I quite liked this book. It provides standard a framework, concepts and jargon around a very large topic. Personally, I found the first half more useful than the second.
pg 38 - The Five Parts of Every Business
- Value Creation. Discovering what people need or want, then creating it
- Marketing. Attracting attention and building demand for what you've created
- Sales. Turning prospective customers into paying customers
- Value Delivery. Giving your customers what you've promised and ensuring that they're satisfied
- Finance. Bringing in enough money to keep going and make your effort worthwhile
pg 39 - Economically Valuable Skills
If you want to improve your value as a businessperson, focus on improving skills related to the Five Parts of Every Business See book: Ready, Fire Aim
pg 45 - Ten Ways to Evaluate a Market
- Urgency - How badly do people want or need this right now
- Market size - How many people are actively purchasing things like this?
- Pricing Potential - What is the highest price a typical purchaser would be willing to spend for a solution
- Cost of Customer Acquisition - How easy is it to acquire a new customer? How much money and effort does it take to generate a sale?
- Cost o Value Delivery - how much would it cost to reate and deliver the value offered, both in money and effort?
- Uniqueness of Offer - How unique is your offer versus competing offereings in the market, and how easy is it for potential competitors to copy you?
- Speed to Market - How quickly can you create something to sell?
- Up-Front investment - How much will you have to invest before you're ready to sell?
- Upsell Potential - Are there related secondary offers that you could also present to purchasing customers?
- Evergreen Potential - Once the initial offer has been created, how much additional work will you have to put into it in order to continue selling?
pg 75 - Economic Values
- Efficacy - How well does it work?
- Speed - How fast does it work?
- Reliability - Can I depend on it to do what I want?
- Ease of Use - How much effort does it require?
- Flexibility - How many things does it do?
- Status - How does this affect the way others perceive me?
- Aesthetic appeal - How attractive or otherwise aesthetically pleasing is it?
- Emotion - How does it make me feel?
- Cost - How much do I have to give up to get this?
These can be categorized into convenience and fidelity. Things that are quick, reliable, easy and flexible are convenient. Things that offer quality, status, aesthetic appeal or emotional impact are high-fidelity. It's incredibly difficult to optimize for both fidelity and convenience at the same time. The Trade-Offs that are made in the development of new offerings are what give each option its unique identity
pg 77 - Relative Importance Testing
Relative Importance Testing can help you quickly determine which benefits you shoiuld focus on to make your offering maximally attractive. They are is a set of analysis techniques that give you a way to determine what people actually want by asking them a series of simple quetions designed to simulate real-life Trade-offs. For example, we show the following options: A. Orders delivered to table in five minutes or less B. Most entree prices under $20 C. Appealing restaurant decor D. Large variety of menu options After this set is shown, the participant is asked:
- Which of these items is most important
- Which of these items is least important Once answered, they are shown another set of questions. Random question sets containing four or five criteria are provided until there are no more possible combinations or the participant's attention wanders, typically around the five- to ten-minute mark.
pg 79 - Critical Assumptions
Critical Assumptions are facts or characteristics that must be true in the real world for your business or offereing to be successful.
Note that Eric Reis calls these "leap of faith assumptions" in Lean Startup
pg 80 - Shadow Testing
Shadow testing is the process of selling an offering before it actually exists. Be up front with your potential customers that the offering is still in development.
pg 106 - Call to Action
Your prospects can't read your mind. If you want your prospects to take the next step you're encouraging, you need to tell them exactly what to do. The most effective marketing strategies give the recipient or prospect a single very clear very short action to take next. The best Calls-To-Action ask directly either for the sale or for Permission to follow up.
pg 128 - Three Dimensions of Negotiation
Setup
Who is involved, what are you proposing, what's the setting, what are the environmental factors of the deal that make this more or less important to the other party?
Structure
What exactly will you propose, how will you frame it, what are the benefits to the other party, what's they other party's Next Best Alternative and how is your proposal better, how will you overcome their objections and are there concessions you're willing to make to reach an aggrement
Discussion
This is where you talk through your proposal to the other party. Outcomes are either "yes", "not yet" or "no"
pg 143
Value Delivery involves everything necessary to ensure that every paying customer is a happy customer: order processing, inventory management, delivery/fulfillment, troubleshooting, customer support, etc.
pg 145 - Value Stream
A Value Stream is the set of all steps and all processes from the start of your Value Creation process all the way through the delivery of the end result to your customer.
You can think of the Value Stream as a combination of your Value Creation and Value Delivery processes.
pg 158 - Force Multiplier
As a general rule, the only good use of debt or outside capital in setting up a system is to give you access to Force Multipliers you would not be able to access any other way.
Always choose the best tools you can afford. By investing in Force Multipliers, you free up time, energy and attention to focus on building instead of just operating
pg 160 - Systemization
If you can't describe what you are doing as a process, you don't know what you're doing
pg 171 - Cash Flow Statement
The cash flow statement is straightforward: it's an examination of a company's bank account over a certain period of time.
Cash tends to move in three primary areas: operations (selling offers and buying inputs), investing (collecting dividends and paying for capital expenses) and financing (borrowing money and paying it back). Cash Flow statements usually track these sources separately.
May investors use a metric called "free cash flow" when evaluating companies. This metric comes from the cash flow statement: it's the amount of cash a business collects from operations minus cash spent for capital equipment and assets.
pg 174 - Balance Sheet
Assets - Liabilities = Owner's Equity
and
Assets = Liabilities + Owner's Equity
This looks odd: why would you ever wnant to add Liabilities and Owner's Equity? Here's why: when a business borrows money, it receives the amount of cash borrowed. That goes on the clash flow statement, and the influx of money makes it look like the business had a very good month if you don't notice it's a loan.
pg 176 - Financial Ratios
Comparing ratios to industry averages makes it easy to see if the company is performing like a typical company or if something is odd. They are useful for sanity-checking profit, debt, cash and efficiency. There are thousands; analysts tend to choose a small set based on the industry (it makes no sense to calculate inventory for a service business)
- Profitability ratios indicate he ability to generate profit. Net Profit / total assets
- Leverage ratios show how the company uses debt. Total liability / shareholder's equity ("debt-to-equity")
- Liquidity ratios indicate the ability of a business to pay its bills and can be used to see if business is sitting on cash instead of investing. "Current Ratio" - current assets / current liabilities. "Quick Ratio" - current assets minus inventory / current liabilities
- Efficiency ratios indicate how well a business is managing its inventory (either too little or too much is bad). "Day Sales Outstanding" shows how long it takes to collect the cash from sales
pg 181 - Lifetime Value
Is the total value of a customer's business over the lifetime of their relationship with your company.
Many businesses that used to offer pay-once products now offer subscription-type services. IDEs, music, even WiFi routers
pg 183 - Allowable Acquisition Cost
AAC is the marketing component of Lifetime Value. The higher the avg Lifetime Value, the more you can spend to attract a new customer.
Having a high Lifetime Value allows you to lose money on the first sale ("loss leader").
Calculation: Avg customer Lifetime Value minus Value Stream costs minus (Overhead / total customer base) * (1 - desired profit margin).
Example: $2000 (Lifetime Value over 5 years) - $500 (Value Stream) = $1500 (Revenue per customer). $500,000 (Overhead over 5 years) / 500 (number of customers) = $1000 per customer (Fixed Costs). So $1500 - $1000 = $500 in revenue before marketing expenses. If you're shooting for 60% profit margin you can afford to spend 40% of the revenue on marketing so $500 * 0.4 = $200 AAC per customer
pg 184 - Costs: Fixed and Variable
Reductions in Fixed Costs (e.g. Overhead) Accumulate: if you can save $50/month on your phone bill this Accumulates to $600/year.
Reductions in Variable Costs (e.g. cost of product) are Amplified by volume: if you can save $0.50 on each T-shirt you produce, you'll save $500 on every 1000 T-shirts.
pg 189 - Amortization
The process os spreading the cost of a resource investment over the estimated useful life of that investment. Say you produce stuffed dogs and want to buy a factory; let's assume the factory can produce 10 million units during its life. On a per-unit basis, that brings the cost per unit of the factory down to $10. If you sell every unity you make for $100, that's a healthy Profit Margin.
If you have a reliable estimate of how much it will cost and how much you can produce, Amortization helps you figure out whether or not investing large amounts of Capital makes sense. Amortization depends on an accurate prediction of useful life.
pg 205 - Sunk Costs
Sunk costs are like quicksand and too much can get you into a dangerous position where you throw bad money after good.
Easy to understand conceptually but much harder to put into practice. When you sink years of work into a career you realize you don't want, it's tough to walk away. Don't pour concrete into a bottomless pit; walk away.
You never have to earn back money the same way to lost it
pg 205 - Internal Controls
Tracking financial and operations data (via SOPs) over time lets you identify patterns in your revenue, costs and Value Chain. These become useful for budgeting, supervising operations, compliance and preventing theft and fraud.
Every year, the Risk Management Association compiles a huge amount of data and makes it easy to discover what solvent businesses of various sizes spend on marketing, sales, operations and capital in a given period of time. Banks and investors rely on RMA data to determine whether or not a business they're examinging is typical.
Industry groups can also be a useful source of data. By comparing your business's data to that of other companies in your market, you can get a better picture of how well you're performing and where your business could use improvement.
pg 216 - Perceptual Control
People act to control their perceptions. A rock on the deck of a ship is not a control system. The rock doesn't want anything so it has nothing to control. A human being on the deck, however, wants to stay upright and will therefore take many different actions to continue to stay standing.
pg 217 - Reference Level
At the heart of every Perceptual Control system is a Reference Level - a range of perceptions that indicate the system is "under control". There are three kinds of Reference levels: set points, ranges and errors.
A set point is a threshold. A range is a spread of acceptable values. An error is a set point defined at zero - any perception that's not zero is out of control. For example, customer service complaints; if zero, everything is under control but if your in-box is filling with complaints you need to act.
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. The perceptions themselves haven't changed, but you'll no longer act to bring the perception under control because it already is under control.
pg 221 - Guiding Structure
Guiding Structure means the structure of your Environment is the largest determinant of your behavior. If you want to successfully change a behavior, don't try to change the behavior directly. Change the structure that influences or supports the behavior.
A great example is the "Sterile Cockpit Rule" that the FAA instituted in 1981. Most airline accidents happen below 10,000 feet; below 10,000 feet the only discussion permitted is about information directly related to the flight in progress. By eliminating distractions, accidents were reduced.
pg 250 - Novelty
In Brain Rules, John Medina shares how he's able to keep the attention of his students effectively in classes that last more than an hour: he plans his class in modules that last no more than ten minutes. Each module starts with a hook - an interesting story or anecdote, followed by a brief explanation of the key concept.
This is what Sal Khan does with his Khan Academy videos
pg 257 - Cognitive Switching Penalty
Productive multitasking is a myth. Every time you swich the focus of your Attention from one subject to another, you incur the Cognitive Switching Penalty.
Yea, welcome to my life
To avoid this, batch similar tasks. Paul Graham calls this his "Maker's Schedule/Manager's Schedule". If you're trying to create something, the worst thing you can do is try to fit creative tasks in between administrative tasks. The "Maker's Schedule" consists of large blocks of uninterrupted time; the "Manager's schedule" is broken up into many small chunks.
pg 278 - Counterfactual Simulation
Think of this as applied imagination - you're conciously posing a "what if" or "what would happen if" question to your mind. Instead of waiting for your brain to simulate a potential course of action, this allows you to force your brain to run simulations
Can help discover hidden opportunities that you may have previously assumed weren't possible. When you run one, you assume the event or end state you're simulating is already true. By supplying your mind with an artificial destination, it will automatically start to fill in the blanks between points A and B.
pg 287 - Performance Load
In order to handle the unexpected, you must have unsheduled time to respond to new inputs. The default mind-set is that "downtime" is inefficient and wasteful. But this ignores the necessity of handling unexpected events, which always occur.
This concept of idle time came out of Toyota and Eli Goldratt describes it really well in The Goal
pg 290 - Stress and Recovery
Winston Churchill has a masterful quote on this. Basically he says the key element is Change.
A man can wear out a particular part of his mind by continually using it. The tired parts of the mind can be rested and strengthened, not merely by rest, but by using other parts. It is not enough to merely switch off the lights which play upon the main and ordinary field of interest; a new field of interest must be illuminated. It is of no use saying to the tired mental muscles, "I will give you a good rest", "I will go for a long walk" or "I will lie down and think of nothing". The mind keeps busy just the same. If it has been weighing and measuring, it goes on weighing and measuring. if it has been worrying, it goes on worrying. It is only when new cells are called into activity, when new stars become the lords of the ascendant, that relief, repose, refreshment are afforded>
pg 306 - Limiting Belief
Limiting Belief can appear when you consider doing things that make you uncomfortable, like applying for a new job or selling something. Images of rejectino and disapproval start flashing through your mind, and your first impulse is to conclude "this won't work".
Here's a useful rule of thumb for these types of situations: make the other party tell you no. This is a Habit worth installing: you may believe you'll be turned down but make the other party say it
pg 311 - Communication Overhead
Proportion of your time spent communicating with 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.
Eight symptoms of bureaucratic breakdown
- No one knows how or where decisions are made
- Too many tasks are started and not completed
- Nothing can be done without checking with a bunch of people
- No innovation or radical ideas
- Minor issues become magnified out of proportion
- The center battles for consistency and control against local/regional units
- The deadlines for work become more important that the quality of the work
- People react to inputs instead of using their own initiative
This is similar to Spotify squads and Amazon's two-pizza teams
pg 315 - Safety
Basically, Don't be an asshole
Way to communicate without provoking anger or defensiveness:
- Share the facts - Facts are less controversial than conclusions so lead with them
- Tell your story - Explain the situation for your point of view, taking care to avoid insulting or judging
- Ask for others' paths - Ask for their side of the situation, what they intended, and what they want
- Talk tentatively - Avoid conclusions, judgements and ultimatums
- Encourage testing - Make suggestions, ask for input, and discuss until you reach a productive and mutually satisfactory course of action.
pg 335 - Pygmalion Effect
People will rise to other people's expectations of them. If you don't expect much from the people youwork with, it's likely you won't inspire them to perform to the limits of their capabilities.
Dale Carnagie says "Give others a great reputation to live up to".
Paradox: Having high expectations will produce better results, but it also increases the probabliity that you'll be disappointed. If you're doing a formal assessment of someone's performance, remember to judge performance objectively and quantitatively.
pg 339 - Management
Six principles:
- Recruit the smallest group who can accomplish what must be done quickly and with high quality.
- Clearly communicate the desired End Result, who is responsible for what, and the current status. Everyone must know the Commander's Intent of the project, the Reason Why it's important and must clearly know the specific parts of the project they're individually responsible for completing.
- Treat people with appreciation, courtesy and respect
- Create and Environment where everyone can be as productive as possible. Sheild your team from distractions and provide the best tools and equipment possible
- Refrain from unrealistic expectations regarding certainty and prediction
- Constantly measure what you're doing against a small set of KPIs to see if what you're doing is working
pg 367 - Deconstruction
Lots of stuff about system deconstruction, looking at inputs and outputs to understand flow and keeping an eye on interdependencies. Also look at triggers (what makes something start) and endpoints (what makes it stop)
pg 369 - Key Performance Indicator
You can measure anything but that won't get you anywhere.
KPIs are measurements o the critical parts of a system. It's easy to get distracted; for example, a business' revenue looks important but it's not as important as profit. Watch out for Incentive-Caused Bias (like rating coders on lines of code)
Business-related KPIs are directly related to either the Five Parts of Every Business or Throughput. Example questions to figure these out:
- 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?
- Sales: How many prospects are becoming paying customers? What is the average customer's Lifetime Value?
- Value Delivery: How quickly can you serve each customer? What is your current returns or complaints rate?
- Finance: What is you profit margin? How much purchasing power do you have? Are you financially Sufficient?
pg 379 - Ratio
A ratio is a better measure than an absolute because it compares values. Examples:
- Return on Promotion
- Profit per Employee
- Closing ratio Returns/Complaints ratio
Lean Analytics espouses ratios, too. A related notion is the One Metric That Matters - "What's the most important metric in the business right now? The one that's the most broken"
pg 394 - Diminishing Returns
Four things to do with tasks: complete, delegate, defer or eliminate.
Focus on doing a few simple things that will produce most of the results you're looking for, then call it a day