much effort does it require?
Flexibility—How many things does it do?
Status—How does this affect the way others perceive me?
Aesthetic Appeal—How attractive or otherwise aesthetically pleasing is it?
Emotion—How does it make me feel?
Cost—How much do I have to give up to get this?

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

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

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

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

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

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

Skilled marketers don’t try to get everyone’s attention—they focus on getting the attention of the right people at the right time. If you’re marketing Harley-Davidson motorcycles, trying to land an appearance on Oprah to show off this year’s new models probably isn’t the best strategy.

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

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

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

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

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

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

There are four ways to support a price on something of value:

Replacement cost
Market comparison
Discounted cash flow/net present value
Value comparison

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