The Personal MBA

The Personal MBA author, Josh Kaufman is an independent business professor, education activist and author. Josh’s TEDx talk on The First 20 Hours is one of the 25 most viewed TED talks published to date, with over 22 million views on YouTube. Josh’s website, joshkaufman.net, was named one of the “100 Best Websites for Entrepreneurs” by Forbes in 2013.

“Business schools don’t create successful people. They simply accept them, then take credit for their success. ” – Josh Kaufman

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Introduction

The Personal MBA is a book that aims to provide you with a degree-level understanding of business, without putting you thousands of dollars in debt. Josh Kaufman provides an overview of the business fundamentals necessary for economic success. But he also refutes the myths that you need a college education to succeed in the business world. Kaufman points out that business leaders are not trained in business schools, but through their willingness to seek knowledge. The Personal MBA gives you the opportunity to seek business knowledge on your own terms.

The Personal MBA Chapter 1 – Creating value

“Every time your customers buy from you, they decide they value what you have to offer more than anything their money could buy at that moment.” – Josh Kaufman

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Josh Kaufman points out that any business is fundamentally a set of five interdependent processes, each of which links to the next:

Value creation

Marketing: attracting attention, creating demand

Sales: transforming potential customers into paying ones

Value delivery

Finance

Any skill or knowledge that contributes to creating value is crucial to your economic success.

ERG theory

Kaufman presents ERG theory as the foundation of all value creation. ERG stands for Existence, Relationship and Growth. These are fundamental elements, but first you must obtain existence, then kinship, and finally growth. Once individuals possess each of these fundamental elements of survival, it’s possible to use them as a basis for making and finding friends. Then, once they are satisfied with their relationships, they can concentrate on the activities they enjoy and improve their skills in these areas.

The five fundamental human motivations

All human beings have five fundamental motivations that significantly influence their decisions and actions.

The drive to acquire – The desire to obtain or collect physical objects, as well as intangible qualities such as status, power and influence.
The desire to attach – The desire to feel loved and valued by forming relationships with others, whether platonic or romantic.
The will to learn – The desire to satisfy our curiosity.
The desire to defend – The desire to protect ourselves, our loved ones and our possessions.
The desire to feel – The desire for new sensory stimuli, intense emotional experiences, pleasure, excitement, entertainment and anticipation.
The more clearly you can show that your company provides a combination of these drivers, the more attractive your services will become.

Market evaluation

Kaufman presents ten ways to assess a market:

Urgency – How badly do people want or need your services right now?
Market size – How many people are actively buying your or similar services?
Pricing potential – What is the highest price a consumer would be willing to pay for your services?
Cost of customer acquisition – How easy is it to acquire a new customer? Specifically, how much time and money do you have to spend to get a new customer?
The cost of providing value – How much would it cost you to provide the required quality of service?
Uniqueness of your service – How unique will your service be compared to others available on the market?
Speed to market – How quickly can you create a viable service that can be sold to customers?
Initial investment – How much will you need to invest to create this viable service?
Upselling potential – Are there other services you could offer buying customers in addition to your core service?
Scalable potential – Once you’ve created your initial offering, how much more work and money will need to be invested to keep you selling?

Choose competitive markets

It’s best to start a business in a market where there is competition. Starting up in a competitive market means you already know that paying customers are interested in your idea. By taking this approach, you’ll eliminate your biggest risk as an entrepreneur – the lack of potential paying customers. What’s more, suppose you already know that a market exists. In that case, you can work on improving your product rather than wasting time proving that a market exists.

The most valuable offers

Kaufman suggests four ways to improve the value of the offers you make to others:

Satisfy one or more perspectives of essential human drives.
Offer an attractive end result that’s easy to visualize.
Achieve the highest hassle premium by reducing end-user involvement as much as possible.
Satisfy the prospect’s quest for status by providing desirable social signals that will help him look good to others.
Prototyping

When it comes to prototyping, you should never fear that others will steal your idea. Ideas are one of the cheapest entities. A more critical ability is to be able to translate an idea into a reality that creates value.

Prototypes are an effective way of getting customer feedback on a product close to your chosen offering. Once others have seen a version of your product, you can evaluate and improve it through iteration.

There are six main steps to iteration:

Look
Ideate
Guess
What change to make
Act
Measure

Keep each iteration small, clear and fast. Make sure each iteration is based on what you’ve learned from previous iterations.

Kaufman gives several tips for making the most of feedback on your prototype:

Ask real potential customers for their opinions, rather than friends and family.
Ask open-ended questions.
Keep calm and cool.
Take what you hear with a grain of salt.
Give potential customers the opportunity to pre-order.

The Personal MBA Chapter 2 – Marketing

Marketing is the art and science of finding prospects. Prospects are people who are actively interested in what you have to offer. Essential leads are qualified prospects. The best companies are exceptional at attracting these prospects quickly and cost-effectively.

Kaufman explains that your prospects’ attention span is limited. So you need to filter their attention to your work. You also need to identify the prospects who are most likely to buy from you. The best marketers capture the attention of the right people at the right time.

The best way to capture the attention of potential prospects is to arouse in them a feeling of curiosity, surprise or concern. Always assume that your prospect’s attention is preoccupied with something else. This approach forces you to capture their attention, rather than simply offering them your service. Focus on the desired end result, and make that result a distinctive experience or emotion linked to a fundamental human impulse.

An effective marketing tool is to make your product the entry point to the market. Let’s say you can grab a potential customer’s attention as soon as they become interested in what you have to offer. In this case, you become the standard against which competing offers are evaluated. During this initial marketing, you need to emphasize the crucial details while minimizing the aspects that are not important. You can align yourself with this approach by downplaying certain facts or omitting them altogether.

Controversy can sometimes be used as a marketing strategy. For example, your best approach may sometimes be to adopt a position with which not everyone will agree. But, if you use this controversy constructively, you can attract positive attention.

There are five classic objections to marketing:

It costs too much
It won’t work.
It doesn’t work for me
I can wait
It’s too difficult.

The Personal MBA Chapter 3 – Sales

Setting your prices

Every successful business depends on sales. It’s not enough to have millions of interested customers if none of them decide to buy your product. The sales process starts with these prospects, but must end with a paying customer. The best companies in the world gain the trust of their prospects and help them understand why the product they are offering is worth paying for. The beginning of this process is to price your product appropriately. Kaufman offers four Personal MBA pricing methods:

Replacement cost – This involves supporting the value of the product by asking the question, “How much would it cost to replace it?” This type of pricing is a cost-plus calculation. This means you calculate the cost of creation, add the desired margin and price accordingly.

Market comparison – This involves supporting the value of the product by asking the question, “At what price are other similar products selling?” This is a very common method of pricing.

Discounted cash flow – This supports the value of the product by asking the question, “How much is it worth if it can make money over time?” This type of pricing can only be used for products that provide an ongoing cash flow, such as when assessing the value of an entire business.

Value comparison – This involves supporting the value of the product by asking the question, “For whom is this of particular value?” Your product is likely to offer benefits to a specific customer. If your product makes things easier for a high-income group, then you can offer a slightly higher mark-up without impacting sales.

You can use other methods to identify your reference price. That said, you should always focus on discovering the value of your offer to the other party. You can then set your price accordingly.

Negotiation

In any negotiation, there are three universal currencies:

Resources – tangible items such as money, oil, etc.

Time – the universal limit of capacity

Flexibility – The cost of not doing something else. This is an opportunity cost.

Kaufman also presents three dimensions of trading that can help you get more out of certain currencies:

Prepare – This involves setting the stage for a satisfactory outcome to the negotiation. You can stack the odds in your favor by effectively researching the people you’ll be negotiating with.

Structure – This includes the terms of your proposal. Create content in a structure that your fellow negotiators will appreciate and accept.

Discussion – This is where you present your offer. You should discuss or clarify any issues and respond to any objections. Once you’ve eliminated these obstacles to purchase, you can ask for the sale.

The Personal MBA Chapter 4 – Creating value

You want to try to make your value chain as small and efficient as possible. Your value chain is a combination of your value creation and delivery processes. The main reason to shorten the value creation process is to minimize the risk of something going wrong.

Intermediary distribution can increase sales. That said, this form of distribution may require you to relinquish some control over your value-creation process. Giving up this control also saves time and energy, but the downside is that counterparty risk increases.

Expectations

Expectations surrounding the delivery of your work can have a significant impact on the perceived quality of your business. Kaufman calls this the expectation effect. The quality of your business is determined by your performance, minus your customers’ expectations. That said, your expectations must also be high for the customer to buy your services in the first place. Your job, then, is to ensure that you raise expectations high enough to attract work, while delivering performance that exceeds those expectations.

One way to improve the relationship between your customers’ expectations and your performance is to make your results predictable. Customers love predictability. Kaufman provides three main factors that influence the predictability of an offer:

Uniformity
Consistency
Reliability

Important terms

Throughput – The speed at which a system achieves its objective. It is calculated by dividing units by time.

Duplication – The ability to reliably reproduce something of value.

Multiplication – Duplication for an entire process or system.

The Personal MBA Chapter 5 – Finance

Kaufman describes finance as the art and science of watching money flow in and out of a business, then deciding how to allocate it. It’s also the art and science of determining whether what you’re doing is producing the results you want.

Accounting is the process of ensuring that the data used to make financial decisions is as complete and accurate as possible.

Business isn’t about what you do. It’s about what you keep. The profit margin percentage is calculated by subtracting cost from revenue, dividing by revenue and multiplying by 100. Kaufman doesn’t claim that profits are most important. Profits are important, but they are a means to an end. Instead of focusing on profits, you should be looking to create value, pay expenses, compensate the people who run the business and provide for yourself and your loved ones. These are the most critical aspects of running a business. If you can meet each of these requirements, you can confidently say that you’re running a successful business.

Kaufman offers readers four methods for increasing your company’s revenue:

Increase your number of customers.
Increase the average amount of each customer transaction.
Increase the frequency of transactions per customer.
Increase your prices.

Important terms

In this chapter, Kaufman describes some important terms you need to learn. They are :

Compounding – The accumulation of gains over time.
Leverage – The practice of using borrowed money to amplify potential gains.
Financing – Provides the fuel for your business. If your business needs extra capacity, the right financing can help it grow considerably.
Bootstrapping – Building and running a business without financing.

The Personal MBA Chapter 6 – The human spirit

Kaufman reminds readers that their mind is essentially a physical system. Phenomena such as mental fatigue and emotional distress are simply neural signals emitted by our brains when we don’t get enough of what we need: nutrients, exercise or rest. So one of the most important factors determining your productivity is your ability to take care of yourself.

Laziness is not a bug in our system. It’s a feature installed to enable us to avoid expending too much energy. You should therefore actively try to modify your reference levels for different actions. For example, reading useful books or blogs, or watching motivational documentaries, can help change your reference levels for the better. This point ties in with Kaufman’s recommendation that you should seek to change the structures that influence your behaviors rather than the behaviors themselves.

Motivation

Motivation is an emotion, not a logical, rational activity. Just because your forebrain thinks you should be motivated to do something doesn’t mean you’ll automatically be motivated to do that thing. (If only it were that simple, right?) Very often, mental simulations, patterns, conflicts and interpretations hidden in the midbrain can prevent us from making progress towards what we want to achieve. As long as there are “get away from” signals being sent, you’ll have a hard time feeling motivated to move toward what you want.”

– JOSH KAUFMAN, THE PERSONAL MBA

Your motivation can be broken down into two basic desires: to get closer to what you want, and to get away from what you don’t want. Will is different from motivation. Kaufman describes willpower as an instinctive override, because it’s a way of interrupting our automatic processing.

Focus on positive associations

People generally hate losing things more than they like gaining them, because humans generally have an aversion to loss. So you should try to present your product as something that is very unlikely to be a money-loser. Present your ideas with positive, safe associations. Another way to overcome loss aversion is to use scarcity. People tend to fear scarcity. So, if you give your potential customers the impression that they could lose the opportunity to buy your product, they’ll be more inclined to buy.

Kaufman suggests four ways to incorporate scarcity into your marketing:

Offer limited quantities of products
Increase prices
Lower prices
Give people lead times for price reductions
Novelty attracts potential customers. So be sure to use new sensory data to attract and maintain your customers’ attention over the long term.

Multitasking

Kaufman believes that productive multitasking is a myth. Our minds aren’t built for multitasking. The more you try to pay attention to several things at once, the more your performance in all areas will suffer. So focus on one task at a time, and never mix creative work with administrative work. Your productivity in both areas will be strongly influenced if you switch from one to the other. Concentrate on producing Maker calendars, which incorporate large blocks of uninterrupted time. Most people currently produce or have to live with Manager-type schedules, where time is divided into many small chunks for meetings.

To find out how to avoid over-multitasking, Kaufman suggests using the 3-10-20 method. This method states that you can complete three major and ten minor tasks in one day. For Kaufman, a major task is one that requires more than 20 minutes of concentration.

Habits

Habits are built up over time and become regular actions that sustain us. Some of the most common positive habits are exercise, hygiene and nutrition. That said, habits can also be subdivided into four categories:

Things you want to start doing
Things you want to stop doing
Things you want to do more of
Things you want to do less of

You can develop habits if you identify the triggers in your environment that have an impact on the way you act. Encourage triggers that lead to positive habits, and try to remove triggers that lead to unhealthy behaviors. Habits can be difficult to install or uninstall. Kaufman recommends that you focus all your efforts on changing one habit at a time.

Important terms

“The one that best describes the problem is the one most likely to solve it.” – Josh Kaufman

Self-elicitation – The practice of asking yourself questions, then answering them. It helps you create useful ideas and creative insights.
Counterfactual simulation – Instead of assuming that ambitious goals are unrealistic or impossible, counterfactual simulation involves simulating the events and actions necessary to achieve the required result.
Excessive self-esteem – The natural tendency to overestimate one’s abilities. This tendency is particularly common in situations where people have little experience.
Confirmation bias – The tendency of people to pay more attention to information that confirms conclusions they have already reached.
Hindsight bias – blaming your past for not knowing something you know now.
Performance load – Having too many tasks can have a considerable impact on your performance.

Four ways to work with your body

Your body will always act according to its natural state. So, instead of fighting against it, you should use these four ways to work with your body:

Get to know your habits by using a notebook or calendar to record how much energy you have at different times of the day.
Optimize your peak cycles.
Take a break. When you’re in a down cycle, it’s best to rest rather than try to overcome it. Rest and recovery are not optional.
Get enough sleep. Lack of sleep leads to a longer down cycle.

The Personal MBA Chapter 7 – Working with yourself

Your body and mind are the tools you use to accomplish your tasks. You take these tools with you wherever you go. So you need to learn to work with yourself. If you can master this skill, you’ll find it much easier to achieve your goals. In the modern world, it can mean the difference between a fulfilling career and an exhausting one.

To help you work better with yourself, Kaufman presents the only four ways to “do” something. Using these methods to guide you when creating a to-do list will help you be more productive. He calls them the 4 methods of completion:

Completion – Do the task. This is best for tasks that only you can do particularly well.
Deletion – Eliminating the task. This is effective for anything that is unimportant or unnecessary.
Delegation: Assign the task to someone else. This is effective for anything that other people can do 80% as well as you.
Postpone: Put the task off until later. It’s effective for tasks that aren’t critical or time-dependent.

Kaufman also describes the five-part why, a technique that helps you discover what you really want. Instead of taking your desires at face value, you examine their root cause. He applies these five whys to the desire to become a millionaire:

Why do I want a million dollars? Because I don’t want to be stressed about money.
Why don’t you want to be stressed about money? Because I don’t want to feel anxious.
Why don’t you want to feel anxious? To feel secure.
Why do you want to feel safe? To feel free.
Why do you want to feel free? Because I want to feel free.

The Personal MBA Chapter 8 – Working with others

Relationships are about power and influence. Your influence is your ability to encourage someone to think or act the way you want them to. Coercion is your ability to force someone else to do what you tell them to do. You should seek to increase your influence and reputation rather than your coercion. Power is linked to influence and reputation. So the more people who know about your abilities and respect your work, the more power you’ll have.

Working with others is an effective way to get work done faster and better. But effective collaboration relies heavily on solid communication. Kaufman describes communication overload as the proportion of time you spend communicating with your team members instead of doing productive work. You always want to minimize this time while not skimping on communication quality. To sustainably reduce your communication overload, Kaufman recommends keeping your team small. Specifically, keep your team between three and eight people. In addition, you need to ensure that every team member feels secure and valued within that team.

Kaufman suggests the STATE model as a way to communicate with your team members without questioning their value or provoking anger :

Share your facts
Tell your story
Ask for others’ opinions
Speak hesitantly
Encourage trial and error

Kaufman also provides three characteristics you should always use to help your colleagues improve the work environment: appreciation, courtesy and respect.

Critical team-building points

Kaufman talks about commander’s intent. Commander’s intent means that you must always tell your team why a particular task needs to be done, rather than simply allocating work without meaning.

You should never depend on planning and instead use it to mentally stimulate your team.

Convergence is the tendency of members of a group to become more alike over time. Kaufman calls this the culture of your company. Although you want a certain degree of convergence, you also want a certain degree of divergence.

Six principles of effective management

Recruit the smallest group of people who can accomplish a task.
Clearly communicate the desired outcome, including everyone’s responsibilities and the status of the task.
Treat people with respect.
Create an environment where everyone can be as productive as possible. Then trust your team members to get the job done.
Refrain from unrealistic expectations of certainty and prediction. Create an aggressive plan for completing the project. But be aware that uncertainty and the planning fallacy mean that your initial plan will almost certainly be incomplete or inaccurate.
Measure to see if what you’re doing is working. If it doesn’t, try another approach.

Five steps to easing a constraint

There will always be constraints within a system. That said, Kaufman proposes five steps to alleviate these constraints:

Identification: examine the system to find the limiting factor.
Exploitation: ensuring that resources related to the constraint are not wasted.
Subordination: redesign the entire system to take care of the constraint.
Elevation: permanent increase in the capacity of the constraint.
Reassessment: after making a change, reassess the system to discover where the constraint lies.

The Personal MBA Chapter 9 – Understanding systems

Kaufman describes a complex system as a “self-perpetuating arrangement of interconnected parts that form a unified whole”. Businesses are complex systems within the even more complex systems of markets, industries and societies. So it’s essential that you first understand each of these systems and how they interact.

To balance a system, you need to understand risks and uncertainties. Risks are known unknowns. Uncertainties are unknown unknowns. For example, if you’re planning to pick up a friend at the airport, you’ll understand that there’s a risk that the flight will be several hours late. You’ll want to plan accordingly, with things to do while you’re waiting. Since this is something you can plan for, it’s a known unknown. An example of an unknown unknown is being late to pick up your car because a meteorite hit your car. You could never have predicted this event on the basis of past events. So the only way to prepare for uncertainty is to be flexible, prepared and resilient. These characteristics will help you react appropriately when these events occur in your system.

Contemplating uncertainty is challenging because of the threat of not knowing what’s going to happen. But instead of fixating on predicting unseen and unknown threats, it’s better to channel your energy into improving your ability to handle the unexpected. Don’t rely on precise predictions, because things can change at any moment.

The Personal MBA Chapter 10 – Systems analysis

Systems are the heartbeat of a business. If you feed your company’s system with useless information and ideas, you’ll get useless results. One way to make sure you’re feeding your systems with the best information is to break down your company’s complex systems into smaller, more manageable sub-systems. This is called deconstruction, and it will give you a better understanding of how things work in the company. By examining the results of these individual sub-systems, you can better consider your key performance indicators. KPIs are measures of the critical parts of a system.

The Personal MBA Chapter 11 – Improving systems

To find out how to improve a system, first consider the null hypothesis. The null hypothesis describes what would happen if you did nothing to the system, or if you simply assumed that any adverse situation occurred by chance.

Having considered your null hypothesis and identified the importance of improving your systems, you then want to consider optimization. Optimization is the process of maximizing a system’s output or minimizing a specific input that the system needs to function. The most effective optimization approach is to take the most critical variable in your system and start by focusing all your efforts on that variable. Follow this same rule until you have concentrated your efforts on all the variables. This approach prevents you from trying to optimize several variables at once, which is highly inefficient.

If you’re less concerned with the result of your system than with the efficiency with which your team achieves the desired result, then refactoring is necessary. Redesign is the process of changing a system to improve efficiency without changing the result. One way to improve efficiency is to think of the 80/20 rule. 20% of your inputs will produce 80% of your outputs. So think about how you can put more emphasis on 20% and improve your efficiency by 80%.

Friction is any process that removes energy from a system over time. Friction is therefore a factor that can have a considerable impact on your team’s efficiency. By eliminating friction, you’ll enable your team to work better and feel less exhausted, despite achieving the same or better results.

Final summary and review of The Personal MBA

The Personal MBA aims to do just that for its readers. Kaufman covers every area of the business world that a person needs to understand in order to succeed. Essentially, to become a successful businessman, you need to master:

Create, market and deliver value.
Understanding financial terms.
The complexities of the human mind.
Working with yourself and others.
Understand, analyze and improve systems.

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