The world is complex and mental models help us simplify information, focus on the most important things and make better decisions. Examples include the Pareto Principle which teaches us that in most situations, 20% of inputs lead to 80% of outcomes, so the goal should always be to find and focus on the 20%. Or the maxim that “work expands so as to fill the time available for its completion” should get us setting strict deadlines.
Navigating the business world is no different. As Charlie Munger, the business partner of Warren Buffet, one of the world’s richest people said: ‘You may have noticed students who just try to remember and pound back what is remembered. Well, they fail. You’ve got to hang experience on a latticework of models in your head.”
In this blog, I want to present five mental models that have helped me in my entrepreneurial journey in the hope that you will also add them to your toolkit.
1. Validate + iterate on small audiences
The first mental model comes from comedy. Successful comedians think like effective entrepreneurs in fully embracing the concept of “validated learning”, a term coined by Eric Ries in his seminal book, The Lean Startup. This process teaches business people to create a rapid cycle of build-measure-learn in close collaboration with customers to improve products or services.
Before comedians hit the road to perform night after night in big arenas, they make sure to play the small, intimate venues first to test out and tweak their material through trial and error. They know they’ll win over the tens of thousands if they’ve already won over the hundreds. I’ve also leveraged this learning loop in my business, by testing out practical digital bootcamps on individuals and small groups, before delivering it to thousands of business school students around Europe.
2. Digital is a language
Another useful model is to see digital as the new language of business. Put simply, if you don’t speak the lingo, you’ll find it near impossible to grow your business and understand your competition. You will be a permanent tourist. You only have to look at the companies that are surviving and thriving in the COVID pandemic to understand the power of digital strength on company fortunes. In fact, the US Department of Commerce released data recently showing that e-commerce penetration had jumped from 16% to 27% in the first eight weeks of lockdown.
One of the best ways to learn the language of digital is to fully understand the inner workings of the big tech companies, so familiarise yourself with Google’s business model or how Amazon makes money, or why Facebook is catching the eyes of regulators, as these platforms are the vehicles through which most companies get customers.
3. Crowded markets are good
It has become fashionable in the world of entrepreneurship to celebrate those companies or individuals that are doing things that are totally unique, building products and inventing industries that nobody has ever seen before. Think Elon Musk. But most successful companies take something that already exists and makes their version slightly better.
The reason being that it is a terribly expensive exercise to teach customers that they need something that they don’t already know they need. Norm Brodsky, a serial entrepreneur, makes this point in his brilliant book, The Knack, where he cautions against uniqueness and suggests differentiation in busy markets instead.
4. Build network effects wherever you can
A powerful way to separate your business out from a crowd is to design it to have in-built network effects. A network effect occurs when the value a business provides its customers increases with each additional customer. A good example of this is Facebook which becomes more valuable to users each time a new user joins, both in allowing users to connect to more people but also in improving the relevance and personalisation of its advertising. Or Waze, a travel app owned by Google. More users = more traffic information = a better map experience. Similarly Mumsnet or other community portals become more valuable with each additional user. If you want to know more about network effects, read Peter Thiel’s Zero To One.
5. Focus on things that won’t change
The last mental model is to focus on the things that won’t change. A common perception is to focus on the future and ‘disruption’ but counterintuitively, Jeff Bezos, the founder of Amazon, recommends you focus and orientate your business around things that will never change. For him, that’s speed, convenience and availability of products. Concentrating on these things was why he was so confident in launching Amazon Prime, despite his top lieutenants actively discouraging him from the idea. And that bet has paid off, given more people get divorced in the US than cancel their Prime subscription.
Exactimo provides practical digital training that aims to boost digital confidence and improve employability. The training is specifically for business school students.
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