BusinessEntrepreneurship

The E-Myth: Why Most Businesses Don’t Work

Michael Gerber

The E-Myth is Michael Gerber’s bestseller that explains why some companies fail to thrive and grow because of the boss’ mentality. Bosses who believe they understand the technical aspects and therefore do not need to understand the strategic issues of the business will not succeed. Gerber explains what skills are needed to have a successful business and how you should work each of them. Gerber also addresses the different phases of a company, from its infancy to maturity, giving positioning tips for each of these phases. If you want to learn how to efficiently develop and grow your business, while being predictable and productive.

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Revealing The E-Myth

Many believe that the entrepreneur is a noble person on a journey to make the world a better place, but that is a myth.

Most businesses are started by technical professionals – those who have skills in what they enjoy doing and who find that they prefer to work for themselves rather than someone else. They are very good professionals in their area, who have had an inspiration and decided to start their own business instead of letting others profit from their work.

However, almost all new business owners assume that because they understand the technical side, they also understand how a business should work. In fact, these are two different issues and failing to make that distinction is a fatal error.

The truth is that in new businesses, being able to do the technical work in person is more a liability, not an asset. Why?

  • Business skills are much more important to any new business than technical knowledge.
  • The technical entrepreneur ends up discovering that the work he loves has become a mandatory task, much less exciting and rewarding than the technical aspect of the business.
  • Sooner or later, the owner of a company will realize that the technical work can be performed by someone else. The true value is created by business-building tasks, and for the technical professional, they are much less interesting and more difficult.

With this, many new business owners are deluded and discouraged because building a business requires three sets of unique profiles:

The entrepreneur who is responsible for providing business insight; the manager, who provides the systems and organizes the company; and the technician, who provides the expected results. Although all three types of people want to be ‘the boss,’ none of them wants to have a boss. Even so, all three of these skill sets are needed.

The entrepreneur turns every trivial question into a great business opportunity. They are the dreamers who focus on the future. Managers are the pragmatists who bring order and put the systems in place. They focus on the past and cling to the status quo. Finally, technicians like to do things and live in the present. They are hardworking individuals who like results and hate interruptions.

The typical personality of a new entrepreneur is 10% entrepreneurial, 20% manager, 70% technical. However, a businessperson should have 33% entrepreneurial profile, 33% managerial and 33% technical. Knowing how to combine these three skills is crucial for entrepreneurs looking to be successful in business.

Understanding The Company Phases

Most companies go through three growth phases: Childhood, which occurs when the technical profile is in the foreground; expansion, when better management skills are needed; and maturity that comes when the prospect of a visionary entrepreneur to guide the company toward a bright future becomes necessary.

Many problems arise when the business is managed according to what the owner wants and not what the business needs. In reality, business’ needs will vary at different stages of development.

For a company in its infancy, the technician is the principal. That means if you take the technician off, the deal is over since he does it all. Childhood ends when the technician gets tired of doing everything and realizes that something needs to be changed in the company if he wants to make progress. If he is not willing to make these changes, the shop will close. Otherwise, the company will enter into adolescence or expansion.

In expansion phase, the business owner gets in the comfort zone performing a collection of responsibilities to which he is accustomed. The technician profile is comfortable with the amount of work he can do, the manager is comfortable with his subordinates, and the entrepreneurial profile is happy at ease with the number of individuals who share the vision. However, when a business grows beyond this comfort zone, there are four possible paths:

  • Going back to being small: Effectively turn back the business to its childhood when things were easier. That is the natural inclination of most technical bosses.
  • Going hard: Trying to grow the business fast enough to generate money to hire the resources you need to manage it yourself.
  • Holding on: hoping that order will appear in the midst of chaos.
  • Get the business to the Maturity Stage: If the owner is willing to learn new skills and take on different priorities.

Finally, the maturity phase comes when the business has a clear understanding of what it needs to do to achieve the intended future.

The best businesses in the world exemplify a mature approach to building a business and are led by people who have the right perspective and balance. They understand what makes a great business and are shaped by businesses that work and last.

A good business model is not only concerned with results. The business model is composed of the following elements:

  • How the business works: instead of: what work needs to be done by the business.
  • How the business will generate profit: instead of: how the business will generate sales revenue.
  • Where the business is headed in the future: instead of: how the present can be replicated countless times.
  • How the business operates as a whole: instead of: what each part of the business does.
  • The businesses’ future vision: instead of: focusing on the model that is working in the present.

The business model comes to the fore during the maturity stage. The focus then becomes on meeting customer needs in specific demographic categories. At this stage, the business needs to be structured to fit the customers’ needs and requires time and attention. Operational rules and corporate principles need to emerge for the company to work seamlessly and for the current customer to begin to be seen as an opportunity to generate more and more future revenue.

Business reaches maturity when the customer takes center stage of the company’s strategy rather than the product or service. In this new perspective, the way business is done becomes much more important than the type of business that is done. If the business model used is balanced, it will provide equal opportunities for the entrepreneur, manager, and technician to contribute to building a large enterprise.

Start Your Business Like A Franchise

The best model to build a successful business is to see its operation as the prototype that will be duplicated by a large number of franchises. The challenge is to maximize the amount of time you spend working on your business model, rather than on the business itself.

To build a chain of successful franchises in your company, you must obey two rules:

  • Your model should deliver value that consistently exceeds the expectations of customers, employees, suppliers, and creditors. Unless you pay close attention to creating value-added, exceeding expectations, any long-term business is unlikely to succeed.
  • Your model should be operable by individuals with low skill levels. Systems need to be in place so that people without technical skills get involved with the model, and it can be replicated. If each franchise needed a clone of yours to function, you would have a major limitation.

This approach requires you to build a franchise model that is system dependent, not personalities or experts. You need to build a system where ordinary people can produce extraordinary results. Your model must be fully in order – with a system for everything, so customers, employees, managers, and owners know what’s going on. All systems need to be documented in a formal and written Operations Manual. With documentation, each work step can be articulated, and performance standards can be specified. The manual should show how to deliver a service that is uniform and predictable. Good business is consistent with the delivery experience for customers.

Focusing on your efforts to work on your business model, you will begin to address some key issues that most people ignore:

  • How can the business be organized to work productively and efficiently when I’m not there?
  • How can employees be motivated to work without direct supervision?
  • How can systems be organized to serve a large number of customers efficiently and consistently?
  • How can I be the owner of the business without having to be there every hour and every day?
  • How can I maximize time spent doing things I enjoy?
  • How can I minimize the time spent doing things I hate, but that need to be done?

In other words, by treating your business as a blueprint for a system of future franchises, you are forced to focus on the right problems and not the most common problems. By doing so, you increase your chance of success – either by opening franchises or by adopting other different models of scale later on.

The 3 Essential Activities

The process of business development is a dynamic and flexible process because the world never stands still. Everything in the business world is changing daily, and the company needs to be  flexible and responsive enough to move with these changes if it wants to generate added value.

However, the process of business development must also be involved in the communication that takes place between the people working in the company. It is not only a way of acting but also a way of thinking and communicating efficiently.

There are three basic activities that empower you to make changes and move forward. In essence, they are the engine for the entire business development process and will be used to take the seven business development steps you will learn below:

Basic activity 1 – Innovation: Creativity is thinking about new ideas, while innovation occurs whenever good ideas are put into practice. An innovative business constantly finds new answers to these questions:

What prevents customers from getting more value added from interactions with the business? What is the best way to ensure that customer needs are met? Innovation creates a high level of energy and differentiates the business by being bold, progressive and advanced. It also includes the ability to simplify the business on its critical elements.

Basic Activity 2 – Quantification: These are the numbers that show how much impact the innovation has generated. Good business record and quantify everything, and later do their best to improve those numbers every week. Once you have quantified everything, you can build a database to track your business’ health and progress. Filled with specific details, your business planning will have new urgency and relevance.

Basic Activity 3 – Orchestration: it is similar to optimization. It is the process of removing the operational complexities to produce the best results. Orchestration begins with innovation, is validated by quantification, and incorporates best practices into business operating procedures. Once you have orchestrated something, the results become predictable and consistent. You then have a franchise – the unique way your business delivers value to customers whenever they interact with you.

In short, innovation, qualification, and orchestration form the foundation of the business development process because they are the processes by which business can anticipate and respond to changing market conditions. They are the essence of continuous quality, the secret to any company that wishes to make a business successful in the long run.

The 7 Steps Of Business Development

When analyzing the business development process, your goal should be to create a predictable and structured franchise prototype to achieve repeatable results. After mastering the three core activities, it’s time to complete the seven steps of the business development process:

Step 1 – Main Purpose: Although your business is not your life, it plays an important role in it. So the first step in developing a company is to answer questions like: What do you value most in your life? What kind of life do you want to have? How do you want your life to be to feel complete? Who do you want to be? In short, great people have a vision of how they want their lives to play out. Until you take the time to think about it, your business cannot grow properly. The critical difference between successful people and those who are not is that the former do not let fate take over their lives; they actively create their lives rather than wait for things to happen. In other words, successful people work out their lives; they do not simply exist.

Step 2 – Strategic Objectives: Your strategic goals are metrics or standards by which you specify how you will measure success. They declare what deals you need to make to reach your main goal. There are no “right” or “wrong” standards, but some of the most commonly used patterns are:

  1. Financial: Gross revenue, profitability, market value. How big is your vision? What do you want? What is your exit strategy and what do you need to show to get to that point?
  2. A Value Opportunity: Is the concept of your business broad enough that you reach your main and strategic goals? If not, what will change? You do not want to fail. Will you be able to attract qualified customers?
  3. Geographic reach: Will your business be local, regional, national or international?
  4. Deadline: How long will it take for you to complete your business prototype? Two years? Three? Five? A career?
  5. Business Positioning: Will your business serve customers directly, serve other businesses, or which demographic markets are being targeted?

Step 3: Organizational Strategy: Many small businesses fail to develop a formal organizational map because they believe everyone in the business knows what they should. However, if the business should work as a prototype franchise, an organizational map will be important. So a description of each function in the company needs to be prepared for each position, specifying the results to be achieved by that professional and the standards that will measure those results. Each descriptive should be created by the person filling out the paper and by his superior. In doing so, the business development process forces the creation of a template for the business to grow. Some people can fill multiple positions initially, but as more are hired, they can specialize and leave responsibilities clearer. Technicians do technical work while managers focus on strategy. By developing an organizational map that grows with the company, more members will do specific tasks, allowing more time to be spent developing business strategies. Also, the organizational map provides a template for developing manuals and other written materials. Codes and systems can also be organized through it.

Step 4 – Management Strategy: A strategy for managing a franchise prototype does not require highly skilled managers because you as a beginner entrepreneur will not know how to choose and lead them. Instead, systems need to be created, to allow ordinary people to produce great results. The simpler and more direct the management system, the better. Most first-class management systems developed by franchises are checklists that form an operations manual. Each checklist details the specific steps that employees must take to create a satisfied customer. In this way, new employees can be trained to work with the same level of competence as experienced ones. All they need to do is to be responsible for the tasks in their checklists.

Step 5 – People Strategy: The primary emphasis on staff strategy should be on creating an environment, so that meeting responsibility is more important than avoiding them. To do this, take your employees seriously and make sure they understand why they should do something. They need to understand that customers should always feel they are right, that they should act as if they are the best in their area and that their growth should come from the development of new skills. Ideally, a good people strategy will convince employees that serving customers is worth it. This knowledge and guidance should generate a sense of purpose in employees. Your business will become a place where integrity, commitment, vision, and excellence represent practical concepts rather than abstract words. Humans can achieve incredible things when they are motivated. An effective people strategy works hard to create an environment where excellence is attainable. The systems are organized so that each one receives an equal opportunity to be part of the solutions offered to the clients.

Step 6 – Marketing Strategy: Marketing requires you to forget your vision and focus exclusively on the customer – and often what you think they want is different than what they want. That is because most purchasing decisions are not made consciously. Making decisions is always irrational or emotionally based. Therefore, most business decisions are made instantly and without any effort on the part of the customer. To have effective marketing, you need to know who your customer is and what your needs are. That is done by compiling a demographic profile of your current customers. With this kind of information, you can focus on a type of marketing message that has already delivered a favorable response in the past. By sending marketing messages of similar structure and type, you can begin to attract potential customers with the right mix of demographic conditions and psychographic preferences. Marketing then focuses on a key problem – how to access the list of people who are in your buying zone and who have the right mix of demographic and psychographic factors. Everything a business does must be integrated into the marketing process, to generate repeatable business opportunities, and to satisfy customers by delivering a guarantee that no industry competitor can copy.

Step 7 – Systems Strategy: businesses need to have three types of systems to be successful:

  1. Physical systems: inanimate objects such as computers, offices, work materials, etc.
  2. Malleable systems: People, ideas, documents, procedures, etc.
  3. Information Systems: Provide data on interactions between physical and malleable systems.

Each system integrates into your company’s overall program to create internal synergy. The best businesses systems are so integrated that it is impossible to separate them. Your franchise prototype should demonstrate the efficiency and productivity of your systems.

Final Notes

If you understand what skills are required for your business to grow and how to work with each of them, you have already taken the first step in getting there.

By following the correct and orderly process of business development, structuring your strategies, defining your primary goals, your business will move out of the childhood phase and follow the natural process until it reaches maturity.

If you want to develop a franchise prototype, it’s essential that your employees also get the idea; they must be able to work independently, without you dictating orders and teaching how to do everything all the time.

By following these steps, you will see your business grow and reach the long-awaited success!

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