A World-class Business Education in a Single Volume
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First published in the United States of America by Portfolio Penguin, a member of Penguin Group (USA) Inc. 2010
First published in Great Britain by Portfolio Penguin 2011
This paperback edition with new material fi rst published in the United States of America 2012
This edition published 2012
Copyright © Worldly Wisdom Ventures LLC, 2010, 2012
All rights reserved
The moral right of the author has been asserted
ISBN: 978-0-14-197109-4
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
1 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
2 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
3 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
4 Value Delivery
Value Stream
Distribution Channel
The Expectation Effect
Predictability
Throughput
Duplication
Multiplication
Scale
Accumulation
Amplification
Barrier to Competition
Force Multiplier
Systemization
5 Finance
Profit
Profit Margin
Value Capture
Sufficiency
Valuation
Cash Flow Statement
Income Statement
Balance Sheet
Financial Ratios
Cost-Benefit Analysis
Four Methods to Increase Revenue
Pricing Power
Lifetime Value
Allowable Acquisition Cost (AAC)
Overhead
Costs: Fixed and Variable
Incremental Degradation
Breakeven
Amortization
Purchasing Power
Cash Flow Cycle
Opportunity Cost
Time Value of Money
Compounding
Leverage
Hierarchy of Funding
Bootstrapping
Return on Investment (ROI)
Sunk Cost
Internal Controls
6 The Human Mind
Caveman Syndrome
Performance Requirements
The Onion Brain
Perceptual Control
Reference Level
Conservation of Energy
Guiding Structure
Reorganization
Conflict
Pattern Matching
Mental Simulation
Interpretation and Reinterpretation
Motivation
Inhibition
Willpower Depletion
Loss Aversion
Threat Lockdown
Cognitive Scope Limitation
Association
Absence Blindness
Contrast
Scarcity
Novelty
7 Working with Yourself
Akrasia
Monoidealism
Cognitive Switching Penalty
Four Methods of Completion
Most Important Tasks
Goals
States of Being
Habits
Priming
Decision
Five-Fold Why
Five-Fold How
Next Action
Externalization
Self-Elicitation
Counterfactual Simulation
Parkinson’s Law
Doomsday Scenario
Excessive Self-Regard Tendency
Confirmation Bias
Hindsight Bias
Performance Load
Energy Cycles
Stress and Recovery
Testing
Mystique
Hedonic Treadmill
Comparison Fallacy
Locus of Control
Attachment
Personal Research and Development (R&D)
Limiting Belief
8 Working with Others
Power
Comparative Advantage
Communication Overhead
Importance
Safety
Golden Trifecta
Reason Why
Commander’s Intent
Bystander Apathy
Planning Fallacy
Referrals
Clanning
Convergence and Divergence
Social Signals
Social Proof
Authority
Commitment and Consistency
Incentive-Caused Bias
Modal Bias
Pygmalion Effect
Attribution Error
Option Orientation
Management
Performance-Based Hiring
9 Understanding Systems
Gall’s Law
Flow
Stock
Slack
Constraint
Feedback Loop
Autocatalysis
Environment
Selection Test
Uncertainty
Change
Interdependence
Counterparty Risk
Second-Order Effects
Normal Accidents
10 Analyzing Systems
Deconstruction
Measurement
Key Performance Indicator
Garbage In, Garbage Out
Tolerance
Analytical Honesty
Context
Sampling
Margin of Error
Ratio
Typicality
Correlation and Causation
Norms
Proxy
Segmentation
Humanization
11 Improving Systems
Intervention Bias
Optimization
Refactoring
The Critical Few
Diminishing Returns
Friction
Automation
The Paradox of Automation
The Irony of Automation
Standard Operating Procedure
Checklist
Cessation
Resilience
Fail-safe
Stress Testing
Scenario Planning
Sustainable Growth Cycle
The Middle Path
The Experimental Mind-set
Not “The End”
Appendix A: How to Continue Your Business Studies
Appendix B: Forty-nine Questions to Improve Your Results
Notes
Acknowledgments
‘A sterling effort … a book to be referred to at crucial moments’
Philip Delves Broughton, Management Today
‘Cherrypicks the cleverest advice from the most effective business books and condenses it into simple, memorable ideas and tools’
Smart.com
‘Few people know how to get things done better than Josh Kaufman’
David Allen, author of Getting Things Done
‘A creative, breakthrough approach to business education. I have an MBA from a top business school, and this book helped me understand business in a whole new way’
Ali Safavi, Executive Director of International Sales & Distribution, The Walt Disney Company
‘Josh has synthesized the most important topics in business into a book that truly lives up to its title. It’s rare to find complicated concepts explained with such clarity. Highly recommended’
Ben Casnocha, author of My Start-Up Life
‘Fundamentals are fundamentals. Whether you’re an entrepreneur or an executive at a Fortune 50 company, this book will help you succeed’
John Mang, Vice President, Procter & Gamble
‘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 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
‘An absolutely amazing book! I’m highly recommending this to all creative types, for the best overview of the modern business mindset they need’
Derek Sivers, founder, CD Baby, sivers.org
‘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
Josh Kaufman is an independent business educator who helps people develop their business skills, start new ventures, and get ahead in their fields.
He founded PersonalMBA.com as an alternative to the business schools, and has introduced hundreds of thousands of readers to the most powerful business concepts of all time.
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.
www.personalmba.com
To the millions of business professionals worldwide who work to make people’s lives better, in ways large and small.
Absence Blindness
Accumulation
Addressability
Agency
Akrasia
Allowable Acquisition Cost
Alternatives
Amortization
Amplification
Analytical Honesty
Association
Attachment
Attention
Attribution Error
Audience Aggregation
Authority
Autocatalysis
Automation
Balance Sheet
Barrier to Competition
Barriers to Purchase
Bootstrapping
Breakeven
Buffer
Bundling and Unbundling
Bystander Apathy
Call-To-Action
Capital
Cash Flow Cycle
Cash Flow Statement
Caveman Syndrome
Cessation
Change
Checklist
Clanning
Cognitive Scope Limitation
Cognitive Switching Penalty
Commander’s Intent
Commitment and Consistency
Common Ground
Communication Overhead
Comparative Advantage
Comparison Fallacy
Compounding
Confirmation Bias
Conflict
Conservation of Energy
Constraint
Context
Contrast
Controversy
Convergence and Divergence
Core Human Drives
Correlation and Causation
Cost-Benefit Analysis
Costs: Fixed and Variable
Counterfactual Simulation
Counterparty Risk
Critical Assumptions
Critical Few
Crusader Rule
Damaging Admission
Decision
Deconstruction
Desire
Diminishing Returns
Distribution Channel
Doomsday Scenario
Duplication
Economic Values
Economically Valuable Skills
Education-Based Selling
End Result
Energy Cycles
Environment
Excessive Self-Regard Tendency
Exclusivity
Expectation Effect
Experimental Mind-set
Externalization
Fail-safe
Feedback
Feedback Loop
Field Testing
Financial Ratios
Five Parts of Every Business
Five-Fold How
Five-Fold Why
Force Multiplier
Four Methods Completion
Four Methods to Increase Revenue
Four Pricing Methods
Framing
Free
Friction
Gall’s Law Flow
Garbage In, Garbage Out
Goals
Golden Trifecta
Guiding Structure
Habits
Hassle Premium
Hedonic Treadmill
Hidden Benefits of Competition
Hierarchy of Funding
Hindsight Bias
Hook
Humanization
Importance
Incentive-Caused Bias
Income Statement
Incremental Augmentation
Incremental Degradation
Inhibition
Insurance
Interdependence
Internal Controls
Interpretation and Reinterpretation
Intervention Bias
Iron Law of the Market
Irony of Automation
Iteration Cycle
Iteration Velocity
Key Performance Indicator
Lease
Leverage
Lifetime Value
Limiting Belief
Loan
Locus of Control
Loss Aversion
Management
Margin of Error
Measurement
Mental Simulation
Mercenary Rule
Middle Path
Minimum Viable Offer
Modal Bias
Modularity
Monoidealism
Most Important Tasks
Motivation
Multiplication
Mystique
Narrative
Next Action
Next Best Alternative
Normal Accidents
Norms
Not “The End”
Novelty
Onion Brain
Opportunity Cost
Optimization
Option
Option Orientation
Overhead
Paradox of Automation
Parkinson’s Law
Pattern Matching
Perceived Value
Perceptual Control
Performance Load
Performance Requirements
Performance-Based Hiring
Permission
Personal Research and Development
Persuasion Resistance
Planning Fallacy
Point of Market Entry
Power
Predictability
Preoccupation
Price Transition Shock
Pricing Power
Pricing Uncertainty Principle
Priming
Probable Purchaser
Product
Profit
Profit Margin
Prototype
Proxy
Purchasing Power
Pygmalion Effect
Qualification
Ratio
Reactivation
Reason Why
Receptivity
Reciprocation
Refactoring
Reference Level
Referrals
Relative Importance Testing
Remarkability
Reorganization
Reputation
Resale
Resilience
Return on Investment (ROI)
Risk Reversal
Safety
Sampling
Scale
Scarcity
Scenario Planning
Second-Order Effects
Segmentation
Selection Test
Self-Elicitation
Service
Shadow Testing
Shared Resource
Slack
Social Proof
Social Signals
Standard Operating Procedure
States of Being
Status Seeking
Stock
Stress and Recovery
Stress Testing
Subscription
Sufficiency
Sunk Cost
Sustainable Growth Cycle
Systemization
Ten Ways to Evaluate a Market
Testing
Threat Lockdown
Three Dimensions of Negotiation
Three Universal Currencies
Throughput
Time Value of Money
Tolerance
Trade-offs
Transaction
Trust
Twelve Standard Forms of Value
Typicality
Uncertainty
Valuation
Value Capture
Value Stream
Value-Based Selling
Visualization
Willpower Depletion
Clear language engenders clear thought, and clear thought is the most important benefit of education.
—RICHARD MITCHELL, AUTHOR OF THE GRAVES OF ACADEME
Many people assume that they need to attend business school to learn how to build a successful business or advance in their career. That’s simply not true. The vast majority of modern business practice requires little more than common sense, simple arithmetic, and knowledge of a few very important ideas and principles.
The Personal MBA is an introductory business primer. Its purpose is to give you a clear, comprehensive overview of the most important business concepts in as little time as possible.
Each idea in this book is presented in plain language. Connections between these ideas are highlighted for easy reference. Once you know the essentials, you’re free to focus on building your career, secure in the knowledge that you’re considering the most important matters first.
Most “MBA alternative” books try to replicate the curricula of top-tier business school programs. That’s not the focus of The Personal MBA. My aim is to help you build a solid understanding of general business practice from scratch, regardless of your current level of education or business experience.
Your time is valuable. I’ve made every effort to distill and condense a very large and diverse topic into an approachable volume you can read in a few hours. If additional research into specific topics is prudent in your situation, you’ll know what to look for and where to begin.
Knowing where to start in common business situations is extremely valuable, whether you’re a brand-new entrepreneur or a successful executive with decades of experience. Having a common language to label and think about what you notice opens the door to major improvements, whether you labor alone, with a small group of colleagues, or inside the largest corporation in the world.
This revised and updated edition of The Personal MBA features many new concepts that make the book’s coverage of fundamental ideas even more comprehensive. In addition, small edits have been made to improve the clarity of the concepts included in the first edition, and new index features have been added to enhance the book’s value as a long-term reference.
If you combine reading this book with real-world experience, you’ll reap the rewards for the rest of your life. I hope this book helps you make more money, get more done, and have more fun in the process.
All my best,
Josh Kaufman
Fort Collins, Colorado
2012
Just what the world needs … another business book!
—U.S. CUSTOMS AGENT AT JFK INTERNATIONAL AIRPORT,
AFTER ASKING ABOUT MY OCCUPATION
Life’s tough. It’s tougher if you’re stupid.
—JOHN WAYNE, WESTERN FILM ICON
Since you’re reading this book, chances are you want to make something important happen: start a business, get a promotion, or create something new in the world. It’s also likely that a few things are holding you back from achieving your dream:
Business Angst. The feeling that you “don’t know much about business” and therefore could never start your own company or take more responsibility in your current position. Better to maintain the status quo than face the fear of the unknown.
Here’s the good news: everyone has these unfounded fears, and they can be eliminated quickly. All you need to do is learn a few simple concepts that will change the way you think about how business works. Once you’ve conquered your fears, you can accomplish anything.
If you’re an entrepreneur, designer, student, programmer, or professional who wants to master the fundamentals of sound business practice, this book is for you. No matter who you are or what you’re trying to do, you’re about to discover a useful new way of looking at business that will help you spend less time fighting your fears and more time doing things that make a difference.
As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.
—RALPH WALDO EMERSON, ESSAYIST AND POET
One of the beautiful things about learning any subject is the fact that you don’t need to know everything—you only need to understand a few critically important concepts that provide most of the value. Once you have a solid scaffold of core principles to work from, building upon your knowledge and making progress becomes much easier.
The Personal MBA is a set of foundational business concepts you can use to get things done. Reading this book will give you a firm foundation of business knowledge you can use to make things happen. Once you master the fundamentals, you can accomplish even the most challenging business goals with surprising ease.
Over the past five years, I’ve read thousands of business books, interviewed hundreds of business professionals, worked for a Fortune 500 corporation, started my own businesses, and consulted with businesses ranging from solo operations to multinational corporations with hundreds of thousands of employees and billions of dollars in revenue. Along the way, I’ve collected, distilled, and refined my findings into the concepts presented in this book. Understanding these fundamental principles will give you the tools you can rely on to make good business decisions. If you invest the time and energy necessary to learn these concepts, you’ll easily be in the top 1 percent of the human population when it comes to knowing:
Think of this book as a filter. Instead of trying to absorb all of the business information that’s out there—and there’s a lot out there—use this book to help you learn what matters most, so you can focus on what’s actually important: making things happen.
People always overestimate how complex business is. This isn’t rocket science—we’ve chosen one of the world’s most simple professions.
—JACK WELCH, FORMER CEO OF GENERAL ELECTRIC
Don’t worry if you’re a complete beginner. Unlike many other business books, this book does not require any prior business knowledge or experience. I don’t assume you’re already the CEO of a large company who makes multimillion-dollar decisions on a daily basis. (But this book will still be very useful if you are!)
If you do have business experience, take it from many of my clients around the world who have MBAs from top schools—you’ll find the information in this book more valuable and practical than anything you learned earning your degree.
Together, we’ll explore 248 simple concepts that help you think about business in an entirely new way. After reading this book, you’ll have a much more comprehensive and accurate understanding of what businesses actually are and what successful businesses actually do.
Education is not the answer to the question. Education is the means to the answer to all questions.
—BILL ALLIN, SOCIOLOGIST AND EDUCATION ACTIVIST
Most business books attempt to teach you to have more answers: a technique for this, a method for that. This book is different. It won’t give you answers—it will help you ask better questions. Knowing what’s critically important in every business is the first step in making good business decisions. The more you know about the essential questions to ask in your current situation, the more quickly you’ll be able to find the answers you need to move forward.
The limits of my language are the limits of my world.
—LUDWIG WITTGENSTEIN, PHILOSOPHER AND LOGICIAN
To improve your business skills, you don’t need to learn everything there is to know—mastering the fundamentals can take you surprisingly far. I call these foundational business concepts mental models, and together, they create a solid framework you can rely on to make good decisions.
Mental models are concepts that represent your understanding of “how things work.” Think of driving a car: what do you expect when you press down on the right-side pedal? If the car slows down, you’ll be surprised—that pedal is supposed to be the accelerator. That’s a mental model—an idea about how something works in the real world.
Your brain forms mental models automatically by noticing patterns in what you experience each day. Very often, however, the mental models you form on your own aren’t completely accurate—you’re only one person, so your knowledge and experiences are limited. Education is a way to make your mental models more accurate by internalizing the knowledge and experiences other people have collected throughout their lives. The best education helps you learn to see the world in a new, more productive way.
For example, many people believe things like “starting a business is risky,” “to get started, you must create a massive business plan and borrow a lot of money,” and “business is about who you know, not what you know.” Each of these phrases is a mental model—a way of describing how the world works—but they’re not quite accurate. Correcting your mental models can help you think about what you’re doing more clearly, which will help you make better decisions:
| INACCURATE MENTAL MODEL | ACCURATE MENTAL MODEL |
| Starting a business is risky. | Uncertainty is an ever-present but manageable part of business, and risks can be minimized. |
| In order to successfully create a business, you must create a flawless business plan before you start your business. | A written plan is secondary to understanding the critical functions of your business, and no matter how much you prepare, there will always be surprises along the way. |
| You must raise large amounts of capital before you start building your business. | Raising money is necessary only if it allows you to accomplish something that would otherwise be impossible (like building a factory). |
| It’s not what you know, it’s who you know. | Personal connections are important, but knowledge is key if you want to use those connections to your best advantage. |
After learning the mental models in this book, many of my clients have realized that their picture of what businesses are and how businesses work was inaccurate—getting their venture off the ground would be far easier than they originally imagined. Instead of wasting valuable time and energy feeling intimidated and freaking out, learning these concepts gave them the freedom to stop worrying and start making progress.
This book will help you learn the fundamental principles of business quickly so you can focus your time and energy on actually doing useful things: creating something valuable, attracting attention, closing more sales, serving more customers, getting promoted, making more money, and changing the world.
Not only will you be able to create more value for others and improve your own financial situation, you’ll also have more fun along the way.
Self-education is, I firmly believe, the only kind of education there is.
—ISAAC ASIMOV, FORMER PROFESSOR OF BIOCHEMISTRY AT BOSTON UNIVERSITY AND AUTHOR OF OVER FIVE HUNDRED BOOKS
People often ask me if I have an MBA. “No,” I reply, “but I did go to business school.”
This section describes the history of the Personal MBA as a project. You may find this context useful, but the primary value of this book is independent of my personal background. If you’d like to get to the material as quickly as possible, feel free to skip ahead to page 17.
As a student at the University of Cincinnati, I was fortunate enough to participate in the Carl H. Lindner Honors-PLUS program, which is essentially an MBA at the undergraduate level. The program was generously funded via scholarships, and as a result I had the remarkable opportunity to experience most of what business schools teach without the crippling burden of debt.
I’ve also been on the “fast track to corporate success.” Through the University of Cincinnati’s cooperative education program, I landed a management position at a Fortune 500 company—Procter & Gamble—during my second year of college. By the time I graduated in 2005, I had an offer to become an assistant brand manager in P&G’s Home Care division, a role typically reserved for graduates of top MBA programs.
As I began my last semester of college, I started focusing less on my coursework and more on the future. My new job would require a solid understanding of business, and almost all of my peers and managers would have MBAs from top-tier schools. I briefly considered enrolling in an MBA program, but it made no sense to pursue an expensive credential to get the kind of job I already had, and my responsibilities would be demanding enough without adding a load of coursework by enrolling in a part-time program.
While considering my options, I remembered a bit of career advice that Andy Walter, the first associate director I reported to at P&G, had given me: “If you put the same amount of time and energy you’d spend completing an MBA into doing good work and improving your skills, you’ll do just as well.” (Andy doesn’t have an MBA—he studied electrical engineering in college. He’s now one of the company’s top global IT managers, responsible for leading many of P&G’s largest projects.)
In the end, I decided to skip business school, but not business education. Instead of enrolling in an MBA program, I skipped the classroom and hit the books, creating my own “Personal” MBA.
Many who are self-taught far excel the doctors, masters, and bachelors of the most renowned universities.
—LUDWIG VON MISES, AUSTRIAN ECONOMIST AND AUTHOR OF HUMAN ACTION
I’ve always been an avid reader, but before I decided to learn everything I could about business, most of what I read was fiction. I grew up in New London, a small farm town in northern Ohio where the major industries are agriculture and light manufacturing. My mother is a children’s librarian, and my father worked as a sixth grade science teacher, then as an elementary school principal. Books were a major part of my life, but business was not.
Before getting my first real job, I knew next to nothing about what businesses were or how they functioned, other than that they were places people went every day in order to draw a paycheck. I had no idea that companies like Procter & Gamble even existed until I applied for the job that swept me into the corporate world.
Working for P&G was an education in itself. The sheer size and scope of the business—and the complexity required to manage a business of that size—boggled my mind. During my first three years with the company, I participated in decisions across every part of the business process: creating new products, ramping up production, allocating millions of marketing dollars, and securing distribution with major retailers like Walmart, Target, Kroger, and Costco.
As an assistant brand manager, I was leading teams of thirty to forty P&G employees, contractors, and agency staff—all of whom had competing projects, plans, and priorities. The stakes were huge and the pressure was intense. To this day, I can’t help but marvel at the thousands of man-hours, the millions of dollars, and the enormously complex processes necessary to make a simple bottle of dish soap appear 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 store.
My work at P&G, however, wasn’t the only thing on my mind. My decision to skip business school in favor of educating myself developed from a side project into a minor obsession. Every day I would spend hour after hour reading and researching, searching for one more tidbit of knowledge that would help me to better understand how the business world worked.
Instead of using the summer after graduation to relax and go on vacation, I spent my days haunting the business stacks at the local bookstore, absorbing as much as I possibly could. By the time I officially started working full-time for P&G in September 2005, I had read hundreds of books across every discipline that business schools teach, as well as in disciplines that most business schools don’t cover, such as psychology, physical science, and systems theory. When my first day at P&G finally arrived, I felt prepared to strategize with the best of them.
As it turned out, my self-education served me well—I was doing valuable work, making things happen, and getting good reviews. As time went on, however, I realized three very important things:
It is important that students bring a certain ragamuffin, barefoot irreverence to their studies; they are not here to worship what is known, but to question it.
—JACOB BRONOWSKI, WRITER AND PRESENTER OF THE ASCENT OF MAN
If there’s one thing I’m good at, it’s taking in a huge amount of information and distilling it to the essentials. I’m a synthesist by nature, and my travels through the world of business literature quickly became an exercise in separating the diamonds from the rough.
The amount of business information being published every day is staggering. As of this writing, the Library of Congress has approximately 1.2 million business-related books in its general collection. Assuming you read at an average speed of 250 words per minute and an average book contains 60,000 words, it would take 528 years of around-the-clock reading to finish the entire collection, 822 years if you allowed yourself the luxury of food and sleep.
According to Bowker, the company responsible for assigning ISBN numbers for the publishing industry, over 11,000 new business books are published worldwide each year, adding to the millions of business books printed since the early 1900s. Amazon.com carries over 630,000 business-related titles, not counting audiobooks, e-books, or materials that are published without an ISBN.
Of course, books aren’t the only source of business information available. Take magazines and newspapers, for example: 527 major business-related periodicals are currently tracked by the Wilson Business Periodicals Index. Every year, the WBPI adds over 96,000 records to its database of 1.6 million entries. That figure doesn’t include blogs: according to Google Blog Search, there are currently over 110 million business-related blog posts on the Internet—a figure that is growing daily. There’s certainly no shortage of business writers in the blog world: the blog search engine Technorati has indexed over 4 million bloggers who write about business-related topics.
Clearly, sifting through the massive amount of business information available would be an enormous challenge. My early business research was mostly haphazard—I simply went to a bookstore and picked up a book that looked interesting. For every great book I found, I had to wade through ten times as many hastily assembled texts by consultants who were more interested in creating a three-hundred-page business card than providing genuinely useful information.
I started to wonder: how much of what’s out there—and there’s a lot out there—I really needed to know. How could I separate the valuable information from the rubbish? I only had so much time and energy, so I started searching for a filter: something that would direct me to the useful knowledge and keep me away from the chaff. The more I searched, the more I realized it didn’t exist—so I decided to create it myself.
I began tracking which resources were valuable and which ones weren’t, then publishing my findings on my Web site, both as an archive and for the benefit of anyone interested. It was a personal project, nothing more: I was just a recent college graduate doing my best to learn something useful, and publishing my research for others seemed like a good use of time and energy.
One fateful morning, however, the Personal MBA went unexpectedly public, and my life changed permanently.
Whoever best describes the problem is the one most likely to solve it.
—DAN ROAM, AUTHOR OF THE BACK OF THE NAPKIN
In addition to reading books, I was following several hundred business blogs. Some of the best business thinking was being published on the Internet months (or years) before it ever appeared in print, and I wanted to read it all as soon as it was available.
One of the bloggers I followed avidly was Seth Godin. A best-selling author (of books like Permission Marketing, Purple Cow, and Linchpin) and one of the earliest successful online marketers, Seth specializes in bold statements of big ideas designed to challenge you to do more, do better, question the status quo, and make a difference.
One particular morning, Seth was commenting on a recent news story: Harvard was rescinding the admission of 119 previously soon-to-be Harvard MBA students.1 These prospective students had discovered an ethically dubious way to hack into the Harvard admissions Web site to view their application status before the official acceptance letters went out. The story quickly became a media frenzy, devolving into a debate about whether MBA students were naturally inclined to lie, cheat, and steal, or if business schools made them that way.
Instead of being outraged at the bad behavior of the applicants, Seth (unsurprisingly) had a different perspective: Harvard was giving these students a gift. By rescinding their applications, Harvard was giving these students a significant opportunity: the university was returning $150,000 and two years of their lives, which would otherwise have been spent chasing a mostly worthless piece of paper. “It’s hard for me to understand,” he wrote, “why [getting an MBA] is a better use of time and money than actual experience combined with a dedicated reading of 30 or 40 books.”
“Holy cow,” I thought. “That’s exactly what I’m doing!”
Over the next two days, I created a list of the books and resources I had found most valuable in my studies,2 then published it on my blog with a link to Seth’s post, so anyone interested in figuring out how to do what Seth suggested would be able to find it. Then I typed a quick e-mail to Seth and sent him a link to my post.
Two minutes later, a post went up on Seth’s blog directing people to my reading list, and a flood of readers from around the world started visiting my Web site.
Popular personal development and productivity blogs like Lifehacker.com picked up the story, which then spread to social media Web sites like Reddit, Digg, and Delicious. Within the first week of the Personal MBA’s existence, thirty thousand people visited my little corner of the Internet to see what I was doing. Better yet, they started talking.
Some readers asked questions—where should they start? Others suggested great books they’d read, helping me with my research. A few told me the entire project was naive, and that I was wasting my time. Through it all, I kept reading, researching, and developing the Personal MBA in my spare time, and the business self-education movement began to snowball.
In a very short time, the Personal MBA grew from a one-man side project into a major global movement. The site, http://personalmba.com, has been visited over 1.6 million times since it went live in early 2005, and the project has been featured by The New York Times, The Wall Street Journal, Bloomberg BusinessWeek, Time, Fortune, Fast Company, and hundreds of other major news organizations and independent Web sites. In late 2008, I left P&G to focus on building the Personal MBA full-time.
As much as I enjoyed the interest in my reading list project, I soon realized that providing a reading list wasn’t enough. People read business books to solve specific challenges or to improve themselves in some tangible way. They’re looking for solutions, and a list of books, while valuable, could only do so much.
The books themselves aren’t as important as the ideas and knowledge they contain, but many of my readers were missing out because it took hours of turning pages to get to the good stuff. Many Personal MBA readers started enthusiastically, then quit after reading a few books—it took too long to reap the rewards, and the demands of work and family life inevitably intervened.
To help them, I had more work to do.
I think it’s undeniably true that the human brain works in models. The trick is to have your brain work better than the other person’s brain because it understands the most fundamental models—the ones that do the most work.
—CHARLES T. MUNGER, BILLIONAIRE BUSINESS PARTNER OF
WARREN BUFFETT, CEO OF WESCO FINANCIAL, AND VICE-CHAIRMAN OF
BERKSHIRE HATHAWAY
My first glimpse into the future of the Personal MBA came when I discovered the work of Charles T. Munger.
Charlie was born in Omaha, Nebraska, shortly before the Great Depression. As a young man, Charlie skipped high school athletics in favor of reading to satisfy his intense curiosity about how the world worked. His early business experience consisted of working in a family-owned grocery store for $2 a day.
In 1941, Charlie graduated from high school. After two years of studying undergraduate mathematics and physics at the University of Michigan, he enlisted in the Army Air Corps, where he was trained as a meteorologist. In 1946, after leaving the army, he was accepted to Harvard Law School, even though he had never earned a bachelor’s degree, which wasn’t absolutely required at the time.
Charlie graduated from Harvard Law in 1948 and spent the next seventeen years practicing as an attorney. In 1965, he left the law firm he had created to start an investment partnership, which went on to outperform the market by 14 percent compounded annually over fourteen years—an astounding record given his complete lack of formal business education.
Charlie Munger isn’t a household name, but Warren Buffett, Charlie’s business partner, certainly qualifies. Buffett and Munger purchased Berkshire Hathaway, a floundering textile manufacturer, in 1975, turning it into a conglomerate investment holding company. Together, Buffett and Munger became billionaires.
According to Buffett, Charlie’s mental-model-centric approach to business is a major contributing factor in the success of Berkshire Hathaway and Buffett’s status as one of the world’s wealthiest business owners: “Charlie can analyze and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in sixty seconds. He’s the perfect partner.”3
The secret to Charlie’s success is a systematic way of understanding how businesses actually work. Even though he never formally studied business, his relentless self-education in a wide variety of subjects allowed him to construct what he called a “latticework of mental models,” which he then applied to making business decisions:
I’ve long believed that a certain system—which almost any intelligent person can learn—works way better than the systems most people use [to understand the world]. What you need is a latticework of mental models in your head. And, with that system, things gradually fit together in a way that enhances cognition.
Just as multiple factors shape every system, multiple mental models from a variety of disciplines are necessary to understand that system … You have to realize the truth of biologist Julian Huxley’s idea that, “Life is just one damn relatedness after another.” So you must have all the models, and you must see the relatedness and the effects from the relatedness …4
It’s kind of fun to sit here and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.5
By basing their investment decisions on their extensive knowledge of how businesses work, how people work, and how systems work, Buffett and Munger created a company worth over $195 billion—an astounding track record for a meteorologist-turned-lawyer from Omaha with no formal business education.
Discovering Munger’s approach to business education was a huge validation. Here was a man who, decades before, had decided to do what I was doing—and it had worked extraordinarily well! Munger’s method of identifying and applying fundamental principles made much more sense to me than most of the business books I’d previously read. I resolved to learn everything I could about the “mental models” Charlie used to make decisions.
Unfortunately, Charlie has never published a comprehensive collection of his mental models. He’s given hints in his speeches and essays—even going so far as to publish a list of the psychological principles he finds most useful in Poor Charlie’s Almanack, a recent biography—but there was no single text that contained “everything you need to know in order to succeed in business.”
If I wanted to understand the fundamental principles of how every successful businessperson works, I’d have to discover them myself. To do that, I had to rebuild my understanding of business from the ground up.
In all affairs, it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted.
—BERTRAND RUSSELL, RENOWNED PHILOSOPHER AND AUTHOR OF THE PROBLEMS OF PHILOSOPHY AND THE PRINCIPLES OF MATHEMATICS
Most business books (and business schools) assume that the student already knows what businesses are, what they do, and how they work—as if it were the most obvious thing in the world. It’s not. Business is one of the most complex and multidisciplinary areas of human experience, and trying to understand how businesses work can be remarkably intimidating, even though they surround us every day.
Businesses are so much a part of daily life that it’s easy to take the business world for granted. Day after day, businesses deliver what we want swiftly, efficiently, and with remarkably little fuss. Look around: almost every material good you’re surrounded by right now was created and delivered to you by some sort of business.
Businesses invisibly create and deliver so many different things in so many different ways that it makes generalizations difficult: what do apple cider and airlines have in common? As it turns out, quite a bit—if you know where to look. Here’s how I define a business:
Every successful business (1) creates or provides something of value that (2) other people want or need (3) at a price they’re willing to pay, in a way that (4) satisfies the purchaser’s needs and expectations and (5) provides the business sufficient revenue to make it worthwhile for the owners to continue operation.
Take away any of these things—value creation, customer demand, transactions, value delivery, or profit sufficiency—and you have something other than a business. Each factor is both essential and universal.
As I deconstructed each of those factors, I found additional universal requirements. Value can’t be created without understanding what people want (market research). Attracting customers first requires getting their attention, then making them interested (marketing). In order to close a sale, people must first trust your ability to deliver on what’s promised (value delivery and operations). Customer satisfaction depends on reliably exceeding the customer’s expectations (customer service). Profit sufficiency requires bringing in more money than is spent (finance).
None of these functions is rocket science, but they’re always necessary, no matter who you are or what business you’re in. Do them well, and your business thrives. Do them poorly, and you won’t be in business very long.
Every business fundamentally relies on two additional factors: people and systems. Every business is created by people and survives by benefiting other people in some way. To understand how businesses work, you must have a firm understanding of how people tend to think and behave—how humans make decisions, act on those decisions, and communicate with others. Recent advances in psychology and neuroscience are revealing why people do the things they do, as well as how to improve our own behavior and work more effectively with others.
Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result. By understanding the essentials of how complex systems work, it’s possible to find ways to improve existing systems, whether you’re dealing with a marketing campaign or an automotive assembly line.
Before writing this book, I spent several years testing the principles in this book with my clients and readers. Understanding and applying these “business mental models” has helped them launch new careers, land job offers from prestigious organizations in the corporate and academic worlds, get promoted, start new businesses, and in several cases go through the entire product development process (from idea to first sale) in less than four weeks.
These concepts are important because they work. Not only will you be able to create more value for others and improve your own financial situation, you’ll find it noticeably easier to achieve what you set out to do—and you’ll have more fun along the way.
You wasted $150,000 on an education you could have got for a buck fifty in late charges at the public library.
—MATT DAMON AS WILL HUNTING, GOOD WILL HUNTING
This is a book about business concepts, not business schools. However, many people simply don’t believe it’s possible to reap the benefits of a comprehensive business education without forking over enormous sums of money for a name-brand diploma from an Ivy League school. This section, which will discuss the merits and downfalls of traditional MBA programs, is for the skeptics.
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