Business is simple, in principal.
Sell something for more than it cost you to produce or acquire it, recognising that the buyer needs to understand that the value they will derive from the product is greater than the cost they incur in buying it.
Simple.
Einstein said everything should be as simple as possible, no simpler, and his E=MC2 is the simplest equation that explains (somehow) masses of complicated stuff. It is the best example ever of Occam’s Razor, named after William of Ockham, a 13th century philosopher which encourages decision making to the broken down by progressively removing those outcomes that are based on beliefs and ideas rather than facts. When you have all the beliefs removed, you are left with the facts.
Often however, not so simple after you go one or two levels down the burrow to figure out just how you go about that process of removing all the biases and beliefs that masquerade as facts.
Charlie Munger, offsider to Warren Buffett in creating billions of value for Berkshire Hathaway shareholders over 50 years spoke about Mental Models in a speech in 1994. His premise was that you need a ‘lattice’ of mental models that apply to the different perspectives that apply to any question being faced in order to distil the ideas and wisdom that applies to your situation.
I agree absolutely with the idea.
It is simple, but as complex as you choose to make it.
As someone who helps small and medium manufacturing businesses improve the economic performance, there are numerous mental models at work simultaneously.
Strategic models: There are many strategic frameworks or models for business planning. Porters 5 forces, Boston consulting’s 4 quadrant, game theory, the old favourite SWOT, and many others. Profoundly important and often missed at this point, is consideration of the business model being employed.
Operational models: Lean thinking, 6 sigma, shift sequencing, the mix of technical, support and operational staff, deployment of technology, interaction of technology and those at the work face, on and on, you have the opportunity to use the wisdom of others to sort the relevant from the not so relevant.
Financial models: the standard accounting forms of cash flow, P&L, and balance sheet, together with a break even analysis, and decisions about the type of costing models to be used, ratios to be calculated, and formats in which the information will be communicated. To properly understand the operational mechanics of a business, you need more than the standard financial reporting. Their limits are a view of what has happened to the money, little about why and how it happened, and certainly very little about what may happen in the future.
Marketing and sales models: where do I start? Ideal customer profiles, value proposition, digital Vs analogue, differentiators, marketing toolbox and the multiplicity of tools to deliver leverage, ROI of marketing investment, Account based selling, selling models such as BANT, sales funnel, conversion rates, anchoring a negotiation, and thousands more.
How do you sort all these options into a few that will deliver results that are worth the investment?
- You start with the end in mind, the strategic and commercial objectives, the why. I call this process ‘hindsight planning’
- You break down the challenges into sequential ‘chewable chunks’
- You focus on the important more than the urgent.
Behavioural models: These usually emerge as a group of expected behaviours, collectively called ‘Culture’. The best example I can think of is the 10 commandments, common to the 3 Abrahamic religions (Islam, Christian and Jewish) that sets a wide framework of the few things you must not do, leaving the rest up to you. Together, in their own environment, they provide a ,macro framework for behaviour, which we then break down further into the components that we seek to live by in a community.
When you need some help sorting this out, call me.
