Summary of The Personal MBA by Josh Kauffman

The Personal MBA is a book that aims to provide you with a degree-level understanding of business without thousands of dollars of debt. Josh Kaufman provides an outline of the business fundamentals required to be economically successful. However, he also disproves myths that you need a college education to do well in the business world. In fact, Kaufman points out that business leaders are not made in business schools but by their willingness to seek knowledge. The Personal MBA is your opportunity to seek business knowledge on your own terms.

About Josh Kaufman

Josh Kaufman is an independent business teacher, education activist, and author. Josh’s TEDx talk on The First 20 Hours is one of the top 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 “Top 100 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

Chapter 2 – Value Creation

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

Josh Kaufman outlines that every business is fundamentally a collection of five interdependent processes, each of which flows into the next:

Value creation
Marketing: attracting attention building and demand
Sales: turning prospective customers into paying customers
Value Delivery
Finance

Any skill or knowledge that helps create value is crucial to your economic success.

ERG Theory

Kaufman introduces ERG theory as a foundation for all value creation. ERG stands for Existence, Relatedness, and Growth. Each of these is fundamental, but you have to obtain existence first, then relatedness, and finally, growth. Once individuals have each of these fundamentals of survival, it is possible to use this as a foundation to make and find friends. Subsequently, once they are satisfied with relationships, they can then focus on doing things they enjoy and improving their skills within these domains.

The Five Core Human Drives

All human beings have five core human drives that significantly impact on their decisions and actions.

The drive to Acquire – The desire to obtain or collect physical objects, as well as immaterial qualities like status, power, and influence.
The drive to Bond – The desire to feel loved and valued by forming relationships with others, either platonic or romantic.
The drive to Learn – The desire to satisfy our curiosity.
The drive to Defend – The desire to protect ourselves, Our loved ones, and our property.
The drive 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 drives, the more attractive your services will become.

Evaluating the Market

Kaufman introduces ten ways of evaluating a market:

Urgency – How bad do people want or need your services right now?
Market size – How many people are actively purchasing your services or similar services?
Pricing Potential – What is the highest price a consumer would be willing to pay for your services?
The 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 obtain a new customer?
The cost of value delivery – How much would it cost you to provide the quality of service required?
The uniqueness of your service – How unique will your service be compared to other services on the market?
Speed to Market – How quickly can you create a viable service that can be sold to customers?
Upfront investment – How much will you have to invest in creating this viable service?
Upsell potential – Are there other services you could offer to purchasing customers on top of your main service?
Evergreen potential – Once you have created your initial offer, how much additional work and money will have to be invested to ensure you continue selling?

Choose Markets With Competition

It is better to start a business within a market that has competition. Starting in a competitive market means you already know there are paying customers interested in your idea. Adopting this approach will eliminate your biggest risk as a businessperson, which is not having enough potential paying customers. Additionally, suppose you already know 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

Satisfy one or more of the prospects for core human drives.
Offer an attractive and easy to visualize end result.
Command the highest hassle premium by reducing end-user involvement as much as possible.
Satisfy the prospect’s status-seeking tenancy by providing desirable social signals that help them look good in the eyes of other people.

Prototyping

When prototyping, you should never worry about other people stealing your idea. Ideas are one of the cheapest things. A more critical ability is being able to translate an idea into a reality that creates value.

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

There are six major steps to iteration:

Watch
Ideate
Guess
Which change to make
Act
Measure

Make every iteration small, clear, and quick. Plus, make sure that every iteration is based on what you have learned from previous iterations.

Kaufman provides several tips for how you can get the most of the feedback you receive on your prototype:

Get feedback from real potential customers instead of from friends and family
Ask open-ended questions
Steady yourself and keep calm
Take what you hear with a grain of salt
Give potential customers the opportunity to pre-order

Chapters 3 and 4 – Marketing and Sales

Marketing is the art and science of finding prospects. Prospects are people who are actively interested in what you have to offer. The essential prospects are qualified prospects, and the best companies are exceptional at attracting these prospects quickly and inexpensively.

Kaufman explains that your prospects’ attention is limited. Therefore, you need to filter their attention toward your work. Plus, you need to identify the prospects who are most likely to buy from you. Great marketers capture the attention of the right people at the right time.

The best way to capture potential prospects’ attention is to promote their feelings of curiosity, surprise, or concern. Always assume that your prospect’s attention is preoccupied with something else. In doing so, this approach forces you to capture their attention rather than just offering your service. Plus, you should focus on your desired end result and make this result a distinctive experience or emotion related to a core human drive.

An effective tool while marketing is to make your product the point of market entry. Suppose you can get a prospective customer’s attention as soon as they become interested in what you are offering. In that case, you become the standard by which competing offers are evaluated. While doing this initial marketing, you should emphasize the crucial details while deemphasizing things that aren’t important. You can align with this approach by minimizing certain facts or leaving them out entirely.

Controversy can sometimes be used as a marketing strategy. For example, your best approach can sometimes be to take a position that not everyone will agree with. However, if you are constructively using this controversy, then you can attract positive attention.

Developing Your Prices

There are four factors you should take into account when considering the price of something of value.

Replacement cost
Market comparison
The discounted cash flow or net present value method
Value comparison

You can use other methods to identify your price baseline. However, you should always focus on discovering how much your offer is worth to the party you hope to sell to, then set your price accordingly.

Negotiation

In every negotiation, there are three universal currencies:

Resources
Time
Flexibility

However, through effective negotiation and trade-offs, you can gain more of certain currencies. Kaufman also provides three dimensions of negotiation that you must consider:

Set up
Structure
The discussion

There are five standard objections to marketing:

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

Both testimonials and referrals are extremely powerful in overcoming “It won’t work” and “It won’t work for me.”

Another effective way of challenging these objections is risk reversal. Risk reversal is a strategy that transfers some of the risks of the transaction from the buyer to the seller. Finally, reactivation is the process of convincing past customers that they should buy from you again. You can run campaigns specific to these customers. They are generally the easiest form of marketing you can engage with. Therefore, Kaufman recommends making reactivation campaigns a priority every three to six months. These campaigns can just be contacting your customers with an offer to see if you can encourage them to start buying again.

Chapter 5 – Value Delivery

You want to try and make your value stream as small and efficient as possible. Your value stream is a combination of your value creation and value delivery processes. The primary reason for shortening the value delivery processes is that it minimizes the risk of something going wrong.

Intermediary distribution can increase sales. However, this form of distribution can require giving up a certain amount of control over your value delivery process. Relinquishing this control also frees up your time and energy, but with the downside of increasing counterparty risk.

Expectations

The expectations surrounding the delivery of your work can significantly impact your company’s perceived quality. Kaufman calls this the expectation effect. In effect, your company’s quality is determined by your performance minus your customers’ expectations. Despite this, your expectations also have to be high for the customer to buy your services in the first place. Therefore, your job is to ensure that you produce sufficient expectations to draw in work, coupled with a performance that exceeds these expectations.

One way to improve the ratio between your customers’ expectations and your performance is your outcomes’ predictability. Customers love predictability. Kaufman provides three primary factors that influence the predictability of an offer:

Uniformity
Consistency
Reliability

Important Terms

Throughput – The rate at which a system achieves its desired goal. The formula for this is calculated by dividing units by time.
Duplication – The ability to reliably reproduce something of value.
Multiplication – Duplication for an entire process or system.

Chapter 6 – Finance

Kaufman describes finance as the art and science of watching money flowing into and out of a business, then deciding how to allocate it. Plus, determining whether or not what you are doing is producing the results you want.

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

Business is not about what you make. Instead, it is about what you keep. The profit margin percentage is calculated by subtracting cost from the revenue, dividing through by revenue, and multiplying by 100. Despite this, Kaufman is not claiming that profits are the most important things. Profits are important, but they are a means to an end. Instead of getting too hung up on profit, you should be aiming to create value, pay expenses, compensate the people who run the business, and support yourself and your loved ones. These are the most important things when running a business. If you can meet each of these requirements, you can confidently claim that you are running a successful business.

Kaufman provides readers with four methods of increasing your business’ revenue:

Increase your number of customers
Increase the average size of each transaction your customers make
Increase the frequency of transactions per customer
Raise your prices

Important Terms

Compounding – The accumulation of gains over time
Leveraging – The practice of using borrowed money to magnify potential gains
Funding – Provides the fuel to your business. If your business needs additional capacity, then proper funding can help scale your company up substantially
Bootstrapping – Building and operating a business without funding

Chapter 7 – The Human Mind

Kaufman reminds readers that your mind is essentially a physical system. Therefore, things like mental fatigue and emotional distress are just neural signals within our brains when we are not getting enough of something we need: nutrients, exercise, or rest. Therefore, one of the most crucial factors influencing your productivity is your ability to take care of yourself.

Laziness is not a bug in our system. Instead, it is a feature that was installed to allow us to avoid expending too much energy. Therefore, you have to actively attempt to change 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 is linked to Kaufman’s recommendation that you should aim 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 does not mean you’ll automatically become motivated to do that thing. (If only it were that easy, right?) Very often, Mental Simulations, Patterns, Conflicts, and Interpretations hidden in the midbrain can get in the way of making progress toward what we want to accomplish. As long as there are “move away from” signals being sent, you’ll have a hard time feeling motivated to move toward what you want.”
– Josh Kaufman

Your motivation can be broken down into two basic desires: Moving toward desirable things and moving away from undesirable things. Willpower is different from being motivated. Willpower is described by Kaufman as an instinctual override, as it is a way of interrupting our automatic processing.

Focus on Positive Associations

People generally hate losing things more than they like gaining them because humans are generally loss averse. Therefore, you should try and frame your product as something with a very low chance of being a waste of money. Hence, present your ideas with positive and safe associations. Another way to overcome loss aversion is to use scarcity. People also tend to be scared of scarcity. Therefore, if you make your potential customers feel like they could lose the opportunity to buy your product, they are more likely to buy.

Kaufman provides four ways in which you can incorporate scarcity into your marketing:

Offer limited quantities of products
Increase prices
Decrease prices
Give people deadlines for price reductions

Potential customers are enticed by novelty. Therefore, make sure you 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 mind is not built to multitask. Therefore, the more things you try to pay attention to at a given time, the more your performance across all domains will suffer. Hence, aim to focus on just one task at a time. Plus, never mix creative work with administrative work. Your productivity across both domains will be heavily influenced if you are switching between them. Focus on producing Maker Schedules, which incorporate large blocks of uninterrupted time. Most people currently produce or have to live by Manager Schedules, which involves time being broken down into many small chunks for meetings.

As an outline of how you can avoid too much multitasking, Kaufman suggests using the 3-10-20 method. This method states that you can finish three major tasks and ten minor tasks within one day. Kaufman describes a major task as any task that requires more than 20 minutes of focused concentration.

Habits

Habits are built over time and become regular actions that support us. Some of the most common positive habits are exercise, hygiene, and nutrition. However, 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
Things you want to do less

You can develop habits if you identify triggers within your environment that impact on the way you act. Encourage the triggers that prime positive habits and try to remove the triggers that prime unhealthy behaviors. Habits can be difficult to install or uninstall. Therefore, Kaufman recommends putting all your effort into changing one habit at a time.

Important Terms

“Whoever 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. This helps you to create useful insights and creative ideas.
Counterfactual simulation – Instead of assuming that challenging goals are unrealistic or impossible, counterfactual simulation involves simulating the events and actions required to reach the required outcome.
Excessive self-regard tendency – A natural tendency to overestimate your abilities. This tendency is particularly common in circumstances where people have little experience.
Confirmation bias – A tendency for people to pay more attention to information that supports conclusions they have already made.
Hindsight bias – Blaming past you for not knowing something you now know.
Performance load – Having too many tasks can hugely impact on your performance.

Four Ways to Work With Your Body

Learn your patterns by using a notebook or calendar to track how much energy you have during different parts of the day.
Maximize your peak cycles.
Take a break. When you are in a down-cycle, it is better to rest then attempt to power through it. Rest and recovery are not optional.
Get enough sleep. Sleep deprivation will result in a longer down-cycle.

Chapter 8 – Working With Others

Relationships are all about power and influence. Your influence is your ability to encourage someone to think or act in the way you intend. In comparison, compulsion is the ability for you to force someone else to do what you command. You want to aim to increase your influence and reputation rather than your compulsion. Power is tied to your influence and reputation. Hence, the more people who know your capabilities and respect your work, the more power you will have.

Working with others is an effective way of getting work done quicker and to a higher standard. However, effective collaboration relies heavily on strong communication. Kaufman describes communication overhead as the proportion of time you spend communicating with your team members instead of getting productive work done. You always want to minimize this amount of time while not skimping on communication quality. To sustainably lessen your communication overhead, Kaufman recommends keeping your team small. Specifically, keeping your team between three and eight people. Additionally, you need to ensure that each team member feels safe and valued within this team.

Kaufman provides the STATE model as a way of communicating with your team members without challenging their value or provoking anger:

Share your facts
Tell your story
Ask for others’ opinions
Talk tentatively
Encourage testing

Additionally, Kaufman provides three characteristics that you should always use to help your coworkers improve the working environment: appreciation, courtesy, and respect.

Critical Points for Building a Team

Kaufman talks about commander’s intent. Commander’s intent means that you should always tell your team why a particular task must be done, rather than just allocating work without meaning.
Planning should never be depended upon and should instead be used to stimulate your team mentally.
People will always choose to work with people they know and like. Therefore, use referrals as a way of helping your coworkers to connect with new team members.
Convergence is the tendency of group members to become more alike over time. Kaufman calls this your company culture. Although you want a degree of this, you still want to have some divergence.

The Six Principles of Effective Management

Recruit the smallest group of people who can accomplish a task.
Clearly communicate the desired end result, including who is responsible for what and the current status of the task.
Treat people with respect.
Create an environment where everyone can be as productive as possible. Then, you need to trust your team members to get the work done.
Refrain from having unrealistic expectations regarding certainty and prediction. Create an aggressive plan to complete the project, but be aware that uncertainty and the planning fallacy mean your initial plan will almost certainly be incomplete or inaccurate.
Measure to see if what you are doing is working. If not, try another approach.

The Five Steps to Alleviating a Constraint

Identification: examining the system to find the limiting factor.
Exploitation: ensuring the resources related to the constraint aren’t wasted.
Subordination: redesigning the entire system to support the constraint.
Elevation: permanently increasing the capacity of the constraint.
Reevaluation: after making a change, reevaluating the system to see where the constraint is located.

Chapter 10 – Analyzing Systems

Systems are the heartbeat of a company. If you feed your company’s system with useless information and ideas, you will receive useless outputs. One way to ensure you are feeding your systems with the best information is by breaking your company’s complex systems into smaller, more manageable subsystems. This is called deconstruction and will allow you to better understand how things are working at the company. Then, upon considering these individual subsystems’ outcomes, you can better consider your Key Performance Indicators. KPIs are measurements of the critical parts of a system.

Chapter 11 – Improving Systems

To consider how you can improve a system, you first have to consider the null hypothesis. The null hypothesis outlines what would happen if you did nothing to the system or just assumed any adverse situations were just by chance.

After considering your null hypothesis and identifying the importance of improving your systems, you then want to consider optimizing. Optimization is the process of maximizing the output of a system or minimizing a specific input the system requires to operate. The most effective optimizing approach is to take the most important variable in your system and start by focusing all your efforts onto this variable. Then, follow this same rule until you have focused on all variables. This approach prevents you from trying to optimize across multiple variables at once, which is highly ineffective.

If you are less worried about your system’s output and more worried about the efficiency with which your team is reaching the preferred output, then refactoring is required. Refactoring is a process of changing a system to improve efficiency without changing the output. One way to improve efficiency is to think about the 80/20 rule. 20% of your inputs will be producing 80% of your outputs. Therefore, consider how you can emphasize the 20% more and improve your 80% efficiency.

Friction is any process that removes energy from a system over time. Hence, friction is one factor that can hugely impact your team’s efficiency. Removing friction will allow your team to work better and feel less exhausted despite achieving the same or better results.

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