The personal MBA josh kaufman

Praise for The Personal MBA “Fundamentals are fundamentals Whether you’re an entrepreneur or an executive at a Fortune 500 company, this book will help you succeed.” —John Mang, Vice President of Japan Fabric & Home Care, Procter & Gamble “This book goes far beyond business: I used the marketing, sales, and communication principles in this book to complete my PhD and land a highly competitive postdoc and professorship at a worldclass research university Whatever you for a living, this book will help you it even better.” —Dr Zachary Gagnon, Assistant Professor of Chemical Engineering, Johns Hopkins University “If you’re thinking of starting a business, this book will radically increase your confidence If you’re already running a business, this book will help you identify weaknesses in your systems to get better results If you’re thinking about plunging yourself into debt to get an MBA, this book will challenge you to your core Are you more interested in becoming a better businessperson, or having a document to hang on your wall to impress people?” —Daniel Joshua Rubin, Playwright and Portrait Artist “I graduated with an MBA in 2005 before I encountered The Personal MBA, but I still felt like I didn’t know anything about business In retrospect, I wish I had read this book before enrolling in an MBA program—it would’ve helped me be more mindful while completing my degree Who knows… I might have skipped the MBA completely This is easily the best foundational business book available.” —Roger Hui, Technical Account Manager, RedHat, Inc “I used the mental models in this book to create a profitable business in less than four weeks Josh quickly dispels many mistaken beliefs about entrepreneurship, and his guidance has made me vastly more productive and successful, and my life more fulfilling.” —Evan Deaubl, President and CEO, Tic Tac Code, LLC “These concepts really work: I’m booked solid with clients, making eight times more money, feeling far less overwhelmed, and having a lot more fun If you want to live up to your potential, you can’t afford to miss this book.” —Tim Grahl, Founder and CEO, Out:think Group “After one hour with Josh, I immediately used his advice to bring in an extra $120,000 this year These simple principles are astoundingly effective.” —Dan Portnoy, Founder and CEO, Portnoy Media Group ABOUT THE AUTHOR Josh Kaufman is an independent business advisor who helps people make more money, get more done, and have more fun running their business Before creating PersonalMBA.com, he worked for Procter & Gamble, where he launched major new products and developed P&G’s global online marketing measurement strategy He lives in Colorado THE PERSONAL MBA Master the Art of Business JOSH KAUFMAN PORTFOLI/OPENGUIN PORTFOLIO / PENGUIN Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Books Australia Ltd, 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi—110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, Auckland 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England First published in the United States of America by Portfolio / Penguin, a member of Penguin Group (USA) Inc 2010 This paperback edition with new material published 2012 10 Copyright © Worldly Wisdom Ventures LLC, 2010, 2012 All rights reserved THE LIBRARY OF CONGRESS HAS CATALOGED THE HARDCOVER EDITION AS FOLLOWS: Kaufman, Josh The personal MBA : master the art of business / Josh Kaufman p cm Includes index ISBN: 978-1-101-44608-9 Management Management—Study and teaching Business Commerce I Title HD31.K343 2010 650—dc22 2010027919 Printed in the United States of America Set in Adobe Caslon Pro Designed by Jaime Putorti Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book The scanning, uploading, and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law Please purchase only authorized electronic editions and not participate in or encourage electronic piracy of copyrightable materials Your support of the author’s rights is appreciated ALWAYS LEARNING PEARSON To the millions of business professionals worldwide who work to make people’s lives better, in ways large and small CONTENTS Key Terms A Note to the Reader Introduction: Why Read This Book? You Don’t Need to Know It All No Experience Necessary Questions, Not Answers Mental Models, Not Methods My “Personal” MBA A Self-Directed Crash Course in Business The Wheat and the Chaff The Personal MBA Goes Global Munger’s Mental Models Connecting the Dots For the Skeptics Should You Go to Business School? Three Big Problems with Business Schools Delusions of Grandeur Your Money AND Your Life Breaking Out the Benjamins What an MBA Will Actually Get You Where Business Schools Came From In Search of Distribution Playing with Fire No Reason to Change The Single Benefit of Business Schools I Owe, I Owe—It’s Off to Work I Go A Better Way What You’ll Learn in This Book How to Use This Book Value Creation The Five Parts of Every Business Economically Valuable Skills The Iron Law of the Market Core Human Drives Status Seeking Ten Ways to Evaluate a Market The Hidden Benefits of Competition The Mercenary Rule The Crusader Rule Twelve Standard Forms of Value Form of Value #1: Product Form of Value #2: Service Form of Value #3: Shared Resource Form of Value #4: Subscription Form of Value #5: Resale Form of Value #6: Lease Form of Value #7: Agency Form of Value #8: Audience Aggregation Form of Value #9: Loan Form of Value #10: Option Form of Value #11: Insurance Form of Value #12: Capital Hassle Premium Perceived Value Modularity Bundling and Unbundling Prototype The Iteration Cycle Iteration Velocity Feedback Alternatives Trade-offs Economic Values Relative Importance Testing Critical Assumptions Shadow Testing Minimum Viable Offer Incremental Augmentation Field Testing Marketing Attention Receptivity Remarkability Probable Purchaser Preoccupation End Result Qualification Point of Market Entry Addressability Desire Visualization Framing Free Permission Hook Call-To-Action (CTA) Narrative Controversy Reputation Sales Transaction Trust Common Ground Pricing Uncertainty Principle Four Pricing Methods Price Transition Shock Value-Based Selling Education-Based Selling Next Best Alternative Exclusivity Three Universal Currencies Three Dimensions of Negotiation Buffer Persuasion Resistance Reciprocation Damaging Admission Barriers to Purchase Risk Reversal Reactivation Value Delivery Value Stream Distribution Channel The Expectation Effect Predictability Throughput Duplication Multiplication Scale Accumulation unsolicited materials, avoiding, 89, 103–4 visualization, encouraging, 99–100 Marks-Beale, Abby, 268 Masterson, Michael, 39, 331 Maximization of system, 390 value capture by, 166 MBA/MBA programs See Business school Mean, 380 Measurement, of system See Systems analysis Median, 380 Medina, John, 211, 250–51 Meditation, 257 Mental models and Berkshire Hathaway, 13–14 for finance, 162–207 forming, 4–5 latticework of, 13–14 for marketing, 86–111 for mind and behavior, 208–51 for sales, 112–42 for systems, 346–65 for systems analysis, 366–87 for systems improvement, 388–417 for value creation, 37–85 for value delivery, 143–61 for work and productivity, 252–306 for working with others, 307–45 Mental stimulation, 227–28, 230 Meyers, Stephanie, 88 Middle path, 413 Midrange, 380 Milgram, Stanley, 329–30 Mind and behavior absence blindness, 244–46 association, 242–43 brain-as-onion analogy, 213–15 caveman syndrome, 208–10, 232, 281 cognitive scope limitation, 240–42 conflicts, 224–26 conservation of energy, 219–20 contrast, 246–48 and environment, 216, 218, 221–22 guiding structure for, 212, 221–22 health, tips for, 210–12 inhibition, 233 interpretation/reinterpretation, 229–31, 237 loss aversion, 236–37 mental stimulation, 227–28 motivation, 231–32 novelty, 250–51 pattern matching, 189, 226–27, 267 perceptual control, 215–17 priming, 267–68 recommended reading, 211–12, 214–16, 242, 245–46, 422–23 reference levels, balance in, 217–19, 225 reorganization, 222–24 scarcity, 248–49 threat lockdown, 237–40, 281 willpower, 234–35 work-related tasks, focus on (see Work and productivity) Minimization of system, 390 value capture by, 166 Minimum viable offer, 81–83, 113 Mischel, Walter, Dr., 234 Modal bias, 334–35 Mode, 380 Modularity bundling and unbundling, 66–67 elements of, 66–67 Monoidealism, 255–57, 262 Most important tasks, 261–62 Motivation, 231–32 and goals, 262–64 Mullins, John, 41 Multiplication of systems, 153–54 and franchising, 154 and scalability, 154–55 Multitasking, 257–59 Munger, Charles T., 12–13 Murphy, W H., 85 Mystique, 295–96 Narratives, as marketing device, 107–8, 332 Negotiation dimensions of, 128–30 recommended reading, 128, 424 Netflix, 141 Newspaper rule, 242 Next action, 273–74 Next best alternative, 125–26, 194–95 Nohria, Nitin, 42 Norms for pricing, 180–81 systems analysis, 382–83 Novelty, and behavior, 250–51 Nutrition, guidelines, 211–12 Obedience, to authority, 329–30 Objections to purchase, countering, strategies for, 137–40 Opportunity costs, 127, 193–94, 393 Optimization of system, 390 Option orientation, 338–39 Options defined, 50 -oriented business, requirements of, 60–61 Outflows, 348–49, 367–68 Overhead in allowable acquisition cost (AAC), 183 burn rate, monitoring, 185 components of, 184–85 Owner’s equity, 174–75 Pareto principle, 392–93 Park, James, 80–81 Parkinson, Cyril Northcote, 280 Parkinson’s law, 262, 280–81 Past performance measure, 385 Pattern matching, mental, 213, 226–27, 267, 305 Patterns, identifying for value creation, 74 Patterson, Kerry, 315 Pavlina, Steve, 270 Pavlov, Ivan, 25 Perceived value, 64–65, 126, 170 Perceptual control, 215–17 Performance load, 155, 287–88 Performance-based hiring, 342–45 Permission and customer reactivation, 141 to market, getting, 103–4 Personal MBA and positive controversy, 109–10 topics covered, 32–33 Personal research and development, 303–4 Persuasion resistance, 132–34 Pfeffer, Jeffrey, 22–23, 24 Planning fallacy, 320–21 and overconfidence, 282–84 Point-of-sale (POS) systems, 142 Pomodoro Technique, 256–57 Power board of directors, 201 and gift giving, 135 and group interaction, 308–9 influence versus compulsion, 308–9 and negotiation, 129 and objection to purchase, 138–39 Predictability of quality, 149–50 Preoccupation, 91–92 Price transition shock, 120–21 Pricing products/services camouflaged, 247–48 discounted cash flow (DCF)/net present value (NPV) method, 118–19 market comparison method, 118 price elasticity, 180–81 price transition shock, 120–21 pricing bubbles, 404 pricing power, 180–81 pricing uncertainty principle, 116–17 replacement cost method, 117–18 supporting price, 116–17 value comparison method, 119 Priming, 267–68 Proactive, 183 Procrastination, 225 Product development prototypes, 67–68 secrecy, avoiding, 67–68 steps in process, 144 Productivity See Work and productivity Products attention-getting for (see Marketing) as business, requirements of, 50–51 defined, 49 exclusivity, 126 needs and wants, filling (see Value creation) pricing (see Pricing products/services) satisfying customers (see Value delivery) types of (see Value, forms of) Profit margin, in allowable acquisition cost (AAC), 183 Profit per employee ratio, 379 Profits defined, 163 and incremental degradation, 186–87 as means to end, 168 profit margin, 126, 164–65 profitability ratios, 176 sufficiency of, 168–69 Progressive Insurance, 94 Project management, recommended reading, 425 Pronovost, Peter, Dr., 402 Protection, drive to defend, 42 Protective Garment Corporation, 85 Prototypes, -oriented business, requirements of, 67–68 Proxy measure, 383–84 Psychographics, 385–86 Public stock offering, 200–201 Purchasing power elements of, 190–91 increasing, methods for, 191–92 Pygmalion effect, 335–36 Qualifying customers, 93–95, 179–80 Quality expectation effect, 147–48 predictability, 149–50 versus incremental degradation, 186–87 Questions counterfactual simulation, 278–80 to improve results, 427–29 self-elicitation, 276–78 Rackham, Nick, 122 Ranges, 217–18 Rath, Tom, 310 Ratios, systems analysis, 176–77, 378–79 Reactivation, past customers, 141–42 Receivables, 191 Receivables financing, 200 Receptivity, to marketing message, 88–89 Reciprocation, in sales process, 134–35 Recruitment, from MBA programs, 30 Refactoring, 391–92 Reference levels, mental, 217–19, 225 Referrals to eliminate risk of purchase, 138 to expand network, 322–23 Reinterpretation, mental, 133, 229–31, 237 Relative importance testing, 77–78 Reliability of quality, 150 Remarkability, and attention-grabbing, 89–90 Reorganization, mental, 222–24 Replacement cost pricing method, 117–18 Reputation of authority, 330–31 strong, building, 110–11, 114, 147, 150 trust, and sales process, 114–15 Resale defined, 49, 146 -oriented business, requirements of, 54–55 Research and development, personal, 303–4 Resilience, 297, 405–6 Resources, universal currencies, 127 Return on investment (ROI), 203–4, 379 Return on promotion ratio, 379 Returns/complaints ratio, 379 Revenue breakeven point, 187–88 increasing, methods for, 179–80 Ricardo, David, 309 Risk reversal, to eliminate risk of purchase, 139–40, 147, 237 Robbers Cave experiment, 323–24 Robin, Vicki, 304 Rohn, Jim, 326 Ross, Julia, 212 Safety, in communication, 314–15 Sales buffers in, 130–32 and commitments, 331–32 common ground as condition, 115–16, 130 customer alternatives, understanding, 125–26 damaging admission to prospects, 136–37 education-based selling, 123–24 exclusivity in, 126 and negotiation, 128–30 objections to purchase, countering, 137–40 past customers, reactivation of, 141–42 persuasion resistance, 132–34 pricing methods, 117–19 pricing uncertainty principle, 116–17 purpose of, 38 reciprocation in, 134–35 recommended reading, 122, 128, 422 risk reversal in, 139–40 transaction in, 113 and trust, 114–16, 332 universal currencies, 127–28 value-based selling, 122–23 Sampling, systems analysis by, 376–77 Satisfaction, customer See Value delivery Scalability, 154–55 Scarcity, and behavior, 248–49 Scenario planning, 410–11 Scheiber, Noam, 27 Schraga, Christian, 22–24 Schwartz, Tony, 288 Scientific management, 25 Sebenius, James, 128 Second-order effects, 333–34, 362–64, 404 Secured and unsecured loans, 199 Segmentation, customer data measure, 385–86 Seinfeld, Jerry, 252–53 Selection test, 355–56 Self-elicitation, 276–78 Self-fulfilling prophesy, and Pygmalion effect, 336 Self-regard, excessive, 282–84 Services attention-getting for (see Marketing) as business, requirements of, 51–52 defined, 49, 146 exclusivity, 126 to fill wants and needs (see Value creation) pricing (see Pricing products/services) satisfying customers (see Value delivery) scalability, lack of, 155 types of (see Value, forms of) Set points, 217 Sethi, Ramit, 394 Setup, in negotiation, 128 Shadow testing critical assumptions, evaluating with, 82 and preorders, 71, 80–81 Shared resources balance in, 53 defined, 49 -oriented business, requirements of, 52–53 Shira, Aaron and Patrick, 149 Skinner, B F., 25, 215 Slack, 321, 349–50 Sleep, and performance, 290 Small businesses, growth of, 28 Smith, Patrick, 84–85 Social proof desperation, 133 to eliminate risk of purchase, 138 forms of, 328–29 Social signals in group interaction, 325, 327–28 luxury goods, 180–81 Spolsky, Joel, 341–42 Spot checks, 376 Standard operating procedure, 400–401 Stanley, Thomas, 327 Starbucks, 153–55 STATE model, 315 States of being, 266–67 Statistics, recommended reading, 34, 378, 425 Status seeking, 43–44, 299 Stimulation, mental, 227–28 Stock public stock offering, 200–201 of resources, 348–49 Stonewalling, 314–15 Stress and recovery, 290–92 Stress testing, 408–9 Structure, in negotiation, 129 Student loans, payoff, 31 Subscriptions and allowable acquisition cost (AAC), 183 customer reactivation, 141–42 defined, 49 -oriented business, requirements of, 53–54 profitability and lifetime value, 183 Sufficiency, 167–69 and comparison fallacy, 301 and pricing power, 180–81 and value capture, 166 Sunk costs, 204–5, 303 Sunlight, and health, 211–12 Switzler, Al, 315 Systemization, 160–61 benefits of, 160–61 checklisting, 401–3 defined, 160 Systems analysis of operation (see Systems analysis) autocatalysis, 353–54 change, 358–59 constraint, 350–52 counterparty risk, 361–62 environment for, 354–55 feedback loop, 352–53, 369 flows, 348, 367–68 Gall’s Law, 346–48, 367 interdependence in, 359–61, 367 normal accidents, theory of, 364–65 performance improvement (see Systems improvement) recommended reading, 425 second-order effects, 362–64 selection test, 355–56 slack, 349–50 stock, 348–49 uncertainty, 356–58 Systems analysis analytical honesty, 373–74 context, 375 correlation and causation, 381–82 deconstruction, 366–68, 391 garbage in, garbage out, 371–72 humanization, 386–87 key performance indicator, 369–71 margin of error, 377–78 mean, median, mode, midrange, 380 measurement, 368–69 norms, 382–83 proxy, 383–84 ratios, 378–79 recommended reading, 378, 379, 425 sampling, 376–77 segmentation, 385–86 tolerances, 372–73 Systems improvement automation, 397–400 cessation, 403–4 checklist, 401–3 critical few, 392–93 diminishing returns, 394–95 experimental mind-set, 413–14 fail-safe, 406–8 friction, 395–97 intervention bias, 388–89 middle path, 413 optimization, 390 recommended reading, 393–94, 402–3 refactoring, 391–92 resilience, 405–6 scenario planning, 410–11 standard operating procedure, 400–401 stress testing, 408–9 sustainable growth cycles, 411–12 Take the puppy home strategy, 140 Target monthly revenue (TMR), 169 Taylor, Frederick W., 25 Teamwork See Working with others Tesco, 55 Testimonials, 328–29 Testing, 293–94 Tharp, Roland, 276 Theft and fraud prevention, 206 Third parties, as buffers, 131 Threat lockdown, mental, 237–40, 281 Throughput, 151–52 Time, as universal currency, 127 Time value of money, 194–95 Tolerances in systems, 372–73 Tools, as force multipliers, 158–59 Toyota Production System (TPS), 145, 155–56, 398 Trade-offs, 73–78 creating, example of, 75–76 incremental degradation as, 186–87 relative importance testing, 77–78 understanding, importance of, 76–77 between universal currencies, 127–28 in value creation, 73–74 Transactions, completing See Sales Travel Web sites, 66 Trust background checks, 114 increasing, with damaging admission, 136–37 and sales transaction, 114–16, 122, 332 See also Reputation Tversky, Amos, 100 Typicality, 379–80 Ultradian rhythm, 288–89 Unbundling See Bundling and unbundling Uncertainty, 356–58 Underwriting, 59 Uniformity of quality, 149–50 Universal currencies, 127–28 Upselling, 46 Vaillant, George, 298 Valuation, 169–70 Value, forms of agency, 56–57 audience aggregation, 57–58 and bundling and unbundling, 66–67 capital, 62–63 insurance, 61–62 lease, 55–56 loans, 58–59 options, 60–61 products, 49–51 prototypes, 67–68 recommended reading, 421 resellers, 54–55 services, 49, 51–52 shared resources, 52–53 subscriptions, 53–54 Value capture, 165–67 Value Chain, 205–6 Value comparison pricing method, 119 Value creation alternatives, examining, 72–73 critical assumptions, 78–80 field testing, 84–85 incremental augmentation, 83–84 and iteration cycle, 68–70 minimum viable offer, 81–83 and modularity, 66–67 and perceived value, 64–65 potential purchase, economic values of, 75 product development, steps in, 144 purpose of, 37, 38 recommended reading, 39, 41, 75, 421 shadow testing, 80–81 and trade-offs, 73–78 in value stream process, 145 Value delivery accumulation in, 155–56 amplification in, 156–57 competition, barriers to, 157–58 distribution in, 146–47 duplication in, 152–53 expectation effect, 147–48 force multipliers, 158–59 multiplication of systems, 153–54 predictability in, 149–50 purpose of, 38, 143 recommended reading, 155–56, 422 scalability, 154–55 systemization, 160–61 throughput in, 151–52 value stream process in, 144–45 Value stream, 144–45 measure of, 151–52 Value-based selling elements of, 122–23 to eliminate risk of purchase, 138 Variable costs, 185–86 Venture capital, forms of, 200 Virtual assistants, 260 Visualization by customer, encouraging, 99–100 to eliminate risk of purchase, 138 Von Mises, Ludwig, 245 Walmart, 55, 153 Watson, David, 276 WIGWAM method, 69 Willpower, 234–35 depletion, 234–35, 256 Winston, Andrew, 242 Womack, James P., 155–56 Work and productivity Akrasia, 252–54 attachment, 302–3 batching technique, 258–59 cognitive switching penalty, 257–59 comparison fallacy, 299–301 completion, methods of, 260–61 confirmation bias, 285–86 counterfactual simulation, 278–80 decisions, 269–70 doomsday scenario, 281–82 energy cycles, 288–90 excessive self-regard tendency, 282–84 externalization, 274–76, 282 five-fold how, 272–73 five-fold why, 271–72 goals, 262–64 habits, 266–67 Hedonic treadmill, 296–99 hindsight bias, 286–87 limiting beliefs, 305–6 locus of control, 301–2 monoidealism, 255–57, 262 most important tasks, 261–62 multitasking, avoiding, 257–59 mystique, 295–96 next action, 273–74 Parkinson’s law, 262, 280–81 performance load, 287–88 personal research and development, 303–4 Pomodoro Technique, 256–57 priming, 267–68 recommended reading, 261, 268, 270, 273, 276, 288, 297, 305, 310, 423 self-elicitation, 276–78 states of being, 266–67 stress and recovery, 290–92 and team (see Working with others) testing, 293–94 3-10-20 method, 259 Working with others attribution error, 337–38 authority, 329–31 bystander apathy, 319–20 clanning, 323–24 commander’s intent, 318–19 commitment and consistency, 331–32 communication overhead, 311–13, 318 comparative advantage, 309–11 convergence and divergence, 325–26 golden trifecta, 316–17, 340 importance, feeling of, 313–14 incentive-caused bias, 333–34, 374 management, 339–42 modal bias, 334–35 option orientation, 338–39 performance-based hiring, 342–45 planning fallacy, 320–21 and power, 308–9 Pygmalion effect, 335–36 reasons for action, giving, 317 recommended reading, 309–10, 313–17, 320, 326–27, 331, 333, 335–36 referrals, 322–23 safety, feeling of, 314–15 social proof, 328–29 social signals, 327–28 Wozniak, Steve, 283 Y Combinator, 168 Zappos, 147–48 Ziglar, Zig, 133 ... 2010, 2012 All rights reserved THE LIBRARY OF CONGRESS HAS CATALOGED THE HARDCOVER EDITION AS FOLLOWS: Kaufman, Josh The personal MBA : master the art of business / Josh Kaufman p cm Includes index... on the shelf of the local supermarket Everything from the shape of the bottle to the scent of the product is optimized—including the text on the cardboard boxes used to ship inventory to the. .. MBA A Self-Directed Crash Course in Business The Wheat and the Chaff The Personal MBA Goes Global Munger’s Mental Models Connecting the Dots For the Skeptics Should You Go to Business School?