The 80/20 Principle applied to business has one key theme—to generate the most money with the least expenditure of assets and effort. But, what is the 80/20 Principle? The 80/20 Principle tells us that in any population, some things are likely to be much more important than others. A good benchmark or hypothesis is that 80 percent of results or outputs flow from 20 percent of causes, and sometimes from a much smaller proportion of powerful forces…The 80/20 pattern that we have come to recognize for over a century—and which has been remarkably consistent, varying mainly between, say, 70/30 and 90/10—is rapidly increasing to 90/10 and 99/1. Understanding this trend and how to be on the right side of it can change your life
It is very rarely true that 50 percent of causes lead to 50 percent of results. The universe is predictably unbalanced. Few things really matter. Truly effective people and organizations batten on to the few powerful forces at work in their worlds and turn them to their advantage.
In 1949 Zipf discovered the “Principle of Least Effort,” which was actually a rediscovery and elaboration of Pareto’s principle. Zipf’s principle said that resources (people, goods, time, skills, or anything else that is productive) tended to arrange themselves so as to minimize work, so that approximately 20–30 percent of any resource accounted for 70–80 percent of the activity related to that resource.
In 1963, IBM discovered that about 80 percent of a computer’s time is spent executing about 20 percent of the operating code. The company immediately rewrote its operating software to make the most-used 20 percent very accessible and user friendly, thus making IBM computers more efficient and faster than competitors’ machines for the majority of applications.
The reason that the 80/20 Principle is so valuable is that it is counterintuitive. We tend to expect that all causes will have roughly the same significance. That all customers are equally valuable. That every bit of business, every product, and every dollar of sales revenue is as good as any other. this “50/50 fallacy” is one of the most inaccurate and harmful, as well as the most deeply rooted, of our mental maps. The 80/20 Principle asserts that when two sets of data, relating to causes and results, can be examined and analyzed, the most likely result is that there will be a pattern of imbalance. The imbalance may be 65/35, 70/30, 75/25, 80/20, 95/5, or 99.9/0.1, or any set of numbers in between. However, the two numbers in the comparison don’t have to add up to 100. The 80/20 Principle also asserts that when we know the true relationship, we are likely to be surprised at how unbalanced it is.
Related to the idea of feedback loops is the concept of the tipping point. Up to a certain point, a new force—whether it is a new product, a disease, a new rock group, or a new social habit such as jogging or roller blading—finds it difficult to make headway. A great deal of effort generates little by way of results. At this point many pioneers give up. But if the new force persists and can cross a certain invisible line, a small amount of additional effort can reap huge returns. This invisible line is the tipping point. The concept comes from the principles of epidemic theory. The tipping point is “the point at which an ordinary and stable phenomenon—a low-level flu outbreak—can turn into a public-health crisis,”10 because of the number of people who are infected and can therefore infect others. And since the behavior of epidemics is nonlinear and they don’t behave in the way we expect, “small changes—like bringing new infections down to thirty thousand from forty thousand—can have huge effects…It all depends when and how the changes are made.”
A few things are important; most are not.
The common view is that we are short of time. My application of the 80/20 Principle suggests the reverse: that we are actually awash with time and profligate in its abuse.
Conventional wisdom is not to put all your eggs in one basket. 80/20 wisdom is to choose a basket carefully, load all your eggs into it, and then watch it like a hawk.
A new and complementary way to use the 80/20 Principle is what I call 80/20 Thinking. This requires deep thought about any issue that is important to you and asks you to make a judgment on whether the 80/20 Principle is working in that area.
Application of the 80/20 Principle implies that we should do the following:
Celebrate exceptional productivity, rather than raise average efforts
Look for the short cut, rather than run the full course
Exercise control over our lives with the least possible effort
Be selective, not exhaustive
Strive for excellence in few things, rather than good performance in many
Delegate or outsource as much as possible in our daily lives and be encouraged rather than penalized by tax systems to do this (use gardeners, car mechanics, decorators, and other specialists to the maximum, instead of doing the work ourselves)
Choose our careers and employers with extraordinary care, and if possible employ others rather than being employed ourselves
Only do the thing we are best at doing and enjoy most
Look beneath the normal texture of life to uncover ironies and oddities
In every important sphere, work out where 20 percent of effort can lead to 80 percent of returns
Calm down, work less and target a limited number of very valuable goals where the 80/20 Principle will work for us, rather than pursuing every available opportunity.
Make the most of those few “lucky streaks” in our life where we are at our creative peak and the stars line up to guarantee success.
Consider the Interface Corporation of Georgia, now an $800 million carpet supplier. It used to sell carpets; now it leases them, installing carpet tiles rather than whole carpets. Interface realized that 20 percent of any carpet receives 80 percent of the wear. Normally a carpet is replaced when most of it is still perfectly good. Under Interface’s leasing scheme, carpets are regularly inspected and any worn or damaged carpet tile is replaced. This lowers costs for both Interface and the customer. A trivial 80/20 observation has transformed one company and could lead to widespread future changes in the industry.
Understanding the cost of complexity allows us to take a major leap forward in the debate about corporate size. It is not that small is beautiful. All other things being equal, big is beautiful. But all other things are not equal. Big is only ugly and expensive because it is complex. Big can be beautiful. But it is simple that is always beautiful.
All effective techniques to reduce costs use three 80/20 insights: simplification, through elimination of unprofitable activity; focus, on a few key drivers of improvements; and comparison of performance.
Because business is wasteful, and because complexity and waste feed on each other, a simple business will always be better than a complex business. Because scale is normally valuable, for any given level of complexity, it is better to have a larger business. The large and simple business is the best. The way to create something great is to create something simple. Anyone who is serious about delivering better value to customers can easily do so, by reducing complexity. Any large business is stuffed full of passengers—unprofitable products, processes, suppliers, customers, and, heaviest of all, managers. The passengers obstruct the evolution of commerce. Progress requires simplicity, and simplicity requires ruthlessness. This helps to explain why simple is as rare as it is beautiful.
But profitability is only a scorecard providing an after-the-fact measure of a business’s health. The real measure of a healthy business lies in the strength, depth, and length of its relationship with its core customers. Customer loyalty is the basic fact that drives profitability in any case.
When something is working well, double and redouble your bets.
Impose an impossible time scale This will ensure that the project team does only the really high-value tasks:
When I was a partner at management consultants Bain & Company, we proved conclusively that the best-managed projects we undertook—those that had the highest client and consultant satisfaction, the least wasted time, and the highest margins—were those where there was the greatest ratio of planning time to execution time.
Build up a long list of spurious concerns and requirements early in a negotiation, making them seem as important to you as possible. These points must, however, be inherently unreasonable, or at least incapable of concession by the other party without real hurt (otherwise they will gain credit for being flexible and conceding the points). Then, in the closing stages of the negotiation, you can concede the points that are unimportant to you in exchange for more than a fair share of the really important points.
If your insights are not unconventional, you are not thinking 80/20.
We have been conditioned to think that high ambition must go with thrusting hyperactivity, long hours, ruthlessness, the sacrifice both of self and others to the cause, and extreme busyness. In short, the rat race. We pay dearly for this association of ideas. The combination is neither desirable nor necessary. A much more attractive, and at least equally attainable, combination is that of extreme ambition with confidence, relaxation, and a civilized manner. This is the 80/20 ideal, but it rests on solid empirical foundations. Most great achievements are made through a combination of steady application and sudden insight. The key is not effort, but finding the right thing to achieve.
The Top 10 highest-value uses of time
Things that advance your overall purpose in life
Things you have always wanted to do
Things already in the 20/80 relationship of time to results
Innovative ways of doing things that promise to slash the time required and/or multiply the quality of results
Things other people tell you can’t be done
Things other people have done successfully in a different arena
Things that use your own creativity
Things that you can get other people to do for you with relatively little effort on your part
Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically and effectively
Things for which it is now or never
When thinking about any potential use of time, ask two questions: • Is it unconventional? • Does it promise to multiply effectiveness? It is unlikely to be a good use of time unless the answer to both questions is yes.
It is important to focus on what you find easy. This is where most motivational writers go wrong. They assume you should try things that are difficult for you;
The 80/20 Principle is clear. Pursue those few things where you are amazingly better than others and that you enjoy most.
10 golden rules for career success
Specialize in a very small niche; develop a core skill
Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
Realize that knowledge is power
Identify your market and your core customers and serve them best
Identify where 20 percent of effort gives 80 percent of returns
Learn from the best
Become self-employed early in your career
Employ as many net value creators as possible
Use outside contractors for everything but your core skill
Exploit capital leverage
Obtain the four forms of labor leverage. First, leverage your own time. Second, capture 100 percent of its value by becoming self-employed. Third, employ as many net value creators as possible. Fourth, contract out everything that you and your colleagues are not several times better at doing.
Koch’s 10 commandments of investment
Make your investment philosophy reflect your personality
Be proactive and unbalanced
Invest mainly in the stock market
Invest for the long term
Invest most when the market is low
If you can’t beat the market, track it
Build your investments on your expertise
Consider the merits of emerging markets
Cull your loss makers
Run your gains
No doubt you have your own pressure points. Write them down: now! Consciously engineer your life to avoid them; write down how: now! Check each month how far you are succeeding. Congratulate yourself on each small avoidance victory.
I think I know the explanation, and it also explains why 80/20 is becoming even more prevalent, affecting our lives in mysterious and perplexing ways. The answer is in the burgeoning power of networks. The number and influence of networks has been growing for a long time, at first a slow increase over the past few centuries, but since about 1970 the increase has become faster and more dramatic. Networks also behave in an 80/20 way—in the way characteristic of 80/20 distributions. And often in an extremely lopsided way. So the principle is becoming more pervasive because the same is true of networks. More networks, more 80/20 phenomena.
In keeping with the selective nature of the principle, this short chapter gives you the five most potent hints that I have discovered in four decades of searching.
Only work in networks
Small size, very high growth
ONly work for an 80/20 boss – someone who consciously or unconsciously follows the principle
Find your 80/20 idea
Become joyfully, usefully unique
Those who have embraced the principle find that the line between work and non-work becomes increasingly blurred. In this sense, the yin and yang of life are re-established. Although there are two apparently opposite dimensions to the 80/20 Principle—efficiency and life enhancement—the dimensions are entirely complementary and interwoven. The efficiency dimension allows us room for the life-enhancing dimension. The common thread is knowing what gives us the results we want, and knowing what matters.
What I got out of it
Nothing “new”, but incredible reminders and thoughtful ways to implement 80/20 thinking into your life. Be ruthless about finding what these things are and double down on them
Diving into the rise of the epic tech companies of the 21st century – Uber and AirBnb
Travis’ Law – politicians who are accountable to their people can be influenced if the product or service being delivered is markedly better than the status quo
The best but hardest solution is to meet the people who hate you – Brian Chesky
Amazing how often a company has to recreate itself as it scales. The right approach, leadership, philosophy, strategy, mindset that gets you from 0 to 1, often isn’t the mindset that lets you create a large and enduring company
What I got out of it
An inspiring overview of the founding and growth of two epic companies. Makes you want to go out and build something world changing. Didn’t take a lot of notes, but the stories behind these two companies is so amazing to learn about
Singer describes his deep dive into meditation and what he calls his surrender experiment – letting go of everything he can, letting the flow of life take him where it wants
A constant practice of surrendering and non resistance. You do not control anything and are responsible for nothing. Do not give your mind the illusion of control, eliminate your personal preferences wherever you can.
Aiming to control everything creates a feeling of stress and pain. But you are not powerless – you have a personal will. Trust the natural process of life and that good things will naturally happen. It takes care of the entirety of the universe.
Use your free will to participate this flow of life rather than struggling against it. The question is: am I better off struggling to try to force what I want or am I better off surrendering and letting go of what I want, working with the natural forces of reality? This is the surrender experiment
By aligning your will with the natural forces around you, powerful things can happen
The ability to separate yourself from your thoughts and emotions is a superpower. Becoming aware of all this noise is the first step in this journey
Mickey had a moving experience while meditating that shifted his priority to never disturbing his inner peace. He had to learn to live and function in the real world while keeping his inner peace intact
Life has more to give us than we could ever take for ourselves
Surrendering does not give you clarity into where your life is headed, but it does clarify your preferences – your likes and dislikes – and giving those up on the whole provides a tremendous amount of freedom and opportunity. This allows your journey to be guided by the very powerful force of life rather than your preferences. It can all unfold by itself without your hand forcing it
Feel compassion for the human part of you, including all their faults and weaknesses
Mickey had a very monastic lifestyle where he woke up at 3, meditates for hours, did yoga, mediated some more. He eventually found that life was moving him from a life focused on self to one focused on serving others
Mickey and the rest of the senior team at Medical Manager were being sued by a disgruntled employee who had stolen nearly $6m and then blamed the senior team for making him do it. It took 5 years, but he was eventually found not guilty. By letting go at each step along the way, no scars were left on his psyche. He could learn from them, but like writing on water, the impressions would only last momentarily
When life’s way becomes your way, all noise stops and peace ensues
What I got out of it
A beautiful, grounding book on the power of surrender. Let go, don’t make things about you and your preferences, serve others, trust the natural forces of life
Jim Haslam, founder of one of the largest gas and convenience store chains, recounts the founding of Pilot and the principles of success that got him there
Never about me. If it were, I would be the ceiling. I always looked to share power and responsibility as early as possible. Gave away incredible responsibility to his kids while they were only in their 20s and 30s
We were lucky to be getting into travel centers and convenience/gas stores just as demand for travel was picking up thanks to the newly built Interstate Highway System
Marathon invested in us early on. This was a fantastic win/win as it helped them expand and it gave us the capital to grow our stores as well
You better know the numbers of your business
If you get relationships right, most everything takes care of itself
If there is a problem in your vicinity, take responsibility
Be an optimist with every fiber of your being. He thought of himself as “encourager in chief”
Life is better when it is lived for others
Some things are better caught than taught
Everyone in the family has a unique and special relationship with Jim
He writes handwritten letters to each of his family members 3 to 5 times a year telling them how proud he is of them and how much he loves them
Although he accomplished so much he was really easy-going and great with people, putting them at ease and easily building a connection with everyone he met
The book ends with each of his kids describing their father. He never missed any of their events although he was traveling like crazy. He was “all in” on their lives and this made all the difference
What I got out of it
Love seeing the humility and simple principles that helped Haslam achieve phenomenal success. Serve others and be others-focused, the importance of timing and relationships, keeping the most important things the most important things.
An innovation stack is a series of interconnected skills, competencies, products, services, that allow you to solve a problem in a way nobody else has and few others can.
An innovation stack is at the core of the most successful companies of history. They solve problems that nobody has been able to solve before. It forces you to be creative even if you don’t want to be
Words matter and in this case the author considers an entrepreneur somebody who is a crazy explorer. The perfect problem for the entrepreneur is one that can be solved but whose solution is not yet known
It is difficult to get feedback so try to parse through where there could be feedback failure and what that means for your product or service.
Making things a little bit difficult so the user really has to pay attention and struggle a little bit really helps damn remember and process what they’ve learned ( ikea effect)
There is a subtle yet profound difference between having low prices and the lowest prices. Low means always giving value to the consumer whereas the west is always relative where are you always have to keep an eye out on the competition and what they’re doing. Your prices should arise out of your innovation stack. You should seek low prices in order to build customer trust, corporate alignment, and competitive advantage. Every company the author studied sought out low prices
Disruption is an overused word today. The author found that the vast majority of successful companies brought new people into the market rather than simply stealing from the incumbents. The focus should be on building and not destroying. Copy when you can, but come up with new solutions when needed
VC’s fund expansion, not exploration
If you’re going to do something brand new, you will be afraid. You can’t get rid of this, but you can learn to effectively deal with it. There is no expertise for those who are truly innovative but these people share stubbornness and perseverance. They care deeply about the perfect problem they are solving for. When you solve a problem you care about, it brings you energy
Business people survive by copying what already exists and do so successfully. We survive because we can replicate. This is natures solution to entropy
Timing is everything m. Right feels early. It a critical component of your innovation stack doesn’t exist yet, work on other things until that step becomes feasible
The world is a series of interdependent innovation stacks. When something new is presented, a whole new world of possibilities is unlocked
You need to have every element in the stack for it to truly work. You can’t pick and choose and this is why copying a truly innovative company is quite hard l. Each element impacts every other element,/8 this quickly becomes an exercise in mathematics where the likelihood of copying 10 things correctly is really low
History is the best place to learn about innovation stocks. These are the truly world changing companies
Stay laser focused on your key customers and the innovation stack that serves them. This is much better than focusing on what the competition is doing
Getting statistics on a market that doesn’t exist yet is difficult if not impossible. Remembered that invisible does not mean not interested
Customers who trust you is more valuable than customers who love you.
There are no answers for the new. We all start at square zero when trying to solve something that hasn’t been done before
What I got out of it
Very helpful book to help frame different types of businesses, questions, answers, innovations. Creating interdependent, interlocking innovations makes you nearly impossible to compete with, especially when you are solving a problem that hasn’t been solved before
The “purple cow” concept is at the core of JB Hunt’s culture and way of thinking. Essential products and services that can’t be copied, unique,, doing things differently, earning above the cost of capital, an intense focus on solving the customer’s problems , embrace the more difficult business, do stuff that other people have trouble doing, be adaptable
Beware overcrowded spaces – have an intense desire to offer specialized and unique services that allow you to do what others wouldn’t or couldn’t
Differentiation, better customer service, a refusal to stand still, natural expansion with homegrown talent
Boring things – even if excellent – quickly become invisible
JB Hunt’s founder was impatient, wanted to maintain frantic growth at all costs, an idea man, was all over, didn’t want to let go
You learn a whole lot more from the struggles in the valley than you do on the mountaintop
Never feed problems while starving opportunities
Decision theory makes it clear that for a given set of costs and benefits, selecting alternatives with lower down-side risk, other things being equal, increases the expected payoff
We’ve never been concerned about cannibalizing one part of a company to offer a better solution to the customer. If there’s a better solution for the customer, we need to offer it. most companies won’t do that. We are not in business to support our trucking company. We are in business to support our customers with the best answer possible in that market
Must constantly adapt and iterate so that you never become stale and optimized for an environment that no longer exists. How you perceive a business segment can affect how you change the curve of the product life cycle
The customer is most certainly not always right. They are always to be respected, listened to, and served, but only when a return is generated
3 criteria needed to develop core competencies: provides potential access to a wide variety of markets; that it makes a significant contribution to the perceive customer benefits of the end product; and that it is difficult to imitate by competitors
Selling JBHT rather than just one segment results in more satisfied and loyal customers. Our bonus structure rewards leaders based on the company’s overall performance. When the company performs well as a whole, everyone reaps the rewards. Ironically, one of the things the original DCS leaders rebelled against was that bonus structure. There are legitimate arguments to do it other ways, but we find our approach fosters a one-for-all-and-all-for-one mentality. We incentivize the company’s success, not just the success of any one part of it. Sharing the wealth with those who helped create it has worked for JBHT for nearly 40 year.
We measure the quality of a team’s results against its peer groups, not against other JBHT units, so we put the emphasis on being “best in class” not “best within JBHT.” We’ve found this helps eliminate the popularity contests, lead to better decisions, and allows us to celebrate contributions that otherwise might get overlooked
Growth is key, growth is oxygen
A good message is clear, actionable, consistent. Give the what/why, not the how
What’s unique is that variables like time, growth and the influx of new people haven’t caused an erosion of our culture. Instead, they have added to it and strengthened it. We’ve been open to change, while staying true to our core; flexible enough to stretch with new ideas, but solid enough to maintain our identity. I credit this to the dynamic interplay between our culture and our leadership and management.
Intermodal – more than one mode of transportation to reach the final destination (ship to train to truck…)
Trucks first complemented and then competed with the railways
“partner with the enemy” became the right choice for railways and trucks as it gave the customer more options, increased efficiencies, grew the pie (win/win/win)
Developing Intermodal opened up new business lines that are now multi-billion dollar segments
Grassroots and top-down – go to local colleges and universities to recruit good students and home grow them. From the top-down, Hr goes to the company’s leaders and asks them for the names of 2-3 people they have in mind as their successor. Having a good understanding of the existing talent pool also allows us to know when we need to look outside the company, as was the case when we shifted our approach toward technology and engineering. Growing organically is really healthy and really great for your culture, but you do have to inject outside thinking strategically and purosefully from time to time.
What I got out of it
A great look inside the culture of a compounder who has grown steadily for decades now
Through Socratic dialogue and real-world life lessons, a successful businessman (Mr. X) shares his wisdom and learnings with a skeptical young student, Nick.
Strategy ROIC > project ROIC
Longer term, more fluid and dynamic
Capital allocation is the study of opportunity cost. This skill is extremely important as it helps usher in resources to the highest return areas. This will not and cannot solve all problems, but if structured and incentivized correctly, can alleviate many ills
What I got out of it
Really fun fiction book that gets across many important capital allocation, business, and financial ideas across in a narrative format. This short summary does not do the book justice – what took several books to convey many financial / capital allocation topics in a dry fashion, this book was able to do in a fun, narrative manner. This could and maybe should be the entry point into the world of finance and capital allocation
My goal is to present the essential Porter in a form that can be more easily digested and put to work than the original. But, to extend my metaphor, if you really want to digest these critically important ideas, you have to be willing to chew on them before you swallow. Strategy is not fast food, and neither is Porter.
“The essence of strategy,” Porter often says, “is choosing what not to do.”
“What Is Strategy?” (1996), one of the most-cited and best-selling HBR articles of all time, and “The Five Competitive Forces That Shape Strategy” (2008),
Strategy explains how an organization, faced with competition, will achieve superior performance.
The goal of strategy is to earn superior returns on the resources you deploy, and that is best measured by return on invested capital.
Strategy is a path, not a fixed point. An effective strategy is dynamic.
One of the important lessons about strategy is that if you’re pursuing a different positioning, then different metrics will be relevant. And if you force everybody to show progress on the same metrics, you encourage convergence and undermine strategic uniqueness.
The essence of strategy is to create your own path.
A business model highlights the relationship between your revenues and your costs. Strategy goes an important step further. It looks at relative prices and relative costs, and their sustainability. That is, how your revenues and costs stack up against your rivals’.
The most common error of all is that competitive success comes from “being the best.” This mind-set is highly intuitive. It is also self-destructive, leading to a zero-sum race to the bottom. Only by competing to be unique can an organization achieve sustained, superior performance.
Porter’s prescription: aim to be unique, not best. Creating value, not beating rivals, is at the heart of competition.
Properly understood, competitive advantage allows you to follow the precise link between the value you create, how you create it (your value chain), and how you perform (your P&L). Competitive advantage is commonly understood as the weapon you use to trounce rivals. For Porter, it’s fundamentally about creating value, and about doing so differently from rivals. In this way, competitive advantage is about how your value chain will be different and your P&L better than the industry average. Competitive advantage lies in the activities, in choosing to perform activities differently or to perform different activities from rivals.
Where does superior performance come from? Porter’s answer can be divided into two parts. The first part is attributable to the structure of the industry in which competition takes place.
These five forces—the intensity of rivalry among existing competitors, the bargaining power of buyers (the industry’s customers), the bargaining power of suppliers, the threat of substitutes, and the threat of new entrants—determine the industry’s structure,
When you analyze the power of suppliers, be sure to include all of the purchased inputs that go into a product or service, including labor (i.e., your employees).
We now have a complete definition of competitive advantage: a difference in relative price or relative costs that arises because of differences in the activities being performed
While not every single activity need be unique, robust strategies always involve a significant degree of tailoring. To establish a competitive advantage, a company must deliver its distinctive value through a distinctive value chain. It must perform different activities than rivals or perform similar activities in different ways. Thus the value proposition and the value chain—the two core dimensions of strategic choice—are inextricably linked. The value proposition focuses externally on the customer. The value chain focuses internally on operations.
Making trade-offs means accepting limits—saying no to some customers, for example, so that you can better serve others. Trade-offs arise when choices are incompatible. Because a successful strategy will attract imitators, choices that are difficult to copy are essential.
Trade-offs play such a critical role that it’s no exaggeration to call them strategy’s linchpin. They hold a strategy together as they contribute to both creating and sustaining competitive advantage.
Fit has to do with how the activities in the value chain relate to one another. At one level, the idea of fit is completely intuitive. Every general manager knows the importance—and the difficulty—of aligning the various functional areas needed to compete in a business. But fit goes beyond simple alignment to amplify a competitive advantage and to make it more sustainable. Its role in strategy highlights yet another popular misconception: that competitive success can be explained by one core competence, the one thing you do really well. Good strategies depend on the connection among many things, on making interdependent choices. A common piece of advice for managers has been to focus on their core activities and to outsource the rest. Fit challenges that bit of conventional wisdom.
Fit has to do with how the activities in the value chain relate to one another. Its role in strategy highlights yet another popular misconception, that competitive success can be explained by one core competence, the one thing you do really well. The fallacy here is that good strategies don’t rely on just one thing, on making one choice. Nor do they typically result from even a series of independent choices. Good strategies depend on the connection among many things, on making interdependent choices.
You can think of fit as an amplifier, raising the power of both of those effects. Fit amplifies the competitive advantage of a strategy by lowering costs or raising customer value (and price). Fit also makes a strategy more sustainable by raising barriers to imitation.
Fit means that the value or cost of one activity is affected by the way other activities are performed.
But once you appreciate the role of fit, you will stop and think much harder about outsourcing. Instead of trying to determine which activities are core, Porter asks a different question: Which activities are generic and which are tailored? Generic activities—those that cannot be meaningfully tailored to a company’s position—can be safely outsourced to more efficient external suppliers. However, Porter argues that outsourcing is risky for activities that are or could be tailored to strategy, and especially for those activities that are strongly complementary with others. The fewer elements that remain in the company’s value chain, the fewer the opportunities to extend tailoring, trade-offs, and fit
In competing to be the best, imitation is easy, and advantages are temporary. The more a company competes on uniqueness, the less susceptible it is to imitation, and advantages can be sustained over long periods of time. Great strategies are like complex systems in which all of the parts fit together seamlessly. Each thing you do amplifies the value of the other things you do. That enhances competitive advantage. And it enhances sustainability as well. “Fit,” Porter says, “locks out imitators by creating a chain that is as strong as its strongest link.”
Continuity over time – if your company can achieve this, it has a robust, stable core but is also able to innovate and adapt
Typical Steps in Industry Analysis
Define the relevant industry by both its product scope and geographic scope.
Identify the players constituting each of the five forces and, where appropriate, segment them into groups.
Assess the underlying drivers of each force.
Step back and assess the overall industry structure.
Analyze recent and likely future changes for each force.
How can you position yourself in relation to the five forces?
In the early years, a shareholder asked CEO Herb Kelleher if Southwest couldn’t raise its prices by just a few dollars since its $15 price on the Dallas–San Antonio route was so much lower than Braniff’s $62 fare. Kelleher said no, our real competition is ground transportation, not other airlines.
Early in his career, Porter identified a set of generic strategies—focus, differentiation, and cost leadership—that quickly became one of the most widely used tools for thinking about key strategic choices. Each of the three reflects the most basic level of consistency that every effective strategy must have. Focus refers to the breadth or narrowness of the customers and needs a company serves. Differentiation allows a company to command a premium price. Cost leadership allows it to compete by offering a low relative price.
My advice is to concentrate on deepening and extending a strategic position rather than broadening and ultimately compromising it. Here are some thoughts about how to grow profitably without destroying your strategy. First, never copy.
Expand geographically in a focused way. If you’ve penetrated your strategic opportunity at home, there’s always the rest of the world.
Two questions will tell you whether you’re dealing with a disruptive technology or not. First, to what extent does it invalidate important traditional advantages? Second, to what extent can incumbents embrace the technology without major negative consequences for their business? If you stop and ask those questions, you’ll see that true disruptions are not so common.
For a nonprofit, there is no directly comparable metric, so you’ve got to create one. A major challenge for every nonprofit is to define its goal or goals in terms of the social benefits it seeks to create. And then it must develop a value metric that looks at the results achieved versus the costs required to achieve them.
What I got out of it
An excellent overview. Great way to frame strategy and to help hone in on where you should focus – being unique, not the best
What is a star venture? It has two qualities. One, it operates in a high-growth market. Two, it is the leader in that market.
The answer is not to work or invest in the great majority of ventures. The key is to select the ventures that are likely to succeed anyway. Without superhuman people. Without perfect balance between the skills of the people. Without blood, toil, tears and sweat.Without the need to keep chopping and changing before the correct formula emerges. The useful answer is not ‘people, people, people’. The really potent, consistently successful answer is ‘positioning, positioning, positioning’.
There is another clue as to whether or not a niche market is viable, and it is simply this: is the niche highly profitable? Does it generate a lot of cash? Leadership in a niche is not valuable unless, sooner or later, the niche is very profitable and gushes out cash.
A leading firm should have higher prices, or lower costs, than a similar business that is a follower. Why higher prices? Because the customers prefer the product. Why lower costs? Because the firm can spread its fixed costs over a much greater volume of business than competitors can.
About 1 in 20 start-ups is a star. So stars are rare. But they are not so rare that, with a bit of patience and careful thought, you can’t discover one – or create one yourself. If you look intelligently for a star, you will find it.
My own experience is that, as I have made more money and started more successful ventures, the less I have worked. Hard work is either a red herring, or negatively correlated with success.
A cash cow can be turned into a star when the concept of the product category is transformed – David’s vision of personal organisers as upscale fashion accessories reinvented the whole market.
A star that is fast losing market share, or an ex-star that has lost it, may be an attractive prospect.
It’s not as unusual as you might expect to find a hole in the market – even a market as big and profitable as gin. Seek a hole and sooner or later you will find one.
Ecologists know that two species of animal that try to exist in exactly the same way become deadly enemies. If two species compete head-on for food, only one of them can win. The other species must change either the food it seeks or the way it hunts for it. If it does neither, the weaker species will die out. It is the same with business, except the time to extinction is compressed. Any business that imitates another slavishly will not be successful. The numbers are against it. It will be competing in the same market as the market leader. It will be smaller. It will have less appeal to customers. It will be less profitable and usually loss-making. It will have to do something different, or die.
Imitation, even of a highly profitable and savvy player, won’t lead to a star business. There are only two exceptions. One is geography – a player may be imitated in a new country or region where it is not present, and sometimes the advantage of being first and the differences in the local market’s preferences can lead the imitator to a star position that can be defended even against the business imitated. The other exception is where the follower has more money or a much better approach than the originator.
There are seven steps necessary for creating a star venture.The seven steps give you an easy template for devising your star.
Divide the market.
Select a high-growth niche.
Target your customers.
Define the benefits of the new niche.
Ensure profitable variation.
Name the niche you plan to lead.
Name the brand in a way that complements the category name. Make the name short, memorable, easy to recognise, appealing to the target market and associated with the niche.
Many great innovations simultaneously divide markets and combine the attributes of two previously unrelated markets.
Start with the markets you and your friends know. How could you turn them upside down, inside out, to create a new category? Here are 32 useful triggers. Some of them are opposites, using one extreme or another to create a new niche. Go against the conventional wisdom of the main market. Many of these triggers are related or similar, but they are included just in case they prompt an idea that otherwise might not occur to you. Don’t be overwhelmed by the list – it’s there to help, not to hold you up. If you can’t relate to a prompt, pass swiftly on to the next.
YOUR IDEAL PRODUCT DOESN’T EXIST
MARKET VERSUS NICHE
BIGGER PRODUCT VERSUS SMALLER PRODUCT
EMOTIONAL VERSUS FUNCTIONAL – Emotion is warm and expensive. Function is no-nonsense, rational, inexpensive, stripped down to the essentials. Can you create a new niche by going ‘emotional’ in a market that is mainly ‘functional’?
HEALTHIER VERSUS TEMPTING
SAFE VERSUS RACY
CONVENIENCE VERSUS PURITY
SAVING TIME VERSUS EXTENDING TIME
FIXED VERSUS MOBILE
UNISEX VERSUS SINGLE SEX
MASCULINE VERSUS FEMININE
GO GREY – Education: universities for those aged 50-plus?
LOW VERSUS HIGH SERVICE, AND DIFFERENTSERVICE
DIY VERSUS PROFESSIONAL SERVICE
PERSONALISED VERSUS UNTAILORED
BUNDLED VERSUS FOCUS AND SUBTRACTION – Focus is by far the best way to create a new star venture.
EXPERT VERSUS INEXPERT USERS
CENTRALISED VERSUS DECENTRALISED USE
TOTAL COST VERSUS INITIAL PRICE
FIRST PLACE VERSUS THIRD PLACE
SECOND PLACE VERSUS THIRD PLACE
OWNED VERSUS RENTED VERSUS FRACTIONALLY OWNED
NARROWED EXPERTISE VERSUS ADDED EXPERTISE
ORCHESTRATING A SUPPLIER ALLIANCE
ONLINE VERSUS OFFLINE, OR A DIFFERENT DISTRIBUTION CHANNEL
ENTREPRENEURIAL JUDO – This is a different kind of prompt, courtesy of the management guru Peter Drucker. The idea is to catch the leading players in a market off balance by turning their strength into a weakness.
IDEAS FROM OTHER INDUSTRIES – Identify an industry that has a peculiar practice that somehow seems to work well. Could you adapt the practice to a completely different context?
IDEAS FROM OTHER PLACES
We cannot create a new star without creating a new category. The new niche must be oriented towards the target customers and must offer a sharply different basket of benefits from the main market. The more the benefits of the new category vary clearly and substantially from the existing market, the greater the chance that the new venture will fly. There are three ways of varying the benefits:
increasing one or more benefits of the product in the main market to a marked degree;
creating one or more new benefits that do not currently exist in the main market; and
subtracting benefits that exist in the main market.
To launch a star venture successfully, three conditions must apply.
Your target customers want something different from the main market.
You understand what it is that they want and can provide it with a new product category.
The new category can be supplied profitably, because you can charge more for it, and/or because you can subtract elements of the main market product that are expensive to provide, so that the new category has lower costs than the main market.
Make things happen reliably, consistently, economically. Make the venture a machine.
The delivery formula has been cracked when all the following events always happen.
Products are delivered to the same high standard, on time, every time.
This year’s product is measurably better than last year’s.
This year’s product costs at least 5 per cent less to make than last year’s.
Volumes can be doubled within a year without panic or loss of quality.
Work is delegated to the lowest-level person who is fully competent to do it.
Everyone increases his or her skill level significantly each year and works better and faster.
The workplace exudes calm, order and discipline.
Standards and procedures are written down, clear, unambiguous – and observed!
Logos, colours and designs are attractive and consistent.
Budgets are always met or exceeded.
Cash is always higher than planned.
The firm is a machine – smooth-running, reliable, relentless, self-maintaining and self-improving.
Nobody is indispensable. If the best people leave, the firm rolls on regardless. New leaders come to the fore.
The way to maximise your chance of take-off is to form four small teams – each comprising a founder and two other employees – charged with masterminding each element of take-off: customer attraction; the commercial formula for fat margins; delivery; and innovation.
At least 90 per cent or more of a star’s value over the long haul derives from its growth. For businesses that grow for a very long time, such as McDonald’s and Coca-Cola, the number is over 99 per cent. Nearly everyone hugely underestimates the growth potential of stars. Typically, the growth potential is underrated not by 100 or 200 per cent but by 1,000 per cent or 10,000 per cent.
Almost all founders of star businesses underestimate their growth potential and value. Two action implications: never sell a star business (while it remains a star); and demand much faster growth.
The nub here is that you should generally ‘outsource’ as much of your operations as possible, retaining only the few things that you do uniquely well. In particular, get other people to make things for you. Since you probably won’t be investing in factories, offices or other physical cash sinks, what’s left is expense investment – the costs of your people, plus external marketing. The joy of stars is that they take modest investment to get to cash break even. Thereafter, investment can be funded out of the star’s own cash flow.
Be willing to accept lower profits to build a dominant market position. As long as you remain cash-positive, short-term profits are totally irrelevant to the long-term value of the business. Build by far the best product and service in your niche, moving further away ahead of would-be rivals.
The trouble with founders who remain executives is that it is very difficult to shift them, even when they are palpably acting in the interests of the managers rather than the owners.
Growth is everything. Star ventures should grow at least 20-50 per cent each year in their first decade. This rate of advance is so far beyond most people’s experience that enormous effort is required to impose ‘unreasonable expectations’.
Profits also rise because of the market growth, but profits should rise faster than sales. In a normal market, profitability is constrained by competition. In a star market, profitability is constrained only by what customers will pay.
Only puny secrets need protection. Big discoveries are protected by public incredulity. Marshall McLuhan
What I got out of it
Niche that is growing 10%+ each year, leader in that market
“E-Myth \ ‘e-,’mith\ n 1: the entrepreneurial myth: the myth that most people who start small businesses are entrepreneurs 2: the fatal assumption that an individual who understands the technical work of a business can successfully run a business that does that technical work…Those mundane and tedious little things that, when done exactly right, with the right kind of attention and intention, form in their aggregate a distinctive essence, an evanescent quality that distinguishes every great business you’ve ever done business with from its more mediocre counterparts whose owners are satisfied to simply get through the day. Yes, the simple truth about the greatest businesspeople I have known is that they have a genuine fascination for the truly astonishing impact little things done exactly right can have on the world. It is to that fascination that this book is dedicated.”
Contrary to popular belief, my experience has shown me that the people who are exceptionally good in business aren’t so because of what they know but because of their insatiable need to know more. The problem with most failing businesses I’ve encountered is not that their owners don’t know enough about finance, marketing, management, and operations—they don’t, but those things are easy enough to learn—but that they spend their time and energy defending what they think they know. The greatest businesspeople I’ve met are determined to get it right no matter what the cost.
So if your business is to change—as it must continuously to thrive—you must change first. If you are unwilling to change, your business will never be capable of giving you what you want. The first change that needs to take place has to do with your idea of what a business really is and what it takes to make one work.
That myth, that misunderstanding, I call the E-Myth, the myth of the entrepreneur. And it finds its roots in this country in a romantic belief that small businesses are started by entrepreneurs, when, in fact, most are not. That Fatal Assumption is: if you understand the technical work of a business, you understand a business that does that technical work. And the reason it’s fatal is that it just isn’t true. In fact, it’s the root cause of most small business failures! The technical work of a business and a business that does that technical work are two totally different things! But the technician who starts a business fails to see this. To the technician suffering from an Entrepreneurial Seizure, a business is not a business but a place to go to work.
The Entrepreneur / Manager/ Technician
But it’s a three-way battle between The Entrepreneur, The Manager, and The Technician. The entrepreneurial personality turns the most trivial condition into an exceptional opportunity. The Entrepreneur is the visionary in us. The dreamer. The energy behind every human activity. The imagination that sparks the fire of the future. The catalyst for change. The managerial personality is pragmatic. Without The Manager there would be no planning, no order, no predictability. The Technician is the doer. “If you want it done right, do it yourself” is The Technician’s credo. The Technician loves to tinker. Things are to be taken apart and put back together again. Things aren’t supposed to be dreamed about, they’re supposed to be done. If The Entrepreneur lives in the future and The Manager lives in the past, The Technician lives in the present. Put another way, while The Entrepreneur dreams, The Manager frets, and The Technician ruminates.
It is self-evident that business, like people, are supposed to grow; and with growth, comes change. Unfortunately, most businesses are not run according to this principle. Instead most businesses are operated according to what the owner wants as opposed to what the business needs. And what The Technician who runs the company wants is not growth or change but exactly the opposite. He wants a place to go to work, free to do what he wants, when he wants, free from the constraints of work Unfortunately, what The Technician wants dooms his business before it even begins.
“If you want to work in a business, get a job in somebody else’s business! But don’t go to work in your own. Because while you’re working, while you’re answering the telephone, while you’re baking pies, while you’re cleaning the windows and the floors, while you’re doing it, doing it, doing it, there’s something much more important that isn’t getting done. And it’s the work you’re not doing, the strategic work, the entrepreneurial work, that will lead your business forward, that will give you the life you’ve not yet known…“Don’t you see? If your business depends on you, you don’t own a business—you have a job. And it’s the worst job in the world because you’re working for a lunatic! “And, besides, that’s not the purpose of going into business. “The purpose of going into business is to get free of a job so you can create jobs for other people.
The Technician’s boundary is determined by how much he can do himself. The Manager’s is defined by how many technicians he can supervise effectively or how many subordinate managers he can organize into a productive effort. The Entrepreneur’s boundary is a function of how many managers he can engage in pursuit of his vision.
You come face to face with the unavoidable truth: You don’t own a business—you own a job! What’s more, it’s the worst job in the world! You can’t close it when you want to, because if it’s closed you don’t get paid. You can’t leave it when you want to, because when you leave there’s nobody there to do the work. You can’t sell it when you want to, because who wants to buy a job? At that point you feel the despair and the cynicism almost every small business owner gets to feel.
“The true question is not how small a business should be but how big. How big can your business naturally become, with the operative word being naturally? “Because, whatever that size is, any limitation you place on its growth is unnatural, shaped not by the market or by your lack of capital (even though that may play a part) but by your own personal limitations. Your lack of skill, knowledge, and experience, and, most of all, passion, for growing a healthy, functionally dynamic, extraordinary business. “In short, businesses that ‘get small again’ die. They literally implode upon themselves. “Not right away, necessarily. But over time they die. Atrophy and die. They can’t do anything else. “And the result of that is enormous disappointment, lost investment, shattered lives, not only the owner’s but those of the employees, the families of both the owner and the employees, the customers, the suppliers, the lenders, all of those people whose lives have somehow been intertwined with the life of this small business, and now with its death.
“Simply put, your job is to prepare yourself and your business for growth. “To educate yourself sufficiently so that, as your business grows, the business’s foundation and structure can carry the additional weight. “And as awesome a responsibility as that may seem to you, you have no other choice—if your business is to thrive, that is. “It’s up to you to dictate your business’s rate of growth as best you can by understanding the key processes that need to be performed, the key objectives that need to be achieved, the key position you are aiming your business to hold in the marketplace.
A Mature company is founded on a broader perspective, an entrepreneurial perspective, a more intelligent point of view. About building a business that works not because of you but without you.
IBM is what it is today for three special reasons. The first reason is that, at the very beginning, I had a very clear picture of what the company would look like when it was finally done. You might say I had a model in my mind of what it would look like when the dream—my vision—was in place. The second reason was that once I had that picture, I then asked myself how a company which looked like that would have to act. I then created a picture of how IBM would act when it was finally done. The third reason IBM has been so successful was that once I had a picture of how IBM would look when the dream was in place and how such a company would have to act, I then realized that, unless we began to act that way from the very beginning, we would never get there. In other words, I realized that for IBM to become a great company it would have to act like a great company long before it ever became one. From the very outset, IBM was fashioned after the template of my vision. And each and every day we attempted to model the company after that template. At the end of each day, we asked ourselves how well we did, discovered the disparity between where we were and where we had committed ourselves to be, and, at the start of the following day, set out to make up for the difference.
The Entrepreneurial Perspective adopts a wider, more expansive scale. It views the business as a network of seamlessly integrated components, each contributing to some larger pattern that comes together in such a way as to produce a specifically planned result, a systematic way of doing business. Said another way, the Entrepreneurial Model has less to do with what’s done in a business and more to do with how it’s done. The commodity isn’t what’s important—the way it’s delivered is. Thus, the Entrepreneurial Model does not start with a picture of the business to be created but of the customer for whom the business is to be created. It understands that without a clear picture of that customer, no business can succeed. To The Entrepreneur, the business is the product.
The Business Format Francise
The Business Format Franchise not only lends its name to the smaller enterprise but it also provides the franchisee with an entire system of doing business. And in that difference lies the true significance of the Turn-Key Revolution and its phenomenal success. The true product of a business is the business itself.
Armed with that realization, he set about the task of creating a foolproof, predictable business. A systems-dependent business, not a people-dependent business. A business that could work without him. Unlike most small business owners before him—and since—Ray Kroc went to work on his business, not in it.
The system integrates all the elements required to make a business work. It transforms a business into a machine, or more accurately, because it is so alive, into an organism, driven by the integrity of its parts, all working in concert toward a realized objective. And, with its Prototype as its progenitor, it works like nothing else before
The system isn’t something you bring to the business. It’s something you derive from the process of building the business.
It is critical that you understand the point I’m about to make. For if you do, neither your business nor your life will ever be the same. The point is: your business is not your life. Your business and your life are two totally separate things. Once you recognize that the purpose of your life is not to serve your business, but that the primary purpose of your business is to serve your life, you can then go to work on your business, rather than in it, with a full understanding of why it is absolutely necessary for you to do so. This is where you can put the model of the Franchise Prototype to work for you. Where working on your business rather than in your business will become the central theme of your daily activity, the prime catalyst for everything you do from this moment forward.
Pretend that the business you own—or want to own—is the prototype, or will be the prototype, for 5,000 more just like it. That your business is going to serve as the model for 5,000 more just like it. Not almost like it, but just like it. Perfect replicates. Clones. In other words, pretend that you are going to franchise your business. (Note: I said pretend. I’m not saying that you should. That isn’t the point here—unless, of course, you want it to be.) Further, now that you know what the game is—the franchise game—understand that there are rules to follow if you are to win:
The model will provide consistent value to your customers, employees, suppliers, and lenders, beyond what they expect.
The model will be operated by people with the lowest possible level of skill.
The model will stand out as a place of impeccable order.
All work in the model will be documented in Operations Manuals.
The model will provide a uniformly predictable service to the customer.
The model will utilize a uniform color, dress, and facilities code.
How can I create a business whose results are systems-dependent rather than people-dependent? Systems-dependent rather than expert-dependent. It is literally impossible to produce a consistent result in a business that depends on extraordinary people. No business can do it for long. And no extraordinary business tries to! Because every extraordinary business knows that when you intentionally build your business around the skills of ordinary people, you will be forced to ask the difficult questions about how to produce a result without the extraordinary ones. You will be forced to find a system that leverages your ordinary people to the point where they can produce extraordinary results over and over again.
Your Business Development Program is the vehicle through which you can create your Franchise Prototype. The Program is composed of seven distinct steps: 1. Your Primary Aim 2. Your Strategic Objective 3. Your Organizational Strategy 4. Your Management Strategy 5. Your People Strategy 6. Your Marketing Strategy 7. Your Systems Strategy
I believe it’s true that the difference between great people and everyone else is that great people create their lives actively, while everyone else is created by their lives, passively waiting to see where life takes them next.
In that regard, your Primary Aim is the vision necessary to bring your business to life and your life to your business. It provides you with a purpose. It provides you with energy. Your Strategic Objective is a very clear statement of what your business has to ultimately do for you to achieve your Primary Aim. It is the vision of the finished product that is and will be your business. In this context, your business is a means rather than an end, a vehicle to enrich your life rather than one that drains the life you have.
The commercial is saying, “Buy Chanel and this fantasy can be yours.” What’s your product? What feeling will your customer walk away with? Peace of mind? Order? Power? Love? What is he really buying when he buys from you? The truth is, nobody’s interested in the commodity. People buy feelings. And as the world becomes more and more complex, and the commodities more varied, the feelings we want become more urgent, less rational, more unconscious. How your business anticipates those feelings and satisfies them is your product.
“If you want it done,” I tell them, “you’re going to have to create an environment in which ‘doing it’ is more important to your people than not doing it. Where ‘doing it’ well becomes a way of life for them.”
Your Marketing Strategy starts, ends, lives, and dies with your customer. So in the development of your Marketing Strategy, it is absolutely imperative that you forget about your dreams, forget about your visions, forget about your interests, forget about what you want—forget about everything but your customer! When it comes to marketing, what you want is unimportant. It’s what your customer wants that matters. And what your customer wants is probably significantly different from what you think he wants. The question then becomes: If my customer doesn’t know what he wants, how can I? The answer is, you can’t! Not unless you know more about him than he does about himself. Not unless you know his demographics and his psychographics. Demographics and psychographics are the two essential pillars supporting a successful marketing program. If you know who your customer is—demographics—you can then determine why he buys—psychographics…And so, while the VP/Marketing and the VP/Operations and the VP/Finance each have their own specific accountabilities, they share one common purpose—to make a promise their customer wants to hear, and to deliver on that promise better than anyone else on the block!
“To do what? “To deliver the promise no one else in your industry dares to make! “That’s what marketing is, Sarah. That’s what your business must be. Alive, growing, committed to keeping a promise no competitor would dare to make.
That your Primary Aim and your Strategic Objective and your Organizational Strategy and your Management Strategy and your People Strategy and your Marketing Strategy and your Systems Strategy—all of them are totally interdependent, rather than independent of one another. That the success of your Business Development Program totally depends on your appreciation of that integration. And that your Prototype is that integration. If you understand all of that, then this book has been worth our time.
What I got out of it
Sounded like a pretty cheesy book but I got way more out of this than I expected. The entrepreneur/manager/technician, work on your business rather than in your business, continuous learning, get free from your job so that you can create jobs for others, build a “franchise” – something that can be replicated over and over again without fail (a systems thinking approach that is effective even if you never open another office/shop/etc…)