The Personal MBA {summarized}

An in-depth summary of Josh Kaufman’s book, The Personal MBA. Written by Stefan Leon.

Finished reading: Jan. 29, 2019; 417 pages.
Tags: business, startups, education
Rating: 10/10

Who should read this book [or summary]: Everyone setting out to start a business or considering getting an MBA.

Synopsis: An extremely high-level book outlining:

• all the moving parts of most businesses
• what you need to know in order to operate a business effectively
• key definitions of business terms and concepts
• the fundamentals of being an owner and working with others
• creating, analyzing, and improving systems for business

Personal Note: This book was incredibly easy to read but very dense with information. Since this book is basically a summary itself, a lot of the text included here is meant to be a searchable reference to key terms, ideas, and concepts. That said, I tried my best to put things in my own words, reinforce certain concepts with real-world examples, and include some of my own analysis.

Special Resource: This book was written out as 1–2-page subsections covering individual topics that are all available on Kaufman’s website! [link]. The entire book is available link-to-link on that website.

Legend
// <words> → comment
/* <words> */ → long comment
{ <words> } → in-line comment
i.e. “in other words”
e.g. “for example”

Most of the direct excerpts are properly quoted, though not all. If you’re offended, please lmk.

I hope this serves you well!

Intro

People form mental models in order to understand things.
Mental models are concepts that represent an understanding of how things work.
Businesses are complex systems, that are made up of fundamental mental models or foundational business concepts.

Defining a Business:

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

MBA programs are not worth the money.

VALUE CREATION

Without a good market, you’re in the wrong business.

Iron Law of the Markets: if you don’t have a large group of people who really want that you have to offer, chances of building a viable business are slim.

Revenue is completely dependent on people wanting what you have to offer.

Business has five interdependent core processes:

1. Value creation
2. Marketing
3. Sales
4. Value delivery
5. Finance

Economically valuable skills are those which directly improve one of the core processes of the business.

5 Basic Human Drivers

1. Drive to Acquire — Physical objects and immaterial things (status, power, influence)
2. Drive to Bond — Desire to feel valued and loved. Businesses that facilitate bonding or make us feel attractive, well-liked or regarded.
3. Drive to Learn — Desire to satisfy curiosities. All of academia, workshops, courses, etc.
4. Drive to Defend — Desire to feel safe, protect ourselves, fam, loved ones, and property
5. Drive to feel — Desire for new sensory stimulus, intense emotional experiences, pleasure, excitements, entertainment, and anticipation

Status seeking is also a thing // drive to acquire status

Humans needs can also be explained by Maslow’s Hierarchy and Clayton Alderfer’s ‘ERG’ (Existence, Relatedness, Growth) [ link ].
/* But I believe it defines the priority/order of desires rather than the methods to fulfill the desires themselves. */

10 Ways to Evaluate a Market:

1. Urgency
2. Market Size
3. Pricing Potential
4. Cost of Customer Acquisition
5. Cost of Value Delivery
6. Uniqueness of offer
7. Speed to market
8. Up-front investment
9. Upsell potential
10. Evergreen potential — how much addtl. work is needed to continue selling after the first sale?

Don’t be in it just for the money; you’ll quit. Don’t be a crusader without going through the actual feasibility as a business, or it’ll just be a hobby.

12 Standard Forms of Value

1. Product — e.g. toothbrush
2. Service —e.g. tax preparation
3. Shared Resource — e.g. gyms
4. Subscription — e.g. Netflix
5. Resale — i.e. Retail stores e.g. Walmart
6. Agency — i.e. being an agent to someone e.g. an actor’s agent
7. Audience Aggregation — e.g. Facebook
8. Loan — e.g. mortgage
9. Lease — e.g. car lease
10. Option — e.g. movie tickets, licensing rights
11. Insurance — e.g. homeowners insurance
12. Capital — e.g. angel investing for equity

Hassle Premium
You get to charge to save people “hassle”. This includes projects or tasks that:

• take too much time
• take too much effort to ensure a good result
• involve too much confusion, complexity, or uncertainty
• Distract from other more important priorities
• require expensive or intimidating prior experience
• Require specialized equipment or resources that are difficult to attain.

→ The more “hassle” you can remove for a customer, the more you can charge in terms of a hassle premium.

Perceived Value determines how much your customers will be willing to pay for what your offering.

The most valuable offers do one or more of the following:

1. Satisfy one or more of a customer’s core human drives
2. Have an easy to visualize end-result
3. Command the highest hassle premium
4. Satisfy the prospect’s status seeking tendency by providing desirable social signals

Modularity refers to the individual nature of offerings, like the standard forms of value,
→which can then be bundled for a premium (higher perceived value)
→or unbundled to convert prospects who might not have otherwise bought. Modularity also allows companies to improve and experiment with offerings in isolation and then mix and match them based on customer feedback and response.

Iteration Cycle - Incremental improvements that prioritize learning and feedback to make decisions on future improvements.

→ Watch what’s happening. What’s working and what’s not?
→ Come up with ideas of what you can do to improve
→ Guess which of your ideas will work best
→ Execute on the idea(s) you decide will work best.
→ Measure the results of any changes in order to determine effect of changes.
→ Decide whether to keep or discard changes.
→ → Repeat.

Go fast through iteration. Key is to keep each iteration small, clear and quick, basing each iteration on what you learned from each previous iteration and current data/feedback.

The problem with a direct approach — aka building an end product first — is that you miss all the opportunities to get feedback and find out earlier what is going to work and not in the hands of a consumer. Ends up usually being far more costly and wasteful.

Feedback {obviously key} should be received from actual potential customers. It is important to record what people say but also watch what people do (and compare the difference). Of course, don’t crumble under criticism and take critiques with a grain of salt. Try to read between the lines as well, people might not always be able to answer the questions you as a product designer or entrepreneur are asking yourself, but they will point you towards sentiment that could guide those decisions. A bad response is not an emphatic negative critique, but rather total apathy. If people you think should care about it don’t, then that’s a signal of trouble.

The best feedback mechanism is selling on preorder. Find out what might be holding people back from pre-ordering or purchasing (barriers to purchase)

Trade-offs are omnipresent but are only realized when people make decisions. Without the need to make a decision, people will avoid trade-offs (most people are risk-averse after all). But when they do make a decision, in the absence of a perfect option, people settle for the next best alternative.

When making decisions about what to include in your offerings look for Patterns: how specific groups of people tend to value some characteristic in a certain context. Try to focus on the patterns of your best customers.

Economic Values that people generally consider when making a purchasing decision:

1. Efficacy
2. Speed
3. Reliability
4. Ease of Use
5. Flexibility
6. Status
7. Aesthetic Appeal
8. Emotion
9. Cost - how much do I have to give up to get this*

*cost also adds to the perceived social status, the perceived quality, and resulting post-purchase experience with it (you don’t want to be wrong about spending a lot of money on something, so you also sell it to yourself).

Kevin Maney (author of Trade-Off) explains the list can be split between 1-5 and 6-8 as convenience and high-fidelity, respectively. Stuff that adds to first five make it more convenient but stuff that adds to the ego-driven emotions are considered higher fidelity.

Relative Importance Testing a set of analysis techniques to determine what people actually want by asking them a series of simple questions designed to simulate real-life trade-offs

→ Restaurant Example
a. Orders delivered to table in <5 min
b. Most entrees are <$20
c. Appealing decor
d. A large variety of options

Ask: Which of these is most important and which is least important?
—
You do this till you get a real-world understanding of which of the Economic Values people actually care about most when forced to decide.
/* I believe it’s important to also profile people in order to spot patterns within different demographics/groups/prospects. */

Critical Assumptions will fuck your day up if they turn out to be wrong. These are the main things that determine the feasibility of your business venture.
→ Example of CA: “there’s a market willing to pay at the price I need them to in order for me to meet my debt obligations and make a profit as well. If I build it they will come.”

You can Shadow Test aka run a kickstarter or set up preorders {or even just drive traffic with a landing page}.

Create an MVO (minimum viable offering {or product}: whatever you can get away with that will allow you to test for purchase feedback and run shadow tests to drive info around sales or actual consumer interest.

Field Testing: Literally using the products you intend to sell so you know what to improve or what the experience is like. Aka BE the customer and use that data in all aspects of the business. Using what you make every day is the best way to improve the quality of what you’re offering.

MARKETING

Marketing is the art and science of finding prospects — the people who are actively interested in what you’re offering

Difference between marketing and sales is that marketing is about getting noticed. Sales is about closing.

Rule #1 of Marketing is that your potential customer’s available attention is limited. The cardinal sin of marketing is to be boring.

You have to get people’s attention through marketing and operate under the premise that people are currently preoccupied (because they are).

People are always perceptually filtering— deciding what to pay attention to and not. You have to get around their filters.

Receptivity is a measure of how open people are to your message (marketing).
→It has two primary components: What and When.

If the form of your message suggests that it was created just for the prospect, it is more likely to get their attention.
and the medium matters. Can’t expect to get noticed if you’re email is arriving in the spam folder. Likewise with regular postage.
Timing is also important, in the day to day sense of when do you best present people with marketing as well as when people are most interested in your product.

Point of Market Entry is highly sought after in the marketing world because of its value. If you’re an expecting parent, the first brands you come in contact with are ones that could influence and benchmark your purchase decisions related to baby stuff from then on. Target famously advertised home catalogs featuring baby stuff to expecting mothers based on their shopping trends. Killer.

Qualification is the process of determining whether a prospect is worth your time or not / will be a good customer. Customers who require more time, energy, attention, or risk than they’re worth to your bottom line shouldn’t be pursued or attracted in the first place.

Remarkability is a measure of how remarkable something is (duh). There is the word of mouth play and self-advertising model. How much does your product or marketing stick out? Being remarkable is the best way to attract attention.

Skilled marketers focus on getting the attention of the right people at the right time.

Seek to market to probable purchasers (prospects that are most likely to buy)

Marketing that communicates a desired end result of a purchase to a prospect is most effective when it focuses on a distinctive experience or emotion related to a Core Human Drive.
The communication of that end result is achieved through techniques like visualization and adding as many sensory inputs that get the prospect to start thinking about their lives with your product or service.

Marketing activities should produce some visceral feeling of desire. Your job as a marketer isn’t to convince people to want what you’re offering: it’s to convince themselves that what you’re offering will help them get what they really desire.

Addressability is a measure of how easily you can get in touch with people who might want what you’re offering. How addressable are different groups of prospects you’ve categorized?

Framing is the act of emphasizing the details that are critically important while de-emphasizing things that aren’t, by either minimizing certain facts or leaving them out entirely. This doesn’t mean lying, however. You still inform people about things they deserve to know. Otherwise, you could be harming your reputation.

Free doesn’t pay the bills but could land you traffic and permission to pursue probable purchasers of your other paid products or services.

Permission is key! Being able to solicit people’s permission to follow up or to market to them is valuable. It’s a key to making the most of a connection and following up.

“Asking for permission to follow up after providing free value is more effective than interrupting them. Offering genuine value earns your prospect’s attention, and asking for permission gives you the opportunity to focus on communicating with people you know are interested in what you have to offer.”
→ Whenever you provide value to people, ask them if it’s okay to continue to provide value to them in the future. You can go as far as to say what you want to send people and how it’ll benefit them.

A hook is a single phrase or sentence that describes an offer’s primary benefit. Sometimes it’s a title or catch-phrase. examples used: TFerriss “The 4-Hour Workweek” and Apple’s iPod tagline: “1,000 songs in your pocket”

Call To Action (CTA):

“If you want your prospects to take the next step that you’re encouraging, you need to tell them exactly what to do.”

“If you think you’re being too obvious, you’re doing it right”

Best CTAs ask for a sale or permission to follow up.

You can use a narrative to help you market. People like “the Hero’s Journey” or a “monomyth”. (person goes on adventure, faces a crisis, comes out hero). People want to be heroes.

Controversy can also help drive marketing as long as it’s legitimate and not defaming. Keep it civil.

Reputation is obviously key. Don’t fuck it up by being stupid.

SALES

Sales converts prospects into customers

You can transact with things that are economically valuable. Prospects will only buy if you are offering something they want.

Trust must be present for transactions to take place.

Pricing Uncertainty Principle: “all prices are arbitrary and malleable.” It’s an executive decision. You can price something anywhere you want.
→ However, prices have to be justified to a prospect or potential buyer before a transaction can take place.

4 pricing methods:

1. Replacement cost - typically a “cost-plus” value meaning the total cost of making/replacing something plus the margin you want.
2. Market Comparison - what are other products of similar nature priced at?
3. Discounted cash flow/net present value - “How much is it worth if it can bring in money over time?”. Used for items that will make other people money to justify a larger upfront cost. DCF/NPV is only used to price things that can produce ongoing cash flow - this makes it a common way to price businesses when they are bought or sold.
4. Value comparison - (usually the best way) what is the value of your product to the customer? Price accordingly.

“Discounts attract customers when the offer is a commodity” or items which are price-elastic.

Price-inelastic items have little fluctuation in demand when there are price changes.

When testing different pricing strategies, there are certain thresholds where you stop appealing to certain segments and start appealing to segments with different characteristics, called price transition shock.

2 major considerations while keeping transition shock in mind:

1. Potential profitability
2. Ideal customer characteristics

[IMPORTANT]: The best strategy is to set prices to appeal to prospects that will ensure you work with your most desirable customers in a way that results in higher profits.
→ This is dependent on the industry and target market’s expectations.

Value-Based Selling

The process of understanding and reinforcing the reasons why your offer is valuable to the purchaser. This is how you support the set price.

• This is about listening, not talking. It’s all about value to the customer

SPIN Selling: 4 phases of successful selling:

1. Understanding the situation
2. Defining the problem
3. Clarifying the short-term and long-term implications of that problem
4. Quantifying the need- payoff or the financial and emotional benefits the customer would experience after the resolution of the problem

→ This methodology is about building trust and gaining as much information as possible in order to deliver the most amount of value to a customer (or at least deliver the right information with the right framing).

Education Based Selling

The process of making your prospects more informed and better customers. It requires an upfront investment of time into prospects, but is usually worth it. You simultaneously build trust in your ability to deliver value and your expertise while making them better customers

NBA: Next Best Alternative - or BATNA - Best Alternative to The Negotiated Agreement
When there’s no common ground, what is the next best alternative? → Knowledge of a prospects BATNAs can be used as leverage.

Most power belongs to the party that is able and willing to walk away from a bad deal.

Exclusivity: creating a unique offer or quality that other firms can’t match. iPhones → Apple {for now}. Exclusive offers maintain high perceived value. Exclusivity makes the most sense for products and services. Sole source is the ultimate winner! aka monopolies

3 Universal Currencies

1. Resources - tangible items
2. Time
3. Flexibility - giving up freedoms or liberties

In every negotiation, one currency can be traded for more or less of the others.

3 Dimensions of Negotiation

1. Setup - the environment, mostly. Prep work (setting the stage for a satisfying outcome to the negotiation).
   — Who are the involved parties? Are they open to dealing with you?
   — Do people know who you are how you can help them?
   — What are you proposing and how does it benefit them?
   — What’s the setting for presenting an offer?
   — What are the environmental factors? Are any outside circumstances affecting the outcome?
2. Structure - of the deal you are proposing. Structuring the terms of a proposal that make the prospects likely to accept.
   — What will you propose and how will you frame it?
   — What are primary benefits of proposal to other party?
   — What is their BATNA? How is your proposal better?
   — How will you overcome the other party’s barriers to purchase/ objections?
   — Are there trade-offs or concessions you’re willing to make to reach an agreement?
3. Discussion - talk about the proposal with the other party.
   End results consist of:
   — Yes, we have a deal on these terms
   — We don’t have a deal quite yet— counteroffer or another option to consider
   — No, we don’t have a deal or common ground and we should suspend negotiations.

Buffers - 3rd parties empowered to negotiate on behalf of someone can be used to improve odds of a favorable outcome and save time.
→examples include: agents, attorneys, brokers, accountants.

Be careful of incentive caused bias that happens with people like real estate brokers.

Persuasion Resistance: When a prospect senses that they are being convinced or compelled to do something they are unsure about and reactively resists the attempt + tries to leave the convo.

The more effective strategy, instead, is to present yourself as an “assistant buyer”. You’re not pressuring them to give you their money, you’re helping to ensure they invest their resources wisely.

• Triggers include desperation and chasing. People, like with romantic partners, can sense these things and get turned off
• Frame the convo so that prospects feel like they are chasing you or are proving their worthiness to be customers.

Reciprocation: a desire people feel to pay back or return perceived favors or gifts. It is not necessarily in proportion to the original benefit provided.
/* can literally be small things like handing people a bottle of water without them asking or giving them free samples of anything they look interested in. When there’s effort involved, people feel bad not reciprocating. Think of instances you buy something just to not look like an asshole who made this person invest time and effort into you. */

Damaging Admissions can make sellers seem more honest and trustworthy and increase the likelihood of sales.

Barriers to purchase: Risks, unknowns, and concerns that prevent prospects from becoming buyers. The primary job of a salesperson is to identify and eliminate these barriers.

5 Standard Objections:

1. It costs too much
   → Tackle with value based selling
2. It won’t work
   → best addressed using social proof
3. It won’t work for ME
   → same as above
4. I can wait
   → use education based selling. Especially if prospect is unaware of their problem.
5. It’s too difficult
   → same as above

With a prospect’s attention and permission, you have to either (1) convince them that the objection isn’t true (2) convince them the objection is irrelevant

Risk Reversal: Removing barrier to purchase of associated purchasing risk. Money back guarantees, for instance. Transferring risk from buyer to seller.

Reactivation: Re-engaging past clients in a new sales cycle or attempt. Re-convert!

VALUE DELIVERY

Value delivery involves everything necessary to ensure every paying customer is a happy customer.

The best businesses in the world deliver the value they’ve promised in a way that exceeds the customer’s expectations

Value Stream (or Chain)

All the steps and processes from the start of the value creation process to the value delivery. It’s a combination of the two.

→ The best way to understand it is to diagram it.

A distribution channel describes the form that your value is actually delivered to the end user. 2 types: direct-to-user (or consumer) and intermediary

DTU operates across a single channel
→ limited by your own capacity

Intermediary (like retail reselling) operates across multi-channels allowing for greater distribution scale.
→ constrained by counterparty risk - the risk that your partner will hurt your reputation

Meeting expectations is the baseline of a happy customer.
People view Quality = Performance - Expectations

Surpassing expectations is how you increase your value to the customer and get viewed as great.

Missing expectations is how you lose customers or get seen as having a low-quality product or service regardless of the product or service in absolute terms.

Predictability is the central tenet of expectation and customer retention.

3 Criteria of Predictability:

1. Uniformity - you deliver the same thing
2. Consistency - you consistently deliver the same thing
3. Reliability - you consistently deliver the same thing without error or delay

Throughput* - a very important measurement.
→ Basically, some measured unit / time.

— Dollar throughput: Time to make $1

— Unit throughput: Time to make 1 unit

— Satisfaction throughput: Time it takes to make a satisfied customer

Duplication - ability to reliably reproduce something of value. i.e. Factory

Multiplication - Duplication for an entire system or process. i.e. Franchise

Scale refers to being able to duplicate or multiply in response to an increase in demand volume. Determines maximum potential volume.

Products typically duplicate better.
Shared resources typically multiply better.
Humans don’t scale. As a result, service business aren’t very scalable.

Accumulation is a business concept related to improvement.
Like Toyota Production System (TPS) which iterates on the philosophy of Kaizen - incremental improvement by removing waste from a system.

Amplification is the concept that small changes to scalable systems produce large results.
i.e. saving $0.01 isn’t trivial when you are saving it across 100 million units.

Don’t focus on your competition. Best way to beat your competition is to out-innovate them and to always focus on producing remarkable products that exceed consumer expectations. Always focus on delivering more value instead.

Force multipliers relate to tools that multiply productivity/output. Usually costly. One of the only capital expenditures that can be justified. Factory equipment is an example.

Systemization (KEY) - a process made explicit and repeatable. Only way to improve a system is to outline the system. Things need to be repeatable.

FINANCE

“Finance is the art and science of watching the money flowing into and out of a business,then deciding how to allocate it and determining whether or not what you’re doing is producing the results you want.

Accounting is the process of ensuring the data you use to make financial decisions is as complete and accurate as possible.”

Profit Margin: ((Revenue - cost) / Revenue) x100 = %PM

*PM can never exceed 100%. Obviously, because the formula is revenue over revenue.

Not the same as markup which represents how the price of an offer compares to its total cost.

Markup: ((Price - cost/ cost) x100 = %M

• Higher the price and lower the cost, higher the markup.

Value Capture is the process of retaining some percentage of the value provided in every transaction.
i.e. I consult for a company which makes them an additional 100,000. whatever I charge them is a percentage of the value created which = value captured. This is critical information for pricing and is especially true for things which net high returns over time, like a force multiplier (i.e. factory).

• The more value you capture, the less attractive your offer is [to your prospective buyer]

2 Dominant philosophies: Maximization & Minimization

• MAX: capture as much value as possible
  → Tends to erode customer perception
• MIN: capture as little value as possible while the company remains sufficient.
  → When something is viewed as a “good deal” that usually drives the spread of business to other customers.

Sufficiency

Enough to make it worth it past breakeven for the business. Sufficiency is subjective.

[woke]: “Profits are important but they’re a means to an end: creating value, paying expenses, compensating the people who run the business, and supporting yourself and your loved ones. Dollars aren’t an end to themselves: money is a tool, and the usefulness of that tool depends on what you intend to do with it.”

Track sufficiency using “Target monthly revenue” (TMR).

Valuation

An estimate of the total worth of a company.

• Business revenue
• Profit margins
• Bank balance
• Future outlooks

→ These all contribute to the business overall valuation.

—
Cash Flow Statement:
A look at a company’s bank account (cash in & cash out) and is always looking at a specific time period.

Cash tends to move in 3 areas:

• Operations: selling offers and buying inputs
• Investing: collecting dividends and paying for capital expenditures (cap ex)
• Capital: Borrowing money and paying it back

“Free cash flow”:
Amount of cash a business collects from operations — (cash spent on capital equipment + assets necessary to keep the company operating).

• The higher the better; a company doesn’t have to keep spending on cap ex in order to bring in revenue.

More cash = Higher resilience.

Income Statement:
Also called a P&L (profit and loss), Operating or Earnings Statement. It contains an estimate of the business’s Profit over a certain period of time, once revenue is matched with related expenses.

General format: Revenue - COGS - Expenses - Taxes = Net Profit

• Income statements include many estimates and assumptions. Large expenses have to be amortized, and so do large cash-flows.
• The incomes statement can be easily manipulated and introduce biases in expense matching.

Balance Sheet:
A snapshot of what the business owns and what the business owes at a moment in time. They always cite a specific date.

formula: Assets - Liabilities = Stockholder Equity

• Assets are things the company owns that have value: products equipment, stock, etc.
• Liabilities are obligations the firm hasn’t discharged: loans, financing, etc
• Owner’s equity = company “net worth”. Includes the value of the company’s stock, capital from investors, and retained earnings (profit not paid to shareholders).

Balancing comes from a rearrangement of the formula:

Assets = Liabilities + Stockholder Equity. The balance sheet always balance.

• By examining the BS - you can determine if a company is solvent.
• There are also biases that can be introduced to the BS like the value of current inventory, stock price, or % of A/R that will be paid.

—

Financial Ratios:

Profitability ratios: How good the company is at realizing profit

• Return on Assets: NP / TA (Total Assets)

Leverage ratios: Tell you how the company uses debt

• Debt to Equity: TL (Total Liabilities) / SE

Liquidity ratios: the ability of a business to pay its debt

• Current ratio: CA / CL
• Quick ratio: CA - Inventory / CL

Efficiency ratios: How well a business is managing assets and liabilities. Commonly uses in inventory management.

• Avg number of days in inventory
• Days sales outstanding

—

4 Methods to Increase Revenue:

1. Increase the number of customers you serve
2. Increase the average size of each transaction by selling more.
3. Increase the frequency of transactions per customer
4. Raise prices

** Your ideal customer is someone who buys early, buys often, spends the most, spreads the word, and are willing to pay a premium for the value you provide.

• If you can double your prices and lose less than half of your customers, it’s probably a good move.

Pricing Power:
Refers to the ability to raise prices over time. Related to price elasticity.

Lifetime Value: Total value of a customer’s business over the lifetime of their relationship with your business.

• By understanding the LTV of a prospect, you can calculate the max amount of time that you should be willing to spend to acquire a new prospect (AAC).

Allowable Acquisition Cost:

How much you’re reasonably allowed to spend to try to acquire a new customer based on their LTV.

First sales can be “loss leaders” - low introductory prices to establish a relationship with a buyer.

AAC Formula: average customer LTV - Value Stream Costs - (OH / Total Customer Base) x (1 - desired PM)

• Value Stream Costs (what it takes to create and deliver the value promised to that customer over your entire relationship with them)
• OH / Total Customer Base represents fixed costs needed to pay to stay in business over that period of time
• OH represents minimum ongoing resources for a business to continue operations

Costs:

• Fixed: incurred no matter how much value you create. Reductions in fixed costs accumulate.
• Variable: directly related to how much value you create. Reductions in VCosts are amplified.

Cost savings could lead to incremental degradation. i.e. Milk Chocolate emulsified so much it’s not even chocolate — it’s chocolate flavored candy. Avoid diminishing returns (cost savings now, loss of business later).

Amortization: Depends on an accurate assessment of useful life, which is a prediction. Doesn’t work well if you don’t sell what you produce or if your equipment wears out quicker than expected.

Purchasing Power:
The sum total of all liquid assets at a business’s disposal.
Includes cash, credit, & available financing.
It’s what’s used to pay your overhead and suppliers.

Cash Flow Cycle: Describes how cash flows in a business. Made up of:

• Receivables are promises of payment you’ve accepted from others
• Debt is a promise you make to pay someone at a later date.

Estimating the Time Value of Money is a way of making decisions in the face of opportunity costs. Can help you determine which decision to make with money given the alternatives. Especially true of investments. {spending a dollar here today vs there today/tomorrow — what’s my best return)

Compounding
is the accumulation of gains over time. Gains reinvested exponentially build upon the investment. (compounded).

Leverage
the practice of using borrowed money to magnify potential gains. [could also magnify potential losses].

—

Hierarchy of funding

1. Personal cash
2. Personal credit
3. Personal loan
4. unsecured loan
5. secured loan (require collateral)
6. Bonds: Company pays bondholder an agreed upon rate for a certain amount of time until bond maturity in which case the original loan (bond) amount is repaid in addition to payments already made.
7. Receivables financing: a special type of secured lending. Credit is made available for collateral which is control over the business’s receivables. This ensures loans are paid before anything or anyone else.
8. Angel capital
9. Venture capital
10. Public Stock Offering: typically used by angel and VCs to exchange ownership for money. IPO’s are simply the first public stock offering.

Investors increase communication overhead (like bureaucracy). Things end up happening more slowly.

Usually, the best way to start a business is to bootstrap and move up the hierarchy of funding as appropriate.

Return on Investment (ROI) is the value created from an investment of time or resources (or both). Future ROI estimates are educated guesses only.

Sunk costs are investments of time, energy, and money that cannot be recuperated. All that matters is how much more investment is required vs the reward you expect to obtain.

Internal Controls:
A set of SOPs a business uses to collect accurate data, keep the business running smoothly, and spot trouble as quickly as possible.

Budgeting is the act of estimating future costs and taking steps to ensure that these estimates aren’t exceeded without good reason.

Supervision is important in business that relies on employees or outside firms for important parts of its business process.

Compliance is necessary for business in industries subject to gov regulations.

Theft and Fraud Prevention is important to protect against the risk of financial loss by an unscrupulous party.

• In all of these areas it’s useful to have a dispassionate 3rd party audit your data and control processes.

THE HUMAN MIND

For the sake of simplicity we can think of the brain as having three layers:

1. hindbrain - responsible for actual actions - moving signals through spinal cord and nerves that result in physical actions.
2. midbrain - processing sensory data, emotion, memory and pattern matching. Constantly predicting and sending that info to the hindbrain, which readies our bodies for immediate action
   → associated with radio announcer and the hindbrain is the radio.
3. forebrain - conscious engagement of the mind - self awareness, logic, deliberation, inhibition and decision. Halts automatic action until it is done ‘thinking’ in which case the other two brains can resume normal function.

“one of the best things you can do to get more done is to dissociate yourself from the voice in your head.”
/* basically, we are not our thoughts. I am not a two year old that is distracted at the sight of any new object or an adolescent distracted by a fat ass at will */

People act to control their perceptions.

I perceive cold, therefore I put on a jacket. Obviously, the environment is a major factor of perception. It also dictates which actions are possible to bring the perception under control.

Overtime

• If a worker is controlling for income, paying more for overtime will usually lead to more overtime work.
• If a worker is not controlling for income, raising overtime pay might actually cause them to work less because they will reach their price point faster. {this is also true for the taxi drivers that make their target revenue earlier than usual and go home early instead of maximizing their revenue by staying as long as they normally would.}

At the heart of perceptions are reference levels - a range of perceptions that indicate the system is “under control”.

3 kinds of reference levels:

1. set point: minimum or maximum value.
2. range: two set points. A range of acceptable values.
3. error: the set point is 0 or null.

If you want to change a behavior, you must either change the system’s reference level or change the environment in which the system is operating.

People are lazy: Conservation of Energy principle.

If you want to change a behavior, don’t try to change the behavior directly. Change the structure that influences or supports the behavior, and the behavior will change automatically.

Reorganization is a random action that occurs when a reference level is violated but you don’t know what to do to bring the perception back under control. So, you try different things (reorganize) until the reference level changes or the perception is agreeable again.

Conflict*

Occurs when two control systems try to change the same perception.
The white and black wolf. One wants a thing and perceives working as “sleep.” The other wants to work and perceives working as “the move.” They are both control systems that will lead to different actions.

• Conflicts can only be resolved by changing the reference levels — how success is defined by the parties involved — and is best done by changing the structure of the situation.
• Each party in a conflict have different reference levels which are influenced by a situation or the environment.

i.e. for procrastination - setting aside time for rest assures the sleep control system that there will be a time for sleep which decreases the perception of loss when doing work.

—

The human mind constantly relies on prior patterns and info to make interpretations in the absence of information. Our brains are smart enough to fill in the gaps of missing information.

→ Which is why we can see Abraham Lincoln at 20 meters in Salvador Dali’s painting ‘ Gala Contemplating the Mediterranean Sea, which at Twenty Meters Becomes the Portrait of Abraham Lincoln’.

Worldwide rights ©Salvador Dalí. Fundació Gala-Salvador Dalí (Artists Rights Society), 2017 / In the USA ©Salvador Dalí Museum, Inc. St. Petersburg, FL 2017. Photo © Joseph Siciliano USA, 2016

Reinterpretation is possible because our memory is fundamentally impermanent. New memories basically change the whole thing. We can even use new memories and information to reinterpret old memories which are saved in new locations with the alterations we’ve made to it.

—

Motivation

Motivation is an emotional state that links the parts of our brain that feel with the parts that are responsible for action. Can be broken down into two different desires:

1. Desire to move toward things that are desirable
2. Desire to move away from things which are undesirable

Motivation is not a logical, rational activity—It’s an emotion. Just because you feel motivated doesn’t mean you’ll actually take some action. If there are any “move away from” signals being sent, you can be taken off the path towards whatever you are “motivated” to do.

Inhibition is the ability to temporarily override our natural inclinations.

Willower is the fuel of inhibition.
Willpower can be depleted.

—

Loss aversion is real.
people feel the pain of loss more than the enjoyment of equivalent gains.

• Best way to overcome loss aversion is to reinterpret the risk of loss as “no big deal”. We choose our interpretations of things we perceive!!! Even losses.

Threat lockdown
A phenomenon where we are in a protection mode which makes it difficult to do anything but fixate on a threat.

• If experiencing TL, the worst thing is to try to repress it. It will be like a little kid trying to get his mother’s attention while being ignored. The cry for attention will eventually get so loud and strong that it cannot be ignored.

Cognitive Scope Limitation
Basically, people can be lazy in their thinking or simply don’t spend enough time thinking about things (from either laziness, lack of time, or fatigue).

• The “newspaper rule”: A simulation that asks your forebrain to run through a decision as if it were going to be published on the front page of Times where all of your friends and family would see it so that you avoid making decisions that are morally or ethically compromising or otherwise “slp” (‘slp’ meaning unconscious, stupid, or illogical — used frequently).
• The “grandchild rule”: Evaluating a decision with the long-term consequences in mind such as I’m imagining that your grandchild will give you feedback on the decision in 30-40 years. (or that it affects them).

Absence blindness* (important)
A cognitive bias that prevents us from identifying what we can’t observe (slp).

• i.e. you don’t see a manager working that hard to put out fires [but that’s because they are avoided in the first place by responsible and efficient work + systems].
• Praise the manager that is low-drama who quietly and effectively gets things done.

Contrast: in business, the principle that our perceptions are influenced by information gathered from the surrounding environment [we contrast things with others in the environment]

• i.e. Economist Web vs Economist Print vs Economist Web + Print pricing experiment & case study by Nobel Prize economist, Dan Ariely [link].

Scarcity

• Encourages people to make decisions quickly.
• Adding a scarcity element to an offer can encourage people to take action quicker.

Adding scarcity to an offer:

1. Limited Quantities
2. Price Increases - inform prospects the price will go up in the near future
3. Price decreases (discount expirations)
4. Deadlines - offer deadlines.

Novelty
Critical if you want to attract and maintain attention over a long period of time.

WORKING WITH YOURSELF

Your body and mind are tools to get things done.

Akrasia*

The experience of knowing or feeling that we should do something but we don’t do it.

• It’s a general feeling that you “should” do something, without necessarily deciding you should do it {like a maybe/someday list in Trello}
• The “should” feeling sticks around but doesn’t lead to action, which generates frustration
• In Greek - “Lacking command over oneself”
• It is a barrier to getting things done

Akrasia seems to have 4 components:

1. A task
2. A desire/want
3. A “should”
4. An emotional experience of RESISTANCE (R)

• R: You can’t define what you want
• R: You believe the task will bring you closer to something that you don’t want
• R: You can’t figure out how to get where you want from where you currently are
• R: You idealize the desired end result to the point that you estimate a low chance of achievement, leading to loss aversion
• R: The “should” was established by someone else, leading to persuasion resistance.
• R: A competing action in the environment promises immediate gratification
• R: The benefits of the action are distant leading to near/far thinking when compared to ‘closer’ immediate or concrete actions

The examples given in the book include tasks that we typically say to ourselves in that ‘should’ fashion such as ‘I should make a salad for dinner instead of mac-n-cheese’, or ‘I should give so-and-so a call’, or ‘I should test my business idea with a landing page project’. But we don’t. We engage in our habitual behaviors and procrastinate.

/* The difference here between akrasia and procrastination is that procrastination is the mechanism with which we delay action on a task while akrasia is the feeling that we get when we are presented with the option to choose to do the thing we ‘should’ do, but don’t. I.e. I’m procrastinating doing the dishes by watching tv, but I feel akrasia while i’m watching tv because I should be washing the dishes.*/

—

Monoidealism: the state of solely focusing your energy and attention on one thing ONLY, without conflicts. Also called the “flow” state, like when I’m writing this summary {ideally}.

• Conflicts kill productivity, progress, decision making, and adherence to a system.

Flow is a state of focus without conflict.

To enhance transition into FLOW:

• Eliminate potential distractions and interruptions
• Eliminate inner conflicts before starting to work
• kick-start the Attention process by doing a “dash” (a Pomodoro [link])
  → the philosophy is that the transition into flow takes between 10 and 30 min on average so you should commit to working at least that much (which is when it’s hard) and give yourself the permission to stop and do something else at the end if you want, though that rarely happens.

Meditation is a form of monoidealism “resistance training”. The same technique of recapturing awareness to breath is the principle behind bringing yourself back to work when we are distracted. {key}

Cognitive Switching Penalty occurs when shifting attention from one thing to another. This is a friction cost, but basically, the less you switch the less pay a cognitive cost.

Kaufman (the author) recommends “batching” and references Paul Graham’s Maker/Manager schedule [link]. It makes sense to group activities based on the nature of the work, like meetings, chores, and creative work.

• Maker’s schedule is large uninterrupted chunks of time.
• Manager’s schedule is smaller chunks for meetings and administrative tasks

It is important to avoid unproductive context switching to get more done with less effort!

Four Methods of Completion

1. Completion
   → Best for tasks that only you can do particularly well
2. Deletion
   → Unimportant and unnecessary items should be deleted (as in the Eisenhower Matrix [link])
3. Delegation
   → Effective for anything a person can do 80% as well as you can. {important}*
4. Deferment
   → For non-critical and not time-dependent tasks

Credit: James Clear

MIT - Most Important Task
The critical task that creates the most important results you’d like to achieve.

“If i were only to accomplish one thing today, what would have the greatest impact or what would I be happiest about?”

—

GOALS

A statement that clarifies precisely what you want to achieve.

Well-formed goals

• help you visualize what you want to achieve
• make you excited about achieving it, leading to motivation to achieve it

When goals are well formed, our brain can use mental simulation to visualize what the achievement of the goal looks like.
/* This is exactly what Master Key System [link] and Psycho-Cybernetics [link] (among others like Ask and It Is Given [link]) advocate for {find these books on my Mindset Book List here}. Clarity in our mental image of the end result activates our automatic success mechanism (Psycho. language) and puts things in motion for its achievement through automatic planning, attraction, and alignment with it. */

Decisions to achieve a goal allow the mind and your ASM to start putting things in motion for its achievement.
You won’t plan if you’re uncertain whether or not you actually have that goal. If you doubt, you won’t follow through on the necessary steps in the way you would if you didn’t doubt your achievement, leading to self-fulfilling prophecies.

Usually the reason we don’t achieve our goals is because we stand in our own way.

“When you don’t achieve a goal, it is indicative either that you didn’t really want it or you tried to negotiate on the price” — Rudyard Kipling

PICS format

Positive: refers to motivation. Goals are something you move toward not away from. Be positive in you goal setting. Generating more income vs getting out of debt.

Immediate: refers to the time scale. You should be willing to make progress on your goals immediately, not sometime in the future. If it’s not that important, don’t pretend to work on it now, because it will only get in the way of you achieving your other goals. Don’t quit in the dip [ link ] either. Start on achieving your goal when you are ready and don’t stop unless you realize that you don’t want it or the price is not what you’re willing to pay.

Concrete: refers to the ability to see the results in the real world. Basically, you should know when you’ve accomplished what you’ve set out to achieve.

Specific: ability to define the what, when, where of your achievement. {i don’t necessarily think the specifics matter as much as the end result does}

Goals should be under our control
Goal is to exercise 30 minutes a day vs to lose 30 pounds. In other words, get invested in the system. Make the system the goal.

Also, make changing your mindset a goal. So, for tasks that are currently difficult for you, make the goal to change your mindset around it (remove conflict). We should have goals to love to do the work we don’t or like the people that give us the hardest time (and can’t avoid).

Kaufman thinks it is a mistake for people to set goals for states of being (i.e. happiness) — the quality of our present experience.

• Emotional experiences aren’t achievements because they fluctuate over time {valid}. So, being happy, might not be the end goal, though you can use your knowledge of the feeling of happiness to imagine it resulting from the achievement of some other goal and amplify your clarity and reinforcement of desire for its achievement.
• States of Being are decision criteria, not goals— ways of understanding whether or not your actions are leading to your desired results. /* This is the a central tenant of Ask and it is Given, whereby our emotions are the feedback mechanism that indicates whether or not we are on our way to the achievement of things we want to realize/manifest. */

Author breaks down states of being beyond the general sense to give himself a more specific definition. So, instead of feeling happy, what does that actually look like? It could be to be surrounded by good friends and family, have time to yourself to write and play music, or create, and have romance with a partner.
{this is a good point. this can really guide the thinking on goal setting}

Habits

Regular actions that support us.

Most habits take 4 forms:

1. things you want to start doing
2. things you want to stop doing
3. things you want to do more
4. things you want to do less

Habits typically require some willpower to create.

Guiding structures will facilitate the forming of adherence to new or even existing habits. (i.e. have a fruit bowl out and hide the cookie jar)

Habits are easier to instill when you look for triggers to attach a habit to. (i.e. stretch every time you wake up)

For best results, try to install one new habit at a time.

Priming
A method of consciously programming our brain to alert us when particular info is present in our environment and consciously influencing our Pattern Matching capabilities.

• prime your brain to look for things you want to notice and your brain will almost always find it (mindset)

Decision
The act of committing to a specific plan of action. Comes from the Latin word “decidere” which means to cut off. /* yes, we cut off other paths, and other things. It’s hard because of buyers remorse and loss aversion, but these are simply heuristics */

• No decision large or small is made with complete information..
• We often attribute indecision with being uninformed.
• The world is too complicated to make accurate decisions
• Once you acquire 40-70% of the information, go with you gut
• Failure to make a decision is itself a decision! (We can’t stop time)
• When facing difficulty making a decision, ask “which experience would I prefer to have?”

Root Cause Analysis
Conducted to find out what our real motivations are. Understanding why.

• When we discover the root causes of our goals we can develop other strategies for achieving what we actually want.

→ One technique is 5-Fold Why.
Ask “why?” 5 times. In a spirit of curiosity. Until you get to an “I want it”.

Next action is the next specific, concrete thing you can do right away to move a project forward. (Getting Things Done philosophy [link]). If you know what the “done” state looks like, you can focus on “doing” what will get you there (taking next steps). So have clarity of what completion looks like.

Externalization takes advantage of our perceptual abilities by giving our brains a way of re-inputting the information in a new way such as through speaking or writing.

• Useful if used as a tool to examine plans, goals, and actions.
• Jotting down events for later review in a diary format is useful, but using a journal as a problem-solving tool is even more useful.

Self-Elicitation is the process of asking ourselves questions and answering them to grasp important insights or generate new ideas.
→ 5 fold why and how are examples of this process.

When you are faced with analyzing behaviors that don’t serve you, try the ABC method of SE (Antecedent, Behavior, and Consequences)

1. Antecedent: what was happening before? (thoughts, circumstances, people, feelings, activities)

2. Behavior: What were you doing and thinking?

3. Consequences: Result. Was it pleasant or not?

When uncertain about what questions to ask yourself, try asking “ What are the best questions I could ask myself about this situation?”

Counterfactual simulation - A visualization technique that is unrestricted by “facts” or current circumstances. You are only limited by imagination. This method can help discover hidden opportunities you previously assumed weren’t possible. // simulate hypotheticals

Parkinson’s Law “Work expand’s so as to fill the time available for its completion.”

“Ignorance more frequently begets confidence than does knowledge”
— Charles Darwin

One of the best ways to figure out whether or not you’re right is to actively look for information that proves you’re wrong.

Confirmation bias
Is the tendency for people to pay attention to inform that supports them and ignore information that doesn’t

Changing the past is outside our internal locus of control

Humans are not machines.

The ideal of human productivity is not acting like a robot
—

Your goals may have mystique about them. But, no job, position, or project is flawless. All come with their tradeoffs.

Learning what they are in advance gives you a major advantage: you can examine an option without idealizing it, then choose if it’s really what you want to do before you start. This will aid in the long term commitment to the day-to-day next actions.

Avoiding Hedonic Treadmill: Over time, our joy from a new thing will fade. We become adapted. and the danger is to be on the hedonic treadmill we are constantly in a cycle of achievement, joy, reference adjustments, and new desires for achievement.

• One way to avoid this is by knowing your monetary point of diminishing returns
• Focus on health and energy
• Spend time with people you enjoy
• Remove chronic annoyances
• Pursue a new challenge (grow)* // very important.

Keep your attention on what you’re doing to build the life you want to live, and it’s only a matter of time before you get there.

Be careful with attachment. We can become attached to an idea, a person, a strategy, etc. But attachment can keep us from dealing with the unexpected or from considering a better alternative. It will limit flexibility. Which is why always holding root causes in mind is key. Leave the field flexible for different plays.

Most people should budget a personal R&D, just like companies do.
→ Spend some money on anything that will improve skills and capabilities. Books, conferences, courses, etc.

Our ability to save is limited; Our ability to earn is not. (you can only save what you earn)

On anticipating rejection: Make the other party tell you no.

• If you assume rejection, go test that. Make the other party say it before assuming it’s a given.

WORKING WITH OTHERS

Power:
The ability to influence the actions of other people.
We can’t really control people, but we can act in ways that encourage people to do the things we suggest.

2 Fundamental forms of Power:

1. Compulsion — force
2. Influence — encourage

Power is a neutral tool (not good or bad); represents your ability to get work done through other people.

The more power you have the more you can ultimately accomplish, but it comes with great responsibility {yes!}

*If you don’t have a plan, your actions will be determined by someone else. If you defer decisions to other people, you will be led by those with a plan.

The best way to increase your power is to do things that increase your influence and reputation.

Comparative Advantage
Its better to focus on your strengths than your weaknesses and trade on that basis.

• true in an organization as it is in economies: “strengths-based management” — where people do what their best at and work with other specialists for their other needs.

“No man is an island. Focus on what you can do well, and work with others to accomplish the rest.”
— John Donne

Communication Overhead* (important)
The proportion of time you spend communicating with members of your team instead of getting productive work done.

• The more team members you have to work with, the more you have to communicate with them to coordinate action.
• Communication OH increases ‘geometrically’ until the total percentage of time each individual must devote to group communication approaches 100 percent.

Derek Sheane Beyond Bureaucracy:
“8 Symptoms of Bureaucratic Breakdown”:

1. The invisible decision — No one knows how or where decisions are made (no transparency)
2. Unfinished business — too many tasks are started and not carried through to completion
3. Coordination Paralysis — Nothing can be done without checking with a host of interconnected units
4. Nothing new — No radical ideas, inventions, or lateral thinking (possibly stemming from a lack of initiative) *
5. Pseudo-problems — Minor issues are magnified out of proportion (probably because it’s easier to put out a fire and spending time identifying problems (or people to blame), than it is to do important work. This becomes a form of resistance)
6. Embattled Centers — The “center” (HQ, core, etc) battles for consistency and control against local/regional units
7. Negative Deadlines — Deadlines for work become more important than the quality of work being done [AVOID at all costs!]
8. Input domination — Individuals react to inputs (their inbox or in-tray) as opposed to their own initiative. (reducing creativity and adding to ‘nothing new’)

The solution to Communication OH is simple, but not easy: reduce your team size as much as possible.

• The recommendation for effective teamwork is THREE to EIGHT people. Keep teams “ELITE & SURGICAL”.

Everyone has a fundamental need to feel important.

The more important you make someone feel, the more they will value your relationship with them.

Make someone feel important by undivided focus:

• Paying attention
• Listening intently
• Expressing interest
• Asking questions

—

Effective Communication

• Some people will put others down to feel smarter or more important…

What putting others down actually accomplishes is shutting down effective communication.

Effective communication can only happen when the two parties feel safe.

When people start to feel threatened or unimportant in a conversation, they start “stonewalling” aka shutting down communication.

People have a need to feel safe when expressing what’s on their minds and talking about things that are Important to them.

For communicating without provoking anger or defensiveness:
Crucial Conversations “STATE Model”

1. Share your facts - Lead with facts. They are less controversial and insulting. (be prepared to locate a source and also make sure they are understood as facts - get confirmation)
2. Tell your story - Explain from your point of view, WITHOUT INSULTING OR JUDGING
3. Ask for others’ paths - Ask for the other person’s side of the situation and what they intended, and what they want. (v. imp. to know intention, b/c then the person feels more understood and you guys can agree on the intention rather than the “how”. This will make the conversation feel safer.)
4. Talk tentatively - avoid conclusions, judgements, and ultimatums
5. Encourage testing - Make suggestions AND ASK FOR INPUT, and discuss until you reach a productive and mutually satisfactory course of action.

Always remember to not pass judgement and focus on making the other party feel important.

—

Golden Trifecta: Treat people with appreciation, courtesy, and respect.

Appreciation - expressing gratitude for what others are doing for you even if it’s not quite perfect.

Courtesy - Politeness. “accepting small inconveniences on behalf of another person.

Respect - “is a matter of honoring the other person’s status”. Respect other people as an individual.

The golden trifecta stems from the golden rule - treat others the way you want to be treated. Apply the GT to all interactions.

• Treating other people poorly sends a clear signal to others that you cannot be trusted.

—

People are far more likely to comply with a request if you give them a reason why. /* but I think this has a neg correlation with the familiarity you have with the requestor + a factor of how much you care about being liked */

Humans are predisposed to look for behavioral causes.

Commander’s Intent is a better method of delegating tasks: Tell a person why a task needs to be done when assigning a task to someone.
“The more your agent understands the purpose behind your actions, the better they’ll be able to respond appropriately when the situation changes.”

• Commander’s Intent alleviates Communication OH.

If you’re a competent professional, nothing is more demeaning than someone else defining and scrutinizing your work to the last detail. People hate being told exactly what to do.

When delegating responsibilities, always assign tasks to a single owner with a clear deadline. Only then will people feel responsible for getting things done.

—

Planning Fallacy: People have a persistent tendency to underestimate the amount of time it will take to accomplish things.

• The more complex the project, the more interdependencies. The more interdependencies, the higher the chance something will not go according to plan. (the more moving parts there are…)

Hofstadter’s Law: “ It always takes longer than you expect, even when taking into account Hofstadter’s Law.”

— Douglas Hofstadter

“People overestimate what they can get done in {6} months and underestimate what they can accomplish in {6} years.”

Most plans drastically underestimate the slack necessary to make a plan accurate. Slack being extra time to overcome obstacles or changes, etc.

“No battle was ever won according to plan, but no battle was ever won without one…plans are useless, but planning is indispensable.”

— Dwight D. Eisenhower

Plans are useful, although inaccurate. The mere act of planning helps you better understand requirements, dependencies, and risks before starting.

The value of planning is in mental simulation.
Use plans, but don’t rely on them

—

Referrals make it much easier for people to decide to work with someone they already know

• They transfer the quality of being known and liked {huge advantage}
• Even obscure commonalities (same area code, college, etc.) can close the gap of being unknown and invoke familiarity

—

“Clanning”
Humans naturally tend to form distinct groups from each other:
→ instinctual human behavior {evolutionary}

Convergence
The tendency for group members to become more alike one another over time. True for a company culture where people working at a certain place adopt similar characteristics, behaviors, and philosophies {& hobbies}

“The tallest blade of grass is the first to be cut”.

The norms of the group work to bring people away from tails of the bell curve into the middle. Violating norms sends social signals that you don’t belong {a primal human’s worst fear!}. {Convergence could even explain conformity amongst people in groups}

Divergence is the tendency of groups to differentiate themselves from other groups over time (i.e. hipsters).

• the norms of the groups constantly change to avoid being identified with other groups {this is hipster counter-culture 101}

Social Signals
“Tangible indicators of some intangible quality that increases a person’s social status or group affiliation” {or, conversely, decreases that person’s social status or affiliation}. They are statements of identity.

People will spend a lot of money on social signals because people are ego-driven, comparative creatures with a need to belong and measure one’s worth against a reference point subjectively determined according to external indications (like from other people).

• Social Signals may not be dependable data points for correctly associating people to what they are signaling. (i.e. wealth or happiness)
• However, SS’s do have economic value.
• SS’s relate back to people’s core human drives (acquisition, bonding, learning, defending, and feeling). If a business owner can effectively embed a social signal related to a prospect’s core human drive(s), then the offering becomes stronger.

Social Proof, like testimonials, is a social signal that a product or service is acceptable or valuable to other people. To the extent that someone viewing your offering can connect with the people showing their support for it, does the social proof for your offering increase in value/effect.

• That’s why testimonials that connect with a prospect’s uncertainty (i.e. ‘I was uncertain about this product, but bought it anyway and am thrilled I did’) are most effective. People can connect/relate with that person.

People have an inherent tendency to comply with authority figures. (something that begins in childhood)

• Work to become an authority figure on the subject matter of your business and it will increase trust in consumers and prospects

—

‘Commitments, even small ones, make it more likely that individuals will take actions constant with those commitments in the future’

• ‘Obtain a small commitment, and you’ll make it far more likely that others will comply with your request’

Incentive-Caused bias ‘explains why people with a vested interest in something will tend to guide you in the direction of their interest.’

“Don’t ask the barber if you need a haircut”.

On Compensating Salespeople. From Norm Brodsky and Bo Burlingham:

Most companies have commission based structures that incentivize closing a sale. Closing more sales nets a person more commission. But salespeople become hyper-focused on closing sales regardless if those sales weren’t profitable or in the long-term interest of the company.

• By compensating people on a salary basis and giving generous bonuses based on long-term performance, B&B encouraged them to focus on making profitable sales versus sales at any cost.

Basically, sometimes incentives create unintended Second Order Effects

• Incentives are tricky because they inevitably interact with our Perceptual Control systems.
• i.e. Giving an employee a bonus or raise for doing something good can result in them stopping what got them the reward. The reward already existed— internally {perhaps}. When you pay someone for actions they would otherwise do from internal motivation, you reduce their inner drive to complete it because the reward now makes the action a part of their job.
• Perceptual Controls beat incentives every time.

—

Modal Bias: ‘the auto-assumption that our idea or approach is the best.’

• In the absence of evidence to the contrary, the HiPPO rules (the Highest Paid Person’s Opinion).
• ‘If you are a leader or manager, it pays to consciously suspend your judgment long enough to thoroughly consider the perspectives and suggestions of the people you work with.’

—

Pygmalion Effect: People tend to rise to the level of other people’s expectations of them

Named after mythical Greek sculptor, Pygmalion, who sculpted a woman so perfect and beautiful that he fell in love with his statue. He prayed to Aphrodite (gdss of love) who took pity on him and brought his statue to life.

• Explains why most relationships are self-fulfilling prophecies.
• “give others a great reputation to live up to” (HTWFAIP philosophy #7 in “be a leader” [link])
• ‘Paradox of Pygmalion Effect’ is that as we increase our expectations of others → the chances that they rise to meet them increases, but so do the chances that we will be disappointed.

The expectation effect means ‘our perception of the quality of someone’s work is a function of our original expectations’.

Attribution error
The fallacy of blaming others’ characters when they screw up, but blaming externalities when we screw up.

• Give people the benefit of the doubt unless a particular behavior clearly becomes a pattern.

When faced with issues [or crises]: focus on options {b/c it’s all about moving forward.}

—

Management
is the act of coordinating a group of people to achieve a certain goal while accounting for uncertainty and change.

6 principles of effective management:

1. Recruit the smallest group of people possible to accomplish the goals, remembering that some people will be better than others (comparative advantage). Small elite teams are best.
2. Clearly communicate the end result, who is responsible for what, and the current status.
3. Everyone should know commander’s intent, the reason why it’s important, and know the specific parts they are responsible for
4. Treat people with respect. (Golden trifecta: appreciation, courtesy, and respect). Make people feel important. Working together under a mutually supportive environment fosters clanning.
5. Create an environment for productivity. Provide the best equipment and tools to reinforce the work people are doing. Shield your team from distractions (like bureaucracy and meetings)
6. Refrain from having unrealistic expectations regarding certainty and prediction.
7. Update the plan as you go along. Reapply Parkinson’s law to find the shortest feasible path to completion that works, given the necessary trade-offs required by the work.
8. Measure progress and compare. If what you’re doing is not working, consider a different approach and run an experiment.
9. A primary fallacy of effective management is that the initial plan is perfect and should be followed to the letter. Wrong. Allow room for learning and iteration throughout the process.
10. Effective management plans for learning, requiring constant readjustments along the way.
11. Measure performance across KPIs

• Management should be thought of as a support team for the core value producing workers, not as the “decision-making team”. {this is particularly hard to swallow because usually management is the party with the full understanding of the goals and business strategy, and you can’t have the crew running the ship - you need a captain}
• “Try to get everyone to have a gigantic brain in their area and you provide a minimum amount of admin support to see them humming along” {again, this is traditional silicon valley philosophy}

—

Performance-Based Hiring

Good employees and contractors are not necessarily the people with the fanciest resumes or perform best in an interview: the best hires are people who get things done and work well with other members of your team.

The golden rule of hiring: the best prediction of future behavior is past performance

On recruiting:

• describe what the applicant will actually do on a day-to-day basis if they work for you, with as much detail as possible.
• Identify an acid test to screen applicants: ask a few basic questions that require a certain amount of specialized knowledge in the field to answer
• Once promising candidates are identified, ask each one to show examples of 2-3 of their best projects to date
• they do not have to be directly related, but should be work the applicant is proud of and believe highlights their skills

On Checking references, ask:

• Would they work with the candidate again?
• If they hesitate or talk around the question, it’s a no.
• If you can’t reach a reference when you call, leave a message and ask them to contact you if the candidate is extraordinary. If they are, they will; if not, they won’t.

Skip Interviews; Field Test Candidates Instead

Finally, give promising candidates a short-turnaround project or scenario to see how they think, work, and communicate first hand.

• The outcome should be a deliverable of some kind: a report, a pitch, an asset, or a process
• Bring the candidate in to meet and present their results. Let this presentation replace the interview

Don’t put the candidate in an artificial environment. Let them use the tools and resources they are comfortable using. They should be able to contact you.

→ The purpose of the project or scenario is to evaluate the candidate’s actual work in a realistic environment.

Assignments like these should be short - only a couple of hours of work.

If you look for past performance and evaluate a candidates work firsthand, you’ll make much better hires

—

UNDERSTANDING SYSTEMS

A complex system is a self-perpetuating arrangement of interconnected parts that make up a whole.

Businesses are complex systems within even more complex systems (markets, industries, societies)

Gall’s Law

“A complex system that works is invariably found to have evolved from a simple system that worked. The inverse proposition also appears to be true: A complex system designed from scratch never works and cannot be made to work. You have to start over, beginning with a simple system.”
— John Gall, systems theorist

To take the extreme example - imagine building something from scratch without relying on anything someone else has discovered (virtually not possible). We always use things that already work to build or create with, otherwise we’d be starting at true square 1. Everything built will thus be built upon the work of other people, even the simplest items.

Systems are no different. Build a system that works and build upon it. Add a new variable and see if the system still works. Imagine if you tried adding two or more variables? If it fails, you don’t really know the cause…instead, iteratively build the system so you know that it performs correctly at each build stage. Then you’re just adding and optimizing, but you don’t lose your base.

To explain why complex systems cannot be developed from scratch, we revisit Gall.

• “All complex systems that work evolved from simpler systems that worked. Complex systems are full of variables and interdependencies that must be arranged just right in order to function”
• Gall’s Law is where environmental selection test meets system design. Environmental selections test meaning is more like a survival test — the environment will not sustain that which does not meet its selection tests.
• If you want to build a working system, the best approach is to build a simple system that meets the environments current selection tests first, then improve it over time.
• Iteration and incremental augmentation over time will produce complex systems that work, and, ideally, even as the environment changes

Flow

Flows are movements of resources into and out of the system.

inflows are resources moving in

outflows are resources moving out.

Follow the flows to understand how the system works.

• Examine what’s coming in and what's coming out to understand how the system works.

Stock

By following a system’s flows you will find places where resources tend to pool together.

Stock refers to a pool or holding tank of resources.
i.e. a bank account is a pool of money waiting to be used. Inventories. Customer queues. Waiting lists.

Stocks are affected mathematically by inflows and outflows.

Slack

Slack is the actual amount of resources in a stock. More resources = more slack. (makes sense in the traditional way we think of slack)

• In a biz, you want slack to be just right. not too much where you have assets tied up to heavily in one stock and not too little where a lack of slack could create a constraint that affects the business.
• Large stocks grant flexibility, but come at a cost, especially when thinking of stock of inventory and its related costs.

Constraint

“Once you eliminate your number one problem, number two gets a promotion” — Gerald Weinberg

The performance of a system is always limited by the availability of a critical input.

“Theory of Constraints”:
Any manageable system is always limited in achieving more of its goal by at least one constraint.

Five Focusing Steps to use to identify and alleviate a constraint:

1. Identification: examine the system and find the limiting factor. (where do bottlenecks exist?)
2. Exploitation: ensuring the resources related to the constraint aren’t wasted. (identify the ‘waste’ in a bottleneck.)
3. Subordination: redesign the entire system to support the constraint. (redesign to facilitate alleviation - further waste reduction even at a penalty in other areas(reasonably))
4. Elevation: permanently increase the capacity of the constraint. (add new resources or upgrade existing resources)
5. Reevaluation: After making changes, reevaluate the system to locate the constraints.

—

Feedback loops:
Exist whenever the output of a system becomes one of the inputs in the next cycle.

Feedback is how systems learn.

Balancing loops:
Dampen each system cycle’s output, leading to system equilibrium and resistance to change. i.e. Tennis ball falling and each bounce getting smaller due to friction and air resistance.

• They stabilize the system, dampening oscillations and keeping the system in a certain state
• Perceptual control systems are usually balancing loops. i.e. thermostat

Reinforcing loops amplify the system’s output with each cycle.

• Tend to lead to runaway growth or decay over time. i.e. price war
• Compounding is an example of runaway growth (a reinforcing loop)

Stock is influenced by several loops all pulling it in different directions. i.e. bank account that has many input sources and outputs, all related to different systems.

// I don’t really understand this section that well.

—

Autocatalysis:
A reaction whose output produces the raw materials necessary for an identical reaction.

An autocatalyizing system produces the inputs necessary for the next cycle as a by-product of the previous cycle, amplifying the cycle. Autocatalysis is a compounding, positive, self-reinforcing feedback loop. i.e. television advertising in the 20th century which had a great return on investment, which was reinvested, yielding greater returns, until it reached the massive scale it’s at. worth noting, that it is no longer as lucrative considering the saturation of advertising and the rise of the internet.

• Doesn’t have to be money; “network effects” and “viral loops” are examples. i.e. someone viewing a video on YT and sharing it.
• *If your business includes some autocatalyzing element, it will grow more quickly (i.e. sticky, shareable software)

—

“Reality is that which, when you stop believing in it, doesn’t go away” — Philip K. Dick

No system stands alone.

An environment is the structure in which a system operates and influences or impacts the system’s flows or processes, changing the output of the system.

• When the environment changes, the system must change with it to continue operating. aka adaptability is key.

Self-perpetuating systems (like business and organisms) must meet the environmental conditions necessary to exist.

Selection test is an environmental constraint that determines which systems continue to self-perpetuate and which ones die. (literally, the “environment” tests us. failure = death)

• Instead of survival of the fittest, it’s more of “death of the unfit”
• As the environment changes, so do the selection tests.
• STs are ruthless [but really just objective]

—

Uncertainty

Nobody knows the future.

Risks vs Uncertainties

Risks are known unknowns

Uncertainties are unknown unknowns

You can’t reliably predict the future based on past events in the face of uncertainty. Unexpected or random events can always occur suddenly, which can have major impacts on goals and plans.

No matter how stable or predictable things seem, unpredictable “black swan events” can change everything in an instant.

Black swan:
The problem of induction: A philosophy concept that basically says that by using inductive methods of inference (observing past instances) you will be right until you are wrong aka until you see a black swan. Until you see every swan that exists, you can never assume the statement “all swans are white” is true.

• All you can do is be flexible, prepared, and resilient enough to react appropriately if and when black swan events occur.

Planning for flexibility in response to uncertainty by scenario planning (discussed later) is far more useful than pretending to know the future.

Change

“It is not the strongest of the species that survives, not the most intelligent, but the one most responsive to change.” — Charles Darwin

All systems change. No such thing as a system ‘in stasis’.

Plans that do not take change into account are of limited value.

Because of heuristics and the human ability to pattern match, we tend to see patterns where none exist and tend to attribute changes to our skill if the changes are good or misfortune if they’re bad (fooled by randomness [link]).

You will never develop your business to the point that everything is perfect and unchanging.

—

Nothing in the world exists in isolation. Most things are inherently interdependent, and complex systems are full of interdependencies.

A dependency is an input that’s required before the next stage of a process can take place. The more dependencies there are in a system, the higher the likelihood of delay or system failure.

Tightly coupled systems are highly interdependent systems where the processes in a system are tightly coupled, increasing the likelihood that a failure, delay, or change in one part of the system will have an effect in another part of the system.

• These systems are typically time dependent, rigidly ordered, and have very little slack.
• There’s often one path to a successful outcome, and a failure in any part of the system can cascade to the rest of the system

→ Eliminating a dependency makes a system less tightly coupled

Critical path contains only the tasks that must be completed in order for the project to be finished on schedule. (a project management term).

• Any delay or task on the critical path will delay the entire project.

Loosely coupled systems have low degrees of interdependence. They are more relaxed and usually not time dependent (asynchronous systems).

• May be able to use parallel processing — completing multiple steps at a time
• Usually have plenty of slack and have more than one strategy to accomplish the goal

Counterparty Risk

“The man who makes everything that leads to happiness depend upon himself, and not upon other men, has adopted the very best plan for living happily” — Plato

If the system relies on other people in order to function, this poses a major risk to the operation of the system {think outsourcing software development for a tech startup}

Counterparty risk is the possibility that other people won’t deliver what they have promised.

Too much counterparty risk increases the risk of catastrophic system failure.

Counterparty risk is amplified by the planning fallacy. **

• Remember people are always optimistic about plans and deadlines.
• Make plans and commitments, but always have a plan for when the project doesn’t go as expected.
• When the system does rely on the performance of someone outside your control, do all that you can to prepare for the possibility that they won’t perform as expected.

Second Order Effects: The consequences of the consequences of an action.

i.e. rent control NYC. Hard to have predicted the resulting housing crisis {but some foresight could help}

• Uncertainty guarantees that we won’t be able to completely understand or predict second order effects.

Approach making changes to a complex system with extreme caution: what you get may be the opposite of what you expect

Normal Accidents

“shit happens”.

In a tightly coupled system, small risks accumulate.
Enough accumulation makes errors or accidents inevitable.

The larger and more complex the system, the higher the likelihood that something will eventually go wrong.
i.e. Challenger or Colombia shuttle failures.

Overreacting to normal accidents is counterproductive.

Fight our instincts!

• Locking things down and adding more systems only makes the system more tightly coupled (bad), increasing the risk of future accidents.
• The best way to avoid normal accidents is to analyze breakdowns of “close calls” when they happen.

/minimize the risk of the same issue reoccurring without adding more systems that could potentially fail.

Analyzing Systems

Systems must be analyzed as they’re working.
(you can’t tell time to stop just so you can understand the world better)

• Deconstruct the system to understand it. This is the reverse engineering aspect of Gall’s law (a complex system is made up of simpler systems that work)
• Separate complex systems into the smallest possible subsystems

If there are more than 7 or 8 variables or dependencies in the system, you start to suffer from cognitive scope limitation.

• analyze the subsystems up to this point and how they interact with one another

1. Where does the subsystem begin?
2. What flows are involved?
3. What processes take place inside the system?
4. Are there feedback loops?
5. What happens if inflows don’t come in?
6. Where does the system end?
7. What are the outflows?

Interdependence remains an important factor when deconstructing. Knowing the triggers and endpoints guides the understanding of the interdependencies.

• triggers are what makes a subsystem start
• endpoints are what makes a subsystem stop

Measurement is the process of collecting data as the system is operating (duh).

• There to help us avoid absence blindness — we have a hard time seeing things that aren’t present.

“what gets measured gets managed” — Peter Drucker

KPIs are the measurements of the critical parts of the system. Not everything can be a KPI and it is highly dependent on the system and goals of the system.

• We establish KPIs to not waste time, attention, and resources measuring things that don’t help us make improvements.

KPIs are usually related to the 5 parts of every business or throughput

Value Creation:

• How quickly is the system creating value?
• What is the current level of inflows?

Marketing:

• How many people are paying attention to your offer?
• How many prospects are giving you permission to provide more information (key)

Sales:

• How many prospects are becoming paying customers?
• What is the average customer’s LTV?

Value Delivery:

• How quickly can you serve each customer?
• What is current complaint/returns rate?

Finance:

• What is your profit margin?
• How much purchasing power do you have?
• Are you financially sufficient?

Try to limit # of KPIs to 5. It’s tempting to build a dashboard that contains every piece of information you’d ever want to see. Resist the temptation.

If you overload yourself with too much data, you’ll be far less likely to see changes that are critically important.

→Dig deeper into data as necessary

→Don’t get caught up in vanity metrics

Trend analysis is usually impractical to conduct on a day to day basis, considering the rate of change for things in a system isn’t always proportionally correlated with change in results or output.

—

Garbage in, garbage out refers to the output of a system directly correlated to the quality of the inputs.

• this can refer to the data you collect when measuring
• mostly refers to the actual quality of inflows into a system

Tolerance — an acceptable level of “normal” error in a system. As long as errors don’t exceed a certain threshold, urgent intervention is not required.

“Perfection is impossible.”

In the Service Level Agreement (SLA) you can promise to compensate customers if errors exceed a certain threshold.

• Tight tolerances are an indicator of quality (and usually have a corresponding price tag)

—

Analytical honesty:
Measuring and analyzing acquired data dispassionately [and objectively].

• don’t look at your data with rose-colored glasses: always strive to be honest with ourselves about what the data indicates can be improved.
• This is key when picking KPIs. don’t pick vanity metrics. keep it honest

Context:
Using related measurements to provide additional information about the data being examined. i.e. knowing expenses when reviewing revenue. Context is everything.

Aggregate measurements are worthless when it comes to making improvements because they lack context.

Examine no measurement in isolation:
Always look at measurements in Context with other measurements

Ratios

Method of comparing two measurements against each other

• Return on Promotion — Marketing dollar spent : revenue collected
• Profit per employee — DL : profit
• Closing ratio — Prospects engaged : prospects sold
• Returns/Comlplaints ratio — Sale : Returns

Be creative. Study the business and construct ratios that highlight the critical aspects of the system

Sampling — The process of taking a small percentage of total output at random and using it as a proxy for the entire system. i.e. blood drawn for a blood analysis is a sample used as a proxy for entire blood supply.

Depending on how quickly and accurately we need to spot errors, increase or decrease sampling [and thus measurement] rate.

Random “spot checks” are a form of sampling [as well as quality control].

Sampling is prone to bias if the sample is not truly uniform or random.

Margin of Error
Refers to an estimate of how much you can trust your conclusions from a given set of observed samples.

• Beware of misleading conclusions based on small or misrepresentative sample sizes [how to read a graph 101]

“It aint what you don’t know that hurts you. It’s what you know that aint so.” — Will Rogers.

Typicality: identifying a normal or ’typical’ value for some important measurement. i.e. using mean, median, mode, and midrange to determine what is ‘typical’.

• Calculating the median and comparing it to the mean can tell us if the average is being influenced by data points at the tails of the distribution curve.
• A midrange is the value halfway between the highest and lowest data points in a set of values. This is not the median, since the median refers to the value of the data set at the 50%-tile position, whereas midrange identifies the absolute value between the highest and lowest data points in a data set calculated by adding the two points together and dividing by 2.

—

Causation: a complete chain of cause and effect.

Correlation is not causation. Refers to association, but cannot be proved to be causal.

• The more you can isolate the change in the system from other factors, the more confidence you can have that the change you made intentionally actually caused the results you see.

—

Norms are measures that use historical data to provide context for current measurements. i.e. seasonality determined by trends in sales according to the date of sale.

Norms are useful for examining current data and having a baseline to compare the measurements to a previous ‘norm’.

• Only valid as long as the measurement protocol has not changed. If you change how you measure something now, the measurement with the old method is no longer a valid norm to compare against, because it’s now comparing apples to oranges.
• You have to be consistent with measurement in order to use norms. V imp.

Proxy measures one quantity by measuring something else. i.e. Votes are a proxy for political will of a country. or proxies used in scientific measurement, like how the distance to the sun was determined or what the speed of light is.

• Useful proxies are closely related to the primary subject. Make sure it is actually related to the intended subject.
• The better the correlation, the better the proxy

—

Segmentation
A technique that involves splitting a data set into well-defined subgroups to add additional context.

• splitting data into subgroups can help uncover previously unknown relationships.

3 Common ways to segment customer data:

Past Performance: segmenting customers by past known actions

• LTV calculations are a form of PP segmentation. i.e. segmenting customers by existing vs new customers

Demographics: segmenting customers by external personal characteristics

• You can use personal information to determine who may be probable purchasers. Obviously important for things that are demographic specific i.e. gender or age-targeted products. Going deeper on demographics can reveal subgroups that are better or worse customer segments.

Psychographics: Segmenting customers by internal psychological characteristics i.e. surveys, assessments, focus groups.

• These are attitude or worldview that influence how people see themselves and the world at large.
• Particularly useful for crafting a marketing and sales strategy, or even going as deep as to shape the value being created and at the very least each value proposition

Humanization — The process of using data to tell a story aka translate the data into real-world examples and understanding

• When analyzing data from a system, it’s easy to forget that it often pertains to the actions of real human beings {so KEY!}.
• This technique will make analysis efforts more useful. It requires extra work and is KEY.

IMPROVING SYSTEMS

“The purpose of understanding and analyzing systems is to improve them…”

Since human beings are predisposed to doing something rather than nothing, it leads to:

Intervention Bias — humans are likely to introduce unnecessary changes to feel in control of the situation, when perhaps the best action is to not act.

→ usually, the result is an increase in waste, bureaucracy, or communication overhead.

To avoid intervention Bias, create a null hypothesis (like in statistics or econ). “What would happen if you did nothing or assumed the situation was an accident or error?” [important]

→ examine the null before proceeding with an intervention. If things are a normal accident, it is an error to overreact.

Optimization

• “the process of maximizing the output of a system or minimizing a specific input the system requires to operate.”
• typically revolves around KPIs

Maximization focuses on a system’s throughput. i.e. optimizing for measurable results, like # of customers served, earnings, or units sold.

Minimization focuses on in-process inputs required for the system to operate. i.e. minimizing costs to optimize for margins. “I want less of input x to produce more of unit y”

The author makes an important note that you cannot optimize for more than one variable because at that point you are making a trade-off. More importantly, when coupling changes, you are confounding the results of each input and simply arriving at correlations and not causations. Basically, by isolating a variable for a set amount of time, you can more reliably determine whether the changes you make to optimize variable x are working or not and what other changes it may have in the system or process as a whole. Pick the most important variable to optimize and concentrate on it.

Refactoring — {a type of change to the system}

• “the process of changing a system to improve efficiency without changing the output of the system”.

/* basically, I want the same outcome, but is there a better or more efficient process to achieve this? */

Refactoring begins by deconstructing a process or system and then looking for patterns.

• Break it down: what’s most important? what is constrained? what is the order of operations and can it be changed?
• When you see things that don’t make sense (i.e. temporary solutions that were made permanent) you can change them.
• Once patterns emerge, the system can be rearranged or grouped to put similar processes or inputs together.

The critical few — the minority of inputs that produce the majority of the output. (The Pareto principle aka the 80–20 principle)
i.e. 20 percent of customers amount to 80% of revenue or orders; 20 percent of the labor force is as effective as the other 80.

• Non-critical inputs are significant opportunity costs.

“Find the inputs that produce the outputs you want, then make them the focus of most of your time and energy. Ruthlessly weed out the rest.”

“All good things are subject to diminishing returns.”

• This extends to analyzing and optimizing a system. Optimize and refactor the critical few and then evaluate if optimizing or refactoring the system further will cost more compared to what will be saved or produced.

—

Friction

• “Any force or process that removes energy from a system over time.”
• “In the presence of friction, it is necessary to continue to add energy to a system to keep it moving at the same rate over time.”
• “Removing small amounts of friction consistently over time accumulate are improvements in both quality and efficiency.”

/* The author uses the example of Amazon that has made online shopping a virtually frictionless experience — from “free” prime shipping to one click buys and more, the experience has very little friction. */

Friction can also be used to get people to behave a certain way such as the introduction of friction in a return policy so that people are less likely to return something. This must be balanced to avoid hits to reputation.

Automation refers to a system or process that can operate without human intervention.

• best for well defined, repetitive tasks.
• automation allows you to scale via duplication and multiplication.

The paradox of automation
“the more efficient the automated system, the more crucial the contribution of the human operators of that system”

• If an error occurs, it’s up to the human operators to identify the error and stop the damage from multiplying. Like Toyota’s $5 billion recall when there was that faulty accelerator pedal in 2009. That’s the multiplication effect of automation.
• Efficient automation makes humans more important, not less.

The irony of automation
“The more reliable the system, the less human operators have to do, so the less attention they pay to the system while it’s in operation.”

Humans get extremely bored if things stay the same and things will stay the same the more reliable the system is.
→This makes it very difficult for human operators to notice errors.

• To avoid errors from multiplying, rigorous batch sampling and testing for quality control (QC) is paramount.
• and if there’s a way for keeping an operator mentally stimulated and engaged, there’s less room for boredom and missed errors.

Standard Operating Procedure (SOP)
“A predefined process used to complete a task or resolve a common issue.”

• A well-defined SOP will reduce friction and minimize willpower depletion.
• SOPs also allow for effective delegation and training. New people can be brought up to speed quickly and critical operating procedures are not at risk for being lost if something happens to the operators that hold the knowledge.
• Review SOPs on a periodic basis (like 2–3 months) so that things remain efficient.

Checklists!

• “an externalized, predefined SOP for completing a specific task.” You make one when you want to make sure that a specific task is being carried out correctly every time.
• Creating a checklist will help you define a system for a process that hasn’t been formalized’

/* The real benefit here cannot be overstated. When you break down a task by each individual step, record your progress and the time it takes, you get a real life breakdown of what it takes to get that thing done. Having this information you can review a checklist as a way to improve the overall process or a piece of the system. And, from here you can create the best version of an SOP that will be delegated and have an accurate estimate of time and requirements that you can measure performance against when that task gets delegated. */

• Using checklists can help important tasks not get overlooked when there is a lot to do or people aren’t mentally on point during work.

Cessation
the choice to intentionally stop doing something that’s counterproductive.

“ There is nothing so useless as doing efficiently that which should not be done at all.” — Peter Drucker

Like operating with absence blindness and trying to limit intervention Bias, where you don’t do anything when something goes wrong (because maybe it’s a normal accident or making a change would complicate the system unnecessarily and create waste), sometimes the best thing to improve a system is to stop doing so much.

Kaufman describes an example used by another author (Fukuoka), that deems foolish the man that makes a hole in the roof and rushes to patch up the hole when it rains and he sees his roof rotting, deeming himself a hero/intelligent for fixing the roof.

/* The author is basically making a point for patience. Let things play out. Yet, cessation, based on the definition, would imply that we identify an action in our process that is counterproductive and so we stop that, instead of acting on recent data that things have changed negatively (perhaps because of things out of our control. Yet, this point is illustrated by examples of doing nothing in the face of an observed “negative” change. So I take his point about cessation separately and take the content of this part to reinforce what was stated earlier about doing nothing and avoiding intervention bias. */

Resilience — Your ability to adjust strategy and tactics as conditions change.

• Usually the difference between surviving and death
• Being flexible comes at a price, however. (important). If you sacrifice things that would keep you safe in common changes to conditions (i.e. lower demand, geo-political volatility, natural disaster, technology changes, etc.) because you were all in on growth or sales, then you made your own bed when those conditions do occur.

Things that make your business resilient:

1. Low (or none) outstanding debt
2. Low overhead, fixed costs, and operating expenses
3. Substantial cash reserves for unexpected contingencies
4. Multiple independent products/industries/lines of business
5. Flexible workers/employees who can handle many responsibilities well
6. No single points of failure
7. fail-safes/backup systems for all core processes.
8. [my inclusion] Large amounts of insurance

• Resilience isn’t sexy because the positive benefits suffer from absence blindness

Fail-safe

“a backup system designed to prevent or allow recovery from a primary system failure.” i.e. generator for when the power goes out; Broadway shows with understudies to lead performers; external HDs for system backups

• Fail-safes have to be developed beforehand for obvious reasons

And as much as possible, never have a single critical point of failure.

Stress Testing
“The process of identifying the boundaries of a system by simulating specific environmental conditions.”

• you can stress test a website for a massive influx of visitors and see how your server does
• could you keep up with a day you have a product defect and you have 10x the amount of customer service inquiries?
• if you had a sudden order for more units than you ever anticipated, could you keep up?

Try to run actual stress tests that simulate an event that would put a major strain (stress) on your systems whether it be production, customer support, PR, etc. Use this data to know your boundaries.

Scenario planning
“The process of systematically constructing a series of hypothetical situations, then mentally simulating what you would do if the scenario occurred.”

• This is counterfactual simulation aka hypotheticals.

This is the essence of effective strategy.

• With scenario planning, you aren’t reliant on a strategy that only takes into account one version of the future, but multiple ones you’ve planned for and simulated, reducing your risk of being caught completely off guard when conditions change.

Regularly spend non-negotiable time to step back and plan for the future.

Sustainable Growth Cycle
A cycle Kaufman has noticed successful businesses go through.

1. Expansion — here the company is focused on growing. New offers are tested, new markets are explored, new business units are built and staffed, and future plans are created. Early data is collected for later use.
2. Maintenance — company focuses on executing the current plan. Marketing, Sales, and Value Delivery parts of the business are in full operation and an emphasis is placed on exploring the full potential of the current business structure.
3. Consolidation — Analysis phase. Information of performance is analyzed in detail. Waste gets cut back. Critical Few inputs, customers, and processes are given more resources.

“A business that fixates on expansion but shortchanges maintenance and consolidation will experience the commercial equivalent of cancerous growth.”

• “Parts of the business will grow out of control, consuming too much time, energy, and resources compared to what they contribute to the health of the business.”

Have an Experimental Mindset

• best way to learn something is to jump in and try it.
• constant experimentation is the only way to prove theories of what will work and won’t
• All failures are temporary. You learn the most from what doesn’t go well.
• experimentation is learning through ‘play’.

The last quote in the book:

“A truly good book teaches me better than to read it. I must soon lay it down, and commence living on its hint. What I began by reading, I must finish by acting.”

— Henry David Thoreau

phew. If you made it to the end, I commend you on taking this subject seriously. Undoubtedly, I have left things unclear due to fluctuations in my thoroughness and discipline to summarize (and not just write out definitions). Whatever is unclear you can read in its entirety from Kaufman on his website, with full context and examples in individual and extremely digestible explanations [ link ].

Thanks for viewing and/or reading, and I appreciate your applause!

If you found this summary useful, please please please let me know in the comments or Twitter. It reinforces my labor to bring it to a public audience instead of keeping it private.

Any other feedback is greatly appreciated.

Stefan Leon (@stefan_lion) | Twitter